Jagran Prakashan 194H TDS

7/31/2019 Jagran Prakashan 194H TDS

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Reserved on 04.5.2012Delivered on 23.5.2012

Case :- WRIT TAX No. - 388 of 2012

Petitioner :- Jagran Prakashan Limited

Respondent :- The Deputy Commissioner Of Income Tax (Tds)Petitioner Counsel :- Ritvik UpadhyaRespondent Counsel :- Bharat Ji Agrawal,B. Agarwal,GovindKrishna

Hon'ble Ashok Bhushan,J.Hon'ble Prakash Krishna,J.

(Delivered by Hon'ble Ashok Bhushan, J.)

This writ petition by a public Ltd. Company, publishing aHindi daily newspaper Dainik Jagaran has invoked the jurisdiction

of this Court under Article 226 of the Constitution of India

challenging the initiation of proceedings under sections 201 and

201 (1A) of Income Tax Act, 1961 (hereinafter referred to as 'Act')

vide notices dated 19.3.2012 and 21.3.2012 on the allegation that

although the petitioner had allowed trade discount of 15% to

advertising agencies in the assessment years in question but hadfailed to deduct the tax at source hence, the petitioner may show

cause as to why it may not be declared as an asessee in default of

such tax. The petitioner replied the notices. During the pendency of

the writ petition assessment orders dated 28.3.2012 (Financial Year

2009-10) and 29.3.2012 (Financial Year 2008-09) were passed

fastening liability of Rs.13,15,31,472 and Rs.3,26,82,953

respectively, which orders were also challenged in this writ petition

by means of an amendment application, which was allowed on

18.4.2012.

The brief facts giving rise to this writ petition are; the

petitioner is engaged in the business of printing and publishing

newspapers 'Dainik Jagaran' and 'I-next' from different centres

across the country. The registered office of the petitioner'scompany is situate at Kanpur Nagar. The major source of revenue

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of the petitioner is generated from advertisements published in the

said newspapers. The petitioner is also member of Indian

Newspaper Society (hereinafter referred to as INS). The petitioner

has been giving 15% trade discount to accredited advertising

agency and trade discount of 10% to 15% to non-accreditedadvertising agency as per Rules and Regulations of INS for last

several years. On 15.3.2012, the respondent conducted a survey

under section 133A of the Act at the premises of the petitioner at

Kanpur Nagar and recorded statement of General Manager

Taxation and Legal. The notice dated 19.3.2012 for the financial

year 2009-2010 was issued to the petitioner stating that during the

course of survey on 15.3.2012, it has been gathered that thepetitioner has failed to deduct tax at source under section 194 H of

the Act on the payment received from advertising agencies after

allowing 15% trade discount, which is as well a deemed

commission. Details of monthwise amount of payment of discount

were required to be submitted. The petitioner was asked to show

cause as to why order under section 201 (1) and 201(1) A of the

Act be not passed declaring the petitioner as an assessee in default

in respect of such taxes and interest thereon. The petitioner was

asked to appear on 22.3.2012. Another notice dated 21.3.2012 for

the financial year 2008-09 was issued requiring details as

mentioned therein including monthwise amount of payment of trade

discount by the petitioner along with copy of the bills from January

to March 2009. The petitioner filed a reply to the notices dated

19.3.2012 and 21.3.2012 on 22.3.2011. On 22.3.2012, the

petitioner was required to submits monthwise bills of the

advertisements received and trade discount given thereon by the

next date i.e. on 23.3.2012. On 23.3.2012, another notice was

issued by the respondent calling the petitioner to submit reply along

with documents called for by 12:00 noon on 26.3.2012 positively.

The petitioner was also informed by the same notice that Kerala

High Court in 325 ITR 205 on the similar issue had decided that



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advertising agency has acted as an agent of the principal hence

trade discount allowed can be considered as commission or

brokerage defined under Explanation (i) of Section 194H of the Act.

This writ petition was filed in this Court on 23.3.2012 praying for

quashing the notice dated 29.3.2012 and 21.3.2012. The writpetition was heard on 19.3.2012 on which date following order was

passed.

Supplementary affidavit filed today is taken on

record.

On a mention made by learned counsel for the

petitioner, the matter is taken up in the presence of

learned counsel appearing for the department.

By means of this petition, the petitioner has prayed

for quashing the notice dated 19.3.2012 and

21.3.2012 issued by the respondent ( Annexure

No. 4 and 5 to the writ petition) by which the

petitioner has been asked to furnish certain

informations as required.

Learned counsel for the petitioner challenging the

notice contended that notices do not furnish any

jurisdiction to the authority to proceed under

section 201 of the Income Tax Act. as no TDS.

was deductible on 15% trade discount.

He submits that the trade discount can not be

treated as commission so as to liable for any

deduction. He has placed reliance on the decision

of Delhi High Court passed in the case of I.T.A.

No. 1264 of 2007,Commissioner of Income Tax

Vs. Living Media India Limited filed as Annexure

No. 1 to the writ petition at page 33.

He has submitted that there is no material with the

respondent to proceed under section 201 of the



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Income Tax Act.

Shri Govind Krishna, learned counsel appearing

for the respondent submits that by notice

impugned only informations have been called from

the petitioner and there is no lack of jurisdiction inthe authority to proceed. He further submits that at

this state, the writ petition be not entertained.

Learned counsel for the petitioner further placed

reliance on the decision of Supreme Court passed

in the case of Siemens Ltd. Vs. State of

Maharashtra and others reported in (2006)12

Supreme Court Cases 33.

Be that as it may, in view of the fact that the

assessment order is to be passed on or before

31.3.2012 as indicated in the notice, we are of the

view that the petitioner may appear and submit

necessary information as required and respondent

may proceed to pass appropriate orders inaccordance with law.

It shall be open for the parties to bring on record

the order passed by the respondent.

Respondent is allowed three weeks' time to file

counter affidavit.

List thereafter.

On 26.3.2012, the petitioner again submitted a letter to the

Department stating therein that information sought for is not readily

available and it needs a herculean manual exercise of compilation

of more than 1,80,000 bills. On 28.3.2012, the petitioner again

submitted a letter stating therein that relationship of the petitioner

with the advertising agency is principal to principal and not as



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principal and agent. Reliance was also placed on the order of the

Kerala High Court dated 9.12.2005, passed in writ petition No.

26871/2005, The Malayala Manorama Co. Ltd. Vs. The Income

Tax Officer & others , wherein on identical facts, the proceedings

of the department initiated under section 201/201 (1A) had beenstayed. It was further stated that the judgment of the Kerala High

Court reported in 325 ITR 205 was not applicable and points of

distinction from the said judgment were specifically pointed out in

the reply. It was stated that there is no liability of the petitioner to

deduct tax at source.

On 28.3.2012 an assessment order for the financial year

2009-10 has been passed by the Deputy Commissioner of Income

Tax holding the petitioner to be an assessee in default for non

deduction of tax at source for an amount of Rs. 10,94,60,865 under

section 201 (1) of the Act on which interest under section 201 (1A)

amounting to Rs. 2,62,70,607/- making the total amount to Rs.

13,57,31,472/-. A demand notice was issued on 29.3.2012.

Proposal for initiating penalty proceeding was also sent to JointCommissioner Income Tax TDS Kanpur separately. Another order

dated 29.3.2012 for the Financial Year 2008-09 was passed holding

the petitioner to be an assessee in default for non deduction of TDS

for an amount of Rs. 2,40,31,583 and on which interest was also to

be chargeable making the total amount of Rs. 3,26,82,953/-.

