ORDER
B.P. Jain, Accountant Member
1. These are two appeals against the orders of Ld. CIT(A)-III, Jaipur dated 08.10.2004 for the financial year 2001-02 (Asstt. Year 2002-03) and Ld. CIT(A)-III Jaipur order dated 7.10.2004 for the Financial year 2002-03 (Asstt. Year 2003-04) In both the appeals the issue is common, therefore, both the appeals are being taken up together for the sake of convenience.
2. There are fifteen grounds of appeal in each year. Ground No. 1, 3 to 9, 11, 12, 14, 15 are not pressed by the appellant. The remaining grounds of appeal are as under:
Ground No. 2
“The CIT (A) has erred in facts and law in holding that the appellant’s transactions with its distributors were subject to deduction of tax at source as per the provisions of Section 194H of the Act.”
Ground No. 10.
“The impugned order has been passed in gross violation of the principles of natural justice as the CIT(A) has disregarded the evidences furnished by the appellants to being additional evidences not permissible under Rule 46A even though the said evidences are critical for a proper appreciation of facts and just and equitable adjudication of the matter thereafter.”
Ground No. 13
The CIT(A) erred in upholding the order under 201 on irrelevant considerations and in failing to quash the conclusions reach on irrelevant & wrong facts.”
3. The main issue in both the appeals are that the AO has passed order Under Section 201(1) for not deducting tax at source Under Section 194H of the act on distribution and commission from 01.06.2001 onwards.
4. The Brief facts of the case are that the assessee is a company engaged in the manufacturing and distribution of non-alcoholic beverages packed in glass bottles and plastic crates. The Head Office of the assessee is based in Gurgaon while it has a branch office as well as production unit at Kaladera, Jaipur. The assessee has obtained TAN and has been filing its TDS returns in respect of TDS of salary, contract/Sub-contract and interest but no TDS return in respect of commission payment have been filed. A survey Under Section 133(A) was conducted on 20.12.2002 at business premises for the purpose of verification regarding TDS being made by the assessee. During the course of survey a trial balance showing affairs of company for the period between 1.1.2002 to 19.12.2002 was obtained. From this trial balance it was found that Distributor Commission a/c has been debited by an amount of Rs. 4,75,22,929/-. However, it is found that no TDS was deducted and paid on corresponding credit entries or Commission payment whatsoever.
5. To go into assessee’s actual relationship with its distributors and there by real nature of the transaction between assessee and distributors, survey action Under Section 133(A) were carried out on three of its distributors and statements of relevant persons were recorded during survey. The name of the distributors and persons whose statements were recorded are as follows:
1. Sh. Rajesh Kumar Khandewlal Prop. M/s. Om Prakash Rajesh Kumar, Amer
2. Sh. Kedar Pd. Gupta, Prop. M/s. R.R. Enterprises, Bassi.
3. Sh. Purusottam Lal Sindhi Prop. M/s. Dilip Kumar Agency, Ratangarh
The assesses was given show cause notice and also copies of statements of relevant persons recorded during the course of these surveys were supplied to the assessee along with this show cause notice and were also offered inspection of various documents.
6. The assessee in his reply to show-cause notice submitted his arguments before AO vide para 5 A to E of AO’s order which are summed up at para 5F of AO’s order as under:
(a) The company does not pay any commission to the distributor. There is no payment from the company to the distributor, much less commission or brokerage. In fact the distributor is liable to pay the company the price of the goods purchased by him.
(b) Transaction between the Company and distributor is on a principal to principal basis. All risks and transferred to the distributor on delivery of the goods. The transaction is one of the sale subject to sales tax.
(c) It is totally incorrect to consider the margin earned by the distributor as commission. To assume otherwise would be contrary to facts of the case.
(d) Just because the margin of the distributor appears to be “constant” a conclusion can not be made that the same is commission. The margin of all those involved in a modern supply chain for products which have a Maximum Retail Price prescribed by law would necessarily be predetermined. This does not convert a principal to principal relationship to that of a principal and agent.
(e) The distributor is not authorized to do any acts on behalf of the company. When he sells to the retailer, he sells in his own right and any credit risk etc. arising from the transaction is solely his. This is borne out by the invoice that he raises on the retailer. The invoice is raised in his own right and not on behalf of the company.
(f) The nomenclature distributor commission appearing in their books is a misnomer. It is just an accounting entry generated for Management Information System purposes to identify channel costs. This is also borne out by the fact that corresponding credit in the journal entry is to gross sales and not to be account of any distributor. It is an entry passed at the month end as follows:
DR. Distributor Commission
Cr. Gross Revenue
Books entries by themselves do not create any legal or tax obligations. Accordingly, it is contended that since all records, invoices, and transactions bear but that the transaction is on a principal to principal basis, provisions of Section 194H will not apply.
