Income Tax Appellate Tribunal - Pune
Foster'S India (P) Ltd. vs Income Tax Officer on 28 April, 2008
Equivalent citations: (2008)117TTJ(PUNE)346
ORDER
Pramod Kumar, A.M.
1. These four appeals, filed by the appellant tax deductor, are directed against the consolidated order dt. 12th July, 2006 passed by the CIT(A) in upholding tax withholding demands, in respect of 'distributors incentive', 'early payment discount' and 'bond expenses' paid by the assessee to its distributors, raised under Section 201(1) r/w Section 194H of the IT Act, 1961, for the asst. yrs. 2002-03 to 2005-06.
2. Grievance of the assessee, in short, is that the CIT(A) ought to have held that there was no tax withholding requirements from the 'distributors incentive', 'early payment discount' and 'bond expenses' paid by the assessee to its distributors.
3. A few material facts need to be taken note of. The appellant is an Indian company engaged in the business of manufacture and sale of beer. The appellant has, for the purposes of sale and distribution of its products, appointed certain distributors. In the course of a survey carried out in the assessee's premises, and upon examining the appellant's books of accounts, it was noticed that while the appellant has paid certain amounts on account of 'distributors incentives' and 'early payment discount', tax has not been withheld from these payments under Section 194H of the Act. It was also noticed that the appellant has appointed distributors granting them non exclusive rights to sell the products in a specified territory, that services to be rendered by the distributors are closely defined inasmuch as standards of warehousing, promotional activities and reporting requirements are controlled by the appellant, that the distributors are forbidden from appointing sub distributors, that the price to be quoted by distributors is determined by the appellant, and that the activities of the distributors are controlled by the appellant. It was also noticed while discounts and incentives consisted of (i) free issues under trade schemes, (b) sponsorships and promotions, (c) incentive travels, and (d) early payment discounts, the overwhelming majority of the expenses booked under the head 'Discounts and incentives' consisted of free issue of beer. It was in this backdrop that the AO (TDS) required the appellant to show cause as to why demands should not be raised, under Section 201 of the Act, for non deduction of tax at source under Section 194H from these payments. The contention of the appellant was that the payments made to the distributors were not in the nature of "commission" as the transactions with these distributors were on principal to principal basis, that no services were rendered by the distributors to the company, that the payments were in the nature of 'discounts', and that these were in fact sales promotion expenses under different nomenclatures, and that, as such, provisions of Section 194H were not. attracted. None of these arguments impressed the AO. He was of the view that considering the manner in which distributors were controlled in every possible way, the transactions of the appellant with these distributors could not be said to be on principal to principal basis, and that things like incentive travels and appellant bearing other costs was nothing less than payment of 'commission in kind'. Early payment discount, as indeed all types of incentives, were accordingly treated as 'commission' on which provisions of Section 194H did apply. Accordingly, demand under Section 201 r/w Section 194H was raised on the appellant in respect of non deduction of tax at source from the distributors incentives and early payment discounts. The AO also noticed that the assessee had made payments to the distributors on account of 'bond expenses'. The payments for 'bond expenses' were also made on 'per case (of bottles/cans of beer) basis'. While plea of the appellant was that these payments were primarily made to meet the costs of distributors with regard to (i) unloading charges at the bond of goods received from appellant's plant, (ii) loading and onward transportation, (iii) transit breakages and (iv) stationery, postage, electricity and other day to day running expenses on operations and maintenance of the bond; this submission of the assessee was rejected by the AO that "had it been the reimbursement of expenses, the same should have been reimbursed by the company on the basis of actual bills received from C&F agents". The AO was further of the view that "as in case of every C&F agent, payment on account of warehousing is inevitable and embedded". The AO observed that "the argument of the assessee that they have not occupied any space, and possession of bond is with the agent, and the conditions such as bond charges being able only in the event of sales, is also not acceptable.... It is mainly because C&F agents are the custodians of the product of the assessee and product has to be warehoused for its distribution in the market". The AO thus concluded that "even though the premises is in the occupation of the agent but the expenditure reimbursed by the assessee on per case basis invariably includes payment on account of warehousing charges" and "the moment payment on account of warehousing charges comes into picture, provisions of