Whether when a newspaper offers trade discount to advertising agencies, such discount constitutes commission, liable to tax deduction at source u/s 194H

THE issues before the Bench are - Whether the trade discount given to the advertising agents is to be considered as commission to agents and is liable to TDS u/s 194H and Whether if the assessee is found to be assessee in default for non deduction of tax, only the interest and penalty can be levied on the deductor and no tax can be recovered. And the verdict goes against the Revenue.

Facts of the case

Assessee is engaged in the business of printing and publishing newspapers. Assessee had been giving 15% trade discount to accredited advertising agency and trade discount of 10% to 15% to non-accredited advertising agency as per Rules and Regulations of INS for last several years. In survey proceedings the Revenue issued notice to the assessee that it had failed to deduct tax at source u/s 194H on the payment received from advertising agencies after allowing 15% trade discount, which was as well a deemed commission. Assessee contended that the relationship of the assessee with the advertising agency was principal to principal and not as principal to agent. AO passed the order u/s 201(1) holding the assessee as an assessee in default for non deduction of tax at source on the discount given to the agent which is a deemed commission to the agent and raised a liability u/s 201(1) and the interest u/s 201(1A).

Assessee challenged in the writ petition that an advertising agency is not an agent of the assessee and the transaction between the assessee and advertising agency was on principal to principal basis. Advertising Agency infact acts as an agent of the advertisers. Section 194H is not attracted on trade discount allowed by the assessee to advertising agency and the proceeding initiated u/s 201/201 (1A) were without jurisdiction. The trade discount was given as per the rules of INS. Reliance was placed on the decision of M/s Living Media, in which it was held by the ITAT that there was no liability of the news agency to deduct tax at source and advertising agency is not the agent of news agency. The Hon’ble High Court and Supreme Court dismissed the appeal of the revenue in such case. It was further contended that under sections 201 and 201(1A), in a case where tax is not deducted at source, the only proceedings which could be initiated were proceedings for realization of interest and penalty and the liability to pay tax could not be fastened on deductor. The assessee could not had been treated to be an assessee in default with regard to tax which according to the revenue was required to be deducted unless a finding is returned that the advertising agency had not paid the tax.

Revenue contended that the assessee was not entitled to invoke the jurisdiction of High Court under Article 226 of the constitution since the assessment order had already been passed and the assessee be relegated to avail the alternative remedy of statutory appeal as provided under the act. The payment which was being made by the assessee to the advertising agency in the name of 15% trade discount was nothing but payment of commission to advertising agency in lieu of services which were being rendered by the advertising agency to the assessee in bringing business to the assessee i.e. advertisements. If the advertising agency could not had rendered services to the assessee, it could not had received any discount or payment and the advertising agency acts on behalf of the news agency since it is a news agency, which decides as to what type of advertisement it publishes e.g. it does not publish advertisement of alcoholic drinks. There was a contract between the news agency and advertising agency through INS, since the assessees are members of the INS and INS enters into an agreement with the advertising agency for accrediting the said agency thus, there was an implied contract between the assessee and advertising agency.

After hearing both the parties, the High Court held that,

++ for treating the amount as commission the person receiving payment should be acting on behalf of another person i.e. he must be agent of the principal and secondly payment should be for the services rendered by the agent. As per Rules of INS, advertising agency is free from control or interference from any business or person who owns or controls newspaper, the newspaper agency cannot be treated to be principal and advertising agency as agent. The accredited advertising agency shall be entitled to receive from the members of the Society the maximum and minimum Trade Discount of 15% in respect of advertisement business placed by it with such members. Rules prohibit the members of the society from appointing advertising agency as their representatives. Members of the Society are free to appoint whomsoever they like as their representative provided the said representatives are not classified as “advertising agents” and do not function as advertising agencies. In publication of advertisement submitted by advertising agency, the responsibility to make payment of bills of the newspaper is on the advertising agency and there is no responsibility of advertiser to make payment to the newspaper agency and no privity of contract took place between the newspaper agency and the advertiser and had the advertising agency being agent of newspaper agency, the advertiser was to be liable for payment to the newspaper agency. 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 second precondition, which is required to be fulfilled for applicability of Section 194H of the Act is that the person receiving payment has rendered service to the deductor. A perusal of the INS Rules clearly indicates that advertising agencies are rendering service to the advertisers/customers and they are accredited by the society not as an agent of newspaper agency but to provide service to the advertisers/its clients. Thus no foundational fact exists on the basis of which any inference can be drawn that advertising agencies are agent of the assessee and further advertising agencies render any service to the newspaper. Being non-existent of the foundational facts, the proceedings u/s 201/201(1A) of the Act were clearly not permissible;

