Deduction of tax at sources – The Transaction of purchase of stamp papers at discount by the Stamp Vendors from the State Government is a transaction of sale and there is no obligation on the State Government to deduct tax at source u/s. 194 H on the amount of discount.

The registered association of the stamp vendors of Ahmedabad approached the Gujarat High Court to quash the communication received from the Income Tax Department calling upon the State Government to deduct tax at source u/s. 194 H on commission or brokerage to the person carrying the business as “Stamp Vendors” and for a declaration that section 194H was not applicable to an assessee carrying on business as a stamp vendor.

The principal controversy before the High Court was whether the stamp vendors were agents of the State Government who were being paid commission or brokerage or whether the sale of stamp papers by the Government to the licensed vendors was on principal to principal basis involving the contract of sale.

The High Court after considering the Gujarat Stamps and Sales Rules, 1987, Gujarat Sales Tax Act, 1969 and the authorities cited held that the stamp vendors were required to purchase the stamp papers on payment of price less the discount on the principal to principal basis and there was no contract of agency at any point of time and that the discount made available to the licensed stamp vendors under the provisions of the Gujarat Stamps and Supply and Sales Rules, 1987, does not fall within the expression ‘commission’ or ‘brokerage’ u/s. 194H of the Act.

On appeal by the Department, the Supreme Court held that 0.50 % to 4 % discount given to the stamp vendors was for purchasing the stamps in bulk quantity and the said discount was in the nature of the cash discount. The Supreme Court concurred with the judgement of the High Court that the impugned transaction was a sale and consequently, section 194H had no application.