1 TDS on Sales Incentives [Incentives provided for promotion of sale of goods will not be subject to TDS and also will not form part of the total income of the recipient] [Published in 406 ITR (Journ.) p.1 (Part-2)] By S.K.Tyagi At times, queries have been raised by certain business entities (i) Whether incentives provided for the promotion of sale of goods will be liable to TDS, and (ii) Whether the aforesaid incentives will form part of the total income of the recipient. Before we proceed further in the matter, it will be appropriate to examine the scope of the definition of goods. As regards the scope of the definition of the term goods, the same may be discussed as follows : (i) As per section 2(7) of the Sale of Goods Act, 1930, goods means every kind of movable property, other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. (ii) As per clause (12) of Article 366 of the Constitution of India, goods includes all materials, commodities and articles. (iii) As per Chambers 21 st Century Dictionary, the word goods means articles for sale, merchandise. From the aforesaid discussion, it appears that the term goods means every kind of movable property, whether in the form of stock-in-trade or otherwise. In the present context, the relevant provisions of the Transfer of Property Act, 1882 (TPA, for short), may also be useful. Part A of Chapter II of TPA deals with transfer of property, whether moveable or immoveable. This part includes sections 5 to 37 of TPA. In this context, we may refer to section 5 of TPA, wherein the term transfer of property is defined. For the sake of ready reference, the aforesaid section 5 is reproduced as follows : 5. Transfer of property, whether moveable or immoveable In the following sections transfer of property means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons; and to transfer property is to perform such act.
2 In this section living person includes a company or associations or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals. In this connection, it may also be stated that it is within the contemplation of section 5 that there may be a transfer by a person exercising powers over the property of another. It may also be stated here that the words transfer of property clearly contemplate that the transferor has interest in the property which is sought to be conveyed, but transferee has no such interest in such property, as long as it is not conveyed by the transferor to him. The transferee in such a case, gets an interest in the property conveyed only when the transfer is complete and not otherwise. Part B of Chapter II of TPA, deals with transfer of immoveable property. Part B of Chapter II contains sections 38 to 53A. Section 38 of TPA deals with Transfer by person authorized only under certain circumstances to transfer. For the sake of ready reference, aforesaid section 38 is reproduced as follows : 38. Transfer by person authorized only under certain circumstances to transfer Where any person, authorised only under circumstances in their nature variable to dispose of immoveable property, transfers such property for consideration, alleging the existence of such circumstances, they shall, as between the transferee on the one part and the transferor and other persons (if any) affected by the transfer on the other part, be deemed to have existed, if the transferee, after using reasonable care to ascertain the existence of such circumstances, has acted in good faith. Section 38 is intended to protect bona fide transferees, for valuable consideration without notice, who act under good faith and, after making reasonable enquiry, acquire property from a person having only limited powers therein. In the present context, Chapter III of TPA is also relevant, because it relates to sale of immoveable property. This Chapter contains sections 54 to 57. Section 54 of Chapter III is also relevant in the present context. As per section 54 of TPA, sale is a transfer of ownership in exchange for a price, paid or promised or part-paid and part-promised. In view of the aforesaid definition of sale, which refers to transfer of ownership of a property, we may also refer to the definition of the term transfer, as laid down under section 2(47) of the
Income-Tax Act, 1961 (the Act), which deals with transfer in relation to capital assets. For the sake of ready reference, the relevant part of section 2(47) of the Act, is reproduced as follows : 3 2. Definitions. In this Act, unless the context otherwise requires, / (47) "transfer", in relation to a capital asset, includes, (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stockin-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. From the aforesaid provisions, it may be seen that in order to attract the provisions of section 2(47), there must be a capital asset and a sale / exchange or relinquishment of that asset or extinguishment of any right therein or its compulsory acquisition under any law. It may, thus, be seen that the aforesaid definition of the term transfer under section 2(47) of the Act, is used for the computation of capital gains, as per section 45 of the Act, because section 45(1) of the Act, refers to any profits and gains arising from the transfer of a capital asset, etc. The aforesaid discussion is necessary, in order to cover the transactions of sale of goods, being movable articles, as also sale / transfer of capital assets.
