In CIT v. Canon India (P) Ltd. (ITA 137/2014, 138/2014, A.Y.2006-07, 2007-08 & 2008-09, decided on 03.08.2015), the assessee being a wholly owned subsidiary of Canon Singapore Pvt. Ltd. (hereafter ‘CSPL’) started its operations in India in 1996. During the course of its business, the assessee entered into various agreements/transactions with the Canon Group of Companies. These transactions pertained to purchase and resale of Canon products such as photocopiers, printers, scanners and cameras in India. The Assessee was also engaged in software development and as a part of its business, exports software and provides software related service to other Canon Group of Companies.
2. Canon India Appeals
One of the issue in the above appeals was relating to the adding by assessing officer unutilized subsidies, to the total income of the assessee received by the Assessee from its holding company – CSPL. The assessing officer observed that the subsidies received by the Assessee became its property notwithstanding that the same had not been spent for the purpose for which they were received. And, on the aforesaid basis, the assessing officer held that the subsidies received by the Assessee were required to be treated as its income for the relevant previous year.
3. Submission by assessee
The assessee had stated before the Tribunal that is had received sum of Rs.27,10,87,594 and Rs.50,16,13,022 from CSPL during the years relevant to assessment years 2007-08 and 2008-09 respectively. It was pleaded by the assessee that these subsidies were received for meeting specific advertisements and sales promotion expenditure that had been pre-approved by CSPL. During the period of the previous year ending 31.12.2007, the assessee had utilized a sum of Rs.19,48,29,160 for advertisements and sales promotion activities and this amount had been directly reduced from the relevant expenditure. The balance amount of Rs,7,62,58,434 remaining after incurring the expenditure was reflected as “Current Liabilities” by the Assessee in its books. Out of the said sum, a further amount of Rs.39,161,177 was utilized towards advertisements during the period from January to March 2007 and this amount had been directly debited to “Current Liabilities”. According to the Assessee, the remaining amount of Rs.37,097,257 continued to be reflected as “Current Liabilities” in its books as on 31.03.2007. In the subsequent year i.e. the Previous Year relevant to the assessment year 2008-09, the Assessee received an amount of Rs.50,16,13,022, which was directly credited to the account under the head “Current Liabilities”. All expenditure incurred against the aforesaid subsidy was directly debited to the said account. The unutilized part of the total subsidy as on 31.03.2008 amounted to Rs.10,54,11,660, which continued to be reflected as Current liabilities. The Assessee further pleaded that there were some inadvertent discrepancies in the amount of unutilised subsidy as recorded in the Assessment Order.
The procedure for receipt/reimbursement of subsidies against expenditure, as explained by the assessee, was recorded in the order of the Tribunal as under:
(a)Initially the assessee forwards a proposal to CSPL for reimbursement of expenditure to be incurred for specific purpose (eg display charges of neon sign fabrication charges of neon sign, advertisement in newspapers, etc.)
(b) Once the same is approved by CSPL, the assessee prepares debit notes from time to time for receiving the advance payment. This debit note contains the details of the particular relevant expenditure to be incurred.
© Thereafter, CSPL remits the advance in lump sum with a specific direction that such money is to be spent only for the specified purpose and any amount of subsidy remaining unspent/unutilised shall be held by the assessee in trust for and on behalf of CSPL and the same shall not utilized by the assessee for any other purpose.”
