Excel for
Chartered Accountants

In the following important judgment, Allahabad High Court has held that trade discounts given by a publishing house to accredited and non accredited advertising agencies as per Rules and Regulations of Indian Newspaper Society (INS) hereinafter referred to as INS) cannot be treated as commission and hence not liable to deduction of tax under section 194H of Income tax Act, 1961.

The Court also ruled that that in a case of default is committed by way of non-deduction or short deduction of tax at source, it cannot be realised from the deductor and the liability to pay such tax shall be on the receiver of the income and hence and a person who fails to deduct the tax at source, at best is liable for interest and penalty only.

Case Details:
WRIT TAX No. - 388 of 2012
Jagran Prakashan Limited … Petitioner
The Deputy Commissioner Of Income Tax (Tds) … Respondent

Coram:
Hon'ble Ashok Bhushan,J.
Hon'ble Prakash Krishna,J.

Judgment Delivered on: 23.5.2012

Case Law Referred:
Kerala High Court CIT Vs. Director Prasar Bharti [2010] 325 ITR 205
I.T.A. No. 1264/2007, CIT Vs. Living Media India Limited
Siemens Ltd. Vs. State of Maharashtra and others (2006)12 SCC 33.
Kerala High Court WP 26871/2005, The Malayala Manorama Co. Ltd. Vs. ITO & others
Calcutta Discount Co. Ltd. vs. Income Tax Officer 1961(41) ITR 191 SC
Raza Textiles Ltd. vs. Income Tax Officer, Rampur (1973)87 ITR 539 SC
Shrisht Dhawan (Smt.) vs. M/s Shaw Brothers reported in (1992)1 SCC 534
Arun Kumar and others vs. Union of India and others (2007)1 SCC 732
Loon Karan Sohan Lal vs. Firm John and Co. and others AIR 1967 Alld. 308.
P. Krishna Bhatta and others vs. Mundila Ganapathi Bhatta and others, AIR 1955 Madras 648
Chiarman, Life Insurance Corporation vs. Rajiv Kumar Bhasker (2005)6 SCC 188
Moped India Ltd. vs. Assistant Collector of Central Excise, Nellore and others (1986)1 SCC 125
Commissioner of Central Excise, New Delhi vs. DCM Textiles (2006)9 SCC 349
Universal Radiators Vs. Commissioner of Income Tax (1993) 201 ITR 88 SC
GE India Technology Centre Private Limited Vs. CIT (2010) 10 SCC 29
Azam Jha Bahadur Vs. Expenditure Tax Officer AIR 1972 S.C. 2319
Hindustan Coca Cola Beverage (P) Ltd. Vs. CIT (2007) 8 SCC 463
Director of Income Tax Vs. MAERSK Co. Ltd. (2011) 334 ITR 79 Uttarakhand High Court
CIT Vs. Ranoli Investment P. Ltd. And others, (1999) 235 ITR 433 Gujarat HC
Punjab National Bank Vs. O.C. Krishnan and others AIR 2001 S.C. 3208 2004 (266)
ITR 283 V.K. Packaging Industries Vs. Tax Recovery Officer and others,

Facts of the Case:
The writ petition was filed Jagran Prakashan Limited publishing a Hindi daily newspaper “Dainik Jagaran” under Article 226 of the Constitution of India challenging the initiation of proceedings under sections 201 and 201 (1A) of Income Tax Act, 1961 (Act) allegation that the petitioner for FY 2009-10 and 2008-09 had failed to deduct the tax at source on payments to advertising agencies and hence why it may not be declared as an asessee in default of such tax.

INS had on 114-08-2008 circulated a letter on the issue of “TDS on advertising agency trade discounts under Section 194H of the Income Tax Act”. to all the members of the INS which on the basis of the judgment of Delhi HC in Living Media where it was held that the assessee was not liable to deduct TDS on payment received by the agency.

During the course of survey conducted at the premises of the petitioner at Kanpur, it became known that the petitioner has failed to deduct tax at source on the  15% trade discount allowed to advertising agencies, which was a deemed commission under section 194H.

It was contended that the petitioner being a member of Indian Newspaper Society (INS) is required to pay trade discount of 15% according to the rules of INS. It was submitted that there was no agreement between the petitioner and the advertising agency. Also the relationship of the petitioner with the advertising agency was as principal to principal and not as principal and agent and hence trade discounts could not be considered as commission.

In March 2012, DCIT passed two orders for FY 2009-10 and FY 2008-09 declaring assessee in default for non deduction of tax at source plus interest along with penalty proceeding under Section 271C.