7. The assessee has relied upon various judgments to prove his claim as under:
1. Ahmedabad Stamp Vendor Association v. Union of India (Guj)
2. Bhopal Sugar Industries v.
3. STO (1977) 40 STC 42(SC)
8. The AO was not satisfied with the arguments of the assessee’s counsel because of the following reasons
(A) In assessee’s own accounts margin of Distributor has been included in gross revenue realization by debiting Distributor commission account and crediting ‘Gross revenue account’. If the transactions were strictly on principal-to-principal basis, there was no reason to give any effect to the distributor margin in its own books of accounts under any circumstances.
(B) Assessee has heavily relied upon the sales invoice made by the company and the distributors and corresponding accounting entries to claim that their transactions with the Distributor are principal to principal. However, assessee himself has rightly argued that the entries in books of account are not conclusive in determining the real nature of transaction. The real nature of transaction is governed by the actual understanding between the two parties and the manner in which the transaction is completed in the reality. In the case of assessee and his distributors, the distributors do not have any substantial independence in carrying out their own transactions which an independent principal always enjoy. The distributor is just acting as an arm of the assessee company in carrying out its business for a margin just like it is done in the case of Principal agent’s relationship. This is clear from the following facts:
(a) Distributors are clear that they are commission agents acting on fixed margin and fixed responsibilities:
In the absence of a written agreement what the different parties to oral agreements thinks of their role becomes extremely important. All the three distributors whose statements were recorded at different places thinks the same way that they are working on commission basis for the assessee company. In response to question No. 8 of Shri Purushottam, question No.3 of Shri Kedar Gupta and question No. 4 of Shri Rajesh Kumar (statement dated 13.1.2003) have categorically stated above fact.
(b) No independence for fixing the sales price to the distributors;
In principal to principal relationship, within the restrictions of MRP, a principal enjoys full freedom of fixing a sale price. However, in this case, the distributors do not have any independence whatsoever to do so by reducing their margins. In response to question No. 8 & 16 of Shri Purushottam, question No. 2 of Shri Kedar Gupta and question No. 4 & 5 of Shri Rajesh Kumar (statement dated 13.1.2003) have categorically stated above fact.
(c) Fixed area of operation;
In principal-to-principal relationship once the goods are sold there can be no restriction imposed by one principal on the other one as regard to his area of operation. However in this case, the distributors can make sales only in the area precisely specified by the assessee company. In response to question No. 7 of Shri Purushottam, question No. 2 and 3 of. Shri Kedar Gupta and question No. 2 of Shri Rajesh Kumar (statement dated 15.1.2003) have categorically stated this fact. In fact, the sales executive of the assessee company ensures that above conditions are strictly adhered to.
(d) Loss on stock due to price fall borne by assessee company;
If assessee company reduces the MRP which has been done recently, then it is compensating the distributors for the loss on the value of stock available with them. In response to question No. 10 of Shri Purushottam, question No. 7 of Shri Kedar Gupta and question No. 4 of Shri Rajesh Kumar (statement dated 15.1.2003) has explained this practice. In principal to principal relationship seller can never be responsible for the loss accruing to the purchaser on account of fall in value of goods already sold by him. This practice also destroys the sanctity of sale price mentioned on the sales invoice prepared by the company for its transactions with the Distributor.
(e) Loss on account of expiry of sold goods borne by assessee company;
If the stock available with the distributor cannot be sold before expiry date, the loss accruing on this account is also borne by the company after the claim is submitted by the distributor and is verified by the company. In response to question No.10 of Shri Purushottam and question No. 8 of Shri Rajesh Kumar (statement dated 15.1.2003) above fact was confirmed.
(f) Control of sales executives over the operations of distributors;
Sales executives of the assessee company, regularly monitor the operations of distributors, which is neither possible nor needed in principal-to-principal relationship. They see to it that area of operation by distributors is strictly adhered to, at the time of sale FIFO system is maintained etc. Importantly, safes executives send weekly report of stock with distributors to the company. In distant places, like Ratangarh, Auditors of company also audit the records and stock of the distributor on monthly basis (question No. 7 and 13 of Shri Purushottam) In fact, a copy of such report on the stationery of company itself (Distributors Warehouse Age Survey Form) signed by the representative of assessee company found during the course of survey from the premises of Dilip Kumar Agency is enclosed with AO’s order as Annex-A which clearly shows that how even the stock of the distributor is controlled by the assessee company.
