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In the normal course of business, to gear the sales the manufacture will give many types of incentives (in the form of commission or brokerage) and discount to his dealers. The very disputable issue is the differentiating the discount and incentives/benefits in the nature of commission or brokerage. The very interesting thing is even though both commission and discount are beneficial item to the dealer  but commission is given for undertaking certain task/job (to gear up the sales) and discount is a benefit directly derived from the purchase of goods on discounted price.

Therefore commission or brokerage is an income and hence it should be charged to tax. And discount is the discounted purchase value.  For this purpose section 194H has been introduced in the Income Tax Act.

In this article I would like to discuss some critical point about the section 194H with a case law regarding this.

Before we move on to the critical part of the section let us have a brief content of the section 194H.

194H. Any person, not being an individual or HUF who is responsible for paying, on after 1st day of June, 2001, to a resident, any income by a way of commission (not being insurance commission referred under section 194D) or brokerage, shall at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 10% .

Provided:

1. If aggregate amount of commission paid is below 5000 in the previous year; then no need to deduct tax.

2. If HUF/Individual is under Tax audit, then such persons also deduct tax on Payment of commission.

3. Commissions paid by BSNL/MTNL to their public call office franchise are excluded from the provision of this section.

Explanation.—for the purposes of this section,—

1. "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;

2. the expression "professional services" means  all those profession as is notified by the Board for the purposes of section 44AA;

3. the expression "securities" shall have the meaning assigned to it in clause (h) of section  of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

4. where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Now the question arises is; as stated in the explanation [(1) by acting on behalf of another person] is it necessarily required that there should be a principal and agent relationship to attract this section on commission paid?

Now let us analyze the above question with a case law-  

‘X’ Ltd, has engaged in selling of beverages. The X ltd, has sold beverages to Y ltd, (who is the dealer of the products of X ltd). The dealer will sell the products to the ultimate customer at his own risk and reward. Now the X ltd has given many discounts on the bill and also has given many beneficial schemes to the dealer for the purpose of making more sales. However X ltd doesn’t have the ownership on the products which are sold to Y ltd.     One of the benefits given to the dealer for the gearing of the sales is sales price discount; that is X Ltd will raise the credit note on the sales made to the dealer. However by treating it as discount given to the dealer, the X Ltd. has not deducted the TDS. X ltd is of the opinion section 194H will not applicable to them but the assessing officer has disallowed the credit note amount U/S 40 (a) (ia).

The assesse has contended his argument as follows:

He has submitted the arrangement between the assesse and dealer’s company is on principal to principal in basis. He has further submitted that once the product is sold to the dealer the assesse company doesn’t exercise any ownership over it. The dealer will sell the goods on his own risk and reward. And hence there is no principal and agent relation. Which is one of the requirements to attract the section 194H as it is stated in the explanation (1) to the section 194H.

The court has given the decision as below:

1. When a purchase is made on discounted price, the benefit is called discount; whereas when an incentive or benefit or compensation is given for undertaking of task/job services provided or on sales of goods by one person on behalf of other, then it is called as commission.

Hence in this case the benefit of credit notes raised is not included in bill and it is the separate arrangement between the assesse and dealer and it is clear that credit note benefit given by the assesse is in the nature of commission.

However our question is still unsolved. As the assesse and the distributor are not in principal and agent relation so how this section is applicable to them?

For this again the court has clarified as below:

2. Section 194H talks about the payment to a recipient which is the income by a way of commission or brokerage and doesn’t talks about the relation between the payer and payee necessarily be of a principal and agent. The explanation to this section 194H elaborates the term commission or brokerage by including any payment received or receivable directly or indirectly by a person acting on behalf of another person. Thus it is clear that provision of section 194H do not require any formal contract of agency.

By analyzing the above point we can conclude that-

1. Section 194H is applicable to all those payment transaction which are in the nature of commission or brokerage.

2. Explanation to (1) is includes payer and payee relation also be principal and agent but does not state there should be a principal and agent relation.

3. Hence even though commission paid is principal to principal in nature it attracts the provisions of this section.

By: Dhruva Kalamanji Srikanth  

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Category Income Tax, Other Articles by - CA Dhruva Kalamanji 



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