TDS: S/s 194H, Expl (i), 201(1A): A. Ys. 2009- 10 and 2010-11: (i) Trade discount is not a discount, commission or brokerage: Tax not deductible at source: (ii) Failure to deduct tax at source: When payer deemed in default: Only if payee fails to pay tax directly: Tax not to be recovered from payer if payee pays directly : Liability of payer only for interest and penalty:

The petitioner is a publisher of a hindi daily newspaper. The petitioner had granted trade discount of 10% to 15% to the advertising agencies in accordance with the rules and regulations of the Indian Newspaper Society of which the petitioner was a member. For the A. Ys. 2009-10 and 2010-11, the Assessing Officer treated the petitioner as an assessee in default on the ground that the petitioner has failed to deduct tax at source u/s 194H of the Income-tax Act, 1961 on the trade discount and also passed orders u/s 201(1A) levying interest. The case of the Department was that allowing trade discount to the advertising agencies by the petitioner 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 petitioner preferred a writ petition challenging the order. The Allahabad High Court allowed the writ petition and held as under:

“i) The proceedings u/s 201/201(1A) of the Act were clearly not permissible because the two fundamental facts did not exist: (a) the relationship between the petitioner and the advertising agency was not that of principal and agent; and (b) advertising agencies rendered service to advertisers and were accredited by the society not as an agent of the newspaper agency. The observation of the Assessing Officer that advertising agencies rendered service to the petitioner was without any basis and foundation. No fundamental facts existed on the basis of which any inference could be drawn that advertising agencies were agents of the petitioner and further that advertising agencies rendered any services to the newspaper.

ii) The authorities had not adverted to the Explanation to section 194H nor had applied their mind to whether the assessee had also failed to pay such tax directly. Directing recovery of interest from the petitioner and recovery of tax alleged to be short deducted, was beyond the scope of section 201 and without jurisdiction.”