The assesee is running a shop where it sale and serve sweetmeats, namkeens, cold drinks and other edible items and also restaurant. The dilemma here is related to classification of the supply, whether the supply by the assesse will fall in the supply of goods or supply of services. Additionally one needs to find out the applicable tax rate and admissibility of input tax credit to the assessee.
2. Legal Provisions
In order to identify classification of the supply narrated above, it is essential to understand the relevant provisions of law as per the CGST Act, 2017.
Section 2 deals with the definition of the term used in the said Act, the relevant definition are as under:-
(30) “Composite Supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary, course of business, one of which is principle supply;
(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
(74) “ Mixed supply “ means two or more individual supplies of goods or services or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply
(90) “Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;
(102) “Service” means anything other than goods. Money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
3. Mixed supply and Composite Supply
The concept of mixed or composite supply has evolved from the concept of naturally bundled service which was explained in the Education Guide issued by the C.B.E. & C. in the year 2012 (the Education Guide) and the same is borrowed in explaining the meaning of naturally bundled service under GST law vide CBEC Flyer No.4 dated 01.01.2018. The relevant extract is reproduced as under for ease of reference:
“Bundled service” means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport service provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.
The rule is – ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’
Under GST law, supplies which are bundled with two or more supplies of goods or services or combination of goods and services are classified with distinct characteristics as : -
(i) Composite Supply
(ii) Mixed Supply
If we look at the definitions (supra), composite supply is one where two or more goods or services or both are supplied together, in a natural bundle and in a normal course of business, provided one of which is a principal supply. However, principal supply will be that supply which is predominant over other supplies. This means that the goods and services and bundled owing to natural necessities. The Composite supply is taxed at the rate applicable to the principal supply whereas a mixed supply means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price of these items can be supplied separately and is not dependent on any other. In Mixed Supply, the combination of goods and /or services is not bundled due to natural necessities, and they can be supplied individually in the ordinary course of business.
In order to identify if the particular supply is a Mixed Supply, the first requisite is to rule out that the supply is a composite supply. A supply can be a mixed supply only if it is not a composite supply. As a corollary, it can be said that if the transaction consists of supplies not naturally bundled in the ordinary course of business, then it would be Mixed Supply. Once the amenability of the transaction as a composite supply is ruled out, it would be a mixed supply, classified in terms of a supply of goods or services attracting highest rate of tax.
4. Discussion and Findings
In view of advance ruling given in the case of sweet-shop-cum restaurant, the services from the restaurant is a principle supply which provides a bundled supply of preparation and sale of food and serving the same and therefore, it constitutes a composite supply. It further satisfied the following conditions of a composite supply;
(i)Supply of two or more goods or services or both together
(ii)Goods or services or both are usually provided together in the normal course of business.
In the instant case the nature of restaurant services is such that it may be treated as the main supply and the other supplies combined with such main supply are in the nature of incidental or ancillary services. Thus restaurant services get the character or predominant supply over other supplies. Therefore, in the present case the supply shall be treated as supply of service and the sweet shop shall be treated as extension of the restaurant in as much as the said activity covered under Schedule II of the said Act and the relevant portion of the same read as under:-
The following composite supplies shall be treated as a supply of services, namely:-
(a) Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption) where such supply or service is for cash deferred payment or other valuable consideration.
Further, as the activity is classified as “restaurant services,” the same falls under Heading 9963 of GST rates on services under Notification No.11/2017-Central Rate (Tax), dated 28.06.2017 (as amended time to time) and the relevant portion of the same is reproduced as under:-
Heading 9963 (Accommodation, food and beverage services) –
(i)Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or drink, where such supply or service is for cash deferred payment or other valuable consideration, provided by a restaurant, eating joint including mess, canteen whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied, other than those located in the premises of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purpose having declared tariff o any unit of accommodation of seven thousand five hundred rupees and above per unit per day or equivalent.