++ the another factor which is required to be established for applicability of Section 194H of the Act i.e. as to whether any payment was made to the advertising agency as commission. The sample bills, which were collected by the department at the time of survey and are part of the assessment order, mention the total amount paid to advertising agency and the discount provided for and the net bill amount. As per the order of the Hon’ble High Court in the case of Living Media against which the appeal of the revenue before Supreme Court is dismissed, it was held that there is no liability of deduction of tax at source under Section 194H with regard to trade discount of 15% given to the advertising agency as the contract between the newspaper publisher and advertising agency is a principal to principal contract. Thus, the payment made by the Assessee to the advertising agency cannot be classified as commission. The judgment of the Delhi High Court was fully applicable;

++ Section 190(1) provides that tax on income shall be payable by deduction or collection at source or by advance payment. Sub-section (2) of section 190 starts with a negative injunction i.e. “nothing in this section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of Section 4.” Sub-section (1) of section 4, provides that charge of the income tax shall be on the income of a person. Sub-section (2) of Section 190 clearly mandates that despite of mode and manner of collection and recovery of tax i.e. by deduction or collection at source as envisaged under section 190 (1), the charge of payment of income tax is on a person, whose income is to be taxed. Section 191 provides that in the case of income in respect of which provision is not made under this Chapter for deducting income tax at source and where income tax has not been deducted in accordance with the provision of this chapter, income tax shall be payable by the assessee direct. Thus, both the conditions i.e. (i) in the case of income in respect of which provision is not made under chapter XVII for deducting income tax at the time of payment and (ii) in case where income tax has not been deducted in accordance with the provisions of Chapter XVII, the Income tax is payable by the assessee direct. Section 191 thus re-enforces that primarily the liability of payment of income tax is on the person, whose income is to be taxed as delineated under sub-section (1) of section 4 and sub-section (2) of section 190. The explanation to Section 191 provides that where a deductor who was required to deduct income tax at source does not deduct or after deduction does not pay and where the assessee has also failed to pay such tax directly then such person shall without prejudice to any other consequence be deemed to be an assessee in default within the meaning of subsection (1) of Section 201 in respect of such tax. The explanation to section 191 thus has to be read into section 201(1). Sub-section (1) of Section 201 provides that where deductor does not deduct or does not pay after deduction such person shall without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax. The language of the explanation to Section 191 and sub-section (1) of Section 201 is almost similar except with one difference. In Explanation to Section 201, the deductor shall be deemed to be an assessee in default where the assessee has also failed to pay such tax directly, whereas in sub-section (1) of Section 201, the above condition is not mentioned. While interpreting the provisions of sections 191 and sub-section (1) of Section 201, a harmonious construction has to be adopted and such interpretation is to be put which gives meaning and purpose to both the provisions. Explanation to section 191 specifically mentions “....be deemed to be an assessee in default within the meaning of sub-section (1) of section 201 in respect of such tax.” The above meaning thus has to be read in sub-section (1) of section 201, which has been specifically provided for. Thus, deductor who fails to deduct income tax at source shall be deemed to be an assessee in default only when the assessee has also failed to pay such tax directly. Thus, it flows that there is no occasion to treat the deductor as an assessee in default unless the assessee has not paid the tax directly. In the present case, the Income tax authorities had not adverted to the Explanation to Section 191 nor had applied their mind as to whether the assessee has also failed to pay such tax directly. Thus, to declare a deductor, who failed to deduct the tax at source as an assessee in default, condition precedent is that assessee has also failed to pay tax directly. The fact that assessee has failed to pay tax directly is thus, foundational and jurisdictional fact and only after finding that assessee has failed to pay tax directly, deductor can be deemed to be an assessee in default in respect of such tax. In the case of the assessee, since there is no finding that the tax is not recovered from the agents, collection of tax from the assessee is beyond the scope of section 201 and is an action of the authorities without jurisdiction. 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;

++ unless pre-conditions for exercise of jurisdiction exists in an authority assumption of jurisdiction on assuming wrong fact can always be questioned in a writ court and the mere fact that income tax authorities have assumed jurisdiction and proceeded to pass an order does not preclude the scrutiny that whether jurisdictional facts to assume to jurisdiction were present or not. Huge liability running in several crores have been fastened on the assessee and on the basis of the assessment order, reassessment notice has been issued by the Department for reopening the assessment for five years, which will again expose the assessee, which proceedings would be nothing but multiplicity of proceedings to be faced by the assessee which may prolong years increasing the sufferings of the assessee, whereas under law section 194H of the Act is not applicable in the facts of the present case. Taking into consideration over all facts and circumstances of the present case, the assessee has rightly invoked the jurisdiction of this Court under Article 226 and the assessee cannot be thrown out on the ground of alternative remedy;

++ 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. The adequate opportunity to which the petitioner was entitled was not provided for by the Department and the Department rushed through the proceedings against the natural justice.