Penalty proceeding was to be separately initiated under Section

271C. The demand notice was also issued on 29.3.2012. Thepetitioner filed an application for amendment of the writ petition

praying for adding paragraphs, grounds and reliefs in the writ

petition for challenging the assessment orders dated 28.3.2012

and 29.3.2012. The amendment application was allowed by this

Court on 18.4.2012 and the petitioner was permitted to challenge

the assessment orders in this writ petition. Counter affidavit has

also been filed by the Department to the writ petition and amended

pleadings to which rejoinder affidavit has also been filed. Following



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are the reliefs which have been claimed in the writ petition including

the reliefs prayed for by means of amendment application :

i) a suitable writ, order or direction in the

nature of Certiorari calling for the records of thecase and to quash the impugned notices dated

19.03.2012 and 21.03.2012 issued by the

respondent (Annexures-4 and 5 to this writ

petition).

ii) a suitable writ, order or direction in thenature of Certiorari calling for the records of the

case and to quash the impugned order dated

28.03.2012 along with the notice of demand dated

28.03.2012 (Annexure-6 to this writ petition) and

the impugned order dated 29.3.2012 along with

the notice of demand dated 29.03.2012

(Annexure-7 to this writ petition).

We have heard Sri V.K. Upadhyay learned senior Advocate,

assisted by Sri Ritvik Upadhyay, for the petitioner, Sri Govind

Krishna for the respondent Income Tax Department and have

perused the record.

Learned Counsel for the petitioner challenging the notices

dated 19.3.2012 and 21.3.2012 contended that there were no

foundational facts on the basis of which the respondent could have

assumed jurisdiction under sections 201 and 201(1A) for initiating

the proceedings. He submits that the petitioner allowed trade

discount to advertising agencies on the advertisements received in

accordance with the established trade practice and allowing of



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trade discount cannot be termed as commission paid by the

petitioner to the advertising agency for any service. It is submitted

that an advertising agency is not an agent of the petitioner and the

transaction between the petitioner and advertising agency is on

principal to principal basis. Advertising Agency infact acts as anagent of the advertisers. Section 194H is not attracted on trade

discount allowed by the petitioner to advertising agency and the

proceeding initiated under section 201/201 (1A) are without

jurisdiction. The Income Tax Authorities have wrongly assumed

jurisdictional facts although no such jurisdictional facts exist so as

to enable the respondent Department to initiate proceedings under

section 201/201 (1A) of the Act. The initiation of the proceedings bythe Department is wholly without jurisdiction. The jurisdictional facts

as required by Section 194H does not exist in the present case.

Circular issued by Central Board of Direct Taxes dated 8.8.1995

clarifies that commission received from advertising agency by

media would require deduction of tax at source under section 194J

of the Act. The above circular was clarified by the CBDT vide

subsequent letter dated 12.9.1995, clarifying that where the media

raises only a bill for an advertising contract including therein inter-

alia commission at the specified percentage to be retained by

advertising agency, the media is not required to deduct tax at

source since such a payment is subjected to TDS by the advertiser

at the time of payment. Further where the media makes a direct

payment to the advertising agency in respect of professional or

technical services, it shall deduct tax at source @ 5% under section

194J.

Learned Counsel for the petitioner submits that the petitioner

being a member of INS is required to pay trade discount of 15%

according to the rules of INS. The advertising agency which are

accredited by INS are also bound to follow the rules and under theterms of agreement entered with the advertising agency and INS



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under which it is obligatory for the news agency to give 15% trade

discount and as per Rules of INS and terms of agreement entered

between INS and advertising agency, the advertising agency acts

as agent of the advertiser. The advertising agency carry on

business of advertising and is not an agent appointed by thepetitioner. No agreement with any advertising agency has been

entered into by the petitioner nor there is any other relevant factor

on the basis of which it can be said that the advertising agency is

agent of the petitioner. It is submitted that the Rules of INS, as well

as terms and conditions as mentioned above, clearly prove that

advertising agency is not an agent of the petitioner and the

jurisdictional facts as required under section 194H being notpresent, the entire proceedings are without jurisdiction. Learned

Counsel for the petitioner further submits that the question as to

whether 15% trade discount allowed to the news agency invites

deduction of tax at source was raised by Income Tax Department

with regard to news paper publication namely; M/s Living Media

Ltd. Which publishes the magazines India Today, Business today

etc. An order against M/s Living Media Ltd. under sections 201 and

201 (1A) was passed by the assessing authority on the ground that

advertising agencies are agent of the news agencies and 15%

trade discount is commission with regard to which tax at source is

required to be deducted by the news agency. The matter was taken

before the Income Tax Appellate Tribunal by the Department and

Income Tax Appellate Tribunal held that there was no liability of the

news agency to deduct tax at source with regard to 15% trade

discount and advertising agency is not the agent of news agency. It

was held that news agency was not liable to deduct tax. The

Department took up the matter before the Delhi High Court and

Delhi High Court vide its judgment and order dated 6.5.2008 has

dismissed the writ petition of the Department holding that contract

between the news agency and advertising agency was on principal

to principal basis and trade discount allowed to advertising agency



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was as per Rule 32 of the INS Rules and there was no commission

paid to advertising agency and the provisions of section 194H was

not attracted. Although in the counter affidavit (paragraphs 21 and

41) filed by the Department, it was stated that judgment of the Delhi

High Court has not accepted by CBDT and the same has beenchallenged by the Department by means of Special Leave Petition

No. 3433 of 2009 but it was not mentioned that Special Leave

Petition had been dismissed. Learned Counsel for the petitioner

has produced the order of the apex Court dated 11.12.2009 by

which the Special Leave Petition (Civil) 3433 Commissioner of

Income Tax Vs. M/s Living Media India Ltd. has been dismissed.

Learned Counsel for the petitioner submits that the issue havingalready been decided by the Delhi High Court in the aforesaid case,

the initiation of the proceedings under section 201/201 (1A) on the

same allegations are nothing but harassment of the petitioner and

the proceedings so initiated are without jurisdiction. Learned

Counsel for the petitioner submitted that the judgment of the Kerala

High Court relied by the Department in [2010] 325 ITR 205

Commissioner of Income Tax Vs. Director Prasar Bharti, is not

applicable in the present case and although distinguishing facts

were submitted in writing by the petitioner but still the said judgment

has been relied and the judgment of the Delhi High Court which

was directly applicable has been brushed aside on the flimsy

ground that judgment of the Kerala High Court is recent in point of

time. Learned Counsel for the petitioner further submitted that the

assessment orders dated 28.3.2012 and 29.3.2012 and the

demand raised for tax which according to the respondents ought to

have been deducted at source is wholly without jurisdiction.

It is further submitted that under sections 201 and 201(1A),

in a case where tax is not deducted at source, the only proceedings

which can be initiated are proceedings for realisation of interest andpenalty and the liability to pay tax cannot be fastened on deductor.



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As per Section 191 read with Section 4 of the Act, such tax has to

be directly paid by the assessee i.e. advertising agency and the

assessment orders dated 28.3.2012 and 29.3.2012 demanding

payment of tax are wholly without jurisdiction. The petitioner could

not have been treated to be an assessee in default with regard totax which according to the respondents was required to be

deducted unless a finding is returned that assessee has not paid

the tax. In the entire assessment order, there is no finding that

assessee has not paid the tax on the aforesaid trade discount

(alleged commission) hence, the entire order is without jurisdiction.

Learned Counsel for the petitioner further submits that there

is no agreement between the petitioner and the advertising agency

on the basis of which the assessing officer can conclude that

advertising agency was an agent of the petitioner. It is further

submitted that rules of INS have not been adverted to by the

assessing authority which were relevant to find out the nature of

transaction between the petitioner and the advertising agency and

without adverting to the said Rules in its entirety, an erroneous

inference has been drawn by the assessing officer that advertising

agency was agent of the petitioner. It is further submitted that

instead of reliance on circular of the Board dated 8.8.1995 as

clarified on 12.9.1995, the assessing authority has relied on an

article published in the newspaper 'Business Standard' on

31.10.2006, which article contain some opinion of the Central Boardof Direct Taxes that deduction of tax at source is to be made on

commission or brokerage given to the advertising agency. It is

submitted that the aforesaid article was wholly irrelevant, which

vitiates the order of the assessing authority.

