IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN FRIDAY, THE 20TH NOVEMBER 2009 / 29TH KARTHIKA 1931 ITA.No. 27 of 2009() -------------------- ITA.926/CO/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT: RESPONDENT ------------------------------ THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT(S): APPELLANT ------------------------ THE DIRECTOR, PRASARBHARTI, DOORDARSHAN KENDRA, THIRUVANANTHAPURAM. ADV. SRI.DALE P.KURIEN FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20/11/2009, ALONG WITH ITA NO. 62 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR & V.K. MOHANAN, JJ. -------------------------------------------- I. T. A. No. 27 & 62 OF 2009 -------------------------------------------- Dated this the 20th day of November, 2009 JUDGMENT Ramachandran Nair, J. The question raised in the appeals filed by the Revenue is whether the Income Tax Appellate Tribunal was justified in holding that the commission paid by Doordarshan Kendra which is under the control of the respondent to advertising agencies for advertisments canvassed by them does not attract the provisions of Section 194H of the IT Act which provides for deduction of tax at source on payments of commission or brokerage. We have heard standing counsel appearing for the revenue and Sri. Dale P. Kurien, counsel appearing for the respondent. 2. Respondent is a fully owned Government of India undertaking engaged in telecast of news, various sports, entertainments, cinemas and other programmes. Advertisement income is a major source of revenue for all telecasting companies including the respondent. Advertisements are canvassed through agents appointed by the 2 respondent under agreement with them. Advertising agencies recognised by the respondent are of two types, the unregistered agencies which are not entitled to any credit facility and the other type are registered agencies which are given accredition and credit facility with Doordarshan. In other words, while the first category will be able to telecast advertisment programmes canvassed from customers only on advance payment, the other category can have telecast done before making payments. Advertisement charges are based on air-time used for telecasting advertisement material. Rates are also varying depending upon the time of advertisment. However, these matters have no relevance for the purpose of deciding this case because the issue involved is whether the commission paid at the rate of 15% by the respondent on advertisement charges remitted by the advertising agencies is subject to tax deduction at source as commission under Section 194H of the Act. For easy reference, we extract hereunder the relevant portion of Section 194H for the purpose of deciding this case: 194H. Commission or brokerage Any person, not being an individual or a Hindu 3 undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in Section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate of ten per cent: Provided.... Provided..... Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephoen Nigam Limited to their public call office franchisees. Explanation.- For the purposes of this section, -- (i) "commission or brokerage" includes any payment received or receivable directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities. ....................................................... During hearing copies of agreements executed by the respondent with two parties are produced. The nature of transactions as stated in Annexure B agreement between Doordarshan and its agencies is as 4 follows: WHEREAS, for the better regulation of the practice of advertising and to secure the best advertising service for advertisers, the Doordarshan Commercial Service has agreed to allow commission in respect of advertisements placed by any advertising agent and accredited by it. ............................................ (2) By the Agency:- In consideration of the accredition herein afforded and of the commission to which the Agency will be entitled by reason of such accreditation. ................. (c) the renumeration of the Agency for placing advertisements in the Commercial Service shall be in the form of standard agency commission of 15 (fifteen) per cent to be paid by the Doordarshan Commercial Service. From the above it is very clear that parties have understood their relationship as Principal and Agent and what is paid to the agent by Doordarshan is 15% of advertisement charges collected and remitted to it by the agent which is in the form of commission payable to the Agent by Doordarshan. Counsel for the respondent referred to one of the agreements where the commission is referred to as standard discount and contended that the arrangement between respondent and 5 advertising agency is not agency but is a Principal to Principal arrangement of sharing advertisement charges. We are unable to accept this contention because advertisement contract entered into between the customer and the agency is for telecasting advertisement in Doordarshan channels. The agent canvasses advertisement on behalf of Doordarshan under agreement between them and the advertisement charges recovered from the customers are also in accordance with tariff prescribed by Doordarshan which is incorporated in the agreement. Further it is specifically stated in the agreement that advertisement material should also conform to the discipline introduced by Doordarshan which is nothing but a Government agency which cannot telecast all what is desired to be telecast by advertising agencies. In fact, Doordarshan is bound by advertisement contract canvassed by advertising agencies and it is their duty under the agreement between them and the advertising agencies to telecast advertisement material in terms of the contract which the agency signs with the customer. In our view, the transaction is a pure agency arrangement between the respondent and the advertising agencies because one acts for the other and the act of the agent binds the respondent in their capacity as 6 Principal of the agent. It is pertinent to note that commission or brokerage defined under explanation (i) to Section 194H has a wide meaning and it covers any payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered. In this case, no one can doubt that 15% commission paid to advertising agencies by the Doordarshan is for canvassing advertisements on behalf