Reimbursement of Expenses would not be subject to TDS u/s 194H

Providing services in respect of sale of product of assessee is essentially requirement of nature of transaction of commission; where consignee agents were making sale on behalf of assessee - company and in addition to commission on which tax was deducted at source, they were also paid expenditure incurred by them on basis of fixed cost rate as per agreement executed between them, TDS under section 194H was not required to be made as consignee agents did not give any service in respect of payment of reimbursement

[2013] 35 taxmann.com 487 (Agra - Trib.)

IN THE ITAT AGRA BENCH

Pee Cee Cosma Sope Ltd.

v.

Joint Commissioner of Income- tax, Range -4, Agra*

BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER

IT APPEAL NOS. 54 & 55 ( AGRA) OF 2013
[ ASSESSMENT YEAR 2009-10]

APRIL  30, 2013 

Section 194H, read with section 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Commission or brokerage etc. [Reimbursement of agent's expenses] - Assessment year 2009-10 - Whether commission is said to be payment of commission if it is evident that it is being paid for service of a person provided in respect of sale of product of assessee - Held, yes - Whether, therefore providing services is essentially requirement of nature of transaction of commission - Held, yes - Assessee-company was engaged in business of manufacturing and trading of laundry soap, washing powder and detergent cake etc. - Consignee agents were making sales on behalf of assessee on commission basis - Assessing Officer noted that certain amounts paid to consignees were claimed as reimbursement of expenses - He held that fixed percentage was paid to consignees irrespective of actual expenses incurred by them - Therefore, assessee was liable to deduct tax at source as per provisions of section 194H - He, accordingly, made addition by invoking provisions of section 40(a)(ia) - Perusal of agreement executed between assessee-company and consignee agents showed that in consideration of various services rendered, consignee agents would be liable to receive commission at rate of one per cent on value of sales made by them - In addition assessee would also reimburse to consignee agents expenses incurred by them (to be derived on fixed cost structure basis) - Expenses incurred by consignee agents and reimbursed by assessee-company as per agreement executed between them were-(a) loading and unloading expenses, (b) cartage paid on dispatch of goods/sale to distributor/dealer/retailer and (c) travelling expenses of staff kept by consignee agents or salary of sales staff - Further, concerned parties had also furnished sale patti along with claim of expenses - Those expenses had been adjusted and accounted for in account of respective parties - Whether impugned payment was reimbursement of expenses and was not commission as concerned party did not give any services in respect of payment of expenditures made - Held, yes - Whether since payment was not a commission payment, there was no question of deducting tax at source under section 194H - Held, yes [Paras 5.3 & 5.4][In favour of assessee]

FACTS

■		The assessee-company was engaged in the business of manufacturing and trading of laundry soap, washing powder and detergent cake etc. It paid certain amounts to the consignees to whom it had sold goods. Those amounts were claimed as reimbursement of expenses.
■		The Assessing Officer, however, noted that the case of the assessee was not reimbursement of actual expenses incurred by consignees but a fixed percentage was paid irrespective of actual expenses incurred by them. Therefore, as per the Assessing Officer the assessee was liable to deduct tax at source as per the provisions of section 194H. Since the assessee had failed to do so, the Assessing Officer made addition by invoking the provisions of section 40(a)(ia).
■		The Commissioner (Appeals) confirmed the addition made by the Assessing Officer.