Learned counsel for the petitioner lastly contended that the

Department has violated the principles of natural justice, while



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proceeding under sections 201 and 201 (IA). It is submitted that

notices were issued on 19.3.2012 and 21.3.2012, requiring

submission of details regarding trade discount given to various

advertising agencies by 22.3.2012, which was nothing but denial of

adequate opportunity since in the accounting practice adopted bythe petitioner, only revenue receipts were recorded in its account

and there was no separate account maintained for trade discount

given to the advertising agencies. The order of authorities asking

the petitioner to give the details of trade discount within three days,

given to the advertising agencies from its various centres

throughout the country, from where the newspapers are published,

which could have run in more than 1,80,000 items is nothing butdenial of adequate opportunity to the petitioner. The compilation of

the said data was a herculean task and the request by the

petitioner to grant reasonable time, was denied. Had the petitioner

been given adequate opportunity, it would have established that tax

on the income of 15% trade discount, has already been paid and

there was no occasion to impose liability upon the petitioner but the

respondent rushed through the proceedings which was completed

within ten days from issue of notice.

Sri Govind Krishna, learned counsel for the Department

refuting the submissions of learned Counsel for the petitioner,

contended that the petitioner is not entitled to invoke the jurisdiction

of this Court under Article 226 of the Constitution of India since theassessment order has already been passed and the petitioner be

relegated to avail the alternative remedy of statutory appeal as

provided under the Act. He submits that the judgment of the Kerala

High Court in Prasar Bharti's case is fully applicable and there is no

lack of the jurisdiction in the authorities in initiating the proceedings

under sections 201 and 201 (1A) of the Act. He submits that the

payment which is being made by the petitioner to the advertisingagency in the name of 15% trade discount is nothing but payment



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of commission to advertising agency in lieu of services which are

being rendered by the advertising agency to the petitioner in

bringing business to the petitioner i.e. advertisements. It is

submitted that the assessing officer has rightly recorded finding in

paragraph 30 of the order that jurisdictional facts as required forapplicability of Section 194H, are fully present and neither the

initiation of the proceedings were without jurisdiction nor the

assessment order can be held to be without jurisdiction. The

petitioner, inspite of giving opportunity could not provide details of

monthwise trade discount allowed by it to different advertising

agencies hence, no error has been committed in assessing the tax

liability on 15% of gross receipts of revenue from advertisingagency, which amount has been disclosed by the petitioner himself

in the survey on 15.3.2012. It is submitted that if the advertising

agency could not have rendered services to the petitioner, it cound

not have received any discount or payment and the advertising

agency acts on behalf of the news agency since it is a news

agency, which decides as to what type of advertisement it publishes

e.g. it does not publish advertisement of alcoholic drinks. There is a

contract between the news agency and advertising agency through

INS, since the petitioner are members of the INS and INS enters

into an agreement with the advertising agency for accrediting the

said agency thus, there is a implied contract between the petitioner

and advertising agency. It is further submitted that principal and

agent relationship can also exist without any written or codified

agreement. The assessing order has rightly referred to recent stand

of Central Board of Direct Taxes in its judgment as such, the order

of the assessing officer was based on recent stand of CBDT.

Advertising Agency Institution of India (AAAI) in its rules also

provide for payment of 15% commission to the advertising agency.

Thus, the payment of commission by the news agencies to

advertising agencies is fully proved. The logic and reasons are not

relevant, while interpreting a tax statute. Since the petitioner is



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allowing the discount/commission, the petitioner is payer and liable

under section 204 (iii). Under section 201, the deductor, who fails to

deduct the tax at source, is an assessee in default and apart from

interest and penalty, the tax which was not deducted can very well

be recovered from the deductor. He submits that if there is anymistake in the order of the assessment, it is open for the petitioner

to invoke section 154 of the Act for correction of mistake, if any.

Learned Counsel for the petitioner replying the objections of

learned Counsel for the respondent regarding relegating the

petitioner to statutory appeal, submitted that the present is not a

case where the petitioner be denied relief under Article 226 of the

Constitution of India. It is submitted that when the Income Tax

authorities assumed jurisdiction without there being jurisdictional

facts available for initiating the proceedings under section

201/201(1A), the notice initiating the proceeding can very well be

challenged through writ proceedings. It is further submitted that by

the order impugned huge liability has been imposed on the

petitioner and apart from assessment order, proceedings under

section 147 of the Act have also been initiated. The notice under

section 147 has been issued for several assessment years. It is

further submitted that assessment order directing for realisation of

tax, which according to the respondent was not deducted at source

by the petitioner is without jurisdiction since under section 201/201

(1A) at best proceeding could have been initiated only for recoveryof interest and penalty. He submits that when the order of

assessing authority directing for recovery of tax is without

jurisdiction, the writ petition be not thrown out on the ground of

alternative remedy. Apart from above reason, huge illegal demand

would have a cascading effect on the petitioner company. Penalty

proceedings have also been initiated including proceedings for re-

opening of all completed assessment and total tax liability may bemore than 100 crores, which may adversely and irreparably effect



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the petitioner business and its shares. The pre-determined and

void orders cannot withstand judicial scrutiny of this Court hence,

the present is not a fit case in which the petitioner be relegated to

alternative remedy.

Learned Counsel for the parties have relied on various judgements of the apex Court, this Court and other High Courts

which shall be referred to while considering the submissions in

detail.

We have considered the submissions of learned counsel for

the parties and have perused the record.

From the submissions of learned counsel for the parties

following are the issues which arise for consideration:

1. Whether in the facts and circumstances of the present case,

the petitioner is entitled to invoke the writ jurisdiction of thisCourt under Article 226 of the Constitution of India for the

reliefs sought or the petitioner be relegated to avail the

statutory remedy of appeal in view of the fact that the

assessment order has already been passed during the

pendency of the writ petition?

2. Whether condition precedent as contemplated by Section

194H making liable the petitioner to deduct tax at source for

15% trade discount allowed by it to Advertising Agency is

present so as to give jurisdiction to the authorities to initiate

proceedings under section 201/201 (1A) of the Income Tax

Act, 1961?



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3. Whether between the petitioner and the advertising agency

there is a relationship of principal and agent?

4. Whether the advertising agency is rendering services to the

petitioner or they are rendering services to advertiser as their

agent?

5. Whether 15% trade discount allowed by the petitioner to

advertising agencies is payment of commission within the

meaning of Section 194H Explanation (i).

6. Whether the Judgement of the Kerala High Court in 325 ITR

205 was attracted in the present case or the judgment of the

Delhi High Court in ITA 1264/07, The Commissioner of

Income Tax Vs. Living Media India Ltd. decided on

6.5.2008 was applicable?

7. Whether against a deductor who fails to deduct the tax at

source, the liability of payment of tax can also be fastened

against the deductor under section 201 apart from liability of

interest and penalty?

8. Whether with regard to tax which was required to bededucted at source, the liability is of the assessee with

regard to whose income the tax was required to be deducted

at source or the liability is of deductor for payment of tax

which could not be deducted?

9. Whether according to Section 191 read with Section 201, adeductor, who fails to deduct tax at source can be deemed to



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be an assessee in default without adverting to the issue and

recording a finding that assessee who is liable to pay tax

directly had not paid tax?

10. Whether the assessing authority has taken into consideration

all relevant materials for taking the decision and has not

taken into consideration any irrelevant material ?

11. Whether the assessing authority has violated the principle of

natural justice in the proceeding under section 201 and 201

(1A)?

12. To what relief, if any the petitioner is entitled in the present

writ petition?

The first issue, which is to be answered, is as to whether the

petitioner can be permitted to invoke the jurisdiction of this Court

under Article 226 of the Constitution of India for challenging the

notices dated 19 th March, 2012 and 21 st March, 2012 and the

subsequent assessment order dated 28 th/29 th March, 2012 on the

principal ground that there were no foundational facts to assume

jurisdiction by the Income Tax authorities to proceed under Section

201/201(1A) of the Act. The next challenge of the petitioner to the

assessment order is on the ground that assessment order directing

for recovery of tax, which according to the respondents was not

deducted by the petitioner at source, is without jurisdiction. The

submission is that under Section 201 read with Section 191 of the

Act the liability of the tax, which was required to be deducted at

source, cannot be fastened on the deductor and in the event the tax

has not been deducted the primary liability to pay such tax is on the

assessee and the assessment order framing assessment of tax on



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the petitioner was beyond the jurisdiction and was outside the

provisions of Section 201 of the Act.

