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TMI Blog2020 (11) TMI 906X X X X Extracts X X X X X X X X Extracts X X X X ..... ed beyond the time limit stipulated under section 201 (3) of the Act; it is time barred and needs to be quashed. Assuming but not accepting and without prejudice to the above, the learned CIT(A) further erred in not appreciating that even on the basis of logic given by the Assistant Commissioner of Income Tax, TDS Circle, Ahmedabad, that time limit is to be decided based on the financial year in which the statement is filed, is accepted, only for the statement relating to fourth quarter of F.Y. 2010-11, which was filed in May 2011 (in F.Y. 2011-12), the A.O can pass order u/s 201 of the Act up to 31.03.2014 i.e. within two years from end of F.Y. 2011-12. 2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the order passed by the Assistant Commissioner of Income Tax, TDS Circle, Ahmedabad, wherein the Appellant company was held as "assesse-in-default" for not deducting tax at source u/s. 194H of the Act in relation to certain payments in the nature of Selling and Marketing expense by treating the same as commission paid to the doctors. 3. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red on meeting and travelling (debited under the head Marketing Development and Promotional Expenses) as commission liable to IDS under the provisions of section 194H of the Act, without appreciating the fact that the said expenditure have been incurred by the Appellant mainly on various kind of field meetings organized for product promotion and travelling relating to said meetings. 8. Without prejudice to ground no. 2 to 4 above, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing officer to treat 20% of Product Promotion expenditure as commission liable for TDS under section 194H, being expenditure relating to doctors. 9. Without prejudice to ground no. 2 to 4 above, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing officer to treat 20% of MR expenses as liable for TDS under provisions of section 194H of the Act on the ground the said expenses are relating to doctors. 10. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in dismissing the grounds relating to interest u/s. 234A/234B/234C/234D of the Act and initiation of pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... General Manager Finance and Accounts and Shri Rajnikant Patel General Manager Marketing in the statements furnished under Section 133A and under Section 131(1) of the Act dated 10.10.2013 and 06.12.2013 respectively. 7. The reasoning by the assessee for the aforesaid expenses was submitted that the doctors, stockiest /distributors and field staff provide extra business to it (assessee) or help in getting larger customer base. 8. However, the AO was of the view that these expenses are in the nature of commission and liable to tax deduction @ 10 % under Section 194H of the Act but the assessee has failed to do so. Accordingly, the AO issuedthe show cause notice dated 5.3.2014 proposing the assessee as assessee in default under Section 200(1)/201(1A) of the Act for non-deduction of TDS under section 194H of the Act. 9. The assessee in response to show cause notice vide letter dated 13.3.2014 submitted that none of the payment mentioned in show cause arein the nature of commission as envisaged under Section 194H of the Act. The assessee further made submission with respect to each item of expenses covered in the show cause notice which is as follows: 1. Regional and Scientific con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er deducting tax @ 10% whereas the tax was deducted @ 2% on the payments made to conference organizer and travel partner for staff meeting. But there was no TDS liability on payment made for the distribution of books & journals and gift & articles etc. to stockiest, distributer, CFA and filed staff. 4. Product promotion expenses: The assessee submitted that expenditure incurred under this head includes for the distribution of some articles like surgical equipment, momentum etc. which were given to medical fraternity member by the field staff while meeting for the promotion of new pharmaceuticals products. Accordingly the assessee claimed that the payment of this nature does not attract the provision of tax deduction under chapter XVII-B of the Act. 5. Camp expenses: The assessee submitted that it organized medical camps for public and payment under this head includes payment for laboratory charges and reimbursement to field staff for camp organization related expenses. The assessee claimed that the payment made to laboratory was paid after deducting taxes @ 2% under section 194C of the Act. 6. Academic work shop: The assessee submitted that it organized CME for medica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibing the particular drugs. Accordingly, such expenses as discussed above partake the character of the commission and therefore the same are subject to TDS under section 194H of the Act. 11. The AO, while invoking the provisions of Section 194H of the Act on the expenses as discussed above to facilitate the doctor and other stakeholders also made the reference to following rules and regulations, having bearing on the profession of the Doctors: i. The Medical Council of India guidelines on industry - physician relationship: braking the conspiracy of silence. ii. India medical Council (professional conduct, etiquette and ethics) regulation 2009. iii. Code of pharmaceutical marketing practices 2007 prescribed by the Organization of pharmaceutical producers of India. iv. International Federation of pharmaceutical Manufacturers Association code of pharmaceutical marketing practices (IFPMA 2000). 