of the respondent. So much so, the payment of 15%, by whatever name called, whether discount or commission, falls within the definition of "commission" as defined under Explanation (i) to Section 194H of the Act. 3. The next question to be considered is whether the provision in the agreement permitting advertising agencies to retain 15% of the advertising charges payable by them to the respondent towards commission from out of the charges received for advertising services from customers will exonerate the respondent from their liability to deduct tax at source under Section 194H of the Act. In this context, it is pertinent to refer to clause 2(e) of Annexure A agreement which is extracted hereunder: 7 (e) The Agency shall retain in full all discount earned as an advertising agency and that it will at no time pay or otherwise allow directly or indirectly any part of such discount or remuneration to any person, advertiser or representative of any advertiser for whom it may be acting or has acted as an advertising agency. Agency agrees to pay the TDS/Income Tax liability as applicable under the Income Tax Law on the discount retained by him. For this purpose agency agrees to make payment to Doordarshan Commercial Service by means of cheque/demand draft for the TDS on 15% discount retained by them. This cheque/demand draft will be drawn separately and should not be included in the telecast fee/advertisement charges. It is very clear from the above provision that advertising agency clearly understood the agreement as an agency arrangement and the commission payable by the respondent to such agency is subject to tax deduction at source under the Income Tax Act and so much so the provision in the agreement was for the agent after retaining 15% to give cheque or demand draft for TDS amount which was originally 5% until it was enhanced to 10% by Finance Act 2007 with effect from 1.6.2007 and inspite of specific clause providing for recovery of tax at source and payment of the same, the officers of the respondent who are virtually officers in the service of the Government have violated the 8 provisions of the Act by taking untenable contention before the income tax authorities that the transaction does not attract provisions of Section 194H. In our view, the department should take serious note of the violation by officers of Central Govt. agency and take up the matter with the Ministry for taking appropriate action for violation of the Act and for engaging in evasion of tax. 4. Advertisement charges collected by agents are for respondent and agents are allowed to retain 15% of the commission by the respondent only to avoid the hassle of deposit of full amount and repayment of 15% thereof towards commission. Since permission given to agents is to withhold 15% out of advertisement charges collected by them from the customers, and payable to Doordarshan, it is nothing but a payment made to agents in advance by Doordarshan before remittance of net advertising charges to them by the agents. We are therefore of the view that permission granted by Doordarshan under the agreement to the agencies to retain 15% of the commission amounts to payment of commission by them to agents which is subject to deduction of tax at source under Section 194H of the Act. It is clear from Section 194H that payment includes credit of such sum to the 9 account of the payee or at the time of payment of such income in cash or by the issue of cheque or draft or by any other mode. When the respondent receives 85% of the advertising charges from the advertising agency concerned, Doordarshan accounts full amount as received from the customer for whom advertisement was undertaken, crediting 85% received in their account and simultaneously crediting 15% in the account of the advertising agency. Irrespective of the pattern of account maintained by the respondent, what happens when the agent pays 85% of the advertisement charges collected from the customer is that the agent simultaneously gets paid commission of 15% which he is free to appropriate as his income. TDS on the commission charges of 15% has to be paid by the respondent to the income-tax department with reference to the date on which 85% of the advertisement charges are received from the agent. In fact, it is only to comply with the provision, clause 2(e) extracted above is incorporated in the agreement wherein it is stated that agent will pay to the Doordarshan through DD or cheque the TDS amount payable on the commission retained by agents which we have already found as payment of commission by the respondent to the agent. 10 5. Even though counsel for the respondent has relied on the decision of the Gujarat High Court in AHMEDABAD STAMP VENDORS ASSN. V. UNION OF INDIA, 257 I.T.R. 203 and a decision of learned single Judge of this Court in M.S. HAMEED V. DIRECTOR OF STATE LOTTERIES, 249 I.T.R. 186 and contended that commission payable cannot be subjected to deduction, we are unable to accept this argument because the case decided by the Gujarath High Court pertains to sale of stamp by the Government to stamp vendors at a discount and the case decided by this Court pertains to sale of lottery tickets to the agents at a discounted price. In both the cases, the purchasers, namely, stamp vendors and lottery agents purchased stamps and lottery tickets respectively at a discounted price and they run the business at their risk. They will get the discount retained by the Government only if stamp paper or lottery ticket is sold and destruction of the stamp paper or lottery ticket before sale in their hands will be a complete loss to them. Therefore the transactions of purchase at discounted price and sale at face value were rightly treated as not agency transactions by the Courts. On the other hand, in this case, on facts and based on terms of agreements between parties, we 11 find that the transaction is pure agency arrangement whereunder respondent allows the agents to canvass advertisement for them at tariff prescribed by the respondent on payment of commission of 15%. We therefore allow the appeals reversing the orders of the Tribunal and restore the orders of assessment confirmed in first appeals. However it is for the respondent to invoke, if permissible, the indemnity clause and recover the levies from the agents. (C.N.RAMACHANDRAN NAIR) Judge. (V.K. MOHANAN) Judge. kk 12