The question as to whether sufficient grounds have been

made out for exercise of writ jurisdiction by this Court under Article226 of the Constitution of India or the petitioner has to be

necessarily relegated to avail the statutory remedy of appeal under

the Income tax Act, 1961 is dependent on various issue which have

been raised in this writ petition and are to be answered by us. We

thus are of the view that first issue be answered after considering

the various grounds of attack and submissions of learned counsel

for the parties which have arisen in the writ petition.

Issues No.2, 3, 4,5 and 6 are interrelated and are being taken

together.

The proceedings under Section 201/201(1A) of the Act have

been initiated against the petitioner on the ground that the

petitioner, who was required to deduct tax at source with regard to

payment of 15% trade discount (alleged commission) given to

advertising agency, having failed to deduct the tax on the said

payment is liable to pay interest and tax. The proceedings are

founded on Section 194H of the Act. Section 194H of the Act is

quoted below:-

194H. Commission or brokerage. Any person,not being an individual or a Hindu 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 beinginsurance commission referred to in section194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at thetime of payment of such income in cash or by theissue of a cheque or draft or by any other mode,whichever is earlier, deduct income-tax thereonat the rate of ten per cent.



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Provided that no deduction shall be made under this section in a case where the amount of suchincome or, as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial

year to the account of, or to, the payee, does not exceed five thousand rupees.

Provided further that an individual or Hinduundivided family, whose total sales, grossreceipts or turnover from the business or

profession carried on by him exceed themonetary limit specified under Clause (a) or Clause (b) of Section 44AB during the financial

year immediately preceding the financial year inwhich such commission or brokerage is credited or paid, shall be liable to deduct income tax under this Section.

Provided also that no deduction shall be madeunder this section on any commission or brokerage payable by Bharat Sanchar NigamLimited or Mahangar Telephone Nigam Limited tothe 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 thecourse of buying or selling of goods or in relationto any transaction relating to any asset, valuablearticle or thing, not being securities;

(ii) the expression "professional services" means

services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA;

(iii) the expression securities shall have themeaning assigned to it in clause (h) of section 2of the Securities Contracts (Regulation) Act, 1956

(42 of 1956);

(iv) Where any income is credited to any account,



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whether called "Suspense account" or by any other name, in the books of account of the

person liable to pay such income, such creditingshall be deemed to be credit of such income tothe account of the payee and the provisions of this section shall apply accordingly.

The case of the department against the petitioner is that

allowing 15% trade discount to advertising agencies by the

petitioner during the relevant assessment year is nothing but

payment of commission within the meaning of Section 194H

Explanation-(i) and the petitioner was liable to deduct tax at source.

The commission or brokerage has been defined in explanation. As

per definition for payment to be treated as commission, followingthree conditions are required to be fulfilled:-

(1) payment received or receivable directly or indirectly;

(2) by a person acting on behalf of another person;

(3) for services rendered (not being professional services).

The Condition Nos. (2) and (3) , which are interrelated, are

being taken first. The Condition Nos.2 and 3 contemplate that

person receiving payment should be acting on behalf of another

person i.e. he must be agent of the principal and secondly payment

should be for the services rendered by the agent. Thus the test is

as to whether person receiving commission is agent of the principal

and he is receiving commission in lieu of services. The above are jurisdictional facts which have to be found out in the proceeding to

be taken under Section 201/201(1A) of the Act. What are the

jurisdictional facts and what is the scope of entertaining such

challenge in proceeding under Article 226 of the Constitution of

India needs to be first examined before proceeding further to

examine the facts of the present case.

The Apex Court in the case of Calcutta Discount Co. Ltd.



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vs. Income Tax Officer reported in 1961(41) ITR 191 had occasion

to consider the aforesaid issue in context of the provisions of

Income Tax Act, 1922. It is useful to note the facts of the said case

in some detail. The appellant in the aforesaid case was assessed to

income tax for the assessment year 1942-43, 1943-44 and 1944-45by three separate orders. Three notices purporting to be under

Section 34 of the Income Tax Act, 1922 for re-assessment was

issued. Notices were replied by the appellant and it challenged the

proceedings by means of writ petition under Article 226 of the

Constitution of India on the ground - The said pretended notice

was issued without the existence of the necessary conditions

precedent which confers jurisdiction under section 34aforementioned, whether before or after the amendment in 1948.

Learned Single Judge held that the above ground was not made

out but being of the opinion that Amending Act, 1948 was not

retrospective,held the notices without jurisdiction and issued a writ

of prohibition to the Income Tax Officer from continuing the

assessment proceedings any further. In the Letter Patent Appeal,

the Division Bench set-aside the order of learned Single Judge and

the writ petition was dismissed. The appeal was filed in the Apex

Court. The Apex Court laid down following:-

To confer jurisdiction under this section toissue notice in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year two

conditions have therefore to be satisfied. The first is that the Income-tax Officer must have reasonto believe that income, profits or gainschargeable to income- tax have been under-assessed. The second is that he must have alsoreason to believe that such " under assessment " has occurred by reason of either (i) omission or failure on the part of an assessee to make areturn of his income under s. 22, or (ii) omissionor failure on the part of an assessee to disclose

fully and truly all material facts necessary for hisassessment for that year. Both these conditionsare conditions precedent to be satisfied before



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the Income-tax Officer could have jurisdiction toissue a notice for the assessment or re-assessment beyond the period of four years but within the period of eight years, from the end of the year in question.

The Apex Court considered the facts of the case including theaffidavits filed in the High Court as well as before the Apex Court.

The Apex Court took the view that one of the preconditions for

initiating proceedings under Section 34 that there had been any

material non-disclosure by reason of which under assessment was

taken place, was not there before the Income Tax Officer, hence he

had no jurisdiction to issue notice. In this context following was held

by the Apex Court:-

It must therefore be held that the Income-tax Officer who issued the notices had not beforehim any non-disclosure of a material fact and sohe could have no material before him for believing that there had been any material non-disclosure by reason of which an under-assessment had taken place.

It is relevant to note that before the Apex Court also counsel

for the department contended that company would have sufficient

opportunity to raise the question before the Income Tax Officer and

in the event it is unsuccessful there is appellate jurisdiction under

Section 66(2) of the Income Tax Act, 1922, hence the High Court

ought not to have entertained the writ petition. Repelling the said

submission, following was laid down by the Apex Court:-

Mr. Sastri mentioned more than once thefact that the company would have sufficient opportunity to raise this question, viz., whether the Income-tax Officer had reason to believe that under assessment had resulted from non-disclosure of material facts, before the Income-tax Officer himself in the assessment

proceedings and, if unsuccessful there, beforethe appellate officer or the appellate tribunal or in



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the High Court under section 66(2) of the IndianIncome-tax Act. The existence of such alternativeremedy is not however always a sufficient reasonfor refusing a party quick relief by a writ or order

prohibiting an authority acting without jurisdictionfrom continuing such action.

The next case to be considered is the judgment of the Apex

Court in the case of Raza Textiles Ltd. vs. Income Tax Officer,

Rampur reported in (1973)87 ITR 539. In the said case Income Tax

Officer, Rampur directed the appellant to pay tax on a sum of

Rs.2,00,000/- remitted by it as a selling commission to M/s.