(g) Appointment of sub-distributors by assessee company;
Once the goods are sold to the distributor, how the goods are sold further by him should be solely his discretion in principal to principal relationship. However, they have no right to appoint any sub-distributor. At the same time, company can appoint any sub-distributor and direct distributor to supply goods to such sub-distributors and importantly the entire margin (commission) receivable by such sub-broker from the company is first paid by the distributor and then only a part from the same is recoverable by the distributor from the company by making a claim of spoke discount (question No. 2 of the statement of Shri Rajesh Khandelwal dated 15.1.2003 and question No. 14 of Shri Purushotam)
(h) Different type of claims received by distributors from the company;
A large number of claims, which would never be available in principal-to-principal relationship are made by the distributors and paid by assessee company. Some of such claims are as follows:-
(i) Diesel and petrol claim to meet part of the distribution expenses.
(ii) Vehicle repair to meet part of the distribution expenses.
(iii) Salary of salesman claim to meet part of the expenditure in off-season.
(iv) Leakage and breakage claim in respect of leakage and breakage between distributor and retailer.
(Question No. 3 of statement of Shri Rajesh Khandelwal and question No. 14 of Shri Purushottam Sindhi)
(i) Providing vehicles to the Distributors:
It was also found that assessee company had provided vehicles to some of the distributors for carrying out their distribution operations. Thus, some vehicles owned by assessee company are used by the distributors and the depreciation on these vehicles is claimed by assessee company. Firstly, if the distributors were independent principals why would company provide them with its own vehicle for the sales made by the distributor, which should be an independent operation of an independent principal. Secondly, if the distribution of goods by distributor would have been independent sales by independent principal, then how the assessee company would claim depreciation on these vehicles, because for making a claim of depreciation in respect of an asset, not only the asset should be owned by the assessee but it should be used by assessee for its own business. Thus, it is very clear that in the considered view of assessee company and its management, the distribution of goods by the distributors is an extension of their own business.
9. Thus, it is clear from the discussion made in para(a) to (i) that the distributors are acting like an arm of assessee company. For carrying out all their operations, they are controlled by the signals given by the brain located with the assessee company. Clearly they are acting on behalf of assessee company with fixed responsibilities and their relationship with the company is that of principal agent in the reality.
10. The arguments of the assesee’s counsel before the AO in respect of principal to principal relationship is that responsibility of collection of payment in respect of sales made by distributor squarely lies with distributors themselves and loss of bad debts also borne by them only. Even in principal agent relationship it is quite common that this responsibility rest with agent only. The margin of commission if fixed keeping such contingency in mind in such situations. In fact, Pucca Arahtia, which is a known category of commission agents operating all over, the country specially in Mandies are also responsible for the collection of payments. Similarly, share brokers are also acting as Brokers or commission agents on behalf of sellers are fully responsible for collection of sale proceeds and bad debts. Thus, above argument of assessee is clearly not tenable and not sufficient to prove its point of view.
11. Assessee’s reliance on the judgment of Gujarat High Court in the matter of Ahmedabad Stamp Vendor Association is also misplaced under above facts and circumstances. In that case, the restrictions imposed on Stamp Vendors are very few and not substantial in nature unlike this case. Moreover, there are several restrictions in respect of sale of stamps placed by the law of land and therefore, they are mandatory. In this case, however, the restrictions, which are substantial in nature, govern the relationship between assessee and distributors and are not borne out of any legal restrictions.
12. It has been further argued on the basis of decision of Hon’ble Supreme Court in the case of Bhopal Sugar Industries that in the case of Contract of sale, title of property passes on to the buyer on delivery of goods for a price paid or promised. However, for application of above findings, the title of property should be passed not only on papers but also in reality and for all practical purposes without any restrictions or hindrances. In this case, as discussed above in para-B(a) to (g), this is not the case in reality. Even after purported sale transactions, assessee is bearing several losses, such as loss on stock purported sold to the distributors due to price fall, loss on account of expiry of sold goods are borne by assessee company and the distributors are in no position to enjoy absolute title of sold goods.
13. Another argument made by assessee in its favour is payment of sales tax at the time of transferring goods to the distributors through sales invoice which according to assessee makes the transactions between him and the distributor a sale transaction. Payment of sales tax at this stage does not alter either the nature of relationship between company and the distributors or the real nature of transactions. On the contrary, by adopting this practice, assessee company is also able to save sales tax liability. What assessee is doing is, instead of making one invoice directly in the name of retailer, it is making an invoice in the name of distributor and asking distributor to raise another invoice in the name of retailer after including distributor commission. If the invoice was raised including the distributor commission (which otherwise is being included in gross revenue realized for Management Information System by making corresponding accounting entries) and later on the distributor commission would have been paid, then assessee would have to pay sales tax on distributor margin also. Thus, payment of sale tax at this stage is saving assessee’s liability on sale tax account also, though the transactions on document such as sale invoice are not indicative of the real nature of transactions.
