Amount Retention by Advertisement Agencies on Principal-Principal basis is Trade Discount, No TDS Obligation u/s 194H: Delhi HC [Read Order]

In a recent verdict, the Delhi High Court determined that the amount retained back by advertising agencies from the assessee, following a principal-to-principal arrangement, qualifies as a trade discount rather than a commission. Consequently, it does not incur Tax Deduction at Source (TDS) obligations as per Section 194H of the Income Tax Act, 1961.

The matter stemmed from an assessment order issued by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, which resulted in an adjustment to the assessee’s income. Two significant disallowances/additions were made by the AO:

1. A disallowance of Rs. 11,20,43,563 was imposed based on Section 40(a)(ia) of the Act, as the AO believed that the assessee had not deducted Tax at Source (TAS) under Section 194H.
2. An addition of Rs. 23,26,926 was made under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.

The assessee appealed these disallowances to the Commissioner of Income T ax (Appeals) [CIT(A)], and the first appellate tribunal decided to delete the disallowance under Section 40(a)(ia) while reducing the disallowance related to Section 14A of Income Tax Act.

The case revolved around the assessee’s business of selling advertising space in publications of the Times of India Group. The advertising unit of the Times of India Group offered a 15% trade discount to advertising agencies for their services. The assessee had no formal agency agreement with the Times of India Media Group.

The AO concluded that the amount retained by advertising agencies should be considered as a commission, obligating the assessee to deduct TDS under Section 194H of Income Tax Act.

However, the Delhi High Court ruled that since the relationship between the assessee and the agencies was based on a principal-to-principal basis, the amount retained should be considered a trade discount and not a commission. Therefore, there was no requirement for the assessee to deduct TDS under Section 194H of Income Tax Act.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that “since the relationship between the respondent/assessee and the agencies was found by the statutory authorities below to be on a principal-to-principal basis, the amount retained by the agencies it could only be construed as trade discount and not commission. Therefore, as rightly concluded by the Tribunal, there was no obligation on the part of the respondent/assessee to deduct TDS under Section 194H of the Act.”

Similarly, with regard to the second issue, the Assessing Officer (AO) disallowed expenses related to generating tax-exempt income by considering the entire investment made by the respondent/assessee, which encompassed income exempt from tax.

Nonetheless, the Delhi High Court upheld the CIT(A)’s implementation of the formula outlined in Rule 8D(2)(iii) of the Income Tax Rules, 1962, and dismissed the AO’s inclusion of investments unrelated to tax-exempt income.

In conclusion, the High Court found no substantial question of law arising from the case and closed the appeal.

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