Nathirmal and Sons, Djakarta (Indonesia) during the year ending on

December 31, 1951 which was a non-resident firm. After beingunsuccessful before the appellate authorities, the writ petition under

Article 226 of the Constitution of India was filed. The learned Single

Judge held that M/s. Nathirmal and Sons is not a non-resident firm

and the appellant was not required to act under Section 18(3-B) of

the Income Tax Act, 1922. The revenue went in appeal before the

High Court. The High Court allowed the appeal against which

judgment the appellant filed an appeal before the Apex Court. While

reversing the judgment of the Division Bench of the High Court,

following was laid down by the Apex Court:-

..... The single Judge after going into thematter in detail came to the conclusion that M/s.Nathirmal and Sons is not a non-resident firmand that being so the appellant was not required

to act under Section 18(3B). He accordingly, set aside the order impugned. The revenue went upin appeal against the order of the learned single

Judge to the Appellate Bench. That Benchallowed the appeal with the observations, "In the

present case the question before the Income-tax Officer, Rampur, was whether the firm Nathirmal and Sons was non-resident or not. There wasmaterial before him on this question. He had

jurisdiction to decide the question either way. It

cannot be said that the officer assumed jurisdiction by wrong decision on this question of residence". The Appellate Bench appears to have



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been under the impression that the Income-tax Officer was the sole judge of the fact whether thefirm in question was resident or non-resident.This conclusion, in our opinion, is wholly wrong.No authority, much less a quasi-judicial authority,can confer jurisdiction on itself by deciding a

jurisdictional fact wrongly The question whether the jurisdictional fact has been rightly decided or not is a question that is open for examination by the High Court in an application for a writ of certiorari. If the High Court comes to theconclusion, as the learned single Judge has donein this case, that the Income-tax Officer had clutched at the jurisdiction by deciding a

jurisdictional fact erroneously, then the assesseswas entitled for the writ of certiorari prayed for by him. It is incomprehensible to think that a quasi-

judicial authority like the Income-tax Officer canerroneously decide a jurisdictional fact and thereafter proceed to impose a levy on a citizen.In our opinion the Appellate Bench is wholly wrong in opining that the Income-tax Officer can"decide either way".

The Apex Court in the said case held that it is

incomprehensible that a quasi-judicial authority like the Income Tax

Officer can erroneously decide a jurisdictional fact and thereafter

proceed to impose levy on a citizen.

The Apex Court in the case of Shrisht Dhawan (Smt.) vs.

M/s Shaw Brothers reported in (1992)1 SCC 534 had again laid

down that jurisdictional fact is one on existence or non-existence of

which depends assumption or refusal to assume jurisdiction by an

authority. Following was laid down in paragraph 9 of the said

judgment:-

9. ..... A jurisdictional fact is one onexistence or non-existence of which dependsassumption or refusal to assume jurisdiction by aCourt, tribunal or an authority. In Black's Legal Dictionary it is explained as a fact which must exist before a court can properly assume

jurisdiction of a particular case. Mistake of fact in



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relation to jurisdiction is an error of jurisdictional fact. No statutory authority or tribunal canassume jurisdiction in respect of subject matter which the statute does not confer on it and if by deciding erroneously the fact on which

jurisdiction depends the court or tribunal

exercises the jurisdiction then the order isvitiated. Error of jurisdictional fact renders theorder ultra vires and Wade Administrative Law;bad. In Raza Textiles Raza Textile v. Income Tax Officer, Rampur it was held that a court or tribunal cannot confer jurisdiction on itself by deciding a jurisdictional fact wrongly. ..... Error inassumption of jurisdiction should not be confused with mistake, legal or factual in exercise of

jurisdiction. In the former the order is void whereas in the latter it is final unless set aside by higher or competent court or authority. An order which is void can be challenged at any time inany proceeding.....


Court in the case of Siemens Ltd. vs. State of Maharashtra and

others reported in (2006)12 SCC 33. In the said case demand of

payment of cess was issued to the appellants company which was

challenged in the High Court on the ground that no jurisdictional

fact exists for the levy. By the notice the appellant was directed to

make payment of cess with interest. The writ petition was dismissed

by the High Court on the ground that the petitioner may file reply to

the show cause notice. The Apex Court held that although writ

Court may not exercise its discretionary jurisdiction in entertaining a

writ petition challenging the notice unless the same appears to have

been without jurisdiction, but the question herein has to be

considered from a different angle. Following was laid down by the

Apex Court in paragraphs 6, 8 and 9:-

6. A writ petition was filed by the appellant herein questioning the said purported notice. By reasonof the impugned order, the High Court refused toexercise its jurisdiction under Article 226 of theConstitution of India stating:



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"Challenge is to a show cause notice issued bythe Corporation demanding certain payment ofcess on the value of goods imported fromAurangabad and Daman. Petitioners may filetheir reply to the show cause notice and producethe relevant documents within two weeks. In

case the order is adverse to the petitioner norecovery shall be made for a period of four weeksfrom the date of service of the order on thepetitioner."

8. The question as to whether jurisdictional fact existed for issuance of the said notice order passed by the respondent was in question in the said writ

petition.

9. Although ordinarily a writ court may not exercise its discretionary jurisdiction in entertaining awrit petition questioning a notice to show cause unlessthe same inter alia appears to have been without

jurisdiction as has been held by this Court in somedecisions including State of Uttar Pradesh v. BrahmDatt Sharma and Anr. AIR 1987 SC 943, Special Director and Another v. Mohd. Ghulam Ghouse and

Another, (2004) 3 SCC 440 and Union of India and Another v. Kunisetty Satyanarayana, 2006 (12) SCALE 262], but the question herein has to be considered froma different angle, viz, when a notice is issued with pre-meditation, a writ petition would be maintainable. Insuch an event, even if the courts directs the statutory authority to hear the matter afresh, ordinarily suchhearing would not yield any fruitful purpose [See K.I.Shephard and Others v. Union of India and Others(1987) 4 SCC 431 : AIR 1988 SC 686]. It is evident inthe instant case that the respondent has clearly madeup its mind. It explicitly said so both in the counter affidavit as also in its purported show cause notice.


Court in the case of Arun Kumar and others vs. Union of India

and others reported in (2007)1 SCC 732. The question of

applicability of Section 17(2)(ii) of the Income Tax Act, 1961 and

Rule 3 of the Income Tax Rules, 1962 came for consideration. Rule

3 provided for method of computing valuation of perquisite under

Section 17(2). In context of the said challenge, following was laid

down by the Apex Court in paragraphs 74, 75, 76, 77, 78, 82, 83,



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84 and 85:-

74. A "jurisdictional fact" is a fact which must exist before a Court, Tribunal or an Authority assumes jurisdiction over a particular matter. A

jurisdictional fact is one on existence or non-existence of which depends jurisdiction of acourt, a tribunal or an authority. It is the fact uponwhich an administrative agency's power to act depends. If the jurisdictional fact does not exist,the court, authority or officer cannot act. If aCourt or authority wrongly assumes the existenceof such fact, the order can be questioned by awrit of certiorari. The underlying principle is that by erroneously assuming existence of such

jurisdictional fact, no authority can confer uponitself jurisdiction which it otherwise does not

posses.

75. In Halsbury's Laws of England, it has beenstated;

"Where the jurisdiction of a tribunal is dependent on the existence of a particular state of affairs,that state of affairs may be described as

preliminary to, or collateral to the merits of, theissue. If, at the inception of an inquiry by aninferior tribunal, a challenge is made to its

jurisdiction, the tribunal has to make up its mind whether to act or not and can give a ruling on the

preliminary or collateral issue; but that ruling isnot conclusive".

76. The existence of jurisdictional fact is thussine qua non or condition precedent for theexercise of power by a court of limited

jurisdiction.

77. In Raja Anand Brahma Shah v. State of U.P. & Ors., AIR 1967 SC 1081 : (1967) 1 SCR362, sub-section (1) of Section 17 of the Land

Acquisition Act, 1894 enabled the StateGovernment to empower Collector to take

possession of 'any waste or arable land' needed for public purpose even in absence of award. The

possession of the land belonged to the appellant

had been taken away in the purported exercise of power under Section 17(1) of the Act. Theappellant objected against the action inter alia



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contending that the land was mainly used for ploughing and for raising crops and was not 'waste land', unfit for cultivation or habitation. It was urged that since the jurisdiction of theauthority depended upon a preliminary finding of fact that the land was 'waste land', the High Court

was entitled in a proceeding for a certiorari todetermine whether or not the finding of fact wascorrect.