Section 194-I are attracted. The bond expenses paid for territories of Delhi. Chandigarh and Haryana were @ Rs. 30 per case, Rs. 25 per case and Rs. 16 per case respectively. The AO estimated rent element @ 20 per cent, 15 per cent and 10 per cent respectively from these payments. It was in this backdrop that the short deduction at source demand was also raised in respect of the 'bond expenses' partly under Section 201 r/w Section 194-I and partly under Section 194H. Aggrieved by the short deduction of tax source demands under Section 201 r/w Sections 194H and 194-I, on account of 'distributors incentives', 'early payment discounts' and 'bond expenses', the assessee appellant carried the matter in appeal before the CIT(A) but without any success. The CIT(A) held that the relationship between the assessee appellant and its distributors is of principal and agent, and, therefore, the payment made by the assessee appellant is nothing less than commission paid for the services rendered by the agent. The CIT(A) thus upheld the action of the AO in principle. However, as far as the alleged short deduction under Section 194-I on account of rent payment embedded in the bond expenses was concerned, the CIT(A) did not approve the stand of the AO. He was of the view that this payment is also of the commission in nature and, therefore, subject to withholding tax requirements under Section 194H. The assessee is not satisfied by the order of the CIT(A) and is in further appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. In order to adjudicate on the applicability of Section 194H, which imposes tax withholding obligations on a person from payments on account of commission, it is necessary to appreciate the nature of relationship between the assessee and its distributors. This is for the reason that, as held by the Hon'ble Gujarat High Court in the case of Ahmedabad Stamp Vendors Association v. Union of India , unless this relationship is relationship of a principal and agent, the payments made by the assessee cannot partake the character of commission. Therefore, the case of the Revenue primarily hinges on whether or not the distributors appointed by the assessee could indeed be considered to be agents of the assessee company.
6. A plain reading of the assessment order indicates that the very case of the AO is that in view of the restrictions imposed by the assessee company on its distributors, the relationship between the assessee company and the distributor has to be considered to be that of principal and agent. This approach, which is clearly discernible from the following observations made by the AO at pp. 5-6 of the assessment order as follows:
...No independence has been granted by the assessee company in respect of several important matters so that the distributors are virtually seen operating on behalf of the company. Such restrictions can be accepted by the distributors only if the ownership is on principal to agent basis. If sale transaction is complete then why one would agree to keep, maintain warehouse as per the norms of the company, to keep records as per assessee's norms, to do sales-tax and excise formalities etc. for the assessee, and why would one give unrestricted access to the books of accounts and documents maintained by the assessee ? Why would he allow to take inventory/physical check of stock of goods already purchased ? Why would he commit to all information related to market conditions, potential customers and activities of the competitors ? Why would he restrict himself to sell the products of the assessee company only and not that of its competitors ? Only an agent would agree to such restrictions. Therefore, distributors appointed by the assessee take the colour of an agent. The nature of relationship cannot be judged by nomenclature only but by the nature of transaction and to the spirit in which the transaction is carried out. Given the nature of competition in this trade, every player in the market wants to bolster its sales. Hence, it is not possible to achieve such high number of sales without an effective and motivated agent. The best form of motivation obviously is greater return. Hence the distributor chooses the product of the company over other brands with an intention to earn this commission cleaver disguised in the form of distributor incentives'....
7. The approach so adopted by the AO, and which has met CIT(A)'s approval as well, is diametrically opposed to the following observations made by the Hon'ble Supreme Court in the case of Bhopal Sugar Industries Ltd. v. STO :
...the essence of the matter is that in a contract of sale, title and property passes on to the buyer on the delivery of the goods for a price paid or promised. Once this happens, buyer becomes owner of the property and buyer has no vestige left in the property. The concept of sale has, however, undergone revolutionary change, having regard to the complexities of the modern times and expanding needs of society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may, by virtue of agreement, imposes a number of conditions on the buyer e.g. fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sales into a contract of agency, because in spite of these restrictions, the transaction would still be a sale and subject to all the incidents of a sale.