4. Decision by Delhi High Court in the appeal
The judges of the Delhi High Court observed that it is not disputed by the revenue that subsidies were received by the assessee from CSPL against specific obligation to incur expenditure on specific activities and it was not open for the assessee to divert the amount for any purpose other than for which it was remitted. It was also not disputed by the revenue that assessee was accountable to CSPL for the amount received. The Tribunal had examined the relevant facts and also concluded that the unspent amount is to be held in trust on behalf of CSPL and this was also confirmed by CSPL. The assessee rightly so – credited the subsidies received to its Profit & Loss Account but reflected the same as a current liability. In view of the Assessee’s obligation to utilize the same for the specific purposes, the revenue could be recognized only on the application of the subsidy for the specified purposes. In other words, the Assessee could credit the Profit & Loss Account with the quantum of subsidy only if the corresponding expenditure was also debited to the Profit and Loss Account maintained by the Assessee. The revenue’s contention that the unutilized subsidy is required to be recognized as income of the Assessee in the year of its receipt is contrary to the matching concept, which is the substratal principle for computing income during a relevant period. It is necessary that income be recognized along with the corresponding expenditure incurred for earning the income. Thus, where an assessee follows the Accrual/Mercantile system of Accounting – as in this case – income can be recognized only when the matching expenditure is also accounted for irrespective of the cash outflow/inflow during the year. It would thus, not be correct to recognize the subsidies received for incurring specific expenditure as income without accounting for the corresponding expenditure. In the circumstances, is was held that there was no infirmity with the Tribunal’s view on the issue in question.
Facilities – Whether Commission of purpose of TDS under section 194H
1. Meaning of Commission for purpose of TDS under section194H
Section 194H provides for deduction of tax at source from any income by the way of Commission or brokerage to a resident.
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.
2. Nature of payment made to bank on account of utilization of credit card facilities.
Where credit card company retained commission while making payment to merchant establishment then it cannot be said that the bank acted on behalf of the merchant establishment or that even the merchant establishment conducted the transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchant establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Accordingly, there is no requirement for making TDS on the commission retained by the credit card companies:- Vide Dy.CIT v. Vah Magna Retail (P) Ltd. 2012 TaxPub(DT) 2855 (Hyd-Trib).
In Germs Paradise v. Asstt.CIT ITA No.746/Jp/2011 ITA No.841/Jp/2011 (Jp ‘A’-Trib). it was observed that there is no relationship of a principal and commission agent between the bank and assessee shop keeper. It is not the case that bank has advised the assessee to sell their goods to its customers, then he will pay the commission. It is reversed in a situation as bank issued credit cards to the credit card holders on certain fees or whatever the case may be and the card holder purchases material from the market through his credit card without making any payment and that shop keeper presents the bill to the bank against whose credit card the goods were sold and on presentation of bill as stated above the bank makes the payment. Therefore, provisions of section194H are not attracted.
Where bank made payment to dealer for sales against credit cards and deducted handling charges before making payment to assessee, the transactions were principal basis and no element of agency was involved therein, the charges thus not being in the nature of commission, no liability to TDS under section 194H arose. – Vide ITO v. The Mobile Store Ltd 2016 TaxPub (DT) 4629 (Mum-Trib).
No tax is deductible on credit card charges collected by bank and paid by assessee as said commission paid to the credit card companies cannot be considered as falling within the purview of section 194H – Vide ITO v. Hotel Leela Venture Ltd. 2016 TaxPub(DT) 2796 (Mum-Trib).
3. Recent decision in Velankani Information System Ltd.’s case
In Velankani Information System Ltd v. Dy.CIT ITA Nos. 218,283 (Bang.) of 2017 the Bangalore Bench of the Tribunal followed its earlier decision in Tata Tele Services Ltd. V. DCIT (TDS) (2013) 29 taxmann.com 261 (Bang-Trib) : 2013 TaxPub (DT) 652 (Bang-Trib) wherein the Tribunal observed that payment to banks on account of utilization of credit card facilities would be in the nature of bank charge and not in the nature of commission within the meaning of section194H of the Act. The same cannot also be said to be in the nature of professional services as services rendered by Banks is neither a service specified in the section nor notifies. The CBDT by notification under section 197A of the Act vide Notification No.56/2012, dt 31.12.2012 specified that credit/debit card commission for transaction between the merchant establishment and acquirer bank need not be subject to TDS. The notification is only recognition of the position as it always prevailed and as interpreted by several decisions rendered by the different benches of ITAT. The notification cannot be the basis on which it can be said that the amount retained by the bank was in the nature of commission within the meaning of section 194-H of the Act.