HELD

■		The commission is said to be payment of commission if it is evident that it is being paid for service of a person provided in respect of sale of product of the assessee. [Para 5.2]
■		On perusal of agreement, it was noticed that in addition to 3 per cent sale, the agent is entitled to reimbursement of expenses. [Para 5.2]
■		The concerned parties have also furnished the sale patti along with claim of the expenses on sale of consignment goods the claim of expenses given detail the expenses pertaining to the monthly selling expenses loading and unloading dealing with expenses. These expenses have been adjusted and accounted for in the account of respective parties.
■		In view of the above, the impugned payment is reimbursement of the expenses and is not the commission as the concerned party did not give any services in respect of the payment of expenditures made.
■		Providing services is essentially requirement of the nature of transaction of a commission.
■		Since this condition is not satisfied in the case under consideration therefore it is a case of reimbursement of the expenses incurred by the concerned party on behalf of the assessee.
■		Under the circumstances, the revenue authority is not correct in taking such expenses as commission expenses. The finding of revenue authorities in this behalf is on presumption basis, without considering the relevant agreement/documents and books of account maintained by the assessee.
■		Therefore, the order of revenue authorities is to be set aside and the claim of the assessee is to be allowed. [Para 5.3]
■		Since this is not a commission payment, therefore, there is no question of deducting tax at source under section 194H. Since the payment is not subject to tax deducted at source, therefore, provisions of section 40(a)(ia) is not applicable on the issue. [Para 5.4]
■		In the result, the appeal of the assessee is allowed. [Para 7]

Pankaj Gargh for the Appellant. K.K. Mishra for the Respondent.

ORDER

A.L. Gehlot, Accountant Member - These are appeals filed by two different assessees against two different orders, both dated 31.01.2013, passed by the ld. CIT(A)-II, Agra for the Assessment Years 2009-10.

2. First we take up ITA No.54/Agra/2013 in the case of M/s Pee Cee Cosma Sope Limited. The assessee has raised as many as seven grounds of appeal. However, effective ground of appeal is in respect of addition of Rs.28,14,174/- invoking section 40(a)(ia) of the Income Tax Act, 1961 ('the Act' hereinafter).

3. The brief facts of the case are that the assessee company is engaged in the business of manufacturing and trading of laundry soap and washing power, detergent cake etc. During the course of assessment proceedings, the A.O. noticed that the assessee company has paid certain amounts to the consignees to whom they have sold their goods. These amounts were claimed as reimbursement of expenses incurred by them. However, the A.O. noted that the case of the assessee was not reimbursement of actual expenses incurred by consignees but a fixed percentage was paid irrespective of the actual expenses incurred by them. Therefore, as per the A.O. the assessee was liable to deduct tax at source as per the provisions of section 194H of the Act. Since the assessee was liable to deduct tax at source and has failed to do so, the A.O. made an addition of Rs.28,14,174/- by invoking the provisions of section 40(a)(ia) of the Act.

4. The addition made by the A.O. has been confirmed by the CIT(A) as under:- (Paragraph no.5, page nos.7 & 8)

"5. I have carefully considered the assessment order as well as the written submission of the appellant company. I find that in the Assessment Year 2007-08, an identical issue was adjudicated upon by the CIT(A)-II, Agra wherein the following decisions has been given.

'I have analyzed the matter and find that after going through the submissions made by the ld. AR it is abundantly clear that the expenses reimbursed have no co-relation with the expenses incurred by the consignee agents. This position is clear from the submissions made wherein it has been stated that on perusal of the copy of account and of the details of the expenses incurred by them on sales made on behalf of the assessee company it will be seen that the expenses incurred by them are much more than the expenses reimbursed to them at fixed cost rate structure. Expenses at the cost rate are reimbursed to the consignee agent only to have control over the expenses. Therefore, I hold that the claim of the appellant of reimbursement of expenses as it is not linked to that actual expenses is nothing but commissions as it is linked to sale made by the consignee agents. Therefore the appellant was liable to deduct tax at source on these payment which it failed to do. The AO has rightly applied the provisions of section 40(a)(ia) while making that disallowance. The grounds are dismissed.'

The facts are identical to the facts of this case for the year under consideration. I am in agreement with the views of my predecessor and accordingly the addition made by the AO is confirmed and grounds of appeal 2 to 5 are dismissed."

