1. Payment of commission or brokerage liable for TDS under section 194H
Section 194H provides for deduction of tax at source from any income by way of commission or brokerage to a resident. Accordingly any person, not being an individual or a Hindu undivided family, who is responsible for paying, 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 percent.
2. What constitutes commission for the purpose of section 194H
Explanation (i) to section 194H, explains the meaning of the term commission or brokerage. Accordingly, “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.
3. Payment in nature of discount not liable to TDS under section 194H
The following case law may provide guideline as regards nature of transaction:-
(I)Discounts paid by a manufacturer to its distributors for supply of its products to the retailers cannot be categorized as ‘Commission’. Thus, there is no liability upon the assessee to deduct tax at source on such discount payment under section 194H- Vide Addl.CIT v. Pearl Bottling (P) Ltd.2012 TaxPub(DT) 1042 (Visakha-Trib) : (2011) 46 SOT 133 (Visakh-Trib).
(II) No TDS under section 194H was required to be deducted on discount given to dealers as it would not be treated as commission or brokerage as they are not commission agent – Vide Hero MotoCorp Ltd. v. Addl.CIT 2013 TaxPub (DT) 2242 (Del-Trib) : (2013) 60 SOT 25 (Del ‘C’-Trib) : (2013) 156TTJ (Deb ‘C’-Trib) 139.
(iii) Assessee was not required to deduct tax at source under section 194H on discount given to customers on booking of air tickets because the same was a reduction on the sale price and not a commission – Vide ITO v. Kesar Travels ltd. 2014 TaxPub (DT) 3646 (Mum-Trib) : (2014) 34ITR (Trib) 124 (Mum ‘J’-Trib)
(iv) Provisions of section 194H could not be attracted where retail customers or group customers as well as small agents to whom concession was given by assessee-Airlines agents would only be ‘discount’ and not ‘commission or brokerage - Vide Asstt.CIT v.Al Hind Tours & Travels (P) Ltd. 2014 TaxPub (DT) 2662 (Coch-Trib) : (2014) 64 SOT 1 (Coch-Trib).
(v) The discount on MRP granted by the assessee to distributors at the time of sale of the drugs/medicines (i.e goods) does not fall within the ambit of section 194H. Therefore, no tax was required to be deducted at source thereon – Vide ITO v. Unichem Laboratories Ltd. 2016 TaxPub(DT) 2199 (Mum-Trib).
(Vi) Where assessee was paying annual and quarterly discounts to stockiest/dealers on their achieving sale-linked targets and stockists were also providing additional services for such increase in sales, such discount could not be termed as commission, therefore, section 194H could not be applied, based on the facts that sale was made to stockists on principal-to- principal basis and providing of such additional services would directly benefit to stockists themselves – Vide Bajaj Consumer Care ltd.v. Dy.CIT 2016 TaxPub(DT) 2561 (Hyd-Trib).
4. Meaning of ‘Discount’
Discount in general terms, is a deduction from MRP of an article and it is given to attract the customers. Sometimes, such deduction is made in order to provoke the customers to make payment in cash and sometimes it is given when bulk purchases is made.
Discount is generally claimed as deductible expenditure under Profit & Loss account of the assessee. Controversy often arises as regards interpretation and distinction between terms discount and commission because discount is not required deduction of tax at source whereas commission is liable for TDS under section 194H. Generally when transaction is in nature of direct sale transaction on principal to principal basis, TDS obligation does not arises as no commission is involved in such transaction.
5. Recent decision in EPCOS India (P) Ltd.’s case
In EPCIS India (P) Ltd.v.ITO IT Appeal No.2533, 2758 (Kol.) of 2013 & 688,1325,1718 & 1895 (Kol.) of 2014, (Kol ‘C’-Trib) dt 02.02.2018 (2018 TaxPub (DT) 859 (Kol ‘C’- Trib), the assessee claimed certain expenses under the head “trade discount and cash discount” as there was a contract between he assessee and its customers which was based on principal to principal basis. But the assessing officer disallowed the same by contending that amount of discount offered by the assessee was nothing but commission expenses which is liable for deduction of tax at source under section 194H of the Act.
The assessing officer during the assessment proceedings observed certain facts as detailed under:
(i)The amount of discount offered to the customers was subject to various terms and conditions therefore it partake the character of commission.
(ii) The amount of discount was settled by the assessee by issuing credit note to the customers. These credit notes were issued to the customers only on the happening of the particular event/activity such as receipt of payments made by the customers. Thus the discount offered by the assessee is in the nature of commission.
(III) The discount was also offered to the customers on account of prompt payment made by dealers to the assessee. This again reflects that the discount is related to providing some services like prompt payment.
(iv) The amount of commission offered by the assessee is directly linked/related to its liquidity which proves that these are not normal discount offered by the assessee but represents the amount of commission.
(v) The terms and condition between the assessee and its customers is of principal and agent.
On appeal before Commissioner (Appeals), it was submitted that the contract of sale between the assessee and its customers/dealers is based on principal-to- principal basis. Therefore, the transaction between the assessee and its customers represents the sale purchase activities. Thus the discount offered can not be termed as commission under section 194H of the Act. The Commissioner (Appeals) directed assessing officer to allow deduction as claimed by assessee by contending that the offering of discount for purchasing the quantity in bulk by the customers cannot be treated as payment of commission to the customers specially when the sale is happening on a principal to principal basis.
I further appeal before the Tribunal, it was held that the assessee has been supplying goods to its dealers on principal to principal basis as evident from the agreement. Therefore, there was no relationship between the assessee and its customers as of principal and agents. Therefore, the amount of discount offered by the assessee could not be termed as commission under section 194H. Moreover, the issue of discount offered by the assessee has been duly settled by the Hon’ble Supreme Court in the case CIT.v.Ahmedabad Stamp Vendors Association 2012 TaxPub(DT) 2662(SC) : (2012) 348 ITR 378 (SC) wherein it was held as under:
“We are satisfied that 0.50% to 4% discount given to the Stamp Vendors is for purchasing the stamps in bulk quantity and the said discount is in the nature of cash discount.
In the circumstances, we concur with the impugned judgment that the impugned transaction is a sale. Consequently, section 194H of the income Tax Act, 1961 has no application.”
There is no dispute that the discount was offered by the assessee to its dealers in relation to the sales made by it to them.Thus the provisions of section 194H does not apply to the impugned discount offered by the assessee. Thys, there is no reason to interfere in the order of learned Commissioner (appeals).
Whenever deduction is given to customers for purchasing goods in bulk quantity, it would form part of discount in transaction of sale. Hence, on such discount there would be no liability to deduct tax at source under section 194H.