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2016 (1) TMI 1087 - ITAT MUMBAI

2016 (1) TMI 1087 - ITAT MUMBAI - TMI - TDS u/s 194H - whether relationship between the assessee and distributors is in the nature of principal to principal and not that of principal to agent? - Held that:- As observed that the assessee company is raising sale invoice’s on the distributor M/s Rudra Pharma Distributors Limited which are placed on the paper book filed by the assessee company while the ledger account showing invoices raised and payments received from distributor M/s Rudra Pharma Di .....

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wnership got vested in the said distributors on the delivery of goods by carrier to the said distributor which is also supported by the clause 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 .....

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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 in nature to be applicable only from 01-07-2012 as it has caste an additional burden on the tax-payer by way of deduction of tax at source on remuneration .....

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vour of assessee. - I.T.A. No. 4592, 4593/Mum/2014 - Dated:- 29-1-2016 - Shri Saktijit Dey, Judicial Member And Shri Ramit Kochar, Accountant Member For the Appellant : Shri Airiju Jai Karan ( DR ) For the Respondent : Shri Nitin Joshi ORDER Per Ramit Kochar Accountant Member: These are two Appeals by the Revenue directed against the common Order by the Commissioner of Income Tax (Appeals)-13, Mumbai ( CIT(A) for short) dated 11/04/2014 , for the assessment year s 2009-10 and 2010-11. The identi .....

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ith the Tribunal in ITA no. 4592/Mum/2014 for the assessment year 2009-10 read as under: (i). On the facts and circumstances of the case and in law, the Id. CIT (A) has erred in holding that the relationship between the assessee and distributors is in the nature of principal to principal and not that of principal to agent and held that the assessee company was not liable to deduct TDS u/s. 194H of the I.T. Act and thereby erred in deleting the non deduction/short deduction u/s. 201(1) and intere .....

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nother 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 m .....

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to the provisions of Income Tax Act, 1961, should be taken as curative in nature and should be given retrospective effect. 2. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary at the time of the hearing of the case or thereafter. 3. The order of the CIT (A) being erroneous be set aside and Ld. A.O's order be restored. 3. The brief facts of the case are that the assessee company is engaged in the business of manufacturing and trading of formul .....

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he above Depot/ warehouse store the finished products for final dispatch. Finished products are dispatched from own manufacturing locations/ warehouse to Distributors and Consignment Agents based on Indents/order received from them. The assessee company is selling the formulations products to Distributors on Principal to Principal basis and to Stockiest through Consignment agents. The consignment agents are selling the finished formulations to various stockiest. Bulk Drugs and Intermediates are .....

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distributors, stockiest and consignment agent. The assessee company is also exporting products, it was observed by the AO that the assessee company has fixed the MRP for its products beyond which the same cannot be sold to the end user. The assessee company is accounting its 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 .....

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to be to the tune of ₹ 130 crores. It was observed by the AO that assessee company is paying commission to its Consignment Agents and deducting tax at source thereon at the rate applicable u/s. 194H of the Act. It was also observed by the AO that assessee company has given discounts/schemes to distributors and stockiest and no tax is deducted at source thereon. The statement on oath was recorded by the Revenue of the General Manager Finance of the assessee company on 14/10/2011 who stated .....

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s stated that collections are received from distributors, consignment agents and stockiest in the assessee s bank account. Similarly for procurement it was stated that raw material , packing material etc are procured after receipt of approved requisition from manufacturing locations. The orders are placed based on requisition and forecast. On receipt of order, the vendor supplied the material on the basis of terms and conditions contained in the purchase order. After receipt of material, the pay .....

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assessee company and sent to respective locations from port. The payments in foreign currency are paid to vendors 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 .....

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t 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 to the distributors who then further sell them to the stockiest/retailers and finally they are sold to the ultimate customers. The contention of the assessee company is that the distributors .....

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paid by them in first instance. Thus the distributors per se has no risk and all the risk is borne by the assessee company. Furthermore, it is the assessee company who decide the margins to be charged by the distributors. This factors leads to an inference that the nature of the relationship may be one of principal and agent. The AO held that to establish this beyond doubt, enquiries are required to be made with respective distributors with regard to their function and duties to see whether the .....

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being given by the assessee company to the extent of ₹ 10.59 crores on which no tax was deducted at source which are likely to be in the nature of commission paid to the distributors in addition to the margin on which TDS should have been deducted u/s. 194H of the Act. The assessee company in reply submitted in respect thereof as under:- A) Non Deduction of TDS in case of Distributors, 1. The assessee is engaged in the business of manufacturing and trading of Formulations and Bulk Drugs. 2 .....

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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 di .....

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ws that title to the goods vests with the distributors once sale is made to them. vii) The distributor has maintained requisite infrastructure and manpower for its business. viii) In case of any breakage, leakage, etc, distributor is responsible and liable for the loss and not Unichem. However, in case of expired product, Unichem takes back the expired products as per industry norms, since; pharmaceutical products are consumed by the general public and any expired product can cause serious healt .....

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. On verification of expired goods at assessee's depot at Ghaziabad assessee destroy the expired goods under supervision of Quality Assurance person. In view of the above your good self will appreciate that assessee and the distributors are functioning on principal to principal basis and not on principal to agent basis. Taking into consideration the principal to principal basis the assessee is not required to deduct TDS u/ s 194H as the margin earned by the distributors does not constitute c .....

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he course of buying or selling of goods within the meaning of section 194H of the Act. That the pricing structure and pricing factor is closely known to three parties, which is the assessee company, distributor and/or the C/F or 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 structu .....

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ult 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% 10,84,06,660 1,22,82,475 58,95,588 Total 18178062 5. Aggrieved by the orders dated 30.03.2012 passed by the AO u/s 201(1) and 201(1A) of the Act, the assessee company filed the fir .....