14. The pricing scheme and the manner in which sales invoice are being made is also very interesting to throw the light on real nature of the transactions. The rate of goods sold is worked out on the basis of ‘indirect distribution sheet’ found during the course of survey at the premises of assessee, which is enclosed with AO’s order as annex-B. The rate at which the sales invoice is to be raised on backward calculation method in a manner that distributor margin and retailer margin remains constant. It also shows that the price at which distributor has to sell goods to the retailer is also decided by the company itself. Importantly, in respect of transportation of goods from assessee’s premises to the distributor’s premises also, distributors have no independence. Though, the freight is to be charged from the distributor, it is charged only at notional figure at Rs. 11/- per crate. If the freight would have been charged on the basis of real expenditure, it would have been different for distributors located at different distances. However, it can be seen that be the distributor based in Chomu at a distance of 50 Kms. Or he is based in Udaipur at a distance of about 500 Kms. The freight is charged at the same rate. The entire Scheme of “indirect distribution” clearly show that the real sale to retailer is being made by the company itself through the distributor appointed for local distribution by paying them commission and making them responsible for collection of payment and distribution work in geographical area assigned to them. In fact, the distributors are concerned with the margin (commission) which is clear from the fact that none of the distributors was knowing anything about freight being charged from them (question No. 4 of the statement of Shri Purushottam Sindhi, question No. 5 of Sh. Kedar Gupta and question No.3 of the statement dated 13.1.2003 of Sh. Rajesh Khandelwal) because it was an arrangement existing only on paper for making entries in books of accounts of the assessee company.
15. From the detailed discussion made in above paras, it is clear that the relationship between company and its distributors is that of a principal agent in reality and distributors are acting as an arm of assessee company. Distributor commission is being included in gross revenue realized for management information, in books of account by debiting distributor commission account and crediting gross revenue account. Actually if the invoice would have been raised by assessee company in the name of the retailer directly and on account of responsibility of the name of the retailer directly and on account of responsibility of collection lying on the shoulders of distributor, his account would have been debited by corresponding amount, then assessee would not have needed to make so called notional entries of debiting commission account and crediting gross revenue account. The gross revenue account would have automatically increased by the distributor margin amount to match with the present book results and distributor margin or distributor commission would have credited to the distributors account. Such system of making accounting entries is not altering final results and is able to represent the real transactions in a better way, was a correct way of entering transactions between assessee and distributor. Thus just because assessee has made accounting entries in a way that distributors account is not being credited by distributor commission does not mean that in reality he has not paid or credited distributors account by distributor commission. He is actually collecting the sales amount (being value of sales to the retailer though the distributor) from the distributor after allowing him to retain the distributor margin. Assessee ought to have deducted TDS on such distribution and commission Under Section 194H of the I.T Act, 1961 from 1.6.2001 onwards and accordingly held the assessee liable Under Section 201(1) of the Act as deemed to be an assessee in default in respect of the Tax and raised the demand of Rs. 35,72,898/- for the financial year 2002-03 (Ass. Year 2003-04) and Rs. 16,82,171/- for the financial year 2001-02 (Ass. Year 2002-03) being the tax at source not deducted Under Section 194H and interest thereon.
16. Before the Ld. CIT(A) the assessee company raised as much as seventeen objections against the passing of order of AO Under Section 201(1) of the Act and the demand as above said which are available in Ld. CIT(A) orders page 2 to 4. The main argument before Ld. CIT(A) being the same as before the AO, apart from an application under Rule 46A of Income Tax Rules 1962 for additional evidence, wherein certificates from fifteen distributors clarifying that they were not agents of the appellant company were obtained after passing of the order Under Section 201(1), available on record at P.B. 317 to 336. The Ld. CIT(A) rejected the request of the appellant for admission of additional evidence observing in para 4.3 of his order that as per statements given by the distributors at the time of statement that they are receiving the commission at a specific rate per crate and Ld. CIT(A) relied upon the judgment in the case of Smt. Savitri Garg v. ACIT reported in Tax World volume XXX page 131 where it was observed that subsequent statement and acts are tutored and after thought when they might have received some legal advice and as per findings of Ld. CIT(A) at Para 4.4 of CIT(A) order which reads as under:
“Since the survey team has found the specific entries of distributor commission along with the other entries’ in the trial balance and also the distributors of the appellant assessee have admitted that they have been getting the commission from the appellant, the subsequent affidavits, certificates denying the payment of commission cannot be admitted under Rule 46-A of the I.T. Rules, 1962 since these certificates/affidavits are made after thought to avoid the tax liability as falls under the provisions of I.T. Act.”
17. The Ld. CIT(A) observed that the assessee was given sufficient time and opportunity to present its case and furnish necessary evidences to its satisfaction. The findings of sufficient opportunity given by AO are reproduced by Ld. CIT(A) in his order para 3.1.
