Margin on lottery ticket sales in principal-to-principal transactions is not commission under Section 194G.

The Respondent/Assessee engaged in the business of purchasing and selling lottery tickets sponsored by various State Governments.

The Assessee purchased tickets in bulk and sold them to immediate agents/dealers at rates between Rs. 0.76 and Rs. 0.77 per ticket, against a face value of Rs. 1.00.

The Assessing Officer (AO) contended that the difference between the sale price and face value constituted "commission" paid to agents, thereby attracting a liability to deduct tax at source (TDS) under Section 194G of the Income Tax Act.

The AO raised a demand of Rs. 2,19,58,083 plus interest.

Following an initial dismissal on maintainability, the Commissioner of Income Tax (Appeals) subsequently allowed the Assessee's appeal, holding that no TDS was required. This was upheld by the Income Tax Appellate Tribunal (ITAT).

The Revenue Department subsequently appealed to the Madras High Court.

1. Whether the difference between the face value of lottery tickets and the discounted price at which they were sold to distributors, stockists, or dealers amounts to "Commission" under Section 194G of the Income Tax Act?

Section 194G of the Income Tax Act, which mandates TDS on income paid by way of commission, remuneration, or prize on lottery tickets.

The principle that for Section 194G to trigger, there must be a "payment" or "credit" of income to the payee’s account.

M.S. Hameed v. Director of State Lotteries, which established that a discount on the face value of tickets is not a payment of commission.

The distinction between "principal-to-agent" relationships (involving commission) and "principal-to-principal" transactions (involving outright sales or discounts), as cited in Bharti Cellular Limited v. Assistant Commissioner of Income Tax and Ahmedabad Stamp Vendors Association v. Union of India.

Harihar Cotton Pressing Factory v. CIT for the legal distinction between a "rebate" (deduction from price) and "commission" (reward for service).

The Court observed that for an assessee to be liable under Section 194G, they must be "responsible for paying" commission through credit, cash, or other modes.

The relationship between the Assessee and the dealers was found to be "principal-to-principal" rather than "principal-to-agent".

The Court reasoned that a person is taxable on what "goes into his pocket," not what he saves; here, the Assessee never credited any income to the dealers, but rather sold the tickets at a reduced price (discount).

The Court found that once the tickets were sold outright, the Assessee had no further relationship with the dealers regarding the tickets.

Following the Kerala High Court's logic in M.S. Hameed, the Court held that a 24-28% discount on face value cannot be characterized as commission, as the section becomes inapplicable when no actual payment of commission occurs at the time of purchase.

The Assessee was not liable to deduct tax at source under Section 194G and could not be proceeded against under Sections 201(1) and 201(1A) of the Income Tax Act.

The Revenue’s appeal was dismissed, and the ITAT's order was upheld.