The Commissioiner Of Income Tax vs Jai Drinks Pvt. Ltd.
2011 Latest Caselaw 50 Del

*        IN THE HIGH COURT OF DELHI AT NEW DELHI



+                         ITA No. 399/2010

%                               Date of Order :   6th January, 2011

THE COMMISSIOINER OF INCOME TAX            ...APPELLANT
             Through: Ms. Rashmi Chopra, Advocate.

                                Versus


JAI DRINKS PVT. LTD.                                  ...RESPONDENT
              Through:          None.

CORAM:
HON'BLE MR. JUSTICE A.K.SIKRI
HON'BLE MR. JUSTICE M.L.MEHTA

1. Whether the Reporters of local papers                Yes
may be allowed to see the judgment?

2. To be referred to Reporter or not?                   Yes

3. Whether the judgment should be                       Yes
reported in the Digest?


M.L.MEHTA, J. (Oral)

1. This appeal has been preferred under Section 260A of the

Income Tax Act (hereinafter referred to as „the Act‟) against

order dated 28th November, 2008 passed by the Income

Tax Appellate Tribunal („ITAT‟) for the assessment year

2004-2005.

2. The assessee company is engaged in business of

manufacture and sale of soft drinks under the brand name

i.e. Pepsi, Miranda, 7Up, etc. The assessee had appointed

M/s Tirupati Drinks Pvt. Limited (hereinafter referred to as

„Distributor‟) as C&F Agent cum distributor for the

purpose of distribution and sale of its products vide an

Agreement dated 23rd December, 2002.

3. A survey was conducted under Section 133A of the Act

and the Assessing Officer passed an order holding that the

payment made by the assessee to the distributor

constituted commission under Section 194H of the Act.

The Assessing Officer held that the assessee defaulted in

not deducting the tax at source on the amount of

commission paid to the distributor and consequently,

determined the total tax liability of Rs.40,06,679/- under

Section 201(1) & 201(1A) of the Act. Assessee preferred an

appeal before the Commissioner of Income Tax (Appeals)

[hereinafter referred to as „CIT(A)‟] which was allowed. The

CIT(A) held the payments made by the Assessee as

incentives in the normal course of buying and selling.

The revenue preferred an appeal against this order before

the ITAT which was dismissed holding that the nature of

transaction between the assessee and the distributor is

not that of principal-agent, but principal-to-principal and

that the payment given by assessee to the distributor is

nothing but a discount and did not have the

characteristics of commission.

4. The present appeal is preferred against the impugned

order of the ITAT. The admitted facts, as noted above are

not in dispute. The only question that arise for

consideration is as to whether as per the agreement

entered into between the assessee and the distributor and

the payments made by the assessee to the distributor

constitute commission as envisaged under Section 194H,

and whether the assessee was liable to deduct TDS. The

entire dispute centered around the interpretation of the

agreement entered between the assessee and distributor.

The CIT(A) has opined that, a sum allowed to a servant or

agent who manages the affairs of others in recompense for

his services is compensation. It is generally calculated at

a certain percentage on the amount of transaction or on

the profit to the principal. As a matter of fact, generally a

person earning commission would be selling goods not on

his own account but on behalf of another, commonly

known as the principal. In order to attract the provision of

194H, commission must have been received by a person

who is acting on behalf of another. In other words, he

must be acting as an agent to another person. The CIT(A)

had also noticed that the assessee as well as the

distributor are showing their respective sale invoices and

are assessed to sales tax, which was evidenced by the

respective sales bills and sales tax orders. With these

observations, and in the light of each and every clause of

the agreement, the CIT(A) held that the arrangement

between the assessee and the distributor was that of

principal-to-principal and not of principal-agent.

5. ITAT has also on its part examined each and every term

and condition of the aforesaid agreement and held that it

was the case where two parties to a contract have taken a

conscious decision to transact between each other on

principal-to-principal basis and it would not be open to

the Revenue to read into such contract and treat the same

as being on principal-agent basis.

6. The learned counsel appearing for the revenue relied upon

the case of CIT v. Idea Cellular Ltd. 2010-TIOL-193-HC-

DEL-IT. That was the case relating to the distributorship

of prepaid cellular telephones by the assessee through

distributors called Prepaid Market Associates. Since in

that case the overall control and also the ownership of the

SIM cards remained with the assessee and the transaction

in question was not that of sale and purchase, the Court

held that keeping in mind the nature of service provided

by the assessee to the ultimate consumer, a relationship is

established between the assessee and the ultimate

consumer. Distinguishing the legal positions, the Court in

para 24 of its judgment opined as under:-

"24. In contrast, the legal position when the goods are sold by principal to its distributors creating "principal and principal" relationship would be entirely different. On the sale of goods, the ownership passes between the manufacturer and the distributors. It is the responsibility of the distributor thereafter to sell those goods further to the consumers - the ultimate users. The principal/manufacturer does not come in picture at all. Of course, he may be liable for some action by the consumer because of defective goods, etc., which is the result of other enactments conferring certain rights on the consumer or common law rights in his favuor as against the manufacturer..."

7. The facts of CIT v. Idea Cellular Ltd. (supra) are entirely

distinguishable from the facts of the present case.

8. A perusal of the agreement shows that the assessee had

permitted the distributor to sell its products in a specified

area. The distributor was to exclusively deal in the

products of assessee in a specified territory. The products

were to be purchased by the distributor from the assessee

against 100% advance payment, though decision rested

with the assessee to give the products on credit to the

distributor. The distributor was to maintain at all times

the minimum stock and was to deal only in the products

of the assessee. The distributor was to maintain its

operational infrastructure including requisite staff under

its employment with liability of PF contribution, ESI

contribution, etc. as per the laws. It was specifically

stated in clause 16 that the arrangements under this

agreement are on principal-to-principal basis and nothing

in this agreement shall be construed to confer the

authority of an agent to bind the assessee. In clause 17 it

was specifically mentioned that the distributor was to

purchase the products of the assessee and was to be

allowed discount per case on the printed MRP. In case of

any breakage, leakage, etc., it was the distributor who was

liable and not the assessee. Not only this, even all the

approvals, consents, registrations, licenses, etc whatever

may be required from departments or authorities were to

be obtained by the distributor.

9. From all that has been noted above, it is evident that the

distributor was to purchase products at pre-determined

price from the assessee for selling the same within

specified area. The products were to be purchased by the

distributor against 100% advance payment or may be

some times on credit at the discretion of the assessee.

Both the assessee and the distributor have been collecting

and paying their sales tax separately. Both the parties

have clearly understood and accepted the agreement

between them. That being the arrangement between the

assessee and the distributor, it could not be said that the

relation between them was that of principal-agent. On the

other hand it was clearly stipulated to be an agreement

between them on principal-to-principal basis. Both the

CIT(A) and also the ITAT rightly held that the payments

being made by the assessee to the distributor were

incentives and discounts and not commissions. We find

no infirmity in the findings of the CIT(A) and also ITAT.

10. Keeping in view the abovementioned facts and

circumstances of the case, the present appeal has no

merits and is hereby, dismissed.

                                                       M.L.MEHTA
                                                        (JUDGE)



                                                       A.K.SIKRI
JANUARY 6, 2011                                        (JUDGE)
AK