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2016 (1) TMI 1087

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..... use 5 of the distribution agreement dated 01-07-2001. Thus, we, therefore, hold that the assessee company has paid discount to MRP to the distributors at the time of sale of the said goods/products i.e. drugs-medicine which in our considered view is not covered u/s 194H of the Act and no tax was required to be deducted at source on these discount to MRP given by the assessee company to the distributors at the time of sale of drugs-medicine to the distributors. - Decided in favour of assessee. Non deduction of tax at source @10% u/s 194J of the Act on payment of Director’s sitting fee - Held that:- The amendment to the Section 194J(1) of the Act by insertion of subsection (ba) to Section 194J(1) of the Act has caste an additional burden on the taxpayer with respect to deduction of tax at source on remuneration,fee or commission to Director other than salary which as per memorandum to Finance Bill 2012 was not existing as per specific provisions of the Act prior to the aforesaid amendments and the amendments to Section 194J(1) of the Act by insertion of sub-section (ba) to Section 194J(1) of the Act were made effective from 01-07-2012, which in our considered view is prospective i .....

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..... eby erred in deleting the non deduction/short deduction u/s. 201 (1) and interest u/s. 201 (1A) without appreciating that the pricing structure between the assessee company and distributors is nothing but a payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered or for any services in the course of buying or selling of goods within the meaning of section 194H of the Act. (iii). On the facts and circumstances of the case and in law, the Id. CIT (A) erred in holding that the assessee cannot be held as an 'assessee-in-default' for not deducting tax on sitting fees paid to directors and thereby erred in deleting the short deduction u/s. 201 (1) and interest u/s. 201 (1A) without appreciating that the payment was made as honorarium for the managerial services rendered by the directors and was clearly in the nature of professional fees paid for the services rendered by them. (iv). On the facts and circumstances of the case and in law, the Id. CIT (A) erred in holding that no TDS is required to be deducted on directors' sitting fees as the amendment to the provisions of section 194J(ba) were made w .....

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..... sales through distributor after deducting the margin earned by the distributor/stockiest from the MRP as per the following examples:- If MRP of product is ₹ 100 then: DPCO NON DPCO MRP 100.00 100.00 ED 3.35 3.35 VAT 4.76 4.76 Ass Val 91.89 91.89 Ret Margin 14.70 18.38 Stk Margin 6.44 7.69 Dist Mar 3.62 3.46 Price to Dist 75.23 70.48 Price to Stks 78.85 73.94 Price to Retailer 85.30 81.62 Price to Customer 100.00 100.00 Since the .....

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..... s on due date by the assessee company. Similarly for exports made by the assessee company, the GM Finance of the assessee company stated during recording of statement on oath on 14.10.2011 that the assessee company is exporting formulations and bulk drugs to various countries. Finished goods are directly dispatched from manufacturing locations to customs ports. Export documentation is carried out by the commercial and logistic department who ensures all legal compliances and requisite documents with respect to pre and post shipment. Collections from overseas customers are being received directly in company s bank account. It was observed by the AO that there are three methods for the sale of the drugsmedicine by the assessee company. First through the consignment agents which are located in various parts of the country, secondly through distributors and thirdly through export of drugs. With respect to the commission agents, the assessee company is paying commission to the commission agents after deduction of tax at source u/s.194H of the Act . With regard to distributors, it was observed by the AO that the contention of the assessee company was that the drugs-medicine were sold .....

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..... terms of such arrangement is as under; i) On sale of goods by Unichem to its Distributor, ownership over goods pass to the distributor and thereafter Unichem does have any control over goods. ii) Distributor after purchasing goods form Unichem sell goods to the end customer's on its own and Unichem does not come in picture. iii) Distributors purchase goods from Unichem against advance or on payment against deliver or as per normal credit policy of the Unichem. The payment terms of the end customers is independently controlled by Distributors as per their trade policy. iv) Distributor issues sale invoice directly to the end customers and shows the sales so effected in its sales tax returns and assessed to sales tax. We understand that 'you have already verified this by issuing summons to few distributors. We request you to kindly give assessee copy of statement recorded, if any, of the distributors. v) Distributors hold all relevant registration in its name which is required in normal course of its distribution business of pharmaceutical products. vi) The stock of goods lying with distributors is not shown as stock of assessee. Insurance .....

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..... r consignee as the case may be. It is therefore understood amongst themselves that the discount/incentive/rebate is not but a guise for the commission payment. That the payments are nothing but commission payments embedded in mutually beneficial pricing structure. The amount retained in the form of Discount is nothing but income within the meaning of Section 194H of the Act. That the commission retained by distributor is not a discount as it is inextricably linked to the sale of goods. Thus the AO held that assessee company has failed to deduct the tax at source and the assessee company was liable to deduct tax at source u/ s.194H of the Act vide orders dated 30.03.2012. Accordingly, the AO held the assessee company as the assessee in default in terms of Section 201(1) 201(1A) of the Act for non deduction of tax at source on payment of commission and non-payment of interest thereon. The default was worked out by the AO as under, vide orders dated 30.03.2012: Commission Margin Amount TDS U/s. 194H @ 11.33% interest u/s. 201(1A) 3,301,895,785 3.46% .....

