“Trade Scheme Payments” to be Treated as Commission: ITAT Upholds PCIT’s Revision under Section 263 in Income Tax Case [Read Order]

The bench of the Income Tax Appellate Tribunal (ITAT), Delhi, upheld the Principal Commissioner of Income Tax’s (PCIT) revision order under Section 263 of the Income Tax Act, 1961, ruling that payments made to sales promoters, could not be accepted as pure reimbursements in the absence of sufficient documentary correlation and were liable to be examined as commission payments, thereby attracting the tax deduction requirements under Section 194H.

The appellant, Pernod Ricard India Pvt. Ltd., had filed appeals for Assessment Years 2012-13, 2013-14, and 2014-15 challenging the order of the PCIT (Central Delhi). The company, engaged in the business of manufacturing and trading alcoholic beverages, had claimed large expenses on account of trade scheme disbursements made through sales promoters.

In the original assessment framed under Section 143(3) read with Section 144C of the Income Tax Act, 1961, several additions were made, including disallowances under Section 40(a)(ia) relating to trade scheme payments. On appeal, part relief was granted by the Commissioner of Income Tax (Appeals), and the matter was later remanded by the ITAT to the Assessing Officer (AO) in 2020 for fresh examination of whether such disbursements were reimbursements or commission payments requiring tax deduction under Section 194H.

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During the set-aside proceedings, the AO accepted the assessee’s claim partly, allowing ₹22.09 crore as genuine reimbursements out of a total claim of ₹63.24 crore. The PCIT, however, found that the AO passed the order hastily, without verifying the voluminous documents and without ensuring one-to-one mapping of payments from the assessee to sales promoters and from the promoters to retailers. The PCIT, therefore, invoked revisionary jurisdiction under Section 263 to hold the assessment order erroneous and prejudicial to Revenue interests.

Represented by Deepak Chopra, Anmol Anand, Priya Tondon, and Sheetal Kandpal, the appellant argued that the PCIT had wrongly assumed jurisdiction under Section 263 as the AO had conducted a detailed examination and passed the order after applying his mind. It was contended that the AO’s decision to grant partial relief represented one of the possible views, which could not be interfered with merely because the PCIT preferred another.

It was further argued that the payments made to sales promoters were pure reimbursements of trade scheme discounts offered to retailers. It was submitted that there existed a clear correlation between the payments made by the assessee to the sales promoters and the subsequent disbursements by promoters to retailers, establishing the nature of the payments as reimbursements exempt from tax deduction under Section 194H.

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It was urged that the AO had verified the sample evidence, debit notes, and agreements, and had allowed only the portion supported by records. It was also contended that Explanation 2 to Section 263, relied upon by the PCIT, was inapplicable to the relevant assessment years since it came into effect from 2015-16 onwards.

Represented by Javed Akhtar, the Revenue argued that the AO had failed to comply with the directions of the earlier ITAT order. It was submitted that the AO could not have realistically verified more than 400 files, comprising over 2 GB of data, within a single day.

It was contended that the AO had accepted the assessee’s submission without ensuring the crucial one-to-one verification of reimbursements. It was argued that the PCIT rightly held that the AO’s order lacked proper inquiry, rendering it erroneous and prejudicial to the interests of the Revenue as per the mandate of Section 263.

Further, it was contended that the relationship between the assessee and its promoters was one of principal and agent, and hence the payments constituted commission within the meaning of Section 194H. Consequently, the failure to deduct tax warranted disallowance under Section 40(a)(ia).

The Bench comprising of Accountant Member, S. Rifaur Rahman and Judicial Member, Anubhav Sharma held that the AO had not complied with the specific directions issued in the earlier remand order and failed to verify the genuineness of the reimbursement claim. The bench noted that the AO merely accepted the documents furnished by the assessee and allowed partial relief without issuing a reasoned or speaking order.

The bench observed that the assessee did not maintain or produce a written trade scheme or clear documentary proof establishing that the payments to sales promoters were purely reimbursements. The Tribunal ruled that agreements between the assessee and the sales promoters clearly established a principal-agent relationship, under which the promoters’ remuneration was linked to sales volume.

Therefore, the bench ruled that the “trade scheme payments” were not proved to be pure reimbursements and, therefore, were liable to be treated as commission payments attracting the provisions of Section 194H.

The Tribunal held that AO did not verify whether the amounts paid to promoters were actually transferred to retailers/distributors as reimbursements. Thus, the ITAT held that this failure amounted to lack of inquiry and justified the PCIT’s revision under Section 263.

Dismissing the appeals for all three years, the Tribunal upheld the PCIT’s order.

Additionally, ITAT directed the AO to pass a fresh, reasoned order after verifying the trade scheme disbursements, including reconciliation of debit notes and payments to retailers.

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