5. We have heard the learned Representatives of the parties and records perused. The issue under consideration whether the impugned expenditures are in nature of commission or reimbursement of expenditures. To understand nature of transaction first of all we have to see dictionary meaning of "Commission". The related meaning as per different dictionaries are as under :-

(i)		As per THE LAW LEXICON
		Commission Agent : One who sales or buys goods for another and receives by way of remuneration a commission or percentage upon the amount involved in each transaction.
(ii)		As per OXFORD DICTIONARY
		Payment to an agent for selling goods or services.
(iii)		By FARLEX DICTIONARY
		A fee paid based on a percentage of the sale made by an employee or agent, as distinguished from regular payments of wages or salary.
(iv)		As per WEBSTER'S DICTIONARY
		The fee given an agent or sales person for his or her services.
(v)		As per Dictionary of CULTUIRAL LITERACY ECNOMICS
		A fee paid to a broker or other financial agents for negotiating a sale. The fee is based on percentage of sale price.

5.1 In the light of above dictionary meaning, if we see the facts of the case under consideration, we notice that the assessee claimed Rs.28,14,174/- as revenue expenses on consignment sales in profit and loss account. It is relevant to note that the assessee paid commission on sale and were separately accounted for under the head commission on sale of Rs.48,55,646/-in profit loss account. The consignee agents make the sale on behalf of the assessee company to the distributor/dealer/retailer appointed by them for which they are paid commission at the fixed percentage as per the Agreement executed between them and TDS is deducted on the said commission. No dispute on this issue. Goods are sent to the consignee agents from Malanpur Unit for which the primary freight is paid on behalf of the assessee company. This freight paid is reimbursed by the assessee company by way of credit note. No dispute of this fact also. The sale of U.P., Rajasthan and Gujarat are through consignee agents. Agreements are executed between the assessee company and the consignee agents. The important clause for consideration is "That in consideration of various services rendered, the second party shall be commission @ 1% (one) on the value of the sales made by the second party during the financial year. In addition the first party shall also reimburse to the second party the expenses incurred by him (to be derived on fixed cost structure basis)". That on the receipt of goods by the consignee agents till the sales made by them, the consignee agents incur certain expenses on behalf of the assessee company which are otherwise to be incurred by the assessee company if the assessee company make direct sale at these places. The nature of expenses incurred by the consignee agents and reimbursed by the assessee company as per the agreement executed between them are :-

(a)		Unloading expenses on receipt of goods from the assessee company.
(b)		Loading expenses when the goods are sent by the consignee agents for sale to distributor/dealer/retailer.
(c)		Cartage paid on dispatch of goods/sale to distributor/dealer/retailer.
(d)		Traveling expenses of the staff kept by consignee agents or salary of the sales staff. The consignee agents sent the monthly details of sales on "Sale Patti. On the sale patti the consignee agent deducts their commission on sales and the expenses at the fixed cost rate structure as per Agreement. The assessee company by way of credit note amount for their expenses as pr Sale Patti, though the expenses incurred by the, are much more than the expenses accounted for by the assessee company. Copies of their Ledger Account of expenses incurred by them on behalf of Assessee Company have been filed and are put on record. It is also to note that that the expenses incurred by the consignee agents on behalf of the assessee company are from the sale amount collected by them as there always remain outstanding balance. Considering the facts of the case following points are not in dispute :-

(i)		Consignee agents are making sales on behalf of assessee company on commission basis.
(ii)		Consignee agent incurs expenses on sales on behalf of the assessee company.
(iii)		Consignee agent maintains day to day details of expenses incurred by them for and behalf of the assessee company.
(iv)		Monthly Sale Patti is sent by consignee agents along with ledger account of expenses incurred.
(v)		In Sale Patti consignee agent, from the sale amount deduct their commission and expenses which they have to receive from the assessee company on the basis of fixed cost rate as per agreement.
(vi)		On receipt of Sale Patti credit note for the expenses is issued.
(vii)		In the books of the assessee company amount of credit note is debited under the head "Expenses on consignment sale".

