“Principal and agent relationship can also exist without any written or codified agreement”
|Case name:||Jagran Prakash Ltd V/S The Deputy Commissioner Of Income Tax|
|Case number:||Civil appeal number-388 of 2012|
|Court:||Allahabad high court|
|Bench:||Justice Ashok bhushan, Justice Krishna prakash|
|Decided on:||MAY 03, 2012|
|Relevant Act/Sections:||Section 194H, 182 of the Indian Contract Act, 1872|
- BRIEF FACTS AND PROCEDURAL HISTORY:
- The petitioner is engaged in the business of printing and publishing newspapers ‘Dainik Jagaran’ and ‘I-next’ from different centres across the country. The registered office of the petitioner’s company is situate at Kanpur Nagar. The major source of revenue of the petitioner is generated from advertisements published in the said newspapers.
- The petitioner is also member of Indian Newspaper Society (hereinafter referred to as INS). The petitioner has 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. On 15.3.2012, the respondent conducted a survey under section 133A of the Act at the premises of the petitioner at Kanpur Nagar and recorded statement of General Manager Taxation and Legal.
- The notice dated 19.3.2012 for the financial year 2009-2010 was issued to the petitioner stating that during the course of survey on 15.3.2012, it has been gathered that the petitioner has failed to deduct tax at source under section 194 H of the Act on the payment received from advertising agencies after allowing 15% trade discount, which is as well a deemed commission.
- ISSUE BEFORE THE COURT:
- 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?
- 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?
- Whether between the petitioner and the advertising agency there is a relationship of principal and agent?
- Whether the advertising agency is rendering services to the petitioner or they are rendering services to advertiser as their agent?
- Whether 15% trade discount allowed by the petitioner to advertising agencies is payment of commission within the meaning of Section 194H Explanation (i)?
- 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?
- 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?
- 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?
- 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?
- Whether the assessing authority has taken into consideration all relevant materials for taking the decision and has not taken into consideration any irrelevant material?
- Whether the assessing authority has violated the principle of natural justice in the proceeding under section 201 and 201 (1A)?
- To what relief, if any the petitioner is entitled in the present writ petition?
- RATIO OF THE COURT:
- The court contended after hearing all the submission of both the parties by their learned counsel that the challenge of the petitioner to the assessment order is on the ground that assessment order directing for recovery of tax, which according to the respondents was not deducted by the petitioner at source, is without jurisdiction. The submission is that under Section 201 read with Section 191 of the Act the liability of the tax, which was required to be deducted at source, cannot be fastened on the deductor and in the event the tax has not been deducted the primary liability to pay such tax is on the assessee and the assessment order framing assessment of tax on the petitioner was beyond the jurisdiction and was outside the provisions of Section 201 of the Act.
- The agencies by the petitioner during the relevant assessment year is nothing but payment of commission within the meaning of Section 194H Explanation-(i) and the petitioner was liable to deduct tax at source. The commission or brokerage has been defined in explanation. As per definition for payment to be treated as commission, following three conditions are required to be fulfilled:
(1) payment received or receivable directly or indirectly;
(2) by a person acting on behalf of another person;
(3) for services rendered (not being professional services).
- The Condition Nos. (2) and (3) , which are interrelated, are being taken first. The Condition Nos.2 and 3 contemplate that 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. Thus the test is as to whether person receiving commission is agent of the principal and he is receiving commission in lieu of services. The above are jurisdictional facts which have to be found out in the proceeding to be taken under Section 201/201(1A) of the Act. What are the jurisdictional facts and what is the scope of entertaining such challenge in proceeding under Article 226 of the Constitution of India needs to be first examined before proceeding further to examine the facts of the present case.
- The court stated after referring to various judgements that two conditions, which are required to be fulfilled before holding a person liable for deduction at source, are the payment is received by a person as agent of principal and secondly payment is for services rendered (not being professional services). The petitioner’s contention is that relationship between the petitioner i.e. newspaper agency and the advertising agency is not on the basis of principal and agent, rather is on the basis of principal to principal. It has been submitted that there is no agreement between the petitioner and the advertising agency from which any assumption can be inferred nor at any point of time the petitioner has employed the advertising agency as its agent whereas the contention of the department is that advertising agencies are agent of the petitioner since they are bringing advertising business which are services rendered by them to the petitioner and payment of trade discount to the advertising agency is nothing but commission in lieu of services rendered. The court proceeded to examine as to what are the tests for finding out relationship of principal and agent.
- The court also stated that the section 182 of the Indian Contract Act, 1872, which defines “Agent” and “Principal”, is quoted: “Agent” and “principal” defined.-An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.
- The court must examine the true nature of the agreement and the subsequent dealings between the parties, and then decide whether it established a relationship of agency under the law. It is common experience that the word ‘agent’ is frequently used to describe a relationship which is not an agency in law. In several cases, a person described as an agent in the agreement or his letter of appointment was held to be not an agent according to law. Some of these cases are cited in Halsbury’s Laws of England, 3rd edition, Vol. 1 p. 146, in a foot-note to the following observation:
- Agency Depends on True Nature of Relationship In order to ascertain whether the relation of agency exists, the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent will be regarded and if it is found that such agreement in substance contemplates the alleged agent acting on his own behalf, and not as an agent in the agreement, the relation of agency will not have arisen.”
- The cases cited in the foot-note are: Re Nevill, Ex parte White, (1871) 6 Ch. App. 397; Towle (John) and Co v. White, (1873) 29 LT 78; Livingstone v. Ross. 1901 AC 327; Micheline Tyre Co. v. Macfarlane (Glasgow) Ltd., (1917) 55 Sc L. R. 35; Kitson v. King (P. S.) and Son, Ltd. (1919) 36 T. L. R. 162, Lamb (W T.) & Sons v. Goring Brick Co. (1932) K. B. 710.
