ITO (TDS) 2(5), MUMBAI V. PFIZER LTD, MUMBAI

ITA 1765/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8344 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 01-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 05-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A C TEJPAL
• Assessee Lawyers: CHARUL TOPRANI
• Keywords: Recovery proceedings; Business income; Non-deduction of tax
• Section: 133A; 194C; 201(1)

Judgement Text

ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 1 OF 14 IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1667/MUM/2010 (ASSESSMENT YEAR: 2007-08) PFIZER LTD., PFIZER CENTRE, PAREL CENTRE, S.V. ROAD, JOGESHWARI (WEST), MUMBAI 400012 PAN:AAACP 3334 M VS. INCOME TAX OFFICER (TDS) (OSD) RANGE-2, KG MITTAL AYURVEDIC HOSPITAL BUILDING, CHARNI ROAD, MUMBAI 400002 (APPELLANT) (RESPONDENT) ITA NO.1765/MUM/2010 (ASSESSMENT YEAR: 2007-08) INCOME TAX OFFICER (TDS) (OSD) RANGE-2, KG MITTAL AYURVEDIC HOSPITAL BUILDING, CHARNI ROAD, MUMBAI 400002 VS. PFIZER LTD., PFIZER CENTRE, PAREL CENTRE, S.V. ROAD, JOGESHWARI (WEST), MUMBAI 400012 PAN:AAACP 3334 M (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI PERCY PARDIWALLA, MS. VASANTI PATEL & MS. CHARUL TOPRANI DEPARTMENT BY: SHRI A.C. TEJPAL, CIT (DR) DATE OF HEARING: 01/10/2012 DATE OF PRONOUNCEMENT: 31/10/2012 O R D E R PER B. RAMAKOTAIAH, A.M. THESE ARE THE CROSS APPEALS BY ASSESSEE AND THE RE VENUE AGAINST THE ORDERS OF THECIT (A)-14 MUMBAI DATED 31 .12.2009. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO THE LEVY OF TAX UNDER SECTION 201(1) AND INTEREST UNDER SECTION 201(1A) OF THE IN COME TAX ACT ON THE REASON THAT ASSESSEE DEFAULTED ON NOT DEDUCTING THE TDS ON CERTAIN EXPENDITURE/PAYMENTS MADE BY IT. ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 2 OF 14 2. BRIEFLY STATED, THE PROCEEDINGS UNDER SECTION 133A WERE CONDUCTED ON ASSESSEES PREMISES ON 8.9.2008 AND AO PASSED THE ORDER UNDER SECTION 201(1) & 201(1A) DATED 30.12.20 08 CONSIDERING THE FOLLOWING BROADLY CATEGORIZED AMOUNTS AS AMOUNT S COVERED BY TDS PROVISIONS ON WHICH TDS WAS NOT MADE: A) PROVISION MADE BUT TAX NOT DEDUCTED UNDER SECTION 4 0(A)(I) & 40(A)(IA) B) PURCHASE OF TRADED GOODS C) PURCHASE OF PACKING MATERIAL D) CLINICAL TRIAL EXPENSES 3. IT WAS THE CONTENTION OF AO THAT ASSESSEE MADE PROV ISION FOR EXPENSES FOR AN AMOUNT OF ` .10,01,98,450/- AND THERE WAS SHORT DEDUCTION OF TAX AT ` .2,06,45,686/- WHICH IS TO BE DISALLOWED UNDER SECTION 40(A)(I) AND 40(A)(IA). ASSESSEE WAS REQUIR ED TO SHOW CAUSE WHY THE SAID AMOUNT COULD NOT BE CONSIDERED FOR DET ERMINING THE LIABILITY TO THE TDS UNDER SECTION 201(1) AND 201(1 A). AFTER CONSIDERING ASSESSEES OBJECTIONS AO DETERMINED THE AMOUNT OF TAX TO BE DEDUCTED AND THE SAME WAS DEMANDED FROM ASSES SEE UNDER SECTION 201(1). AO ALSO LEVIED INTEREST UNDER SECTI ON 201(1A). LIKEWISE, THE AMOUNTS UNDER THREE OTHER HEADS WERE ALSO DETERMINED BY AO UNDER THE ABOVE PROVISIONS. 