“The assessee has drawn attention of Ld. CIT(A) towards CBDT Circular No. 275 (refer CIT(A) order para 4) by quoting that taxes cannot be recovered from the payer if the tax in question had already been paid by the deductee but without quoting other limb that such taxes cannot be recovered from the payer only after the payer has satisfied the income tax authority that taxes have been paid by the deductees. In this case, assessee had made no efforts to satisfy the ITO(TDS) about such payments by the deductees. In this paper book, they have enclosed PAN No. and copies of returns of some distributors which are not admissible as per Rule 46A. Importantly out of several hundred distributors, he has enclosed acknowledgement of returns of only 6 distributors while he should have satisfied the ITO for payment of taxes by each and every deductee. Importantly even for these 6 distributors the proof only in respect of advance tax/self assessment tax paid by their own sweet will and not the payment equivalent to the TDS which was deductible. Therefore, the appellant has not fulfilled the conditions laid down in circular No. 275 dated 29.1.97. If this circular is made applicable under these circumstances then there will be no need for anybody to deduct any TDS”
18. The Ld. CIT(A) vide his order para 4.5 has distinguished the decision of Hon’ble Gujarat High Court in the case of Ahmedabad Stamp Vendors Association v. Union of India 257 ITR 202 which reads as under.
“I have respectfully perused this citation and noticed that in this case the State Government is supplying stamp papers at a discount to its vendors. The Hon’ble Court in this case has held that the discount does not fall within the ambit of the definition of commission or brokerage. In the present case, the seller i.e. the appellant company in its trial balance at page 11 & 12 has separately debited’ various types of discount such as outlet discount, spoke discount and trade discount. Therefore, Distributors commission is distinct from discount as held in the case of Ahmedabad Stamp Vendors Association. In the case of Ahmedabad Stamp Vendors Association no services are stated to have been provided by the State Government except refund of outdated stamp papers whereas in the instant case the appellant company as held by the ITO has provided the following services which prove that the distributors are not independent from the appellant company.”
19. The Ld. CIT(A) in para 4.6 of his order distinguished the decision of the Hon’ble supreme Court relied upon by the assessee in the case of Bhopal Sugar Industries v. STO (1977) 40 STC 42(SC) where the appellant entered in to an agreement with the Caltex (India) Limited for supply of petrol and petroleum products to it on certain conditions. In the course of this business the appellant sold petrol to various trucks and other car owners and also consumed part of the petrol for its own purposes. The Hon’ble Court observed that “In the instant appeals, we are only concerned with the consumption by the appellant of the quantity of petrol for its own purposes which has been as we have indicated, treated as a sale and therefore exigible to sales tax”
20. The Ld. CIT(A) was of the view that the above facts have no bearing to the facts of the appellant assessee, therefore, the citation as given by the Ld. AR has no help in disposal of this appeal as the provisions of Section 194H are inserted recently by Finance Act, 2001 w.e.f. 1.6.2001. The Explanation (i) to Section 194H defines the “commission or brokerage” which 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.
21. The Explanation (iv) further says that 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.
22. The Ld. CIT(A) before deciding the issue relied upon para 6 of CBDT Circular No. 619 bearing no, F.No. 275/163/91-IT(B) dated 4.12,1991 which speaks as under:-
“a question may arise whether there would be deduction of tax at source under Section 194H where commission or brokerage is retained by the consignee/agent and not remitted to the consignor/principal while remitting the sale consideration. It may be clarified that since the retention of commission by the consignee/agent amounts to constructing payment of the same to him by the consignor/principal deduction of tax at source is required to be made from the amount of commission. Therefore, the consignor/principal will have to deposit the tax deductible on the amount of commission income to the credit of the Central Government, within the prescribed time.”
23. In view of above facts and circumstances the Ld. CIT(A) was of the opinion that action of ITO(TDS) was justified and is in accordance with Income Tax Law.
24. Aggrieved by the decision of Ld. CIT(A) the assessee is before us for adjudication.
25. With this back ground, we heard the rival submissions and having perused the orders of authorities below, written arguments by the Ld. AR running into page 1 to 30 and paper book containing pages 1 to 506 including the copies of various judgments relied upon by the Ld. AR, and the arguments of Ld. DR who has relied upon the orders of authorities below, a decision has to be arrived at looking into the statutory provisions.