4 It may also be stated in this context that as per a number of judgements of the High Courts, a transaction of sale / transfer of property or a contract of sale, does not fall within the purview of TDS provisions under Chapter XVII-B of the Act. Such property will include the stock-in-trade in the case of a trader, as also building units in the case of a developer / builder. The reason for no deduction of tax in respect of a transaction of sale / transfer of property, appears to be that any element of income embedded in the sale transaction gets automatically reflected in the profit and loss account and payment of tax in respect thereof, on the basis of pay as you earn, is taken care of, by the liability to pay advance-tax under section 210 of the Act. We may now deal with the aforesaid queries separately, as follows : 1. Whether there will be TDS liability in respect of the aforesaid incentives. In this connection, we have to examine the provisions of Chapter XVII of the Act, which deals with Collection and recovery of tax. Part A of Chapter XVII contains sections 190 and 191. Part B of Chapter XVII deals with Deduction at source. It contains sections 192 to 206AA. As regards TDS proper, sections 192 to 196D only are relevant. Part BB of Chapter XVII deals with Collection at source and this part does not fall within the scope of the present discussion. It may also be stated in this context that the aforesaid incentives will be provided by the seller or the transferor of the moveable or immoveable property. It may be further stated that the aforesaid incentives will be an integral part of the transaction of sale / transfer of a property, whether moveable or immoveable. In other words, the aforesaid incentive may, to some extent, reduce the sale price of the property. However, the amount of the aforesaid incentive will remain intimately connected with the sale transaction of the property. Therefore, the aforesaid incentive will remain intimately connected with the sale consideration of the property. Accordingly, the aforesaid incentive cannot be dealt with separately. Thus, notwithstanding the aforesaid incentive, the seller / transferor of the property will be the recipient of the sale consideration, which may be equal to the original sale price, minus the incentive being provided for the sale of the property. In the present context, we may also refer to section 204 of the Act. The heading of section 204 of the Act is Meaning of person responsible for paying. As per the provisions of section 204, tax is to be deducted at source by the person responsible for paying the amount or income to the recipient
thereof. It is, thus, quite clear that it is the payer of the amount / income to the recipient thereof, who is under the obligation to deduct tax at source there from. 5 Accordingly, it is obvious that there will be no obligation on the provider of the aforesaid incentives to deduct tax at source, in respect of such incentives, because the aforesaid incentives would form an integral part of the sale consideration of the property, in question. In the present connection, it may also be stated that there is no provision under Chapter XVII-B for deduction of TDS in respect of a transaction of sale / transfer of a property. In this regard it may also be stated that in connection with the interpretation of the provisions of section 194C of the Act, the various High Courts have clearly held that sale contracts or sale transactions will not be subject to TDS. In view of the aforesaid reason, it will be appropriate to briefly deal with the provisions of section 194C of the Act. For this purpose, the relevant part of section 194C, viz. sub-section (1) thereof, is reproduced as follows : 194C. Payments to contractors. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family; (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein. From the aforesaid provisions of section 194C(1), it may be seen that tax is to be deducted at source from payments for carrying out any work, including supply of labour. If the goods are made to order, there is a possibility that the IT Department may treat it as works contract.
6 However, section 194C will not apply to transactions of sales simpliciter. In this context, a reference may be made to the judgement of Bombay High Court, in the case of BDA Ltd Vs ITO(TDS) [2006] 281 ITR 99 (Bom). It was held in this case that a contract for sale is not a works contract. In this case, the Bombay High Court has analysed the difference between a works contract and a contract for sale. The High Court has reviewed a number of cases under sales tax, central excise and income-tax and decided that supply of printed labels itself, did not convert a contract for sale into a works contract. In this connection, it would also be relevant to refer to the definition of the term work under clause (iv) of the Explanation to section 194C of the Act. The aforesaid clause (iv) is reproduced as follows : (iv) "work" shall include (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods or passengers by any mode of transport other than by railways; (d) catering; (e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. If we look at sub-clause (e) of the aforesaid clause (iv), it may be seen that manufacture or supply of a product according to requirement or specification of a customer by using material purchased from such customer will be treated as work, but manufacture or supply of a product, according to the requirement or specification of a customer by using material purchased from a person other than such customer, shall not fall within the purview of contract. In the light of the aforesaid reasons, it is clearly established that a contract of sale will not fall within the purview of section 194C of the Act. In this connection, the other relevant judgements may also be touched upon, which are as follows :