4. THE CIT (A) AFTER CONSIDERING ASSESSEES DETAILED S UBMISSIONS, HOWEVER, DID NOT AGREE WITH THE ASSESSEE CONTENTION S 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 V ARIOUS CASE LAW AND THE ORDERS OF THE JURISDICTIONAL HIGH COURT, TH E CIT (A) DELETED THE DEMANDS SO MADE BY AO HOLDING THAT THE PROVISIO NS OF TDS ARE NOT APPLICABLE TO THE PAYMENTS MADE UNDER THESE HEA DS. ACCORDINGLY ASSESSEE IS AGGRIEVED ON THE AMOUNT CON FIRMED UNDER ITEM (A), WHEREAS THE REVENUE IS AGGRIEVED ON THE A MOUNTS DELETED ON THE ITEMS (B) TO (D). ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 3 OF 14 ITA NO. 1667/MUM/2010 : 5. THE LEARNED COUNSEL REITERATED THE SUBMISSIONS MADE BEFORE AO AND THE CIT (A) TO SUBMIT THAT ASSESSEE IS IN TH E PRACTICE OF MAKING PROVISION FOR EXPENSES AT THE END OF THE YEA R AS IT HAS MULTIFARIOUS LOCATIONS AND INNUMERABLE TRANSACTIONS AND SINCE ALL THE BILLS WOULD NOT BE RECEIVED, WITHOUT MAKING SPE CIFIC ENTRIES INTO ACCOUNTS OF THE PARTIES, MAKES PROVISION FOR EXPENS ES. NEXT YEAR THE ENTIRE PROVISION OF EXPENSES WAS WRITTEN BACK AND T HE ACTUAL AMOUNTS PAID TO THE RESPECTIVE PARTIES WERE CREDITE D TO THEIR RESPECTIVE ACCOUNTS AND TDS AS PER THE PROVISIONS A RE BEING MADE. IN THIS CONTEXT THE METHOD OF ACCOUNTING FOLLOWED B Y ASSESSEE, ENTRIES MADE IN THE BOOKS OF ACCOUNT AND THE RELIAN CE ON THE BOARDS CIRCULAR NO.288 OF 1980 WERE RELIED UPON. I T WAS THE CONTENTION THAT IT IS NOT A CONSTRUCTIVE PAYMENT MA DE TO ANY PAYEE AS PER THE PROVISIONS OF THE ACT AND WHEN ASSESSEE IS MAKING PAYMENT, IT WAS FOLLOWING THE TDS PROVISIONS. IT WA S FURTHER SUBMITTED THAT WHEN PAYEE IS NOT KNOWN OR DETERMINE D, TDS CAN NOT BE MADE AND RELIED ON THE ORDER OF THE ITAT IN THE CASE OF INDUSTRIAL DEVELOPMENT BANK OF INDIA VS. INCOME TAX OFFICER, 107 ITR 45 (MUM). 6. IT WAS FURTHER SUBMITTED THAT ASSESSEE HAS ADDED BA CK THE ENTIRE AMOUNT OF PROVISION MADE AND FILED COPIES OF THE COMPUTATION STATEMENTS AS WELL AS THE ORDERS PASSED BY AO AFFIR MING THE DISALLOWANCE SO MADE IN THE COMPUTATION MADE UNDER SECTION 40(A)(I). THE LEARNED COUNSEL ALSO PLACED ON RECORD THE STATEMENT INDICATING THE AMOUNT OF PROVISION MADE UNDER VARIO US HEADS AND THE ACTUAL AMOUNT PAID IN THE LATER YEAR INCLUDING THE TAX DEDUCTED AT SOURCE AND RECONCILING THE AMOUNTS ON THIS ISSUE . ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 4 OF 14 7. THE LEARNED DR, HOWEVER, SUBMITTED THAT ASSESSEE HA VING MADE PROVISION FOR EXPENSES IN THE BOOKS OF ACCOUNT SHOULD HAVE DEDUCTED THE TAX AND THEREFORE, THE ORDERS OF AO AN D THE CIT (A) REQUIRED TO BE CONFIRMED. 