8. The very foundation of the case of the AO is thus devoid of any legally sustainable merits. Hon'ble Supreme Court's very pragmatic observations succinctly sum up the principles governing decision on the relationship in case where sale is made subject to certain conditions warranted by the exigencies of business. What is to be really seen is the point of time when property in the goods sold passes from the assessee to the buyer. That undoubtedly is the time when assessee sells the goods to its distributors. The goods are invoiced to the distributor, the distributor has to make the payments within specific time schedules vis-a-vis date of invoicing to the distributor, and the risks associated with the goods sold pass on to the distributor when the goods are invoiced to him. It is not unusual that manufacturer of a consumer product puts conditions on the manner in which the product is stored or marketed so as to ensure that reputation of the manufacturer does not suffer. Take for example, a beer bottle, or for that purpose even a cold drink bottle, being sold to the end consumer is sold long after its manufacture. This product, vis-a-vis a similar product, which is available to the end consumer within a month of manufacture, will possibly, be at disadvantage in terms of taste and quality, and thus the manufacturer could suffer. Similarly, the ultimate selling price of the distributors is also controlled for ensuring competitive edge, and so are other checks necessary to ensure that the distribution channels are effective and related policies are in tune with the policies of the manufacturer. The conditions attached to sales are inherent part of ground realities. Even when you buy a book, which is also published abroad at a higher rate, there is a condition attached to the book that it will not be resold or exported outside the country of sales. As to why should a person agree to such conditions, it is for the market forces to decide the business equations. A buyer may see business sense in buying X product with all sort of conditions attached to it, and the same buyer may not buy Y product with greatest freedom. A manufacturer has a legitimate wish that his product should reach end consumer in harmony with the sales policies of the manufacturer, and, with that objective in mind, he may impose conditions on the distributors. It is for the distributors to decide whether or not purchase on such conditions will make business sense or not. A trader's decision to purchase or not to purchase a product for resale is not entirely dependent on the element of freedom attached to the purchases; what generally prevails is trader's perception on whether or not he will get a reasonable reward for his act of purchasing and reselling the product. Even when we look at each component of the distributor incentives, we find that none of these incentives are in the nature of commission. Free issues under trade schemes is assessee's giving free bottles of beer on sale of specified quantities is nothing but a sale incentive by way of trade discount. When the distributor buys x quantity of beer, he gets y quantity as free goods; that is part of the sale where distributor pays for x quantity but gets x + y quantity. Similarly, free gift of beer on sponsorships and promotions are sale promotion costs for the assessee company, and so is the incentive travels for the distributors. As for the early payment discount, it is nothing but a cash discount for timely payment of bills by the distributors to the assessee company. By no stretch of logic, this would constitute commission. The AO was swayed by the considerations which were not germane to the context, and the CIT(A), in our considered view, erred in confirming the stand of the AO.
9. As for learned Departmental Representative's vehement reliance on Tribunal's decisions in the cases of Asstt. CIT v. Bharati Cellular Ltd. and Hindustan Coca Cola Beverages (P) Ltd. v. ITO , suffice to say that as we have decided the nature of relationship between the assessee company and its distributors in the light of principles laid down by the Hon'ble Supreme Court in the case of Bhopal Sugar Ltd. (supra) which the co-ordinate Benches did not have the opportunity of being benefited from, we see no need to address ourselves to the guiding principles of those decisions. The normative effect of the judgments of Hon'ble Supreme Court is obviously far greater than that of the judgments of the co-ordinate Benches.
10. For the reasons set out above, we quash the impugned demands raised on the assessee under Section 201(1) r/w Section 194H of the Act. The assessee gets the relief accordingly. In the result, the appeals are allowed.