Kerala State Stamp Vendors Association v. Office Of The Accountant-General And Others

W.P (C.) Nos. 20115 and 17657 of 2003, 17100, 31207 of 2004, 4721, 5041, 5385, 5575 and 6718 of 2005

Decided on June 20, 2005

The Judgment of the Court was delivered by

C.N Ramachandran Nair, J.:— While the petitioners in W.P (C) Nos. 20115 of 2003 and 6718 of 2005 are Associations of Stamp Vendors in Kerala, the petitioners in all other writ petitions are individual stamp vendors. The challenge in all the W.P(C) is against the demand made by the Income-tax Department to the Treasury Officers to recover income-tax from the discount allowed to stamp vendors on the sale of stamp paper to them. The members of the two petitioner-Associations and the other petitioners are licensed stamp vendors engaged in purchase of stamp paper from the Treasury and sale of the same in accordance with the Kerala Manufacture and Sale of Stamps Rules, 1960 (hereinafter called “the Rules”). Stamp papers are sold to the licensed vendors by the Treasury at a discounted price which varies from 1 per cent. to 4.5 per cent. depending on the face value of the stamp paper. The highest denomination stamp paper sold through stamp-vendors is Rs. 10,000. While the case of the Income-tax Department is that the reduction given in the price of the stamp paper by the Treasury on sale of the same is “commission” which has to be subjected to tax deduction at source in terms of section 194H of the Income-tax Act, the case of the petitioners is that the reduction granted is only discount which does not come within the description of “commission” or “brokerage” covered by section 194H of the Income-tax Act (hereinafter called “the Act”).

2. I heard counsel appearing for all the petitioners and standing counsel for the Income-tax Department.

3. The petitioners have relied on a direct decision of the Gujarat High Court in Ahmedabad Stamp Vendors Association v. Union of India, [2002] 257 ITR 202, and contended that the licensed stamp vendors are not agents of the Government and are independent dealers in stamp paper though subject to the discipline provided in the rules and so much so, deduction of income-tax on discount allowed is not authorised under section 194H of the Act. They have also referred to the provisions of the rules applicable for the sale of stamp paper in Gujarat and compared the said provisions with the rules in Kerala and contended that these writ petitions should be allowed following the decision of the Gujarat High Court. However, standing counsel contended in the first place that the decision of the Gujarat High Court is not correct and he also tried to distinguish the said decision by bringing to the notice of the court, the minor discrepancies between the rules in Gujarat as well as in Kerala particularly, the provision for payment of a discounted price on repurchase of stamp paper by the Government in Gujarat as against full value reimbursable excluding discount on repurchase by the Government in Kerala.

4. In order to appreciate the contentions, the provisions of section 194H of the Act have to be referred to. Therefore, the said section is extracted hereunder for easy reference:

“Section 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.”

5. It is clear from section 194H that what is subject to deduction of income-tax at source is only “commission” or “brokerage”. In the decision above referred the Gujarat High Court took the view that “commission” or “brokerage” arises only in an agency business and therefore, the court proceeded to examine whether the licensed stamp vendors are agents of the Government or not. After analysing the provisions of the Stamp Rules of Gujarat, the court held that the stamp vendors are not “agents” of the Government, though under the rules they have to be licensed and are subject to strict discipline in regard to purchase and sale of stamps from the Government. Based on this finding the court held that discount allowed to stamp vendors does not constitute “commission” or “brokerage” to attract TDS on it under section 194H of the Act. Though standing counsel pointed out that section 194H provides for TDS on any payments for any service rendered in the course of buying and selling of goods whatever be the nature of payment, whether it be paid as discount or otherwise, I do not think the section contemplates discount granted by the seller to the buyer as “commission or brokerage”. What is provided under rule 39 of the Stamp Rules is a discount to the stamp vendor at the time of sale of stamp paper to him by the Treasury. In other words, the stamp vendor pays for the stamp paper, its face value as reduced by the discount allowed to him under rule 39 of the Rules. The short question is whether this discount can be treated as “commission” or “brokerage” under section 194H of the Act for the purpose of deduction of tax at source. It is clear from the definition of “commission and brokerage” as contained in the Explanation to section 194H that the commission or brokerage that attracts TDS is the one paid for “services rendered in the course of sale” which obviously can be the services rendered by a third party like a broker or an agent and cannot be the buyer as the buyer is not rendering any service except buying. Therefore, obviously payments to third parties involved in sale or purchase such as a commission agent or a broker is covered by section 194H of the Act. Discount granted on sale of stamp paper to the licensed stamp vendors by the Treasury therefore cannot be termed as “commission or brokerage” to attract TDS. I am in complete agreement with the findings of the Gujarat High Court that stamp vendors cannot be treated as “agents” of the Government in marketing stamp papers. Standing counsel argued that the definition of commission or brokerage is an inclusive definition and it can take in discount also because sale and purchase of goods are also covered by section 194H. No doubt, payment of commission or brokerage in relation to sale or purchase of goods also would attract deduction of tax at source under section 194H of the Act. However, such situation arises only when there is involvement of services of a third party on payment other than the seller and the purchaser of goods or when the recipient of the benefit markets goods as “agent” of the owner and not as independent dealer. As already stated a discount given on price by the seller to the purchaser cannot be termed as “commission” or “brokerage” for services rendered in the course of buying and selling of goods as the act of buying does not constitute rendering of any service. Counsel for the petitioners referred to various similar transactions involving licensing of dealers, payment of commission and price control. For example, marketing of medicines is controlled by the Drug Price Control Order prescribed under the Drugs and Cosmetics Act, 1940. So also the sale of petroleum products is controlled by the Petroleum Control Orders. Similarly ration articles are distributed by the State through licensed dealers on commission basis. In all these cases the relevant marketing rules provide for fixed commission to dealers. However, the Income-tax Department has no case that commission paid to drug dealers or petrol pumps or ration dealers in the form of discount attract TDS under section 194H of the Act. So much so, the discount given on sale of stamp by the Treasury to the stamp vendor is outside the scope of TDS provisions under section 194H of the Act. Wherever the Legislature wanted to levy tax on trade discount, they specifically provided for the same which is clear from the provisions of section 194H of the Act which provides for deduction of tax on discount paid to lottery dealers in the form of commission. In the circumstances, discount paid to the stamp vendors is not intended to be covered by section 194H of the Act. These writ petitions are therefore allowed vacating the impugned instructions issued by the Income-tax Department for deduction of tax at source on discounts paid to stamp vendors with direction to the Treasury Officers to refund the amounts withheld from the petitioners and other stamp vendors under interim orders of this court, within three weeks from the date of production of copy of this judgment.