DCIT, Chandigarh V. M/s Dhingra Associates, Chandigarh

ITA 503/CHANDI/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5088 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 12-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CHANDRA KANTA
• Keywords: Fair market value; Relationship of principal and agent

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCHA, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA NOS. 503/CHD/2014 (ASSESSMENT YEAR : 2008-09) THE DCIT VS. DHINGRA ASSOCIATES CIRCLE 1(1) 89, INDL AREA PHASE II CHANDIGARH CHANDIGARH PAN: AACD6033E (APPELLANT) (RESPONDENT) ASSESSEE BY : NONE DEPARTMENT BY : SMT. CHANDRAKANTA DATE OF HEARING : 19.02.2018 DATE OF PRONOUNCEMENT : 12/04/2018 O R D E R PER DR.B.R.R.KUMAR, A.M . : THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE AG AINST THE ORDER OF THE LD. CIT(A), CHANDIGARH DT. 27/02/2014. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THE ORDER OF THE LD. CIT(A) IS ERRONEOUS & CONTRARY TO FACTS & LAW. 2. KEEPING IN VIEW THE CIRCUMSTANCES OF CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 10,35,892/- MADE BY TH E AO IN VIEW OF PROVISION OF SECTION U/S 40A(2)(A) OF THE I.T. ACT. 3. KEEPING IN VIEW THE CIRCUMSTANCES OF CASE, THE LD. CIT(A) HAS ERRED IN ALLOWING THE RELIEF OF RS. 97,41,567/- BEING THE AM OUNT DISALLOWED BY THE AO ON THE ACCOUNT OF NON DEDUCTION OF TDS U/S 40(A)(IA) O F THE ACT ON TURNOVER DISCOUNT. 3. GROUND NO.1 PERTAINS TO DISALLOWANCE UNDER SECTI ON 40A(2)(A) OF THE INCOME TAX ACT,1961 OF RS. 10,35,892/- ON ACCOUNT O F PURCHASES MADE FROM M/S DHINGRA AGENCIES [A SISTER CONCERN UNDER SECTION 40 A(2)(B)] OF RS. 10,35,89,20/-. THE ASSESSING OFFICER HELD THAT THE ASSESSEE PAID 1 0% MORE FOR THE ITEMS PURCHASED FROM THE SISTER CONCERN. 4. THE LD. CIT(A) DELETED THE ADDITION ON THE GROUN DS THAT THE ASSESSEE WAS GETTING CREDIT FACILITIES AND SCHEDULE OF PAYMENTS AS PER ITS OWN CHOICE PERTAINING TO THOSE PURCHASES AND HENCE NO DISALLOW ANCE IS WARRANTED. 2 5. BEFORE US, THE LD. DR STRONGLY RELIED ON THE ORD ER OF THE ASSESSING OFFICER. WE HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE LD. DR AND PERUSED THE FACTS ON RECORD. 6. BEFORE THE LOWER AUTHORITIES THE ASSESSEE SUBMIT TED THAT M/S DHINGRA AGENCIES IS A TRADING CONCERN AND INTO BUSINESS FOR THE LAST MANY YEARS AND A WELL KNOWN ENTITY IN FABRIC MANUFACTURING. THE ASSE SSEE GETS LIBERTY TO PAY IN INSTALLMENTS FOR THE PURCHASES OF THE GOODS MADE F ROM M/S DHINGRA AGENCIES. THE ASSESSEE HAS GIVEN COMPARATIVE CHARTS OF PROFIT S FROM VARIOUS ENTITIES WHICH SHOWS THE ASSESSEE HAS GOT THE GOODS AT A CHEAPER R ATE THAN PURCHASES MADE DIRECTLY FROM THE OPEN MARKET. WE ALSO OBSERVED THA T THE ASSESSING OFFICER HAS SUCCINCTLY MENTIONED IN THE REMAND REPORT THAT IT C ANNOT BE ESTABLISHED THAT THE SAME FABRIC WAS PURCHASED FROM M/S DHINGRA AGEN CIES AND SO COMPARISON IS NOT POSSIBLE. THE ASSESSING OFFICER HAS OBSERVED IN THE REMAND REPORT THAT FROM THE BILL SUBMITTED, THE NATURE OF THE FABRIC PURCHA SED FROM M/S DHINGRA AGENCIES AND FROM OUTSIDE CANNOT BE ASCERTAINED. HE NCE, IN THE ABSENCE OF ANY COMPARISON OF GOODS THE DISALLOWANCE MADE BY TH E ASSESSING OFFICER IS LIABLE TO BE DELETED. 