Explanation. – “declared tariff” includes charges for all amenities provided in the unit of accommodation (Given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.
Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.
Thus, in view of the above discussion, the classification of supply shall be of restaurant services and the rate of GST on aforesaid activity shall be 5% as on date and input tax credit shall not be admissible on the goods and services used in the said activity in terms of aforesaid notification.
7. Author’s View
The author of this article partly differs on the ground taken by the AAR in deciding the issue. It seems that the AAR has decided the issue by considering the overall supplies made by the sweet shop-cum-restaurant as bundled supply and has accordingly decided the issue. The inference has been withdrawn by AAR on the basis of mixed supply and composite supply. The author is of the view that the concept of mixed and composite supply. The author is of the view that the concept of mixed and composite supply steps in when there are more than one supply for a single price to a single person. This ruling needs further discussion and revision.
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Establishing a new business as an entrepreneur is not a cake walk especially when faced with competition from other entrepreneurs who are already flourishing in business. Many a times, a budding entrepreneur faces hindrances not in the product or marketing but in financial and compliance aspects. An advice and consultation in such scenarios overcome these obstacles. Here are a few recommendations that can be beneficial in your endeavours:
Set a target that needs to be achieved. Work on creating adequate opportunities through conceptualizing, figuring potential problems that might occur during the business venture and come up with solutions to overcome them. It is advised to avoid acting upon assumptions when it pertains to business ventures. In addition to this, it is recommended to conduct a SWOT (Strength Weaknesses Opportunities Threat) analysis.
Direct and Indirect Tax Consultations:
In case of a budding entrepreneur, due to revenue stress the financial planning can be demotivating. With the assistance of Direct Tax Consultants, who can find adequate solutions for your queries you can overcome these issues. They assist in developing a multifaceted financial strategy which corresponds to your agenda like improving working capital positions, optimising tax positions and cutting costs. Indirect tax consultants provide advice and assistance in handling GST issues for new businesses, such as filing and payment of GST and availing input credit on GST.
Attention to Minute Details:
Issues like conditioning the network connections, maintaining a brand value, upholding a strong social media exposure and providing commendable customer service must not be ignored in order to avoid future business depressions. Also being affirmative about the dedication of the employees to the company is paramount for its continued progress.
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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.
Section 145 of the Income Tax Act, 1961 (Act, for short) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” is to be computed in accordance with the method of accounting regularly employed by the assesse. This leads to the decision as to what are the various method of accounting, which an assesse can adopt?
2. Two methods of accounting generally followed
There are two methods of accounting, which are generally prevalent mercantile and cash system. In order to further clarify the same principle, section 43(2) defines the word ‘paid’ to mean ‘actually paid or incurred’ according to the method of accounting upon the basis of which the profits or gains are computed under the head “Profits and gains of business or profession.” When books of account are maintained on the basis of mercantile system, income is taxable and expenditure is deductible on ‘due’ basis, whereas, if books of account are kept on the basis of cash system, income is taxable on ‘receipt’ basis and expenditure s deductible on payment basis. Earlier up to 31.3.1997, the assesses were permitted to follow ‘hybrid’ system of accounting, i.e. combination of both cash and mercantile system, but this is prohibited since 1.4.1997 when section 145 was substituted by new section 145 by the Finance Act, 1995.
3. Section 145 of the ACT-method of accounting
This section, for ready reference, is reproduced below:
(1)Income chargeable under the head “Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provision of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assesse.
(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assesses or in respect of any class of income.
(3) Where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assesse, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assesse or income has not been computed in accordance with the standards notified under sub-section (2) the assessing officer may make an assessment in the manner provided in section 144.
4. When accounts of an assessee cab be rejected by the AO?
The circumstances in this regard have been stated in sub-section (3) (supra) and these are:
*When the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee; or
*Where the method of accounting provided in sub-section (1) has not been regularly followed by the asessee; or
*Income has not been computed in accordance with the Standards notified under sub-section (2)
In such circumstances, the assessing officer has been empowered to make an assessment in the manner prescribed under section 144 of the Act to the best of his assessment. In other words, he has to first record findings on the aforesaid aspects before rejecting the assessee’s method of accounting – cash or mercantile.
