Demystifying Section 194H: Tax Deduction on Commission and Brokerage Payments

In the intricate web of tax regulations, Section 194H stands as a crucial checkpoint for those involved in financial transactions related to commission and brokerage payments in India. Designed to ensure the collection of income tax, this section places the responsibility of deduction squarely on the shoulders of payers, whether they are individuals or entities. Its provisions, however, come with a set of conditions and exemptions that often leave taxpayers perplexed. This article offers a concise yet comprehensive exploration of Section 194H, providing clarity on its key aspects and implications for those engaged in this facet of financial transactions.

Section 194H

“194H. 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 being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent :

Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts 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 fifteen thousand rupees :

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which 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 made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their 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 the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article 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 the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

(iv) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly."

Analysis of this section:

This section provides for the deduction of tax on payment of commission and brokerage at the rate of 5%. The liability to deduct tax is applicable to any person other than Individual and HUF. However Individual or HUF whose turnover for the immediately preceding year exceeds Rs. 1 crore, in case of business or Rs.50 lakhs, in case of profession, is also required to deduct tax under this section. It may be further noted that no TDS under this section shall be deducted if the amount of brokerage or commission paid to any person during the financial year is up to Rs.15,000. TDS under this section is required to be deducted at the time of payment or at the time of crediting the party whichever is earlier.

No TDS under this section shall be deducted on the insurance commission on which TDS is to be deducted under section 194D. Also, no TDS shall be deducted under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.

It is also been clarified vide circular no. 05/2016 dated 29-02-2016, that no TDS under this section shall be deducted on payments made by television channels or newspaper companies to the advertising agencies for booking or procuring of or canvassing for advertisements.

Some case laws related to this section, for better clarity of some points:

1. CIT vs Ahmedabad Stamp Vendors Association (SC) [2012] 134 TAXLOK.COM (IT) 028 (SC):

In this case, the issue revolves around whether the discount given by the State Government to stamp vendors constitutes "commission or brokerage" under Section 194H of the Income-tax Act, 1961, which requires tax deduction at source (TDS) by the State Government.

The Gujarat High Court, in its judgment, supported the argument of the association of stamp vendors. It held that the stamp vendors were not acting as "agents" of the State Government but were engaging in transactions on a "principal to principal" basis. Additionally, the court ruled that the discount provided to the stamp vendors was not akin to "commission or brokerage," and therefore, Section 194H was not applicable.

Upon appeal to the Supreme Court, the court concurred with the High Court`s judgment. The Supreme Court held that the discount given to the stamp vendors was essentially a cash discount for purchasing stamps in bulk quantity. Consequently, the court determined that the transaction was a sale, and as a result, Section 194H did not apply. Therefore, the Supreme Court dismissed the department`s appeal, affirming that the discount was not subject to TDS under Section 194H.

2. CIT vs Qatar Airways (Bombay High Court) [2009] 116 TAXLOK.COM (IT) 574 (BOMBAY)

In the case of CIT vs. Qatar Airways, the Bombay High Court examined whether the variance between commercial and published ticket prices should be regarded as commission under Section 194H of the Income-tax Act, 1961. The agreement allowed agents to sell tickets within a price range set by the airline, with flexibility to set prices at their discretion, subject to a maximum limit. According to IATA rules, agents were entitled to a 9% commission on the published price, and the airline deducted tax on this commission.

The court considered the practicality of the airline collecting pricing information from numerous agents given their autonomy in setting prices. It concluded that it was unfeasible and unreasonable to expect the airline to gather such feedback. Consequently, the court held that the difference in prices between the commercial and published rates did not fall under the definition of commission or brokerage in the hands of the agents, and therefore, it was not subject to Tax Deducted at Source (TDS) under Section 194H.

The court emphasized that the permission granted to agents to sell tickets at a lower price did not constitute commission or brokerage in their hands, reinforcing the rationale behind the decision that TDS was not applicable to the price difference in question.

3. Vodafone Essar Cellular vs ACIT (Kerela High Court) [2010] 122 TAXLOK.COM (IT) 263 (KERALA)

In a dispute involving a mobile operator and its distributors, the issue at hand revolves around whether payments for the supply of SIM cards should be treated as commission-liable for Tax Deducted at Source (TDS). While the operator considered payments for postpaid services as commission subject to TDS, it deemed payments for prepaid services as a discounted sale of SIM cards exempt from TDS. The court, dismissing the appeal, rejected the argument that the distribution of SIM cards constitutes a sale, emphasizing the SIM card`s intrinsic value solely for accessing the mobile network. The court held that the discount provided during SIM card supply is essentially remuneration for the distributor`s services, categorizing them as agents facilitating customer acquisition rather than operating on a principal-to-principal basis. Therefore, the court concluded that the discount qualifies as "commission" under Section 194H and is subject to TDS.

Additionally, the court addressed the contention that the discount, being deducted from the price, should be exempt from TDS. It refuted this claim, stating that the operator could have either offered a discount net of the tax amount or provided the full discount while separately recovering the tax amount from distributors. This ruling underscore the court`s perspective that the discount represents payment for services rendered and falls within the ambit of commission, making it subject to TDS obligations under Section 194H.

4. Prasar Bharti vs CIT (SC)

In this legal scenario, the central question involves the interpretation of Section 194H of the Income Tax Act, which mandates a 5% tax deduction on payments categorized as "commission or brokerage." The dispute arises as the appellant, a party other than an individual or Hindu Undivided Family (HUF), contests the application of this section to its payments to advertising agencies.

The court underscores that the definition of "commission or brokerage" in Section 194H is comprehensive, covering payments for services related to buying or selling goods or transactions involving assets, excluding securities. The appellant argues that the payments it made to agencies do not fall under the definition of commission. However, the court rejects this argument, emphasizing the explicit use of the term "commission" in the agreement, the absence of ambiguity, and the evident intention of both parties.

Crucially, the court points out that the relationship between the appellant and the agencies is that of principal and agent, and the payment of 15%, as specified in the agreement, is unequivocally termed as "commission." Consequently, the court upholds the decision of the High Court, affirming the applicability of Section 194H. This ruling obliges the appellant to deduct income tax at the rate of 5% on the payments made to advertising agencies. The court dismisses the appellant`s reliance on a judgment from the Allahabad High Court, emphasizing the differences in the facts of that case.

In summary, the court supports the High Court`s rationale, leading to the dismissal of the appeals, and underscores the clarity in the agreement regarding the nature of payments as "commission."