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TMI Blog2012 (11) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... ; b) Purchase of traded goods c) Purchase of packing material d) Clinical Trial Expenses 3. It was the contention of AO that assessee made provision for expenses for an amount of Rs.10,01,98,450/- and there was short deduction of tax at Rs.2,06,45,686/- which is to be disallowed under section 40(a)(i) and 40(a)(ia). Assessee was required to show cause why the said amount could not be considered for determining the liability to the TDS under section 201(1) and 201(1A). After considering assessee's objections AO determined the amount of tax to be deducted and the same was demanded from assessee under section 201(1). AO also levied interest under section 201(1A). Likewise, the amounts under three other heads were also determined by AO under the above provisions. 4. The CIT (A) after considering assessee's detailed submissions, however, did not agree with the assessee contentions on 'provision made but tax not deducted' and upheld the action of AO in determining the tax and interest under section 201(1) & 201(1A). With reference to the other three items following various case law and the orders of the jurisdictional High Court, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also no dispute to the fact that entire provision so made was disallowed in the computation under the head 'tax deductible but not deducted on provisions as on 31st March, 2007' in the computation of income. Therefore, the entire provision so made was disallowed under section 40(a)(i)/(ia) while filing the return of income by the itself. 9. As explained the general entries passed by Pfizer Ltd, in the books of account are as under: "Annexure-1 Journal Entries passed by Pfizer in the books of account: a) At the time of making the year end provision Particulars Debit (Rs.) Credit(Rs.) Expense a/c Dr. XXX To provision for expenses a/c XXX b) At the time of reversal on first day of the next financial year Particulars Debit (Rs.) Credit (Rs.) Provision for expenses a/c Dr. XXX To Expenses a/c XXX c) At the time of making payment to parties on the basis of the actual invoices received by Pfizer. Particulars Debit (Rs.) Credit (Rs.) Expenses a/c DR. XXX To party's a/c XXX To TDS payable a/c XXX" 10. As can be seen from the above entries, when the payment/ credit was made to the indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability credited to 'interest payable account0 He also imposed the penalty under section 221 upon the assessee. On appeal, the Commissioner (Appeals) upheld the impugned order". It was held that "the liability of tax deduction at source is in the nature of a vicarious or sub-stitutionary liability, which presupposes existence of a principal or primary liability. Chapter XVII-B is titled 'Collection and recovery of tax - deduction of tax at source: This title also indicates that the nature of tax deduction at source obligation is obligation for collection and recovery of tax. Under the Act, tax is on the income and it is in the hands of the person who receives such income, except in the case of dividend distribution tax which is levied under section 115-0, a section outside the Chapter providing for collection and recovery mechanism and set out under a separate chapter 'Determination of tax in certain special cases - special provision relating to tax on distributed profits of domestic companies: A plain reading of section 190 and section 191, which are first two sections under the Chapter XVII, and of sections 199, 202 and 203(1), would show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is to pay an income knows the identity of the beneficiary or the recipient of the income. It is a sine qua non for a vicarious tax deduction liability that there has to be a principal tax liability in respect of the relevant income first, and a principal tax liability can come into existence when it can be ascertained as to who will receive or earn that income because the tax is on the income and in the hands of the person who earns that income. Therefore, tax deduction at source mechanism cannot be put into practice until identity of the person in whose hands it is includible as income can be ascertained. It is indeed correct that Explanation to section 193 lays down that even when an income is credited to any account 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, but the fact that the credit to any account is to be deemed to be credit to the payee's account also presupposes that identify of the payee can be ascertained. Therefore, this deeming fiction can only be activated when the identity of the payee can be ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 271C could only have been levied by an Office of the rank of the Deputy (now Joint) Commissioner. The ITO was, from this point of view, not competent to impose the impugned penalty. Further, in the instant case, even according to the revenue, the default was on account of deduction of tax at source. Such a default could not be visited with penalty under section 221. Hence, the impugned penalty under section 221 was unsustainable in law". 11. In view of the above decision of coordinate bench, since the payee is not identifiable in this case also at the time of making provision, no TDS need to be made on the above amount. Further the entire provision has been written back in the next year and the actual amounts paid/credited were subjected to TDS as per the detailed statements filed before the authorities on which there is no dispute. Therefore, assessee is following the provisions of TDS as and when the amounts are paid/credited to respective parties. 12. As already explained and evidenced from the computation of income as well as the orders of AO in the assessment proceedings, the entire provision has been disallowed under section 40(a)(ia) and section 40(a)(i). Once t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material and 3.clinical trials. The order of the CIT (A) on the three issues are as under: 1. Finished/Traded Goods: "11. I have carefully considered the facts of the case, various agreements with third party, submission and legal propositions made by the Appellant. From the agreement it is clear that the assessee has exercised right for quality specification and quality control as agreed by the third party. This is common practice in pharma industries, wherein the purchaser of traded goods purchases goods only when it is up to their quality requirement. Further from the agreement it is clear that all other right and Obligation is with the seller of traded goods and the property in goods passes after it is delivered to the door step of the appellant. It is also a fact that no raw material is supplied by the appellant (purchaser) to the manufacturers. The manufacturing activities are also carried out by the manufacturers in their own premises. The manufacturers have also paid excise duties VAT/sales tax as applicable on the goods manufactured/sold. After going through the agreement and its various clauses and facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Purchase of various materials. b) Expenditure on food and travelling c) Availability of tax exemption certificate d) Payment of regulatory fees. Prima facie TDS is not deductible on all the four items mentioned above. However, this particular break up has not been provided to AO. I therefore, direct AO to verify the above break up given by the appellant. If the above break up of expenditure given by the appellant is found to be correct, then I hold no TDS is required to be deducted on the above payments. AO is directed accordingly". With regard to balance expenditure amount of Rs.7,68,21,907/- is concerned, the appellant has deducted TDS of Rs.42,45,914/- on the same. However, it is seen that payment in question is in the nature of professional fees. In order to carry out clinic trial, the person who carries out the trial must possess medical qualification and the person should be highly quali ..... X X X X Extracts X X X X X X X X Extracts X X X X
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