- The court stated that American Law is similar that “the manner in which the parties designate the relationship is not controlling, and if an act done by person on behalf of another is in its essential nature one of agency, the one is the agent of such other notwithstanding he is not so called. Conversely the mere use of the word by agent in the contract cannot have to be held the effect of making one agent, who, in fact is not such.”
- Section 182 of the Contract Act defines an agent as “a person employed to do any act for another or to represent another in dealings with third person.” The section defines a principal as “the person for whom such act is done or who is so represented.” According to this definition, an agent never acts on his own behalf but always on behalf of another. He either represents his principal in any transaction or dealing with a third person, or performs any act for the principal. In either case, the act of the agent will be deemed in law to be not own but of the principal. The crucial test of the status of an agent is that his acts bind the plaintiff.
- The Apex Court in the case of Chiarman, Life Insurance Corporation vs. Rajiv Kumar Bhasker reported in (2005)6 SCC 188 had occasion to consider various sections of Indian Contract Act including Sections 182, 186 and 187. The Apex Court in the said case held that an agency can be created expressly or by necessary implications. Followings were laid down in paragraphs 26, 27 and 28:
- The definition of ‘agent’ and ‘principal’ is clear. An agent would be a person employed to do any act for another, or to represent other in dealings with third parties and the person for whom such act is done or who is so represented is called the principal. It may not be obligatory on the part of the Corporation to engage an agent in terms of the provisions of the Act and the rules and regulations framed thereunder, but indisputably an agent can be appointed for other purposes. Once an agent is appointed, his authority may be express or implied in terms of Section 186 of the Contract Act. For creating a contract of agency, in view of Section 185 of the Indian Contract Act, even passing of the consideration is not necessary. The consideration, however, so far as the employers are concerned as evidenced by the Scheme, was to project their better image before the employees.
- It is well-settled that for the purpose of determining the legal nature of the relationship between the alleged principal and agent, the use of or omission of the word “agent” is not conclusive. If the employee had reason to believe that his employer was acting on behalf of the Corporation, a contract of agency may be inferred.”
- The court observed that the requirements of principal-agent relationship, certain condition laid down in explanation (I) to section 194H are required to be fulfilled:
1.There should be payment received or receivable directly or indirectly.
2.It should be received or receivable by a person acting on or behalf of another person.
3.The payment should be received or receivable for:
(a) Services rendered (not being professional services) or
(b) For any services in the course of buying or selling of goods or
(c) In relation to any transaction relating to any asset, valuable articles or thing not being securities.
- The petitioner is member of Indian Newspapers Society (INS) by whom the advertising agencies are granted accreditation. According to the Rules of INS the advertising agencies while being granted accreditation are required to enter into an agreement. The department submits that since the petitioner is bound by Rules of INS by whom the accreditation was granted to advertising agencies after entering into an agreement, there is implicit contract between the petitioner and the advertising agencies and the relationship of principal-agent exists between them.
- On a reading of the contract as well as the order passed by the CIT (A) and the Tribunal, the court find that the two authorities below have held it to be a principal to principal contract. That being so, by its very definition, the payment made by the Assessee to the advertising agency cannot be classified as commission. The payment may be called a trade discount or may be described as a concession but since Rule 32 of the INS Rules described it as a trade discount, we have to proceed on that basis and by merely describing the trade discount as commission, the Revenue cannot seek to invoke the provisions of Section 194H of the Act.
- The court held that the relationship of principal and agent was fully established since the advertising agency was appointed as agent by written agreement and there was specific clause that tax shall be deductible at source on payment of trade discount. In the said circumstances the Kerala High Court held that Section 194H of the Income Tax Act was applicable. In the present case, there is no agreement between the petitioner and the advertising agency and the advertising agency has never been appointed as agent of the petitioner.
- The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “sum chargeable under the provisions of the Act” from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act dehors the machinery Sections. The Act is to be read as an integrated code.
- It was also observed by the board that the agency did not book ad space from the newspapers and sell the space, in turn, to the advertisers, the officials said. “The model used by the newspapers is that the agency informs the newspapers about the advertisement and then the paper slots the advertisement. Hence, once again, the agency is merely being paid for the services it renders, which is why such payment is liable to TDS,” the official added.”
- The court stated that this court do not cannot appreciate this practice of the Income-tax Department of hurriedly passing assessment orders shortly before the limitation period is about to expire and justifying this practice by saying that there was shortage of time and hence it was impossible to verify the facts properly, and hence the additions were being made. It is common knowledge that when the limitation for making an assessment is about to expire (usually on 31st March) there is a sudden rush and scramble to complete the assessments. If this practice is countenanced the citizens of the country will be put to great harassment as exorbitant demands can be made against them merely by saying that there was shortage of time and hence additions were being made for this reason without verifying the facts correctly. It is the duty of the Department to make a correct assessment and not to make an excessive assessment merely on the ground of shortage of time.
- No doubt the Department has to assess and collect the correct tax, but for this purpose it should devise and set up a rational scheme in accordance with law. It should certainly not make assessments hurriedly merely by saying that there is shortage of time (as often happens), thus putting the citizens to great harassment.”
- The caution given by the Division Bench in the aforesaid case is fully applicable in the facts of the present case. 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. This court concluded that the adequate opportunity to which the petitioner was entitled was not provided for by the Department and the Department rushed through the proceedings.
- DECISION HELD BY COURT:
- At last the court stated that the petitioner is entitled for the reliefs as claimed in the writ petition. The proceedings initiated vide notices dated 193.2012 and 21.3.2012 culminated into assessment orders dated 28.3.2012 and 29.3.2012 are set aside. The writ petition is allowed.
- The parties shall bear their own costs.