12. The crux of the above is that the gifts to the doctors was discouraged in the aforesaid rules and regulations as it is an unethical practice for both the pharmaceutical industries as well as the doctors. 13. In view of the above, the AO held the assessee as assessee in default u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ription habits in favour of the pharmaceutical company providing gifts. The services rendered by the doctor and payment thereof falls within the definition of "commission" as suggested by the Act and various case laws. The rationale given by the assessee for justifying the expenses as essential for brand building is considered unfortunate in the wake of "unethical" tag attached to such activity by both the Medical Council of India (Doctor's fraternity) and code of ethics laid down by the various pharmaceutical associations/organizations and is unacceptable. 8. Hence, the assessee was liable for deducting TDS @ 10% u/s 194H of the Act w.r.t. the below mentioned expenses but has failed to do so. S.No. Ledger head F.Y.2010-11 (in lacs of Rs.) 1 Regional Conference 455.4 2 Scientific Conference 1832.2 3 Sales Promotion Exps 2281 .3 4 Marketing Development & Promotional Exps 6097.0 5 Product Promotional Exps 4000.8 6 Camp Exps 54.4 7 Academic Workshops 27.9 8 M R Exps 5020.5 9 Travelling Exps - TOTAL 19769.5 Therefore, the assessee is treated as "assessee in default" u/s 201(1) /201(1A) of the Act for not deducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eve the same it has incurred various expenses in order to develop relationship and large network. Hence, in such circumstances the rejection of its contention and explanations without having proper consideration and making huge demand is unreasonable. 18. The assessee also claimed that the AO does not poses the power to reclassify or re-characterize the nature of payment under Chapter XVIB of the Act. 19. The Learned CIT(A) after considering assessment order and submission made by the assessee observed as under: "6.2.6 A perusal of the order shows that after being confronted with the content of the email correspondences between the MD and CFO of the appellant company and medical representatives and their statements recorded during the survey proceedings, it has been acknowledged by the appellant that various sales promotion expenses were also incurred on doctors in the form of gifts and facilities and were debited under various heads, in the order; the AO has cited various email correspondences between the field executives of the appellant company and senior officers of the company to bring forth instances to show that various expenses were incurred by the appellant on doctors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious expenses under this head the learned CIT (A) held as under: (i) Payment made for work assignment in order to obtain expert opinion are wholly and exclusively for its business and that too after deduction of taxes. Thus contention of assessee was allowed. (ii) Payment made for meeting of assessee staff, organization of functions or tour for stockiest,award function for staff and expenses made for export which are not in the nature of commission. (iii) Participation expenses paid to or for doctors are in the nature of commission and therefore liable for TDS under section 194H of the Act but after providing the credit for 2% of taxes already deducted by the assessee. 3. Marketing development and promotion expenses With respect to various expenses under this head the Learned CIT(A) held as under: (i) Payment toward work assignment was made after deducting taxes. Hence no further deduction is required. (ii) Payment toward meeting and traveling, gift to CFA, gift to staff/stockiest, medical books & journals, export center cost are not in the nature of commission. Hence there is no requirement for the deduction of TDS. (iii) Participation expenses are incurred for o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 194H, it is clear that any person, not being an individual or Hindu undivided family, who is responsible for paying by way of commission or brokerage shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash whichever is earlier, is liable to deduct tax. Explanation (1) to section 194H defines "Commission or Brokerage" which includes any payment received or receivable, directly or indirectly by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities. On the facts of the present case, as per the tripartite agreement entered into between the assessee and the dealer, there is no service provided by the dealer to the assessee in the course of buying or selling goods, inasmuch as, the assessee directly sells goods to the dealer and the dealer makes the payment after collecting it from the consumers and, therefore, it is a transaction on principal