TDS on incentive

Facts and issue: The assessee was a distributor of M/s. Sheela Foam Pvt. Ltd (‘SFPL’) for the state of Gujarat. SFPL was selling the goods to the assessee, who in turn was selling goods to the authorized dealers appointed by SFPL. The assessee had paid sales incentive to the dealers of SFPL on the basis of their performance and achievement of the sale target. Various dealers were given sales target and percentage of incentive was given on the basis of their performance/achievement of the sale target given to them. The AO treated the sales incentive paid as ‘commission’, liable to TDS under section 194H of the Act. As the assessee had not deducted any TDS, the AO made disallowance of Rs. 2.46 Crore under section 40(a)(ia) of the Act for non-deduction of TDS. The CIT(A) relied on the decision of the Bombay High Court rendered in the case of CIT vs. Intervet India Pvt. Ltd. (ITA No.1616 of 2011) and decided the issue in favour of the assessee.

Decision: The Tribunal upheld the observation of the CIT(A) that section 194H of the Act read with the Explanation makes it clear that the same shall become applicable, when the payment is received by a person who is acting on behalf of another or acting as an agent of another person. In the given case, the sales incentive was paid to the dealer based on their performance and achievement. The same cannot be equated with “commission”. The AO was therefore not justified in treating the payment of incentives to the dealers as well as to another distributor, as payment of commission liable to TDS under section 194H of the Act. Provision of section 194H are not at all applicable on the facts of the case.

Citation: Bombay Sales Corporation vs. DCIT [ITA No.2433/Ahd/2013 and ITA No.2553/Ahd/2013]