7 (i) CIT Vs Dabur India Ltd [2006] 283 ITR 197 (Del) It was clearly held in this case that the contract was one for sale of goods which took the contract out of the purview of section 194C of the Act. (ii) CIT Vs Reebok India Co. [2008] 306 ITR 124 (Del) It was held in this case that the transactions between the assessee and its manufacturers were of sales simpliciter and not of works contracts and accordingly, there was no TDS liability in respect thereof. (iii) CIT Vs Glenmark Pharmaceuticals Ltd [2010] 324 ITR 199 (Bom): 37 DTR 265 (Bom) In regard to this judgement, a reference may be made to paragraphs (10) and (11), on pages 272 and 273 of 37 DTR. In paragraph (10), the Hon. High Court has referred to Circular No.86, dt.29.5.1972. In paragraph (11) of the judgement, the Hon. High Court has clearly stated that as per the aforesaid Circular, the understanding of the Revenue was that section 194C would not cover a contract for the sale of goods. (iv) ITO (OSD)(TDS) Vs MTNL [2017] 59 ITR (Trib) 244 (Del) It was, inter alia, held in this case that in respect of agreement for the supply of equipment, no tax was deductible at source under section 194C, as it was a contract of sale. (v) TO Vs Millan Dairy Foods P.Ltd [2006] 105 TTJ 252 (Del) It was clearly held in this case that the transaction was one of purchase and sale on principal to principal basis and not works contract. Hence no tax at source was deductible under section 194C. In the present context, a reference may also be made to Circular No.381, dt.8.3.1994, of the CBDT, which also supports the aforesaid view. As per paragraph 7(vi), on page 301 of 206 ITR (St) 299, the provisions of section 194C will not cover contracts for sale of goods. In the light of the aforesaid reasons, a transaction of sale / transfer of property, will not fall within the purview of any of the sections under Chapter XVII-B of the Act. Further, as already stated, the aforesaid incentives being part of the transaction of sale of property, whether moveable or immoveable, will also fall outsider the purview of Chapter XVII-B of the Act.
2. Besides, as the aforesaid incentives will not form part of the total income of the prospective buyers / purchasers, there will be no TDS liability in respect thereof. 8 As per the following paragraph (3), the aforesaid incentives will not form part of the total income of the prospective buyers / purchasers, of the property, in question. Therefore, in view of the provisions of section 4(2) of the Act, there will be no requirement of TDS in regard to the aforesaid incentives. To elaborate the legal position in this regard, section 4 of the Act, is reproduced as follows : 4. Charge of income-tax. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person : Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. As per the provisions of section 4(1), income-tax shall be charged for any assessment year in respect of the total income of the previous year of every person. Further, as per section 4(2), in respect of income chargeable under section 4(1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. As already stated, as per the following paragraph (3), none of the aforesaid incentives will form part of the income of the prospective buyers / purchasers of the property, in question and therefore, in view of section 4(2) of the Act, no tax will be deductible, in respect thereof.
In view of the aforesaid reasons, no tax will be required to be deducted at source, in respect of any of the aforesaid incentives. 9 3. Whether the aforesaid incentives will form part of the income of the purchasers / buyers In order to answer the aforesaid query, it will be necessary to refer to the definition of the term Income under section 2(24) of the Act. The aforesaid clause (24) of section 2 of the Act, is reproduced as follows : 2. Definitions. In this Act, unless the context otherwise requires, (24) "income" includes (i) profits and gains ; (ii) dividend ; (iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust. Explanation. For the purposes of this sub-clause, "trust" includes any other legal obligation ; (iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17 ; (iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit ; (iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living ;
10 (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid ; (iva) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the "beneficiary") and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary ; (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59 ; (va) any sum chargeable to income-tax under clause (iiia) of section 28 ; (vb) any sum chargeable to income-tax under clause (iiib) of section 28 ; (vc) any sum chargeable to income-tax under clause (iiic) of section 28 ; (vd) the value of any benefit or perquisite taxable under clause (iv) of section 28 ; (ve) any sum chargeable to income-tax under clause (v) of section 28 ; (vi) any capital gains chargeable under section 45 ; (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule ; (viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members; (viii) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub-clause (viii) was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;]