However the High Court set aside both the assessment orders dated 28.3.2012 and 29.3.2012

Questions of Law:
The Court framed the following questions of Law:

1. Whether in the facts and circumstances of the present case, the petitioner is entitled to invoke the writ jurisdiction of this Court under Article 226 of the Constitution of India for the reliefs sought or the petitioner be relegated to avail the statutory remedy of appeal in view of the fact that the assessment order has already been passed during the pendency of the writ petition?
2. Whether condition precedent as contemplated by Section 194H making liable the petitioner to deduct tax at source for 15% trade discount allowed by it to advertising agency is present so as to give jurisdiction to the authorities to initiate proceedings under section 201/201 (1A) of the Income Tax Act, 1961?
3. Whether between the petitioner and the advertising agency there is a relationship of principal and agent?
4. Whether the advertising agency is rendering services to the petitioner or they are rendering services to advertiser as their agent?
5. Whether 15% trade discount allowed by the petitioner to advertising agencies is payment of commission within the meaning of Section 194H Explanation (i).
6. Whether the Judgement of the Kerala High Court in 325 ITR 205 was attracted in the present case or the judgment of the Delhi High Court in ITA 1264/07, The Commissioner of Income Tax Vs. Living Media India Ltd. decided on 6.5.2008 was applicable?
7. Whether against a deductor who fails to deduct the tax at source, the liability of payment of tax can also be fastened against the deductor under section 201 apart from liability of interest and penalty?
8. Whether with regard to tax which was required to be deducted at source, the liability is of the assessee with regard to whose income the tax was required to be deducted at source or the liability is of deductor for payment of tax which could not be deducted?
9. Whether according to Section 191 read with Section 201, a deductor, who fails to deduct tax at source can be deemed to be an assessee in default without adverting to the issue and recording a finding that assessee who is liable to pay tax directly had not paid tax?
10. Whether the assessing authority has taken into consideration all relevant materials for taking the decision and has not taken into consideration any irrelevant material ?
11. Whether the assessing authority has violated the principle of natural justice in the proceeding under section 201 and 201 (1A)?
12. To what relief, if any the petitioner is entitled in the present writ petition?

The court decided all the above questions in favour of the petitioner and dismissed the impugned orders

Excerpts from the Judgment:

“The most important material is format of contract between the advertising agency and the INS, which is in Appendix-III to the Rules. The contents of first paragraph of the contract clearly indicates that object is to secure the best advertising service for the advertiser. Thus the accreditation of advertising agency is for the object of providing better service to the advertiser and it is not engaged as agent of the newspaper agency and advertising agency, in fact, is running its advertising business and while conducting the said business it acts on behalf of their client i.e. advertiser.”

“The format of agreement in Appendix-III Clause (2) subclause (d), as quoted above, which provides that advertising agency shall retain full trade discount earned as an advertising agency from member publications and it will at no time pay or otherwise allow any part of such trade discount to any advertiser or representative of any advertiser for whom it may be acting, or has acted as an advertising agency . Thus the said clause clearly indicates that advertising agencies act for the advertisers who are their client and they are not the agent of the News Agency.”

“From the aforesaid , it is clear that no foundational fact exists on the basis of which any inference can be drawn that advertising agencies are agent of the petitioners and further advertising agencies render any service to the newspaper. The above two foundational facts being non existent, the proceedings under Section 201/201(1A) of the Act were clearly not permissible.”

“the assessing authority has distinguished the judgment of the Delhi High Court stating that Kerala High Court has delivered a judgment in the case of CIT Thiruvanathapuram vs. Director, Prasar Bharati reported in 325 ITR 205, which is more recent judgment, hence the recent judgment is to be preferred. The aforesaid reasoning by assessing authority is wholly erroneous. The judgment of the Delhi High Court was fully applicable on the facts of the present case and the department was obliged to take into consideration the said judgment specially when the special leave to appeal filed by the department was dismissed by the Supreme Court.”

“Section 191 provides that in the case of income in respect of which either provision is not made for deduction at source or where income tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct.”

“it is clear that deductor cannot be treated an assessee in default till it is found that assessee has also failed to pay such tax directly.”

“we are of the considered opinion that in a case where tax has not been deducted at source, the short deducted tax cannot be realised from the deductor and the liability to pay such tax shall continue to be with the assessee direct, whose income is to be charged and a person who fails to deduct the tax at source, at best is liable for interest and penalty only. The above issues thus, are decided in favour of the petitioner.”

“Taking into consideration over all facts and circumstances of the present case, and the answers given by us, while deciding the issues No. 2 to 10, we are of the view that the petitioner has rightly invoked the jurisdiction of this Court under Article 226 and the petition cannot be thrown out on the ground of alternative remedy.”

“Suddenly in second quarter of March, the proceedings are started and concluded within ten days. The Department has rushed through the proceedings to complete it before 31.3.2012, which evidences infraction of rules of natural justice. We thus, conclude that the adequate opportunity to which the petitioner was entitled was not provided for by the Department and the Department rushed through the proceedings.”

Download Full Judgment Click Here >>

Allahabad HC again in 2015 Reminds ITD of its above Judgment Click Here >>

Allahabad HC-For Non, Short Deduction of Tax at Source (TDS), Deductor is Liable to Pay only Interest and Penalty not the Tax