5.2 The commission is said to be payment of commission if it is evident that it is being paid for service of a person provided in respect of sale of product of the assessee. In the case under consideration, the ld. Authorised Representative has demonstrated by filing various evidences and material of which copies have been placed in paper book. Copies of agreement, paper book page nos. 1 to 4, copies of Sale Patti page nos. 5 to 9 of the paper book, copies of ledger account of expenses page nos. 32 to 50. On perusal of agreement, we notice that as per clause-3 in addition to 3% sale, the agent is entitled to reimbursement of expenses. The relevant abstract of the agreement is reproduced as below :-

"1.5 That on the receipt of goods by the consignee agents till the sales made by them, the consignee agents incur certain expenses on behalf of the assessee company which are otherwise to be incurred by the assessee company if the assessee company make direct sale at these places. The nature of expenses incurred by the consignee agents and reimbursed by the assessee company as per the agreement executed between them are :-

(a)		Unloading expenses on receipt of goods from the assessee company.
(b)		Loading expenses when the goods are sent by the consignee agents for sale to distributor/dealer/retailer.
(c)		Cartage paid on dispatch of goods/sale to distributor/dealer/retailer.
(d)		Traveling expenses of the staff kept by consignee agents or salary of the sales staff.

1.6 That the consignee agents sent the monthly details of sales on "Sale Patti", copy enclosed (Page No.5 to 29) for kind perusal of your good self. On the sale patti the consignee agent deducts their commission on sales and the expenses at the fixed cost rate structure as per Agreement. The assessee company by way of credit note amount for their expenses as pr Sale Patti, though the expenses incurred by the, are much more than the expenses accounted for by the assessee company. Copy of their Ledger Account of expenses incurred by them on behalf of assessee company are enclosed (Page No. 30 to 50) in support of the submission that the expenses incur by them are much more than the expenses reimbursed to them by way of credit note.

1.7 It is important to mention here that the expenses incurred by the consignee agents on behalf of the assessee company are from the sale amount collected by them as there always remain outstanding balance.

1.8 That the Assessing Officer has treated the reimbursement of expenses as commission paid only on the ground that the expenses are reimbursed at fixed rate and therefore it is not in the nature of reimbursement of expenses but it was part and parcel of commission on which tax at source has not been deducted and consequently made addition u/s 40a(ia) of the Act."

5.3 The concerned parties have also furnished the sale Patti along with claim of the expenses on sale of consignment goods the claim of expenses given detail the expenses pertaining to the monthly selling expenses loading and unloading dealing with expenses. These expenses have been adjusted and accounted for in the account of respective parties. After considering these arguments, we notice that the impugned payment is reimbursement of the expenses and are not the commission as the concerned party did not give any services in respect of the payment of expenditures made. Providing services is essentially requirement of the nature of transaction of a commission. Since this condition is not satisfied in the case under consideration therefore it is a case of reimbursement of the expenses incurred by the concerned party on behalf of the assessee. Under the circumstances, we find that the Revenue authority is not correct in taking such expenses as commission expenses. The finding of Revenue Authorities in this behalf is on presumption basis, without considering the relevant agreement/documents and books of account maintained by the assessee. We, therefore, set aside the orders of Revenue Authorities and the claim of the assessee is allowed.

5.4 Since this is not a commission payment, therefore, there is no question of deducting tax at source under Section 194H of the Act. Since the payment is not subject to tax deducted at source, therefore, provisions of Section 40(a)(ia) of the Act is not applicable on the issue. We therefore, delete the addition of Rs.28,14,174/-.

ITA No. 55/Agra/2013 - M/s. Suraj Bhan Agencies (P) Ltd.

6. The learned Representatives of the parties submitted that the facts of the case in ITA No.54/Agra/2013 in the case of M/s Pee Cee Cosma Sope Ltd. are identical to the facts of the case in ITA No.55/Agra/2013 in the case of M/s. Suraj Bhan Agencies (P) Ltd. except the figures. In that case the amount added by the A.O. was Rs.21,94,506/- and Rs.16,48,186/-. Since the facts are identical with the facts of the case of M/s Pee Cee Cosma Sope Ltd. (Supra) and that case has been decided after detailed discussion made in Para nos.5 to 5.4 of this order, in the light of the above discussion, the addition of Rs.21,94,506/- and Rs.16,48,186/-are deleted.

7. In the result, both the appeals of the assessee are allowed.