5. Method of accounting and computation of profit/Loss in the case of construction contracts.
The institute of Chartered Accountants of India (ICAI) has prescribed vide AS-7 two methods of revenue recognition in the case of construction contracts. These are:
If an assessee engaged in construction business follows any of the above methods for computation of his profit regularly, the same cannot be rejected by the assessing officer for making assessment of his income under the income Tax Act.
Now, the government has specified ICDS-III, which deals with construction contracts and recognises only the percentage completion method.
6. Tribunal’s decision in the case of Ashoka Hitech Builder (P) Ltd.v. DCIT (Central) –I, Indore (2018) 172 ITD (Ind-Trib)
In the background of legal position, as stated earlier the Tribunal’s decision can be examined to indicate how assessing officers, occasionally make assessments disregarding the legal position, as stated earlier, leading to proliferation of litigation unnecessary, putting the assessee to uncalled for hardship, expense and waste of time and energies, to no-one’s benefit. The facts and other relevant aspects emerging from this decision are analysed in later discussion.
The assessee, whose case was before the Tribunal, was engaged in the business of purchase/Sales/development of land, real, estate and infrastructure and construction and civil work. The issue linked to the grounds raised in this appeal related to agreement dt – 01.04.2009 entered into between the assessee and M/s.JSM Devcon (P) Ltd. The assessee is the owner of 2,039 hectare of land and the same was given for development to M/s. Devcon (P) Ltd. As per the terms and conditions of the development agreement, the developer will construct various high-rise buildings on the land and in consideration for allowing the development of land, the assessee company will be entitled to 32% of the total saleable constructed area, to be constructed by the developer. It was decided that entire revenue shall be shared in the ratio of 68:32 as decided in the development agreement. On examination of the audited accounts of the assessee, it was revealed that the assessee has not reflected any revenue from sale of units, however, it was getting advance against sale from the developer from 2010-11 onwards.
(ii)The assessee’s case and AO’s response
It was submitted by the assessee during the assessment proceedings that it is consistently following project completion method and has offered the revenue for tax in the year in which sales have been effected and the sale deeds, registered. However, the assessing officer was not convinced with the submission made by the assessee and he applied the method adopted by M/s.Devcon (P) Ltd, i.e. the percentage completion method on the assessee and calculated the income of the assessee applying the ratio of 68:32 as agreed in the agreement. The assessing officer took the basis of financial data of M/s.JSM Devcon (P) Ltd., which has accounted for the revenue on the basis of percentage completion method as per the guidelines prescribed by the ICAI.
(iii)Appeal before the CIT (A)
Aggrieved assessee filed appeal before the Commissioner (Appeals) against the method and Commissioner (Appeals) confirmed the action taken by assessing officer observing as follows:
“I have gone through the assessment order, the appellant’s contentions and the audited accounts of M/s.JSM Devcon (P) Ltd. In the assessment year under consideration, the appellant company has not reflected any revenue from the operations in the profit and loss account. During the course of assessment proceedings, the appellant company, in response to the query for not recognizing revenue in the books of account, had furnished the following reasons:
(i)The company has been recognizing revenue on the basis of sales deeds executed at the time of full payment coupled with possession of the apartment.
(ii)Advance have been received from various customers on the basis of schedule given in the allotment letter, which specifies that instalment shall be paid on completion of a particular level of activity. The amount so received is liable to refund and the possession shall be given at the time of execution of the sale deed.
(iii)In the transaction of advance received from customer, there is no transfer of property as envisaged in section 2(47) of the Income Tax Act, 1961 read with section 53A of the Transfer of Property Act, 1882.
(iv)Similar type of accounting method (mercantile) has been followed by the assessee from year-to-year.