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borne by the assessee company and hence there is no risk to distributors , the assessee company filed a copy of distributors agreement entered into between the assessee company and M/s. Rudra Pharma Distributors Private Limited. The clause 4.4 provides that any shortage of products during shipping or handling must be notified to the assessee company within seven days of arrival of products and final place of destination and the shortage, endorsement on L/R of the transporter along with the shor .....

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ricelist sent to the distributor in advance by assessee company from time to time. The assessee company also relied upon the clause 5.5 dealing with risk of loss of an damage to the product, the same shall pass to distributor from the time of delivery by the carrier at the destination. The assessee company has submitted that observation of the AO that expired drugs are returned by the distributor to the assessee company and the money is refunded is correct. However, as per clause 7.5 of the dist .....

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e 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 s .....

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credited only for the net amount received/ receivable from the distributors after deducting discount as the assessee company is giving discounts/schemes to the distributors and stockiest. The AO held that no tax has been deducted on the said discount; same is in the nature of commission and thus was liable for tax u/s. 194H of the Act and as per the AO the assessee having not deducted tax at source on the said amount given to their distributors , hence were liable for the consequences in the fo .....

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nsure their reputation, the relationship is that of principal to principal and not of principal and agent. The CIT(A) observed that he has gone through the decisions relied upon by the AO and found that these decisions are dealing with the sale of services and not product per se. while in the instant case the sale is that of a product i.e. medicines and not of any service which assessee company is doing through their distributors. The assessee company has given the discount to the distributors o .....

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f the AO to hold the assessee company in default for not deducting tax on the commission paid and consequently levy of tax and interest amounting to ₹ 1,81,78,062/-, 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 .....

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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 Distributors Ltd., the ld. Counsel of the assessee company submitted that the terms and conditions of the agreement clearly stipulate dealing bet .....

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the discount is given on the MRP to the distributors which is in the nature of discount and not commission and no tax is required to be deducted at source under the provisions of the Act. The assessee company submitted as under the scheme of discount offered by the assessee company: 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 .....

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any 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 th .....

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ng 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 medicines contains certain restriction on the sale w.r.t. good governance and conduct by the distributors to follow first expiry and first out basis as the medicines having expiry could not be sold after the stipulated date of expiry , otherwise it will be health hazard to the consumers , the assessee compa .....

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se it could have severe health hazard impacts on the consumer which is a normal market practice in the industry but the same is not decisive to conclude that the property in the goods with all risks and rewards have not passed to the distributor on sale of products by the assessee company to the distributor at the time of delivery by the carrier to the distributor as per stipulated terms of distribution agreement. We have also observed that the assessee company is raising sale invoice s on the d .....

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ices (including VAT) to their customers , whereby all the above facts clearly reflects that the distributors is buying the products from the assessee company and then selling the same in its own right with all risks and rewards of ownership got vested in the said distributors on the delivery of goods by carrier to the said distributor which is also supported by the clause 5 of the distribution agreement dated 01-07-2001. Thus, we, therefore, hold that the assessee company has paid discount to MR .....

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f 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 .....

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director (not being in the nature of salary) will attract TDS u/ s 194J as fee for professional or technical services at the rate of 10% is prospective from A Y 2013-14 . only Memorandum Explaining the Bill provides as under; Under the existing provisions of the Income-tax Act, a company, being an employer, is required to deduct tax at the time of payment of salary to its employees including managing director/whole time director. However, there is no specific provision for deduction of tax on t .....

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11. The AO after considering the replies of the assessee company held that the assessee company ought to have deducted tax at source on Directors sitting fees which is nothing but fees for managerial services within the meaning assigned u/s. 194J of the Act. Hence, the AO vide orders dated 30-03-2012 held that the assessee company has defaulted on account of the non deduction of tax at source on payment of Directors fee of ₹ 70,40,000/- u/s 194J of the Act and is treated as an assessee in .....

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rce 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 consi .....

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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 ld. Counsel of the assessee company submitted that amendment made in section 194J of the Act by insertion of sub-section (ba) to Section 194J(1) is prospective as the said Section is amended w.e.f. 1-7-2012 and the instant appeal is for assessment year 2009-10. The ld. Counsel of the assessee company relied upon the decision of Pune T .....

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ctors. According to the learned counsel for the assessee the provision of s. 194J is not applicable to such sitting fees since fees do not fall in any of the categories of professional service as per Explanation to s. 194J. Further, no such objection was taken in the past by the Department for such nondeduction and in view of insertion of sub-s. (ba) to s. 194J(1) TDS is required to be made out of such director sitting fees w.e.f. 1st July, 2012. Therefore, for non-deduction of tax at source fro .....

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architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board. We, therefore, find force in the submission of the learned counsel for the assessee that sitting fees paid to the directors do not amount to fees paid for any professional services as has been mentioned in the Explanation to s. 194J(1). We further find from the Memorandum Explaining the Provisions of the Finance Bill, 2012 .....

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t, 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 .....

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pectful agreement with the decision of the Pune Tribunal in the case of Bharat Forge Limited(supra) that no tax is to be deducted at source on Director sitting fee payable to Director u/s 194J of the Act prior to the amendment w.e.f. 01-07-2012 in Section 194J by insertion of sub-section (ba) to Section 194J(1) of the Act . The insertion of sub-section (ba) to Section 194J of the Act has clearly stipulated that tax is to be deducted at source on any remuneration or fees or commission by whatever .....

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s no provision for deduction of tax at source prior to the amendment by Finance Act,2012 w.e.f. 01-07-2012 on payment of remuneration or fee or commission by whatever name called to Directors other than those on which tax is deductible at source u/s 192 of the Act. 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 .....

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