TDS on Trade Margins – Principal-to-Principal Relationship

Case Title: M/s Acer India Pvt. Ltd. v. Commissioner of Income Tax (TDS),

Bengaluru Court: Karnataka High Court, affirmed by Supreme Court

Karnataka HC Order Date: 24 April 2023SC SLP

Dismissal Date: 2024Citation: 2024 TAXSCAN (SC) 191; [2023] 452 ITR 514 (Karnataka)

🧠 Background of the Case:

Acer India Pvt. Ltd. is engaged in the business of selling computers and hardware. It appointed various distributors to purchase goods and further sell them in the market. The dispute arose when the Revenue alleged that the difference between the selling price to distributors and the MRP constituted “commission”, and hence, Acer India was liable to deduct TDS under Section 194H.

⚖️ Revenue’s Argument:

• The Revenue claimed the relationship between Acer and its distributors was akin to principal-agent.

• The discount/margin allowed to distributors was termed as “commission”.

• Based on this, the AO held that Section 194H applied and Acer should have deducted TDS on such trade margins.

🧾 Acer India's Contention:

• Acer contended that it sold goods outright to the distributors.

• The transactions were on a principal-to-principal basis, evidenced by the sales invoices and commercial terms.

• The distributors assumed ownership risk, maintained stock, and resold the goods independently.

• No service element or agency relationship existed that could invoke Section 194H.

🏛️ Karnataka High Court Ruling:

The High Court ruled in favour of Acer India, observing that:

“The distributors are not acting on behalf of the company. There is no principal-agent relationship. It is a clear case of sale and purchase on a principal-to-principal basis.”

• The court emphasized that merely because Acer fixed the resale price or had a price list did not alter the commercial nature of the transaction.

• The margin retained by distributors is not “commission” but is a trade discount.

📝 Result: No TDS under Section 194H.

🏛️ Supreme Court Outcome:

In 2024, the Supreme Court dismissed the Revenue’s Special Leave Petition (SLP), thereby affirming the Karnataka High Court’s view.

📌 Key Takeaways:

1. Nature of Relationship is key – Only where there is an agency, Section 194H applies.

2. Trade Margins on resale between unrelated parties are not “commission.”

3. Control over resale price does not change the transaction’s character if risk and ownership transfer takes place.

💡 Why It Matters:

This judgment provides welcome clarity for businesses operating in FMCG, electronics, pharma, and other sectors that distribute goods via trade channels. It reinforces the position that TDS under Section 194H cannot be mechanically applied to all margins or discounts.