The CBDT Notification No.56/2012, dt. 31.12.2012 has been suppressed by Notification No.SO 2143€, No.47/2016. Dt.17.6.2016 with certain addition but having no relevance. This notification was passed under section 197A (1F) of the Act through which exemption from TDS was granted to certain categories of payments. One of such category is “(Vii) credit card or Debit card Commission for transaction between merchant establishment and acquirer bank” and the same was effective from 1.1.2013. The assumption of assessing officer that since such exemption was not available to the Appellant during the relevant assessment year thus deduction of tax has to be done, is not correct as this notification is clarificatory in nature and not making a fresh concession.
Therefore no addition can be made on account of non-deduction of tax at source under section 194H on the Commission retained by the credit card companies.
4. Concluding remark
From the above discussion it can be concluded that payments to banks on account of utilization of credit card facilities would be in the nature of bank charge and not in the nature of commission within the meaning of section 194H of the Act.
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Under the GST regime, Goods and Services Tax (GST) is leviable on supply of goods or services or both. The scope of Supply is explained under section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act). As per clause (a) of sub-section (1) of section7 of the CGST Act, the “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
The two limbs of any supply under GST are “consideration” and in the course or furtherance of
business. Where the consideration is not extant in a transaction, such a transaction does not fall within the ambit of supply. But, in certain scenarios, as elucidated in Schedule I of the CGST Act, the key element of consideration is not required to be present for treating certain activities as supply.
One such activity which has been detailed in paragraph 3 of Schedule I to the Act, according to which supply of goods:-
(a) By a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
(b) By an agent to his principal where the agent undertakes to receive such goods on behalf of
the principal, would be regarded as supply even if made without consideration.
It may be noted that all the activities between the principal and the agent and Vice versa do not fall within the scope of the said entry. Firstly, the supply of services between the principal and the agent and vice versa is outside the ambit of the said entry, and would therefore require
“consideration” to consider it as supply and thus, be liable to GST.
Secondly, the element identified in the definition of “agent”, i.e. “supply or receipt of goods on
behalf of the principal” has been retained in this entry.
2. Agent and Principal – Defined
Clause (5) of the CGST Act defies the term “agent” to mean person, including a factor, broker,
commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by
whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.
The term is also defined under section 182 of the Indian Contract Act, 1872, according to which the “agent” is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the “principal”. As delineated in the definition, an agent can be appointed for performing any act on behalf of the principal which may or may not have the potential for representation on behalf of the principal. So, the crucial element here is the representative character of the agent which enables him to carry out activities on behalf of the principal.
The following two key elements emerge from the above definition of agent:
(a) The term “agent” is defined in terms of the various activities being carried out by the person
concerned in the principal-agent relationship; and
(b) The supply or receipt of goods or services has to be undertaken by the agent on behalf of
From this, it can be deduced that the crucial component for covering a person within the ambit
of the term “agent” under the CGST Act is corresponding to the representative character
identified in the definition of “agent” under the Indian Contract Act, 1872.
As per clause (88) of section 2 of the CGST Act, “principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.
3. Key ingredient to determine Principal-agent relationship
The crucial factor is how to determine whether the agent is wearing the representative hat and
is supplying or receiving goods on behalf of the principal. Since in the commercial world, there
are various factors that might influence this relationship, it would be more prudent that an
objective criteria is used to determine whether a particular principal-agent relationship falls
within the ambit of the said entry or not.
Thus, the key ingredient for determining relationship under GST would be whether the invoice
for the further supply of goods on behalf of the principal is being issued by the agent or not.
Where the invoice for further supply is being issued by the agent in his name then, any provision of goods from the principal to the agent would fall within the fold of the said entry. However, it may be noted that in cases where the invoice is issued by the agent to the customer in the name
of the principal, such agent shall not fall within the ambit of Schedule I of the CGST Act.
Similarly, where the goods being procured by the agent on behalf of the principal are invoiced in the name of the agent then further provision of the said goods by the agent to the principal
would be covered by the said entry. In other words, the crucial point is whether or not the agent has the authority to pass or receive the title of goods on behalf of the principal.
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