26. At the outset on the persistent demand of the bench, to the Ld. AR to produce the copy of agreement/contract entered into by the assessee and its distributors so that nature of transaction is determined in view of provisions of Indian Contract Act and Sale of Goods Act. To the surprise of the bench, it has been categorically denied by the Ld. AR that no such agreement/contract between the assessee and its distributors have been executed and it is argued by Ld. AR that it is the mutual understanding between the two which governs the nature of the transaction and accordingly sale bills and Sales Tax Return filed are the only documents which can be considered as a result of mutual understanding between the two. It cannot be believed that the necessary procedures like no application is invited, no securities are taken though the prices of the sale, responsibilities, area of operation and fixed margin of profit in the nature of commission as per authorities below are fixed. Whereas there is no shelf sale by the assessee that anybody can go and buy the goods and do the necessary transaction of the sale.
27. However having denied by the Ld. AR that there being no written agreement or document but an oral agreement between the assessee and its distributor, we are left with no alternative except to arrive at conclusion whether present transaction in reality is principal to agent basis or principal to principal basis, on the basis of material on record, books of a/c maintained, various arguments of both the parties.
28. The Ld. LD. AR, first of all argued to explain the difference between the principal to principal basis transaction and principal to agent transaction as per Section 182 of Indian Contract Act 1882 which defined agent and principal as under:
“An ‘agent’ is a person employed to do any act for another or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.”
29. The Ld. AR has mainly argued that the assessee is carrying on the business on principal to principal basis since the title of the goods is transferred for a price paid by the assessee to the distributors, the transferee in such a case is liable to the transferor as a debtor. The assessee raises a sales invoice for goods sold which are subject to sales tax, the goods are sold by the assesee in its own rights and its own risk, assessee recognized sales in its books of a/c as soon as goods are delivered to distributors, recovery of debts for goods sold by the distributor are sole responsibility of the distributor. The Ld. AR has argued that essence of agency is the delivery of goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds. The Ld. AR has relied upon decisions of various courts to substantiate his claim referred in written arguments pages 1 to 30 as under:
(i) Sri Tirumala Venkateswara Timber & Bamboo Firm v. CTO, AIR 1968 SC 784
(ii) Ghasiram v. State,
(iii) Dy. Commissioner of Agricultural Income-tax And Sales-tax v. Alwaye Agencies 1974 Tax L.R. 2281
(iv) Bhopal Sugar Industries v. STO (1977) 40 STC 42 (SC)
(v) Ahmedabad Stamp Vendors Association v. Union of India
(vi) Asst. CIT v. Samaj (77 ITD 363 (Cuttack)
30. The proposition of law as argued by Ld. AR is not in dispute and is well settled and also is part of Indian Contract Act itself. But in reality the transaction between the assessee and its distributor on principal to principal basis are not applicable in the facts and circumstances of the case. There being no agreement or document but from the circumstances and documents available, we are of the considered view that in the case of the assessee following proposition are evident and irrefutable that :-
i) Distributors are clear that they are commission agents acting on fixed margin and fixed responsibilities.
ii) In principal to principal relationship, within the restrictions of MRP a principal enjoys full freedom of fixing a sale price.
iii) However, in this case, the distributors do not have any independence whatsoever to do so by reducing their margins.
iv) In principal-to-principal relationship once the goods are sold there can be no restriction imposed by one principal on the other one as regard to his area of operation. However, in this case, the distributors can make sales only in the area precisely specified by the assessee company.
v) If assessee company reduces the MRP which has been done recently, then it is compensating the distributors for the loss on the value of stock available with them. In principal to principal relationship seller can never be responsible for the loss accruing to the purchaser on account of all in value of goods already sold by him. This practice also destroys the sanctity of sale price mentioned on the sales invoice prepared by the company for its transactions with the Distributor.
vi) If the stock available with the distributor cannot be sold before expiry date, the loss accruing on this account is also born by the company after the claim is submitted by the distributor and is verified by the company.
vii) Sales executives of the assessee company regularly monitors the operations of distributors, which is neither possible nor needed in principal-to-principal relationship. They see to it that area of operation by distributors is strictly adhered to, at the time of sale FIFO system is maintained etc. Importantly, sales executives send weekly report of stock with distributors to the company. In distant places, like Ratangarh, Auditors of company also audit the records and stock of the distributor on monthly basis.
viii) Once the goods are sold to the distributor, how the goods are sold further by him should be solely his discretion in principal to principal relationship. However, they have no right to appoint any sub-distributor. At the same time, company can appoint any sub-distributor and direct distributor to supply goods to such sub-distributors.
ix) A large number of claims, which would never be available in principal-to-principal relationship are made by the distributors and paid by assessee company. Some of such claims are as follows:
(a) Diesel and petrol claim to meet part of the distribution expenses.
(b) Vehicle repair to meet part of the distribution expenses.
(c) Salary to salesmen claim to meet part of the expenditure in off- season.