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..... he products batch wise according to FEFO in accordance with the draft guidelines on good distribution practices for pharmaceuticals products issued by the CDSCO (Central Drugs Standard Control Organization) and as per which pharmaceutical products are stored/distributed (first expiry/first out, FEFO) .The assessee company submitted that if the distributor is maintaining FEFO method and there are expiry of drugs, same are taken back and money refunded. The assessee company relied upon the decisions in the case of the Mother Diary 249 CTR 559 and Jai Drinks Private Limited 336 ITR 363 by Hon ble Delhi High Court and in the case of Fosters India Private Ltd. 29 SOT 32 and Government Milk Scheme 39 ITD 306 by Pune Tribunal . The assessee company also relied upon the decision of Hon ble Supreme Court in the case of Ahmadabad Stamp Vendors Association, 25 Taxman.com 201 (SC) (292). The CIT(A) after considering the submissions of the assessee company held that the assessee company is manufacturing and selling bulk drugs and formulations in their plants at Goa, Ghaziabad, Sikkim, Baddi etc. The assessee company have their own warehouses wherein they store manufactured products. When sur .....

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..... being not sustainable was ordered to be deleted vide orders dated 11.04.2014. 6. Aggrieved by the orders of the CIT(A) dated 11.04.2014, the Revenue is in appeal before the Tribunal. 7. The ld. DR submitted before us that the assessee company has given discount/incentives to distributors which are covered u/s. 194H of the Act and it was observed during the Survey conducted by the Revenue u/s 133A of the Act that the assessee company has paid these amounts of incentive/discounts to the distributors on which tax has not been deducted at source u/s 194H of the Act . The Ld. DR relied on the orders of the AO while on the other hand, the ld. Counsel of the assessee company submitted that the dealing between the assessee company and the distributors is based on principal to principal basis. The Ld. Counsel of the assessee company reiterated the submissions as made before the authorities below and relied upon the orders of the CIT(A), that there is sale of the products by the assessee to the distributors on principal to principal basis. The ld. Counsel drew our attention to the distribution agreement dated 01.07.2001 entered into by the assessee company with Rudra Pharma Distributo .....

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..... pany and the Rudra Pharma Distributors Ltd. which is placed in the paper book page No. 18 to 34 clearly reveals that the assessee company is selling goods/products i.e. drugs-medicine to the distributor which is being paid by the distributor on principal to principal basis and property in goods with all risk and rewards passes to the distributor at the time of selling of the goods by the assessee company to the distributor when the goods are delivered by the carrier to the distributor. In-fact the distributors are the customers of the assessee company to whom the sales of the products i.e. drugs-medicine were effected by the assessee company. It is pertinent to note that the assessee company is dealing in products/goods i.e. drugs-medicine and not in the services. The distributors are required to notify any shortages during shipping or handling within 7 days of arrival of products at final destination to the assessee company along with endorsement on Lorry Receipt of the transporter along with shortage certificates by the transporter to claim loss from the assessee company, in other situations the loss or damage to products shall be borne by the distributor. The drugs being medicin .....

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..... ur considered view is not covered u/s 194H of the Act and no tax was required to be deducted at source on these discount to MRP given by the assessee company to the distributors at the time of sale of drugs-medicine to the distributors. We hold accordingly. 9. The Second issue with which the Revenue is aggrieved is with respect to non deduction of tax at source @10% u/s 194J of the Act on payment of Director s sitting fee of ₹ 70,40,000/-. The assessee was show caused by the AO to explain why tax was not deducted at source on payment of Directors fee of ₹ 70,40,000/- paid by the assessee company. The assessee company replied as under: B) Non deduction of TDS in case of Directors-fees. 1. The obligation to deduct TDS under section 194J arises when the payment is made for any professional or technical services rendered by the person. 2. The non-executive directors have provided honorarium services and for the assessee has paid sitting fees to such directors: The non-executive directors have not provided any technical or professional services to the assessee and therefore payment of sitting fees does not constitute payment of professional or technical s .....

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..... t no tax was deducted at source on payment of Director s fee as the same does not attract the provisions of Section 194J of the Act.The assessee company relied upon the decision of Pune Tribunal in the case of Bharat Forge Limited and also decision of Hon ble Bombay High Court in the case of CIT v. Lady Navajbai R.J.Tata(1947) 15 ITR0008(Bom HC) whereby it was observed that the payment made to taxpayer is neither salary nor wages and can only be taxed as income from other sources. Thus fees paid to Director cannot be considered as profit or gain of business or profession or salary. The CIT(A) observed that amendments to Section 194J(1) (ba) of the Act are w.e.f. 1-7-2012 and as the assessment year involved in the instant appeal is 2009-10, the CIT(A) vide orders dated 11.04.2014 held that the assessee company cannot be held as assessee in default for not deducting tax on sitting fee paid to its Directors and hence levy of tax and interest for the said default being not sustainable was ordered to be deleted . 11. Aggrieved by the orders dated 11.04.2014 passed by the CIT(A) , the Revenue is in appeal before the Tribunal. 12. The Ld. DR relied upon the orders of the AO while .....

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..... that there was no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. We find the provisions of s. 194J(1)(ba) speak of any remuneration or fees or commission by whatever name called other than those on which tax is deductible under s. 192 to a director of a company on which tax has to be deducted at the applicable rate and the above provision has been inserted by the Finance Act, 2012 w.e.f., 1st July, 2012. We, therefore, find force in the submission of the learned counsel for the assessee that no tax is required to be deducted under s. 194J out of such director's sitting fees for the asst. yr. 2007-08. In this view of the matter, the order of the CIT(A) is set aside and the ground raised by the assessee on the issue of TDS on sitting fees paid to directors is allowed. Thus, the ld Counsel of the assessee company contended that the assessee company cannot be held as assessee in default for non deduction of tax at source on payment of Directors fee as Section 194J was amended wef 1-7- 2012 and such amendment is prospective in nature and Pune Tribunal in Bharat Forge case has already held that no tax was re .....

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