78. Upholding the contention and declaring thedirection of the State Government ultra vires, thisCourt stated;

"In our opinion, the condition imposed by s. 17(1)is a condition upon which the jurisdiction of theState Government depends and it is obvious that by wrongly deciding the question as to thecharacter of the land the State Government cannot give itself jurisdiction to give a direction tothe Collector to take possession of the land under s. 17(1) of the Act. It is well-established that where the jurisdiction of an administrativeauthority depends upon a preliminary finding of fact the High Court is entitled, in a proceeding of writ of certiorari to determine, upon itsindependent judgment, whether or not that finding of fact is correct". (emphasis supplied)

82. A question under the Income Tax Act, 1922arose in Raza Textiles Ltd. v. Income Tax Officer,Rampur, (1973) 1 SCC 633 : AIR 1973 SC 1362.In that case, the ITO directed X to pay certainamount of tax rejecting the contention of X that he was not a non-resident firm. The Tribunal confirmed the order. A single Judge of the HighCourt of Allahabad held X as non-resident firm

and not liable to deduct tax at source. TheDivision Bench, however, set aside the order observing that:

"..... ITO had jurisdiction to decide thequestion either way. It cannot be said that theOfficer assumed jurisdiction by a wrong decisionon this question of residence". X approached thisCourt.

83. Allowing the appeal and setting aside theorder of the Division Bench, this Court stated;



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"The Appellate Bench appears to have beenunder the impression that the Income-tax Officer was the sole judge of the fact whether the firm inquestion was resident or non- resident. Thisconclusion, in our opinion, is wholly wrong. Noauthority, much less a quasi-judicial authority,

can confer jurisdiction on itself by deciding a jurisdictional fact wrongly The question whether the jurisdictional fact has been rightly decided or not is a question that is open for examination by the High Court in an application for a writ of certiorari. If the High Court comes to theconclusion, as the learned single Judge has donein this case, that the Income-tax Officer had clutched at the jurisdiction by deciding a

jurisdictional fact erroneously, then the assesseswas entitled for the writ of certiorari prayed for by him. It is incomprehensible to think that a quasi-

judicial authority like the Income-tax Officer canerroneously decide a jurisdictional fact and thereafter proceed to impose a levy on a citizen." (emphasis supplied)

84. From the above decisions, it is clear that existence of 'jurisdictional fact' is sine qua non for the exercise of power. If the jurisdictional fact exists, the authority can proceed with the caseand take an appropriate decision in accordancewith law. Once the authority has jurisdiction in thematter on existence of 'jurisdictional fact', it candecide the 'fact in issue' or 'adjudicatory fact'. Awrong decision on 'fact in issue' or on'adjudicatory fact' would not make the decision of the authority without jurisdiction or vulnerable

provided essential or fundamental fact as toexistence of jurisdiction is present.

85. In our opinion, the submission of Mr. Salveis well founded and deserves to be accepted that "concession" under clause (ii) of sub-section (2)of Section 17 of the Act is a 'jurisdictional fact'. It is only when there is a 'concession' in the matter of rent respecting any accommodation provided by an employer to his employee that the mode,method or manner as to how such concessioncan be computed arises. In other words,concession is a 'jurisdictional fact'; method of

fixation of amount is 'fact in issue' or 'adjudicatory fact'. If the assessee contends that there is no'concession', the authority has to decide the said



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question and record a finding as to whether thereis 'concession' and the case is covered by Section 17 (2) (ii) of the Act. Only thereafter theauthority may proceed to calculate the liability of the assessee under the Rules. In our considered opinion, therefore, in spite of the legal position

that Rule 3 is intra vires, valid and is not inconsistent with the provisions of the parent Act under Section 17 (2) (ii) of the Act, it is still opento the assessee to contend that there is no'concession' in the matter of accommodation

provided by the employer to the employee and hence the case did not fall within the mischief of Section 17 (2) (ii) of the Act.

The proposition of law deducible from the aforesaid

pronouncement is that unless pre-conditions for exercise of

jurisdiction exists in an authority assumption of jurisdiction on

assuming wrong fact can always be questioned in a writ Court and

the mere fact that income tax authorities have assumed jurisdiction

and proceeded to pass an order does not preclude the scrutiny that

whether jurisdictional facts to assume jurisdiction were present or

not.

Now we again revert to the facts of the present case to find

out as to whether preconditions to proceed under Section

201/201(1A) of the Act were present or not.

As noted above, two conditions, which are required to be

fulfilled before holding a person liable for deduction at source, are

the payment is received by a person as agent of principal and

secondly payment is for services rendered (not being professional

services). The petitioners contention is that relationship between

the petitioner i.e. newspaper agency and the advertising agency is

not on the basis of principal and agent, rather is on the basis of

principal to principal. It has been submitted that there is no

agreement between the petitioner and the advertising agency from which any assumption can be inferred nor at any point of time the



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petitioner has employed the advertising agency as its agent

whereas the contention of the department is that advertising

agencies are agent of the petitioner since they are bringing

advertising business which are services rendered by them to the

petitioner and payment of trade discount to the advertising agencyis nothing but commission in lieu of services rendered. We now

proceed to examine as to what are the tests for finding out

relationship of principal and agent.

Section 182 of the Indian Contract Act, 1872, which defines

Agent and Principal, is quoted below:-

182 ."Agent" and "principal" defined.-An"agent" is a person employed to do any act for another or to represent another in dealings withthird persons. The person for whom such act isdone, or who is so represented, is called the"principal".

The rule as to agency is expressed in maxim qui facit per

alium, facit per se. It is founded on a contract, express or implied,

by which one of the parties confides to the other, the management

of some business to be transacted in his name or on his account

and by which the other assumes to do the business and renders an

account of it. A Division Bench of this Court had occasion to

consider Section 182 of the Indian Contract Act in the case of Loon

Karan Sohan Lal vs. Firm John and Co. and others reported in

A.I.R. 1967 Alld. 308. Following was laid down in paragraphs 5 and

6:-

6. ..... The court must examine the truenature of the agreement and the subsequent dealings between the parties, and then decidewhether it established a relationship of agency under the law. It is common experience that theword 'agent' is frequently used to describe arelationship which is not an agency in law. Inseveral cases, a person described as an agent in



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the agreement or his letter of appointment washeld to be not an agent according to law. Some of these cases are cited in Halsbury's Laws of England, 3rd edition, Vol. 1 p. 146, in a foot-noteto the following observation:

"351. Agency Depends on True Nature of Relationship In order to ascertain whether therelation of agency exists, the true nature of theagreement or the exact circumstances of therelationship between the alleged principal and agent will be regarded and if it is found that suchagreement in substance contemplates thealleged agent acting on his own behalf, and not as an agent in the agreement, the relation of agency will not have arisen."

The cases cited in the foot-note are: Re Nevill, Ex parte White, (1871) 6 Ch. App. 397; Towle (John)and Co v. White, (1873) 29 LT 78; Livingstone v.Ross. 1901 AC 327; Micheline Tyre Co. v.Macfarlane (Glasgow) Ltd., (1917) 55 Sc L. R.35; Kitson v. King (P. S.) and Son, Ltd. (1919) 36T. L. R. 162, Lamb (W T.) & Sons v. Goring Brick Co. (1932) K. B. 710.

6. I have examined these cases except theone reported in 55 Sc. L. R. 35 which is not available. They establish the principle that indetermining legal nature of relationship betweenthe alleged principal and agent the use or omission of the word "agent" is not conclusive.

American Law is similar:

"the manner in which the parties designate therelationship is not controlling, and if an act doneby person on behalf of another is in its essential

nature one of agency, the one is the agent of such other notwithstanding he is not so called.Conversely the mere use of the word by agent inthe contract cannot have to be held the effect of making one agent, who, in fact is not such."

American Jurisprudence, IInd edition Vol. 3 page431. The foot-note on this page refers to a casein which it was held that the use of the words"agency agreement" and "agent" by the parties in

a contract does not necessarily establish arelationship of agency in the legal sense.McCarty v. King County Medical Service Corp. 26



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Wash 2d 660, 175 P2d 658. The law in India isthe same. It has been held in several decisionsthat the fact that the parties have called their relationship an agency is not conclusive, if theincidence of this relationship, as disclosed by evidence does not justify a finding of agency, and

that the court must examine the true nature of therelationship and the functions and responsibilitiesof the alleged agent: Banaras Bank v. RamPrasad, AIR 1930 All 573, Phool Chand v.