to principal basis and, therefore, the payment made by the dealer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a vicarious or substitutionary 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-O, 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 this underlying feature of the tax deduction at source mechanism. Section 190 makes it clear that the scheme of tax deduction at source is one of the methods of recovering the tax due from a person and it is notwithstanding the fact that the tax liability may only arise in a later assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence 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. [Para17]" It was also contended that there was no one-to-one identification between the expenses incurred and the benefit availed by the doctors/other stakeholders out of such expenses. Therefore it cannot be said that the expenses were incurred by the assessee to extend the benefit to the doctors and other stakeholders. 28. On the other hand, the Learned DR submitted that the AO in his order has given a clear-cut finding that there was the relationship of principle and agent between the assessee and the stakeholders. As per the Learned DR the whole of the business of the assessee was based on the prescription of the doctors for the particular drugs and therefore the assessee has incurred such expenses to extend the benefit to the stakeholders. The Learned DR before us vehemently supported the stand of the authorities below by reiterating the findings cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any transaction relating to any asset, valuable article or thing, other than securities. 33. The definition of 'commission or brokerage' as contained in the above Explanation to Section 194H of the Act cannot be interpreted so widely as to include any payment receivable, directly or indirectly, for services in the course of buying or selling of goods. To fall within the Explanation, the payment received or receivable, directly or indirectly, is by a person acting on behalf of another person, (i) for services rendered (not being professional services), or (ii) for any services in the course of buying or selling of goods, or (iii) In relation to any transaction relating to any asset, valuable article or thing. 34. The element of agency has to be there in the case of all services or transactions contemplated by the said Explanation as held by the Hon'ble Gujarat High Court in the case of PCIT vs. Gujarat Narmada Valley Fertilizer and Chemicals Limited (supra) and also held in case of Ahmedabad Stamp Vendors Association v. Union of India [2002] 124 Taxman 628 (Guj.) which was affirmed by the Hon'ble Supreme court, wherein it was held as under: "It was also not possib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very of the milk and the other products to the concessionaire." We also find that there being no relationship of a principal and agent between assessee and retailers, trade incentives paid by assessee to retailers through del credere agentsin order to boost its sale could not be treated as commission for purpose of Section 194H of the Act as held by Hon'ble Andhra Pradesh and Telangana High Courts in case of CIT v. United Breweries Ltd. [2016] 387 ITR 150 (T& AP). The relevant extract reads as under: "Transactions of sale of beer by assessee to APBCL and sale of beer by APBCL to retail traders were independent of each other, and were on a principal to principal basis. No services were rendered by the retail dealers to the assessee, and the incentive given by the assessee, to the retailers as trade discount, were only to promote their sales. In the absence of relationship of a principal and agent, as there was no direct relationship between the assessee and the retailer, the discount offered by the assessee to the retailers could only be treated as sale promotion expenses, and not as commission, as no services were rendered by the retailers to the assessee. Section 194H was not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record suggesting that there existed any agency relationship between the assessee and the other stakeholders. Thus, in the absence of such evidence, we hold that the provisions of Section 194H of the Act cannot be applied. It is also pertinent to note that in normal business practice business organizes various functions and tour and extend gift etc. for their distributor, retailer and marketing personal in order to encourage them for better performance which help the business in achieving larger turnover and brand value. These expenses are incurred exclusively for purposes of business and product promotion. By no means these can be classified as commission as envisaged under Section 194H of the Act. 40. In addition to the above, we also note that tax under Section 194H of the Act is to be deducted at source,- "(a) either at the time of credit of such income to the account of the payee, or (b) at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier." Under Explanation (iv) to Section 194H of the Act requires that where any income is credited to any account, whether called 'suspense account' or by any other nam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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