Whether passing of title in goods is critical determinative factor to decide question whether franchisee was acting as agent or working on principal to principal basis - YES: ITAT

THE issue is - Whether passing of title in the goods is important and determinative factor for the question whether franchisee was acting as agent or acting on a principal to principal basis of the Assessee. YES is the answer.

Facts of the case

The assessee is a company engaged in the business of production and sale of milk, icecream and other Dairy products. The assessee sells its milk and other products to the public through franchises who have different retail outlets (booths). The Assessee enters into agreement with Franchisee setting out the terms and conditions under which they were to act as franchisees of Assessee's products. The Assessee fixes the maximum retail price(MRP) for each of the products sold through the franchisee. The Assessee collects price of the product from the franchisees which is less than the MRP. The difference between the MRP and the price that the franchisees pay to the Assessee according to the Assessee was nothing but discount or margin allowed by it to the franchisee so that they may ear profit from their business of sale of dairy products of the Assessee to the public. According to the revenue such difference is nothing but in the nature of "Commission" and therefore the Assessee was bound to deduct tax at source u/s.194H on the difference between the MRP and the price which the franchisee pay to the Assessee. According to the AO, the terms of the Agreement between the Assessee and the franchisee clearly showed that the Franchisee was acting as agent of the Assessee and therefore the payment by the Assessee to the Franchisee partakes the character of "Commission".On appeal, CIT(A) agreed with the contentions of the Assessee and held that the relationship between the Assessee and its franchisee was on a principal to principal basis and was not in the nature of relationship between principal and agent. The CIT(A) also relied on the decision of the Delhi HC in the case of CIT Vs. Mother Diary India Ltd. (infra) rendered on identical facts and circumstances as the case of the Assessee. The CIT(A) therefore concluded that the payment by the Assessee to the franchisee was not in the nature of 'commission' within the meaning of Sec.194-H and therefore there was no obligation on the payment of the Assessee to deduct tax at source on such payment.

Having heard the matter, the Tribunal held that,

++ the Delhi HC in its judgment dated 19.12.2011 in the case of CIT Vs. Mother dairy India Ltd. 2012-TIOL-113-HC-DEL-IT held that it is clear from the judicial pronouncement of the Delhi High Court that passing of title in the goods is important and determinative of the question whether franchisee was acting as agent or acting on a principal to principal basis of the Assessee. It is an undisputed fact that as per the terms of the agreement between the Assessee and its franchisee property in goods was to pass on delivery and the risk of ownership (in the form of the franchisee not being to sell the product or damage to the product) was that of the franchisee. When that is the factual position in the case, we are of the view that the decision of the Delhi HC was squarely applicable to the case of the Assessee. We therefore concur with the view of the CIT(A) and dismiss these appeals by the revenue. In the result the appeals by the revenue are dismissed.