Agarwal B. M. Co., AIR 1938 Lah 814;Suryaprakasaraya v. Matheson's Coffee Works,(1913) 14 Mad L. T. 249. What is the real natureof the relationship created between the plaintiff and the Government of Assam under the so-called agreement of agency Ex. C-1. Beforeanalysing this agreement, it is necessary to statethe essential characteristic of an agency in law.Section 182 of the Contract Act defines an agent as "a person employed to do any act for another or to represent another in dealings with third

person." The section defines a principal as "the person for whom such act is done or who is sorepresented." According to this definition, anagent never acts on his own behalf but always onbehalf of another. He either represents his

principal in any transaction or dealing with a third person, or performs any act for the principal. Ineither case, the act of the agent will be deemed inlaw to be not own but of the principal. The crucial test of the status of an agent is that his acts bind the plaintiff.

A Division Bench of Madras High Court in the case of P.

Krishna Bhatta and others vs. Mundila Ganapathi Bhatta and

others , AIR 1955 Madras 648 laid down following in paragraph 36:-

36. ..... Looked at from this point of view,an agency is a contract of employment for the

purpose of bringing another-in legal relation witha third party or in other words, the contract between the principal and agent is primarily acontract of employment to bring him into legal relation with a third party Or to contract suchbusiness as may be going on between him and the third party. An agent is thus a person either actually or by law held to be authorised and



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employed by any person to bring hint intocontractual or other legal relations with a third

party. He is a representative vested withauthority, real or ostensible, to create voluntary

primary obligations for his principal by making promises or representations to third persons

calculated induce them to change their legal relations. Representative character and derivative authority may briefly be said to be thedistinguishing features of an agent.

The Apex Court in the case of Chiarman, Life Insurance

Corporation vs. Rajiv Kumar Bhasker reported in (2005)6 SCC

188 had occasion to consider various sections of Indian Contract

Act including Sections 182, 186 and 187. The Apex Court in the

said case held that an agency can be created expressly or by

necessary implications. Followings were laid down in paragraphs

26, 27 and 28:-

26. The definition of 'agent' and 'principal' isclear. An agent would be a person employed todo any act for another, or to represent other in

dealings with third parties and the person for whom such act is done or who is so represented is called the principal. It may not be obligatory onthe part of the Corporation to engage an agent interms of the provisions of the Act and the rulesand regulations framed thereunder, but indisputably an agent can be appointed for other

purposes. Once an agent is appointed, hisauthority may be express or implied in terms of Section 186 of the Contract Act.

27. For creating a contract of agency, in view of Section 185 of the Indian Contract Act, even

passing of the consideration is not necessary.The consideration, however, so far as theemployers are concerned as evidenced by theScheme, was to project their better image beforethe employees.

28. It is well-settled that for the purpose of determining the legal nature of the relationshipbetween the alleged principal and agent, the useof or omission of the word "agent" is not



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conclusive. If the employee had reason to believethat his employer was acting on behalf of theCorporation, a contract of agency may beinferred.

Now after having taken note of the propositions as laid down

in the aforesaid judgments regarding tests to be applied for finding

out as to whether particular relationship is of a principal and agent

or not, we proceed to look into the relevant facts and materials

which have been brought on the record to examine the above

question.

As noted above, the assessment order has already been

passed by the assessing authority holding that relationship between

the petitioner and advertising agency is that of principal and agent

and the relevant materials and facts, which have been relied for

coming to the said conclusion, have been expressly referred to in

the assessment order and have been reiterated in the counter

affidavit filed by the department. The entire case of the department

having come on the record, it is useful to refer to and rely on thesaid materials for determining the above jurisdictional question.

The assessment order itself noticed the three conditions,

which were required to be satisfied for principal and agent

relationship, and finding has been returned that all the said three

conditions are fulfilled. The relevant findings and observation are

contained in paragraphs 21, 27, 30 and 31, which are to thefollowing effect:-

21. The gist of the above para is that it is a principal agency relationship because the advertisingagents canvass advertisement for the media house at tariff prescribed by the media house. In thisconnection, it would be relevant to quote para 4 of theStandard of Practice for Advertising Agencies (Asapproved by the Advertising Agencies Association of India, Bombay) as under:



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No member shall pay or undertake or allow to an advertiser or his agent or representative, the whole or any portion of thestandard rate of commission resulting or to result to such member from any advertising mediumnor promise or procure or undertake to procureadvertising or at a reduced rate nor supply freeor partly free to any advertiser, any advertisingmaterial, including finished drawings, or other art work, photographs, blocks, stereos, matrices or the like, typesetting or printing nor defray inwhole or in part the salary of any employee of anadvertiser, nor grant any allowances, discount or the like nor render any service having the effect of rebating the commission allowed by an

advertising medium. The sharing of commissionwith member or overseas agency or with agent by this Association shall, however, be permitted.

27. It can be said that an agent can conduct the business of his principal according to the customwhich prevails in doing business. Therefore, theassessees argument that since it has no codified agreement with the advertising agency, the advertisingagency cannot be treated as its agent, does not hold good. The principal-agent relationship can also exist without any written or codified agreement. Theassessee has himself admitted that the INS as an apex trade body for governing newspaper publishers alsogovern newspaper relations with advertising agencies.Since, assessee is a part of INS it is implied that it alsohas a contract/agreement with the advertising agent though it may not be codified agreement between theassessee and the advertising agency.

30. In order to satisfy the requirements of principal-agent relationship, certain condition laid downin explanation (I) to section 194H are required to befulfilled:

1. There should be payment received or receivable directly or indirectly.

2. It should be received or receivable by a person acting on or behalf of another person.

3. The payment should be received or



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receivable for:

(a) Services rendered (not being professional services) or

(b) For any services in the course of buying or

selling of goods or (c) In relation to any transaction relating toany asset, valuable articles or thing not beingsecurities.

All these three conditions are fulfilled in theinstant case:-

1. In the Jagran Prakashan Ltd. case theadvertising agent is receiving payment indirectly under the name of discount. This discount isnothing but an amount deducted from the grossamount receivable by the principal i.e. JagranPrakashan Ltd. If the advertising agent would have not rendered services to the JagranPrakashan Ltd. it would have not received any discount or payment.

2. This discount or payment was received by the advertising agent for procuring/providingadvertisements to Jagran Prakashan Ltd. Theadvertisements were given as per the spaceavailable in the Jagran Newspaper. Therefore,the publication of the advertisement is strictly subject to the availability of space in thenewspaper. The advertising agency is providingadvertisements on the basis of requirement of the newspaper. The newspaper also decideswhat type of advertisements it will publish. For example, newspapers dont publish the

advertisement for alcoholic drinks. Thus, it is thenewspaper which decides that what type of advertisement it will publish and in how muchspace. Thus, the advertising agency is acting onbehalf of the Jagran Prakashan Ltd. and receiving payment in the name of discount fromthe gross amount accruing to the JagranPrakashan Ltd.

3. The advertisement agency is rendering a

service to Jagran Prakashan Ltd. by procuringand supplying the advertisement to the later and for this service it is receiving its payment from the



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Jagran Prakashan Ltd. under the namediscount.

31. From the above discussion, it can be appreciated that the advertising agency is acting on behalf of

Jagran Prakashan Ltd. and receiving payments for theservices it has rendered to the Jagran Prakashan Ltd.Thus, the existence of principal-agent relationship vis-a-vis assessee and advertising agencies is established.The provisions of section 194 H of the I.T. Act, 1961 areapplicable in such cases. Accordingly, the commission

paid by the assessee to various accredited advertisingagencies in the guise of trade discount is liable toTDS.

It is the case of the department, as apparent from the

impugned assessment order as well as from the counter affidavit,

that there is no inter se contract between the petitioner and any

advertising agency, rather the case of the department is that

principal-agent relationship can exist even if there is implicit

agreement. The conclusions have been recorded in the

assessment order in paragraph 34, which is to the following effect:-

34. In conclusion, the whole discussion of thisorder is summarised as under:-

A. There is a implicit agreement between the Jagran Prakashan Ltd. and theadvertising agencies via Indian Newspaper Society (INS) or otherwise.

B. There is a principal-agent relationship between the Jagran Prakashan Ltd.and the advertising agencies and the advertisingagencies act on behalf and as per therequirement of the Jagran Prakashan Ltd.