8. WE HAVE CONSIDERED THE ISSUE. THERE IS NO DISPUTE W ITH REFERENCE TO THE FACT THAT ASSESSEE MADE PROVISION FOR EXPENSES TO AN EXTENT OF ` .10,01,98,459/- ON ABOUT 23 ITEMS IN THE BOOKS OF ACCOUNT. THERE IS ALSO NO DISPUTE TO THE FACT THAT ENTIRE PROVISION SO MADE WAS DISALLOWED IN THE COMPUTATION UNDER THE HE AD TAX DEDUCTIBLE BUT NOT DEDUCTED ON PROVISIONS AS ON 31 ST MARCH, 2007 IN THE COMPUTATION OF INCOME. THEREFORE, THE ENTIRE PROVISION SO MADE WAS DISALLOWED UNDER SECTION 40(A)(I)/(IA) WHI LE FILING THE RETURN OF INCOME BY THE ITSELF. 9. AS EXPLAINED THE GENERAL ENTRIES PASSED BY PFIZER L TD, IN THE BOOKS OF ACCOUNT ARE AS UNDER: ANNEXURE-1 JOURNAL ENTRIES PASSED BY PFIZER IN THE BOOKS OF AC COUNT: A) AT THE TIME OF MAKING THE YEAR END PROVISION PARTICULARS DEBIT ( ` .) CREDIT( ` .) EXPENSE A/C DR. XXX TO PROVISION FOR EXPENSES A/C XXX B) AT THE TIME OF REVERSAL ON FIRST DAY OF THE NEXT FI NANCIAL YEAR PARTICULARS DEBIT ( ` .) CREDIT ( ` .) PROVISION FOR EXPENSES A/C DR. XXX TO EXPENSES A/C XXX C) AT THE TIME OF MAKING PAYMENT TO PARTIES ON THE BAS IS OF THE ACTUAL INVOICES RECEIVED BY PFIZER. PARTICULARS DEBIT ( ` .) CREDIT ( ` .) EXPENSES A/C DR. XXX TO PARTYS A/C XXX TO TDS PAYABLE A/C XXX 10. AS CAN BE SEEN FROM THE ABOVE ENTRIES, WHEN THE PAY MENT/ CREDIT WAS MADE TO THE INDIVIDUAL PAYEE IDENTIFIED, ALL THE PROVISIONS ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 5 OF 14 OF TDS ARE MADE APPLICABLE WHETHER TO A RESIDENT OR TO A NON- RESIDENT AS THE CASE MAY BE. IN THE ABSENCE OF ANY IDENTIFIABLE PAYEE, THE PROVISIONS OF TDS ARE NOT APPLICABLE AS WAS HELD BY THE ITAT IN THE CASE OF IDBI VS. I.T.O 107 ITD 45(MUM). IN THAT THE CASE THE FACTS ARE AS UNDER: THE ASSESSEE, A FINANCIAL INSTITUTION, WAS FOLLOWI NG FINANCIAL YEARS AS ITS ACCOUNTING YEAR. IT ISSUED ' REGULAR RETURN BONDS'. THE TERMS AND CONDITIONS FOR PAYMENT OF INTEREST ON THESE BONDS PROVIDED THAT THE ASSESSEE WAS LIABLE TO PAY INTEREST AT THE RATE OF 16 PER CENT ANNUALLY IN RESPECT OF REGULAR RETURN BONDHOLDERS, THAT THE INTEREST WAS PAYABLE ON 9TH JUNE OF EACH CALENDAR YEAR, EXCE PT IN THE YEAR OF MATURITY, WHEN INTEREST WAS PAYABLE ON MATURITY, THAT THE INTEREST, EXCEPT AT THE LIME OF MATURITY, WAS TO BE PAID TO THE PERSON WHOSE NAME WAS REGISTE RED IN THE RECORDS OF THE ASSESSEE COMPANY AS ON 15TH MAY OF EACH CALENDAR YEAR, AND THAT THE BONDS WERE TRANSFERABLE BY ENDORSEMENT AND DELIVERY, AND THE ASSESSEE DID NOT, IN ANY WAY, CONTROL SUCH TRANSFER OF OWNERSHIP. THE ASSESSEE AT THE END OF THE RELEVANT PREVIOUS YEAR AS ON 31.3.1994 MADE A PROVISION FOR 'INTEREST ACCRUED BUT NOT DUE' IN RESPECT OF REGULA R RETURN BONDS AND CLAIMED DEDUCTION OF THE SAME IN COMPUTAT ION OF BUSINESS INCOME. THE ASSESSEE FURTHER CREDITED T HE SAID PROVISION TO THE INTEREST PAYABLE ACCOUNT AND REFLECTED THE SAME IN THE BALANCE SHEET. THE ASSESS EE DID NOT DEDUCT TAX AT SOURCE IN RESPECT OF THE PROVISIO N