The Tribunal posed the issue as to whether a person is mandatorily required to adopt percentage completion method or not and then, referring to section 145 of the Act and in the background of that and facts of the case, has decided that where project completion method had been consistently followed by assessee, land owner and it had been accepted by revenue authorities in case of assessee for previous year, assessing officer was not justified in applying percentage completion method on assessee for one year on selective basis merely because it had been followed by its developer.
7. Concluding comments
Such unfettered exercise of discretion by assessing officers, as has been done by the assessing officer in the case before the Tribunal, shows making assessment on the basis of whims and fancies of the assessing officers, who are quasi-judicial authorities without regard to legal provisions. If the assessing officer wants to alter the method of accounting consistently followed by an assessee, he can not do so arbitrarily on the ground that some other assessee follows a different method for computing profit from construction contracts. He has to give proper notice in regard to what he proposes to do, give adequate opportunity to the assessee to have his say and if he does not agree with the same, reject the assessee’s contentions by a speaking order. He cannot make assessment, deviating from the method of accounting followed by the assessee for two years 2012-13 & 2013-14 merely by observing that the assessee has entered into the agreement as a joint venture for development and the method of accounting followed by the assessee for two years 2012-13 & 2013-14 merely by observing that the development and the method of accounting applied by JSM DPL is binding on the assessee also. No such requirement is prescribed either under the Income Tax Act or by ICAI. He cannot function like an autocrat in the matter of making assessments unmindful of legal requirement and discard the method of accounting regularly followed by an assessee without giving any convincing justification merely on the ground that he must switch to the method to that of his co-developer merely because he feels that he should do so.
Such haphazard and arbitrary decisions by assessing officers need to be curbed by the CBDT by suitable instructions. Recently, the DG (Vig) with the concurrence of Chairman, CBDT, has issued instructions to CIT (Appeals) to regulate their way of functioning on the lines stated, which is, in a way, interference in the functioning of CsIT(A), which the CBDT is not authorized to do, there seems to be no reason why the malfunctioning of the ITOs indicated by the case before the Triunal (supra) cannot be regulated. Hence, immediate instructions to the assessing officers seem urgently called for.
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1. Meaning of Prior Period Expenses
Prior period expense are generally those expenses which are relating to the current year in the sense they are crystalised during the year, though relating to activities of an earlier year.
For accounting purposes these are generally known as prior period items and required to be shown separately.
2. Allowability of expenditure in year of crystallization
Normally where mercantile system of accounting is followed, expenses relating to relevant year are accounted for in that year. However prior period expenses had to be allowed in subsequent years because the expenses were crystallized only in that year.
A liability though pertaining to earlier year, is said to accrue when it actually crystallises, is ascertainable and legally enforceable. Refer to, Wolkem (P) Ltd. v. CIT (1996) 54 TTJ (JP-Trib) 414, Kumar Aerosoles (P) Ltd. v.CIT (1996) 55 TTJ (Del-Trib) 385 and Sarvaraja Textiles Ltd.v. CIT (1995) 54 ITD 612 (Hyd-Trib).
In Bearingpoint Property Services (P) Ltd.v.Dy.CIT 2014 TaxPub (DT) 4064 (Bang ‘B’ – Trib) : (2014) 35 ITR (Trib) 177 (Bang ‘B’-Trib), it was held that in the light of the admitted position that the expenditure in question was wholly and exclusively for the purpose of business and that the same was genuine, the fact that the expenditure relates to an earlier period could not be a ground to deny the deduction, especially when factually crystalisation of liability during the previous year had not been disputed. Therefore, the expenses claimed by the assessee were directed to be allowed, as such these expenses were allowed though related to prior period.
Where prior period expenses on account of repair and maintenance were related to earlier years but crystallized when bills were received during current year, same were to be treated as current year’s expenses and hence allowable – Vide Dy.CIT.v.Enercon India Ltd. 2016 TaxPub (DT) 2867 (Mum ‘E’-Trib) : (2016) 48 ITR (Trib) 362 (Mum ‘E’ – Trib).