(d) Leakage and breakage claim in respect of leakage and breakage between distributor and retailer.
x) It was also found that assessee company had provided vehicles to some of the distributors for carrying out their distribution operations. Thus, some vehicles owned by assessee company are used by the distributors and the depreciation on these vehicles is claimed by assessee company. Firstly, if the distributors were independent principals why would company provide them with its own vehicle for the sales made by the distributor, which should be an independent operation of an independent principal. Secondly, if the distribution of goods by distributor would have been independent sales by independent principal, then how the assessee company would claim depreciation on the vehicles, because for making a claim of depreciation in respect of an asset, not only the asset should be owned by the assessee but it should be used by assessee for its own business. Thus, it is very clear that in the considered view of assessee company and its management, the distribution of goods by the distributors is an extension of their own business.
31. Whereas the Ld. AR has argued that such expenses are incurred and control on the distributors is exercised to maintain business relationship, goodwill in the market and to widen the customer base of the assessee and these are purely sales incentives and sales promotion expenses.
32. In reply, to the entries of commission and individual a/c of distributors in which commission a/c is credited, the Ld. AR replied that it is management information system. The only reliance can be placed on audited books of a/c and not other documents and registers found during the course of survey. The Ld. AR further argued that entries in such books of a/c do not determine the reality of nature of transaction. On this proposition of Ld. AR, how even audited books of account could determine the reality of transaction. This argument of the Ld. AR back fires the assessee itself under these circumstances. The assessee himself has shown commission as expenditure which is being fixed and paid to distributors by the assessee apart from various expenses borne by the assessee and control maintained by the assessee itself. The copy of ledger account of the assessee are available at P.B. 339 to 364 submitted by the Ld. AR and a copy of one page of the Ledger at P.B. 357 is reproduced for clarification as under:
HCCBPL-2002
Distributor commission Ledger Account : 1-Jan-2002 to 31-Dec-2002 Page 2
Date Particulars Vch Typ Debit Credit
Brought Forward 1,27,93,030.00
26-4-2002 Gross Revenue-Customer J Journal 11,61,441.00
BEING GROSS REVENUE BOOK-
ED 114182 C/S FOR THE MONTH
OF APRIL 02 FOR SALES MADE
FROM UDAIPUR DEPOT AS PER
THE ENCLOSED DETAILS
24-5-2002 Gross revenue-Customer J Journal 97,35,943.00
Gross Revenue for the period
27-04-02 to 24-05-02
(VKIA + KALADERA)
Gross Revenue-Customer J 14,86,999.00
being GR booked for 1446-37 cases
has been sold during the m.o.
may 2002 as per enclosed
reconciliation
Gross Revenue-Customer J Journal 97,35,943.00
Being reversal entry passed Of
JV No. 763
Gross Revenue-Customer J Journal 14,86,999.00
Being reversal entry passed of
JV No. 769
Gross Revenue-Customer J Journal 14,88,044.00
Being GR booked for 1446-37 cases
Has been sold during the MO may
2002 is per enclosed reconciliation
--------------- --------------
carried over 2,66,65,457.00 1,12,22,942.00
--------------- --------------
33. From the above it is clear that the assessee has made the entries in its books of account debiting commission account as an expenditure and crediting the same to gross revenue account. This cannot be lost sight in view of judgment in the case of State Bank of Travancore v. CIT Kerala 158 ITR 102 (SC). In that case sticky loans, interest were credited to suspense account by debiting to various sundry debtors and interest was not shown as income in the profit and loss account and the claim of the assessee bank, that there is no accrual or arising of the income in such cases. Hon’ble Justice Sabyasachi Mukharji and concurred by Hon’ble Justice Ranganath Misra, have held (relevant para at page 155 and 156) that :
“After debiting the debtor’s account and not reversing that entry-but taking the Interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee.”
“Thus by own admission of the assessee bank, the income has accrued or arisen in the mercantile system of accounting”.
34. In the present case the assessee is maintaining mercantile system of accounting and in its ledgers the amount of commission have been shown as paid or payable cannot be denied by its own admission by calling it as management information system.
35. Further on the perusal of sales bill on which Ld. AR has relied upon very strongly. On perusal of the sales bill approximately 80% of the sales are exempt from Sales Tax. Therefore an inference cannot be drawn on 20% of the sales on which Sales Tax is charged that the transaction is principal to principal basis. Moreover invoices not give any terms and conditions which were so advocated by the Ld. AR as enumerated herein above. Moreover the charges of sales tax are different for different transactions under particular Sales Tax Act of a state. Sales Tax can be charged and returns are filed in many states on works contract, consignment sale and even on transfer of goods from head office to branch office.
