Tax Deduction at Source on Commission: Supreme Court Rules Against Prasar Bharati

Tax disputes involving deductions at source often arise when companies and government entities engage in complex financial transactions. The case of The Director, Prasar Bharati vs. Commissioner of Income Tax, Thiruvananthapuram revolved around whether payments made by Prasar Bharati to advertising agencies qualified as ‘commission’ under Section 194H of the Income Tax Act, 1961. The Supreme Court, in its judgment dated April 3, 2018, ruled that the payments made by Prasar Bharati were indeed commission and were subject to tax deduction at source (TDS).

This ruling is significant as it clarifies the interpretation of ‘commission’ under tax laws and reinforces the obligation of government entities to comply with tax deduction provisions.

Background of the Case

The dispute arose when Prasar Bharati (Doordarshan Kendra), functioning under the Ministry of Information and Broadcasting, engaged advertising agencies to secure advertisements for its television channel. To streamline this process, Prasar Bharati entered into agreements with several advertising agencies, granting them accredited status for advertising services.

According to the agreement:

• The advertising agencies applied for ‘accredited status’ to conduct business with Prasar Bharati.
• Prasar Bharati agreed to pay a 15% commission to these agencies.
• The agencies were required to provide a bank guarantee and ensure a minimum annual business of Rs. 6 lakhs.

During Assessment Years 2002-2003 and 2003-2004, Prasar Bharati paid Rs. 2,56,75,165 and Rs. 2,29,65,922, respectively, to advertising agencies as commission. However, Prasar Bharati did not deduct TDS from these payments, arguing that the transactions did not qualify as ‘commission’ under Section 194H.

Legal Proceedings

Assessing Officer’s Decision: The Assessing Officer (AO), in its order dated September 22, 2003, ruled that the payments were in the nature of ‘commission’ as defined under Section 194H. The AO found Prasar Bharati in default under Section 201 for failing to deduct TDS and imposed a liability of:

• Rs. 16,34,283 (tax) and Rs. 3,80,611 (interest) for AY 2002-03.
• Rs. 11,15,944 (tax) and Rs. 1,54,050 (interest) for AY 2003-04.

First Appeal: Prasar Bharati appealed before the Commissioner of Income Tax (Appeals)-II, Thiruvananthapuram, which upheld the AO’s decision on March 4, 2005.

ITAT Decision: Prasar Bharati then appealed before the Income Tax Appellate Tribunal (ITAT), Cochin Bench, which set aside the AO’s order and ruled in favor of Prasar Bharati on March 28, 2007.

High Court Ruling: The Kerala High Court, in its judgment dated November 20, 2009, reversed the ITAT’s order, holding that Prasar Bharati was liable to deduct TDS under Section 194H. It restored the original order passed by the AO.

Key Legal Issues

The Supreme Court examined the following issues:

• Whether payments made by Prasar Bharati to advertising agencies constituted ‘commission’ under Section 194H.
• Whether Prasar Bharati was liable to deduct TDS from these payments.
• Whether Prasar Bharati’s argument of a ‘principal-to-principal’ relationship with agencies was legally valid.

Arguments by Both Parties

Petitioner’s Argument (Prasar Bharati):

• The relationship between Prasar Bharati and advertising agencies was that of principal-to-principal, not principal-agent.
• The 15% discount was a trade incentive and not a commission.
• Some agreements mistakenly referred to the payment as ‘commission’, but in substance, the transactions were different.

Respondent’s Argument (Income Tax Department):

• The agreements explicitly referred to the 15% payment as ‘commission’.
• The agencies acted on behalf of Prasar Bharati in securing advertisements, making the relationship one of principal and agent.
• The tax law interpretation of ‘commission’ is broad and includes such payments.

Supreme Court’s Observations

The Supreme Court, comprising Justices R.K. Agrawal and Abhay Manohar Sapre, upheld the Kerala High Court’s ruling, affirming that Prasar Bharati’s payments to advertising agencies were indeed ‘commission’ and subject to TDS.

Key Excerpt from the Supreme Court Judgment:

“The agreement itself has used the expression ‘commission’ in all relevant clauses. The intention of both parties was to categorize the 15% payment as commission, and therefore, Section 194H is applicable.”

The Court further held:

“The term ‘commission’ under Section 194H includes payments made to an agent for securing business. The accredited agencies functioned as intermediaries for Prasar Bharati, making them agents under the Act.”

Final Verdict

The Supreme Court ruled:

• Prasar Bharati was liable to deduct TDS on payments made to advertising agencies.
• Section 194H applied as the payments were ‘commission’ under the Income Tax Act.
• Prasar Bharati’s failure to deduct TDS attracted the provisions of Section 201, making it liable for interest and penalties.
• The appeals were dismissed, and the Kerala High Court’s judgment was upheld.

Impact of the Judgment

This ruling has significant implications for tax compliance in commercial transactions:

• It reinforces the principle that payments classified as ‘commission’ must be subjected to TDS.
• It clarifies that the substance of an agreement prevails over its terminology in tax matters.
• It sets a precedent for similar cases involving intermediary commissions.
• It ensures government entities comply with tax deduction obligations like private corporations.

Conclusion

This judgment strengthens the enforcement of Section 194H of the Income Tax Act by holding that payments labeled as ‘commission’ must be taxed accordingly. The ruling ensures that public sector entities like Prasar Bharati adhere to tax compliance rules, reinforcing transparency in financial dealings.

Petitioner Name: The Director, Prasar Bharati.
Respondent Name: Commissioner of Income Tax, Thiruvananthapuram.
Judgment By: Justice R.K. Agrawal, Justice Abhay Manohar Sapre.
Place Of Incident: Thiruvananthapuram.
Judgment Date: 03-04-2018.

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