C. There is payment from the JagranPrakashan Ltd. to advertising agencies in thename of so called discount. The source of thisdiscount is nothing but the ad revenue generated by the Jagran Prakash Ltd.

D. This payment from JagranPrakashan Ltd. to the advertising agencies is



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entirely for the services of advertisement procurement by the advertising agencies.

E. That the Jagran Prakashan Ltd. vis-a-vis INS and AAAI have devised a cosmetic and artificial methodology to circumvent the clear

provisions of section 194H.

The petitioner is member of Indian Newspapers Society (INS)

by whom the advertising agencies are granted accreditation.

According to the Rules of INS the advertising agencies while being

granted accreditation are required to enter into an agreement. The

department submits that since the petitioner is bound by Rules of

INS by whom the accreditation was granted to advertising agencies

after entering into an agreement, there is implicit contract between

the petitioner and the advertising agencies and the relationship of

principal-agent exists between them.

The petitioner has brought on the record Rules governing

accreditation of advertising agencies and the proforma of the

agreement which is entered between the advertising agencies andthe INS. The aforesaid rules have also been referred to in the

assessment order. On the basis of Rules of INS of which petitioner

is also a member and with whom the advertising agency enters into

an agreement, the department has concluded that there is implicit

contract between the petitioner and the advertising agencies from

which relationship of principal-agent can be found out. The

assessment order also refers to Standard of Practice for AdvertisingAgencies as approved by the Advertising Agencies Association of

India, Bombay. Apart from abovesaid two materials, no other

material has been referred to in the order impugned. The

proposition is well settled that relationship of principal and agent

can be founded either expressly or by implication. Even if there is

no agreement between the principal and agent, the relationship can

exist. To find out the real relationship between the petitioner and the

advertising agency, the Rules of INS and the agreement entered



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between the advertising agencies and the INS has to be carefully

looked into. The petitioner has brought on record as Annexure RA-

2, copy of the Rules governing accreditation (INS Press Handbook

2010-11). The aforesaid rules delineate the clear picture of

relationship between the newspaper agencies and advertisingagencies. It is useful to refer to certain rules of INS which clearly

negate the relationship of principal and agent between the

newspaper agency and the advertising agency. Under the heading

Rules and Regulations Governing Accreditation of Advertising

Agencies, Rule 10 clearly indicates that there is no control of

newspapers agency on the advertising agency whereas in a

relationship of principal and agent principal retains full control overthe activities of agent. Rule 10(1), 10(b) and 10(c) are quoted

below:-

10(a). It is free from control or interferenceof any business or person who owns or controlsany newspaper or other advertising medium or media.

(b) Its principal or principals are not the proprietor/partners/salaried employees of any advertiser or publisher of a newspaper or anadvertising medium.

(c) Any of its Directors, Proprietor,Partners or Chief Executives do not hold any share or equity in any publication or any other form of advertising media and have noconnection financially or otherwise, with any

publication or with any firm of advertising mediasuch as outdoor, hoardings, cinemas, radio, etc.or with any advertiser except as an advertisingagent. Such persons can hold a small number of shares in public limited client companies.

When Rule 10, as quoted above, clearly provides that

advertising agency is free from control or interference from

any business or person who owns or controls newspaper , thenewspaper agency cannot be treated to be principal and advertising



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agency as agent.

Rule 32, which provides for payment of trade discount has

been referred by the department, is to the followign effect:-

32. Payment of Trade Discount . As and from the date of accreditation as above, theaccredited advertising agency shall be entitled toreceive from the members of the Society themaximum and minimum Trade Discount of 15%in respect of advertisement business placed by it with such members. In the case of the

provisionally accredited advertising agency, themaximum and minimum Trade Discount shall be

10% of the advertisement business.

Rule 45 prohibits the members of the society from appointing

advertising agency as their representatives. Rule 45 is quoted

below:-

45. Members Representation by Advertising Agency. Members of the Society are free to appoint whomsoever they like as their representative provided the said representativesare not classified as advertising agents and donot function as advertising agencies.

A agency is a contract of employment for the purpose of

bringing another in legal relation with a third party or in other words,

the contract between the principal and agent is primarily a contract

of employment to bring him into legal relation with a third party or tocontract such business as may be going on between him and the

third party. In publication of advertisement submitted by advertising

agency, the responsibility to make payment of bills of the

newspaper is on the advertising agency and there is no

responsibility of advertiser to make payment to the newspaper

agency and no privity of contract took place between the

newspaper agency and the advertiser and had the advertising

agency being agent of newspaper agency, the advertiser was to be



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liable for payment to the newspaper agency. Rule 56(a) of the

Rules clearly contemplates that it is the advertising agency which is

responsible for payment even if the advertiser has not paid to the

advertising agency. Rule 56(a) of the Rules is quoted below:-

56. Defaulting Clients . (a) where an advertiser fails to pay and in consequence the agency isunable to pay publications, INS upon beingauthentically informed by the agency and beingso satisfied will advise its member publications tosuspend the advertisements of the concerned advertiser until payment is realised. This iswithout prejudice to the agencys clear liability to

pay its dues even if its client has not paid.

In the form of application, which is provided in Appendix-II to

the Rules, advertising agency is required to attach a list of the

names and addresses of clients whose advertisement is handled by

the advertising agency, which clearly indicates that in fact the

advertising agency is working for the advertisers/clients. Column 26

of the form of application is as follows:-

Attach a list of the names and addressesof clients whose advertisement is handled by youand products/services as advertised along withletters of appointment issued by the clients asalso with other documentary evidence.

The most important material is format of contract between the

advertising agency and the INS, which is in Appendix-III to the

Rules. The contents of first paragraph of the contract clearly

indicates that object is to secure the best advertising service for

the advertiser . Thus the accreditation of advertising agency is for

the object of providing better service to the advertiser and it is not

engaged as agent of the newspaper agency and advertising

agency, in fact, is running its advertising business and while

conducting the said business it acts on behalf of their client i.e.advertiser. The first paragraph of the agreement is as follows:-



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(1) BY THE SOCIETY: That the Society accredits the Agency and includes its name inthe list of accredited agents published from timeto time.

Clause 2 of the agreement clearly indicates that advertising

agency works in the interest of consumer and advertisers. Clause

2(a), (b), (c) and (d) are quoted below:-

(2) BY THE AGENCY: In considerationof the accreditation herein afforded and of thetrade discount to which the Agency is entitled by reasons of such accreditation.

(a) The Advertising Agency shall maintain a properly equipped office and shall fully abide by the Standards of Service by Advertising Agenciesin the interest of consumers and Advertisers set out in the Societys Rules and Regulations on

Accreditation of Advertising Agencies.

(b) The Advertising Agency shall ensurethat all advertisements placed by it are legal,clean, honest and truthful and it shall render the

best possible advertising service to the advertiser and encourage the development of new advertisement accounts and it shall fully adherein this respect to the advertisement ethics and theCode of Ethics and Standards set out in theSocietys Rules and Regulations on Accreditationof Advertising Agencies.

(c) The Advertising Agency shall be paid tradediscount in accordance with the Societys Rulesand Regulations on Accreditation of the

Advertising Agencies.

(d) That it will retain full trade discount earned as an advertising agency from Member Publications and that it will at no time pay or otherwise allow any part of such trade discount toany advertiser or representative of any advertiser for whom it may be acting, or has acted as anadvertising agency.

In the agreement Clause 2(q) mentions about 15% trade



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discount which advertising agency is entitled from newspaper

agency. Clause 2(q) is quoted below:-

2(q). As and from the date of accreditation, the Advertising Agency shall beentitled to receive from the Members of theSociety the maximum and minimum tradediscount of 15% in respect of advertisement business placed by it with such Members. In thecase of provisional accreditation the Advertising

Agency shall be entitled to receive maximum and minimum trade discount of 10% only.

According to Clause (3) of the agreement the advertising

agencies whose accreditation application is accepted by the societyare bound by the contract to be entered in Appendix-III.

The second precondition, which is required to be fulfilled for

applicability of Section 194H of the Act is that the person receiving

payment has rendered service

Jagran Prakashan 194H TDS

Documents

Transcript of Jagran Prakashan 194H TDS