7. THOUGH THE LD. DR ARGUED THAT BOTH THE ENTITIES ARE PAYING TAX @30% IS NOT A RELEVANT TO DELETE THE ADDITION, WE OBSERVE T HAT IT WOULD BE A MATTER TO BE CONSIDERED WHILE DEALING WITH DISALLOWANCE UNDER SECTION 40A(2)(A)AMONG RELATED ENTITIES. AND IN THE INSTANT CASE SINCE BOT H THE ENTITIES ARE IN THE TAXED AT THE SAME RATE, EVEN IF IT IS ASSUMED THAT THE PRICE S OF GOODS ARE ALTERED TO THE ADVANTAGE OF ONE ENTITY DO NOT HOLD ANY VALID RATIO NALE OR TAX SAVINGS ON THE PART OF THE BUSINESS ENTITIES. EVERY PURCHASE FROM THE SISTER CONCERN NEED NOT NECESSARILY ATTRACT THE PROVISIONS OF SECTION 40A(2 )(A) WITHOUT CONSIDERING THE LEGITIMATE BUSINESS REQUIREMENTS AND IN THE ABSENCE OF ANY EVIDENCE ESTABLISHING PAYMENT WHICH IS EXCESSIVE OR UNREASON ABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS. 8. SINCE IN THE INSTANT CASE, AS THE ASSESSING OFFI CER HAS NOT EVEN ASCERTAINED THE GOODS PURCHASED AND PRICE VIS A-VI S MARKET RATES. HENCE WE DECLINE TO INTERFERE IN THE ORDER OF THE LD. CIT(A) DELETING THE ADDITION. 9. APPEAL OF THE REVENUE IS DISMISSED ON THIS GROUN D. 10. GROUND NO. 2 RELATES TO NON DEDUCTION OF TDS ON THE TURNOVER DISCOUNT GIVEN TO FRANCHISE STORES AND THE ADDITION OF RS. 9 741567/- UNDER SECTION 40(A)(IA). 3 11. THE ASSESSING OFFICER HELD THAT THE ASSESSEE WA S REQUIRED TO DEDUCT TDS ON TURNOVER DISCOUNT AFTER GOING THROUGH THE AGREEM ENTS BETWEEN THE ASSESSEE AND ITS FRANCHISES. 12. LD. CIT(A) DELETED THE ADDITION. 13. BEFORE US, THE LD. DR HEAVILY RELIED ON THE ORD ER OF THE ASSESSING OFFICER. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF THE L D. DR AND PERUSED THE FACTS ON RECORD. 14. THE ASSESSEE F IRM IS ENGAGED IN MANUFACTURING AND SALE OF READYMA DE GARMENTS. THE SALE IS EFFECTED THROUGH DEALERS AND RETAILERS WHOM THE ASSESSEE FIRM BILLS THE INVENTORY OF STOCK SOLD. IN TURN THE DEALER/RETAILER PURCHASING MERCHANDISE FROM THE ASSESSEE SELLS THE SAME IN OPE N MARKET AFTER LEVYING APPLICABLE SALES TAX AND SUCH SALE IS DULY INCLUDIN G IN SALE TURNOVER OF THE SAID DEALER/RETAILER. IN OTHER WORDS, ASSESSEE IS SELLIN G TO DEALERS/RETAILERS WHO FURTHER ARE SELLING MERCHANDISE PURCHASED FROM ASSESSEE FIR M IN THE OPEN MARKET AGAINST THEIR SALES TAX NUMBER. IN THE PROCESS BOTH THE PARTIES ARE LEVYING APPLICABLE SALES TAX AND SUCH SALES CONDUCTED IS PA RT OF GROSS SALE OF DEALER/RETAILER. CERTIFICATES OF THE PARTIES CONFI RMING THE FACT OF SALE OF GOODS WHICH SHALL CLARIFY THE MATTER ALONGWITH BILLS OF S ALE ISSUED BY THE ASSESSEE TO SUCH PARTIES AFTER LEVYING SALES TAX AND ON RECEIPT OF 'C' FORM FOR INTER STATE SALE ISSUED BY SALES TAX AUTHORITIES ARE PRODUCED B EFORE THE LOWER AUTHORITIES. 