When the department was taxing prior period income, deduction of expenses, which had crystalized during the relevant previous year, should have also been allowed to the assesses. In a going concern, certain bills are received late and pertained to the business transaction and are crystalized during the relevant accounting period. These types of expenses are revenue in nature and are allowable in the previous year in which they are crystalized - Vide Dy.CIT v.Khurana Engineering Ltd. ITA No. 571 (Ahd) of 2010 (Ahd ‘D’ – Trib).
3. Expenditure incurred as continuous flow
It was a continuous process to incur expenditure and to account for in the books of account. Therefore, even though they were treated technically as prior period expenses, it related to a continuous flow of expenditure. Therefore, there was no justification in disallowing the expenditure, otherwise normally eligible for deduction – Vide Union Bank of India v. Asstt. CIT (2011) 49 SOT 32 (Mum ‘B’ – Trib) Also see, Bank of India v. Dy.CIT (2012) 139 ITD 493 (Mum ‘B’- Trib).
Where prior period expenses were debited on basis of receipts of bills and were in the nature of routine expenses duly authorized by company’s authorized body, the same could not be disallowed on the basis of tax audit report – Vide DCM Limited v. DY.CIT 2015 TaxPub (DT) 4649 (Del ‘B’ – Trib).
4. Expenditure to be disallowed where assessee failed to prove as to crystallization in current year
In Asstt.CIT v.Adani Wilmar Ltd.2014 TaxPub(DT) 3727 (Ahd ‘B’ – Trib): (2014) 64 SOT 122 (Ahd ‘B’- Trib), it was held that while upholding the disallowance of the expenses, the Commissioner (Appeals) has noted that the assessee had not submitted any evidence to prove that the expenses crystallized during the year either before assessing officer or before the Commissioner (Appeals). The statement of expenses very clearly indicated that the expenses were related to assessment year 2000-01. Therefore there was no reason to interfere with the order of the Commissioner (Appeals) disallowing the prior expenses, after offsetting the income of earlier year. Also see, Gujarat State Fertilizers and Chemicals Ltd.v.ACIT (2013) 1 ITR (Trib) – OL 540 (Ahd).
Assessee had failed to establish that the related expenses were actually crystallised during the year under consideration. Since assessee was following the mercantile system of accounting it has to establish that these liabilities pertaining to the previous year were actually crystallised during the year under consideration. Since the assessee had failed to do so the order of Commissioner (Appeals) was sustained – Vide Dy.CIT v.Cosmo Films Ltd & Ors. (2012) 13ITR (Trib) 340 (Del ‘B’-Trib): (2012) 139 ITD 628 (Del ‘B’- Trib).
Since assessee had failed in proving crystallization of prior period expenditure which included professional fee during the relevant year, assessing officer was justified in disallowing deduction claimed by assessee – Vide Adani Gas Ltd.v. ACIT 2016 TaxPub (DT) 843 (Ahd-Trib).
5. Information as regards expenses with evidence where received after closure of accounts
In State Bank of Bikaner * Jaipur v.Asstt.CIT 2014 TaxPub (DT) 4331 (Jp-Trib) : (2014) 166 TTJ (JP-Trib) 244, the assessing officer observed that as per audit report, prior period expenses had been debited to Profit and Loss Account. It was held that the genuineness of the expenses had not been doubted by the lower authorities. Thus, these expenses of previous year were allowable in respective year to which they pertained but information as regards such expenses with evidence was received by the assessee from the various branches after closing of books of account. Hence, these expenses are allowable during the year under consideration.
6. ICDS vis-à-vis prior period expenses
The notified ICDS does not provide anything on allowability of prior period expenditure. Hence, it can be presumed that the treatment of prior period expenditure shall be decided as per judicial precedents and the provisions of the Act.
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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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