36. Moreover the sales bill is in the capacity as customer or consignee has not been made clear on the sales bill. Further the payment is to be made on fortnightly basis, as is evident from sales bills. But it has not been brought on record, whether the sales price collected from retailer is sent to the assessee after deducting commission or indirectly said to be margin of profit or the distributor has the right to use that money to his advantage or benefit. Whether the distributor have their own warehouses or godowns and sells them as an owner has also not been brought on 21 record. Without bringing on record any material, a said statement that closing stock belongs to distributor, is of no value. Since it is evident from papers found in survey, the distributor is entitled for commission only and hence his right to collect the money from retailer can not be to retain the same but send the same to the assessee. There is an old Section 194-H which is in Peri Materia with the present Section 194-H. The old section came in statute book w.e.f. 1.10.91 and remained effective upto 31.5.92. In pursuance of which there is a Board circular No. 619 dated 4.12.1991, which has also been mentioned by the CIT(A) in his order and the relevant para of the circular reads as under:-
“6. A question may raise whether there would be deduction of tax at source under Section 194-H where commission or brokerage is retained by the consignee/agent and not remitted to the consignor/principal while remitting the sale consideration. It may be clarified that since the retention of commission by the consignee/agent amounts to constructive payment of the same to him by the consignor/principal, deduction of tax at source is required to be made from the amount of commission. Therefore the consignor/principal will have to deposit the tax deductible on the amount of commission income to the credit of Central Government, within the prescribed time, as explained in succeeding paragraph.”
37. And the law of interpretation, is that a repealed section can always be relied upon, for interpreting the new provisions, if the old section is in Peri, Materia and having the same sum and substance. Thus, the issue gets clarified in view of the old section, that the distributor’s margin is nothing but a commission and is liable for tax deduction at source.
38. Regarding applicability of Section 194H, which is the main issue in these appeals, the same has to be analysed and synthesized. The provisions of Section 194H contained in the Act are as under:
Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in 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 five per cent:
Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed two thousand five hundred rupees:
Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under Clause (a) or Clause (b) of Section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section. ?
Explanation-For the purposes of this section-
(i) “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;
(if) the expression “professional services” means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of Section 44AA,
(iii)the expression “securities” shall have the meaning assigned to it in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
(iv) 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.”
39. On perusal of explanation to Section 194H, it is evident that not only directly even indirectly any payment received by the assessee or any payment received for any services in the course of buying or selling of goods or where any income is credited to any account called by any other name in the books of account of the person liable to pay such income, such crediting shall be deemed to credit or such income to the account of the payee and the provisions of this section shall apply accordingly.
40. The statement of the distributors that they are given fixed commission cannot be retracted by filing affidavit for which the AO had already given sufficient opportunity to the assessee.
41. In the facts and circumstances, we also do not agree with the submission made by the Ld. AR that according to the CBDT Circular No. 275/201/95 dated 29.01.1997 a person responsible to deduct tax cannot be regarded as an assessee in default in respect of payment of any amount if the payee has already paid taxes in respect of such income. In this regard we agree with the findings of the Ld. CIT(A) vide his order in para 4.2(4) which reads as under:-
“(4) In para 4 of paper book, assessee has drawn attention towards CBDT circular No. 275 which by quoting only a part of its which states that the taxes cannot be recovered from the payer, if the tax in question had already been paid by the deductee and without quoting the other Mm that such taxes cannot be recovered from the payer, only after the payer has satisfied, the IT authorities that taxes have been paid by the deductees. In this case, assessee had made no efforts to satisfy the I.T.O.(TDS) about such payments by the deductees. In this paper book, they have enclosed PAN No. and copies of returns of some distributors which are not admissible as per Rule 46A. Importantly, out of several hundred distributors, he has enclosed acknowledgement of returns of only 6 distributors while he should have satisfied the I.T.O. for payment of taxes by each and every deductee. Importantly even for these 6 distributors the proof only in respect of advance tax/self assessment tax paid by their own sweet will and not the payment equivalent to the TDS which was deductible. Therefore, the appellant has not fulfilled the conditions laid down in Circular No. 275 dated 29-1-97. If this circular is made application under these circumstances then there will be no need for anybody to deduct any TDS.”
The reliance placed by the Ld. AR on number of judgments and the CBDT Circular No. 275 as afore said are also not applicable in this case.
42. Thus keeping in view in the reality of transaction, own action of the assessee, explanation of Section 194H, Circulars of CBDT and decision in the case of State Bank of Travancore, we are of considered view that tax at source should have been deducted Under Section 194H by the assessee. Ground No. 10 regarding additional evidence and Ground No. 14 have already been dealt by us in the afore said paras. Therefore, we find no infirmity in the findings of lower authorities. Without repeating the same, the same are hereby sustained alongwith the reasons mentioned therein. In other words, the relationship between the assessee company and its distributor is principal and agent basis and the assessee was entitled to deduct the TDS on commission which he failed to do so.
43. In the result, both the appeals of the assessee are dismissed.