14.1 IT IS ALSO OBSERVED THAT THE ASSESSEE FIRM HA S BILLED THESE FRANCHISEES FOR THE GOODS SOLD TO THEM. THE TRANSACTIONS ARE ON PRI NCIPAL TO PRINCIPAL BASIS. THESE FRANCHISEES HAVE SOLD THE GOODS IN THE OPEN MARKET AND HAVE DULY CHARGED APPLICABLE SALES TAX. THE FRANCHISEES DEALE RS ARE REGISTERED WITH THE SALES TAX DEPARTMENT AND HAVE THEIR OWN SALES TAX N UMBERS. THE GOODS ARE SOLD TO FRANCHISEES/ DEALERS AT A PRICE WHICH IS AR RIVED AT BY DEDUCTING AN AGREED PERCENTAGE, WHICH IS TERMED AS DISCOUNT FROM THE MRP. AS LONG AS THE SALES ARE ON PRINCIPAL TO PRINCIPAL BASIS AND NOT O N PRINCIPAL TO AGENT BASIS, THE DISCOUNT CANNOT BE TREATED AS 'COMMISSION'. COMMISS ION MEANS TO RECOMPENSE, COMPENSATION OR REWARD OF AN AGENT, SAL ESMAN, EXECUTOR, TRUSTEE, RECEIVER, FACTOR, BROKER, OR BAILEE, WHEN THE SAME IS CALCULATED AS A PERCENTAGE ON THE AMOUNT OF HIS TRANSACTIONS OR ON THE PROFIT TO THE PRINCIPAL. A FEE PAID TO AN AGENT OR EMPLOYEE FOR TRANSACTING A PIECE OF BUS INESS OR PERFORMING A SERVICE. COMPENSATION TO AN ADMINISTRATOR OR OTHER FIDUCIARY FOR THE FAITHFUL DISCHARGE OF HIS DUTIES WHEREAS DISCOUNT MEANS, AN ALLOWANCE OR DEDUCTION 4 MADE FROM A GROSS SUM ON ANY ACCOUNT WHATEVER. A DE DUCTION FROM AN ORIGINAL PRICE OR DEBT, ALLOWED FOR PAYING PROMPTLY OR IN CA SH IS A DISCOUNT. 14.2 IN THE CASE OF GOVERNMENT MILK SCHEME V. ASSIS TANT COMMISSIONER OF INCOME-TAX (2006)-281-ITR (A.T.)-0088-ITAT (PUNE), IT WAS HELD THAT FOR A PAYMENT TO FALL WITHIN THE CATEGORY OF COMMISSION THERE MUS T BE A RELATIONSHIP OF PRINCIPAL AND AGENT. THE COMMISSION IS COMPENSATION TO AN AGE NT FOR SERVICES TO BE RENDERED. IT IS AN ALLOWANCE OR REWARD MADE TO AGEN TS. THIS IS CALCULATED ON A PERCENTAGE BASIS ON THE AMOUNT OF THE TRANSACTION O R THE PROFITS TO THE PRINCIPAL. THERE IS A DISTINCTION BETWEEN A CONTRAC T OF SALE AND A CONTRACT OF AGENCY. THROUGH A CONTRACT OF AGENCY, AN AGENT IS A UTHORIZED TO SELL OR BUY ON BEHALF OF THE PRINCIPAL. ON THE OTHER HAND, THE ESS ENCE OF A CONTRACT OF SALE IS THE TRANSFER OF TITLE TO THE GOODS FOR A PRICE PAID OR PROMISED TO BE PAID. IN THE CONTEXT OF A CONTRACT OF SALE, THE TRANSFEREE IS LI ABLE TO THE TRANSFEROR AS A DEBTOR FOR THE PRICE PAID AND NOT AS AN AGENT FOR THE PROC EEDS OF THE SALE. THE DISTINCTION BETWEEN THE TWO IS APPARENT BECAUSE THE ESSENCE OF AGENCY TO SELL IS THE DELIVERY OF GOODS TO A PERSON WHO IS T O SELL THEM NOT AS HIS OWN PROPERTY BUT AS THE PROPERTY OF THE PRINCIPAL WHO C ONTINUES TO BE THE OWNER OF THE GOODS. 15. IN THE PRESENT CASE WE FIND THAT T HE TURNOVER DISCOUNT WAS GIVEN TO THE VARIOUS FRANCHISEES AS PER THE TERMS & CONDITIONS M ENTIONED IN THE RESPECTIVE AGREEMENTS AND SO IT CANNOT BE SAID THAT THE TURNO VER DISCOUNT WAS IN THE FORM OF COMMISSION, SINCE THE GOODS WERE NOT SOLD TO THE M ON COMMISSION BASIS, BUT TURNOVER DISCOUNT WAS GIVEN AS PER THE AGREEMENTS E NTERED WITH THESE PARTIES. THEREFORE, IT CANNOT BE SAID THAT THE TURNOVER DISC OUNT IS IN THE FORM OF COMMISSION AND THE ASSESSEE WAS LIABLE TO DEDUCT, T AX AT SOURCE ON THIS PAYMENT HENCE WE DECLINE TO INTERFERE IN THE ORDER OF THE LD. CIT(A). BY FOLLOWING THE ABOVE DISCUSSION WE DISMISS GROUND NO . 2 OF THE REVENUE 16. AS A RESULT, APPEAL OF THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 12/04/2018 AG COPY TO: 1.THE APPELLANT, 2. THE RESPONDENT, 3. THE CIT(A), 4. THE CIT, 5. THE DR