Recently, the Madras High Court held that the discount retained by lottery distributors and dealers on the sale of lottery tickets cannot be treated as “commission” attracting tax deduction at source under Section 194G of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), while dismissing a tax case filed by the Revenue Department. The Court observed that a transaction of outright sale between principal parties cannot be artificially converted into an agency relationship merely because a margin exists between the face value and sale value of lottery tickets.
Brief Facts:
The case arose from proceedings initiated under Sections 201(1) and 201(1A) of the Act, against a lottery distributor engaged in purchasing lottery tickets from State Governments and selling them further to dealers at discounted rates. The Revenue authorities alleged that the difference between the face value of the tickets and the reduced sale price amounted to “commission”, thereby attracting a deduction of tax at source under Section 194G of the Act. While the Assessing Officer treated the assessee as being in default for failure to deduct TDS, the Appellate authorities and the Income Tax Appellate Tribunal held that the transactions were outright sales carried out on a principal-to-principal basis and not commission arrangements. Aggrieved by these findings, the Revenue approached the High Court, raising the question whether the discounted margin retained in lottery ticket transactions could legally be treated as “commission” under Section 194G of the Act.
Contentions of the Petitioner:
The Revenue Department contended that the assessee and its dealers did not share a pure buyer-seller relationship because unsold lottery tickets could be returned, and payments were made only for tickets sold before the draw. The Counsel argued that the amount retained by dealers from the face value effectively operated as commission or remuneration, thereby attracting Section 194G of the Act. The Department maintained that the so-called “margin” was, in substance, a commission paid for promoting lottery sales and that the assessee was therefore legally bound to deduct tax at source. The Petitioner further asserted that the Assessing Officer had rightly invoked Sections 201 and 201(1A) of the Act against the assessee for failure to comply with the statutory deduction mechanism.
Contentions of the Respondent:
On the other hand, the Respondent argued that the transactions were conducted strictly on a principal-to-principal basis and did not involve any agency relationship. Senior Counsel appearing for the assessee submitted that lottery tickets were purchased and sold as part of outright commercial transactions, and no separate amount was ever credited or paid to dealers as commission. The Respondent contended that the rebate or discount on the face value of the tickets could not be equated with “commission” under Section 194G of the Act. The assessee further relied on several judicial precedents, including decisions of the Kerala High Court and the Supreme Court, to contend that mere retention of a margin in a sale transaction cannot transform the relationship into one of principal and agent.
Observation of the Court:
The Division Bench of Justice G. Jayachandran and Justice Shamim Ahmed observed, “A person is chargeable to tax not on the basis what he saves in his pocket, but what goes into his pocket. In this case, as stated above, the Assessee had never paid any amount to the Dealer by way of commission. Hence, the amount saved by the Dealer cannot be termed as “Commission”, as the Assessee never credited any income to the account of its Dealers. When it is shown that there is no payment of commission to the Dealer by the Assessee at the time of purchase of the lottery tickets, Section 194G becomes inapplicable and no deduction of tax is envisaged.”
The Court observed that Section 194G of the Act would apply only where there exists an actual payment or credit of “commission”, remuneration, or prize by the assessee to another person. The Bench emphasised that the statutory requirement for deduction of tax at source arises only when such income is credited to the account of the payee or paid through cash, cheque, draft, or any recognised mode. The Court found that no commission was ever separately paid or credited by the assessee to the dealers. It therefore held that the mere difference between the face value of lottery tickets and the sale value could not automatically be treated as “commission” attracting TDS liability under Section 194G of the Act.
The Bench further observed that the relationship between the assessee and the dealers was one of principal-to-principal and not principal-agent. The Court noted that the lottery tickets were purchased from the State Governments at discounted rates and thereafter sold further by the assessee as part of an outright commercial transaction. Since ownership in the tickets passed through the sale itself, the arrangement could not be construed as a service transaction or an agency arrangement. The Court clarified that the margin retained by dealers was merely part of a commercial sale structure and not remuneration for any services rendered to the assessee.
The Court emphasised that the distinction between “commission” and “rebate” was crucial for deciding the controversy. Relying on several judicial precedents, the Bench held that commission is ordinarily compensation paid for services rendered, whereas a rebate or discount is simply a deduction from the stipulated sale price. The Court observed that taxation cannot be imposed merely on assumptions divorced from the real nature of the transaction and held that the amount retained by dealers from the discounted sale price could not be treated as taxable commission.
The decision of the Court:
In light of the foregoing discussion, the High Court dismissed the Tax Case filed by the Revenue Department and upheld the order of the Income Tax Appellate Tribunal. The Court held that the discounted margin in outright sale transactions of lottery tickets could not be treated as “commission” under Section 194G of the Act, and consequently, proceedings under Sections 201(1) and 201(1A) of the Act were unsustainable.
Case Title: The Commissioner of Income Tax Vs. M/s Martin Lottery Agencies Ltd.
Case No.: TC No. 955 of 2008
Coram: Hon'ble Dr. Justice G. Jayachandran, Hon'ble Mr. Justice Shamim Ahmed
Advocate for the Petitioner: Adv. B.Ramasamy
Advocate for the Respondent: Sr Counsel P.S Raman, Adv. M.Ganesh Kannan,
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