11 (ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. Explanation. For the purposes of this sub-clause, (i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called; (ii) "card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game ; (x) (xi) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees ; any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation. For the purposes of this clause*, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to clause (10D) of section 10 ; (xii) any sum referred to in clause (va) of section 28; Following sub-clause (xiia) shall be inserted after sub-clause (xii) of clause (24) of section 2 by the Finance Act, 2018, w.e.f. 1-4-2019 : (xiia) the fair market value of inventory referred to in clause (via) of section 28; (xiii) any sum referred to in clause (v) of sub-section (2) of section 56; (xiv) any sum referred to in clause (vi) of sub-section (2) of section 56; (xv) any sum of money or value of property referred to in clause (vii) or clause (viia) of subsection (2) of section 56;
(xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in clause (viib) of sub-section (2) of section 56; 12 (xvii) any sum of money referred to in clause (ix) of sub-section (2) of section 56; (xviia) any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56;] Following sub-clause (xviib) shall be inserted after sub-clause (xviia) of clause (24) of section 2 by the Finance Act, 2018, w.e.f. 1-4-2019 : (xviib) any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56; (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee 9 [other than, (a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or (b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be]; In view of the aforesaid definition of the term Income, it may be seen that sub-clause (i) relates to profits and gains, sub-clause (ii) relates to dividend, sub-clause (iia) relates to voluntary contributions received by a trust for charitable purposes, etc and therefore, the same will not be applicable in the present case. Further, sub-clauses (iii), (iiia), (iiib), (iv) and (iva) relate to the value of any benefit or perquisite and therefore, the same will also not be applicable in the present case. Further, sub-clauses (v), (va), (vb), (vc), (vd) and (ve) relate to any sums chargeable under section 28 and therefore, the aforesaid sub-clauses will also not apply in the present case. Further, sub-clause (vi) relates to capital gains and therefore, the same will also not be applicable in the present case.
13 Besides, the other sub-clauses right upto sub-clause (xiia) also will not be applicable in the present case. We have now to examine the scope of the clauses of sub-section (2) of section 56 of the Act, which are referred to in sub-clauses (xiii) to (xviib) of section 2(24) of the Act. The other sub-clause left is sub-clause (xviii) of section 2(24), which relates to subsidy or grant, etc, will also not be applicable in the present case. We would now like to discuss the provisions of the various clauses of section 56(2), viz. clauses (v), (vi), (vii), (viia), (viib), (ix), (x) and (xi). As regards the aforesaid clauses (v), (vi), (vii) and (x), the same relate to receipt of any sum of money or property without consideration. In the present case, it is quite clear that the provision of the aforesaid incentives is for a consideration, viz. purchase of the property, in question, by the prospective purchasers / buyers, and therefore, the same will not apply in the present case. As regards clause (viia), it relates to receipt of shares of a company, etc. Further, clause (viib) also relates to the receipt of shares of a company, etc. Clause (ix) relates to money received in advance or otherwise in the course of negotiation of a transfer of a capital asset. Clause (xi) relates to any compensation or other payment, in connection with the termination of employment, etc. In the light of the aforesaid discussion, it is clearly established that the aforesaid incentives will not fall within the definition of income, as contemplated under section 2(24), read with the relevant clauses of section 56(2) of the Act. Therefore, the aforesaid incentives will not form part of the total income of the prospective buyers / purchasers of the property, in question. 4. Summary In view of the discussion in the preceding paragraphs (1), (2) and (3), it is clearly established that (i) The aforesaid incentives being a part of the transaction of sale / transfer of the property, in question, will not fall within the purview of the TDS provisions in Chapter XVII-B of the Act and accordingly, there will be no TDS liability, in respect of the aforesaid incentives provided by the seller / transferor of the property, in question.
Besides, as the aforesaid incentives will not form part of the total income of the prospective purchasers / buyers, being the recipient, there will be no TDS liability in respect thereof. 14 (ii) Further, the aforesaid incentives will not form part of the total income of the purchasers / buyers of the property, in question Thus, the aforesaid queries have been discussed in detail and answered, accordingly. S. K. TYAGI Office : (020) 26153012 Flat No.2, (First Floor) M.Sc., LL.B., Advocate : (020) 40024949 Gurudatta Avenue Ex-Indian Revenue Service Residence : (020) 40044332 Popular Heights Road Income-Tax Advisor Website: www.sktyagitax.com E-mails : tyagi@sktyagitax.com : sktyagitax@gmail.com : sktyagidt@airtelmail.in Koregaon Park PUNE - 411 001