SO MADE, THE ASSESSING OFFICER NOTICED THAT THE ASSESS EE DID NOT DEDUCT TAX IN TERMS OF PROVISION SO MADE TH OUGH IN TERMS OF THE PROVISIONS OF SECTION 193, PARTICUL ARLY READ WITH EXPLANATION THERETO, IT WAS REQUIRED TO DEDUCT TAX AT SOURCE FROM THE CREDIT TO 'INTEREST PAYABLE ACCOUNT ' AND DEPOSIT THE SAME WITH THE GOVERNMENT. THE ASSESSING OFFICER WAS OF VIEW THAT THE ASSESSEE KNEW THE IDEN TITY OF ALL THE BONDHOLDERS AS ON 31-3-1994 BECAUSE IT W AS MAINTAINING A REGISTER OF BONDHOLDERS, AND, THEREFO RE, IT COULD NOT BE SAID THAT THE ASSESSEE DID NOT KNOW TH E NAMES OF THE PERSONS TO WHOM INTEREST WAS TO BE CREDITED. THE ASSESSING OFFICER, THEREFORE HELD THA T THE ASSESSEE DID NOT COMPLY WITH PROVISIONS OF SECTION 193 AND IMPOSED PENALTY UNDER SECTION 201 UPON THE ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 6 OF 14 ASSESSEE ON ACCOUNT OF NON-DEDUCTION OF TAX AT SOUR CE IN RESPECT OF INTEREST LIABILITY CREDITED TO 'INTEREST PAYABLE ACCOUNT 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 SUBSTITUTIONARY LIABILITY, WHICH PRESU PPOSES EXISTENCE OF A PRINCIPAL OR PRIMARY LIABILITY. CHAP TER XVII-B IS TITLED 'COLLECTION AND RECOVERY OF TAX - DEDUCTION OF TAX AT SOURCE: THIS TITLE ALSO INDICATES THAT THE NATURE OF TAX DEDUCTI ON AT SOURCE OBLIGATION IS OBLIGATION FOR COLLECTION AND RECOVER Y 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 COLLECT ION AND RECOVERY MECHANISM AND SET OUT UNDER A SEPARATE CHA PTER '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 SECTION S 199, 202 AND 203(1), WOULD SHOW THIS UNDERLYING FEATURE OF T HE TAX DEDUCTION AT SOURCE MECHANISM. SECTION 190 MAKES IT CLEAR THAT THE SCHEME OF TAX DEDUCTION AT SOURCE IS ONE O F 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. THE TAX LIABILITY IS OBVIO USLY IN THE HANDS OF THE PERSON WHO EARNS THE INCOME AND TAX DE DUCTION AT SOURCE MECHANISM PROVIDES FOR METHOD TO RECOVER SUCH TAX LIABILITY. THEREFORE, THIS TAX DEDUCTION AT SOURCE LIABILITY IS A SORT OF SUBSTITUTIONARY LIABILITY. SECTION 191 FURT HER MAKES THIS ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 7 OF 14 POSITION CLEAR WHEN IT LAYS DOWN THAT IN A SITUATIO N TDS MECHANISM IS NOT PROVIDED FOR A PARTICULAR TYPE OF INCOME OR WHEN THE TAXES HAVE NOT BEEN DEDUCTED AT SOURCE IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII, INC OME-TAX SHALL BE PAYABLE BY ASSESSEE DIRECTLY. THIS PROVISI ON, THUS, SHOWS THAT TAX DEDUCTION LIABILITY IS A VICARIOUS L IABILITY AND THE PRINCIPAL LIABILITY IS OF THE PERSON WHO IS TAXABLE IN RESPECT OF SUCH INCOME. SECTION 199 MAKES IT EVEN MORE CLEAR B Y LAYING DOWN THAT THE CREDIT FOR TAXES DEDUCTED AT SOURCE C AN ONLY BE GIVEN TO THE PERSON FROM WHOSE INCOME THE TAXES ARE SO DEDUCTED. THEREFORE, WHEN TAX DEDUCTOR CANNOT ASCER TAIN BENEFICIARIES OF A CREDIT, THE TAX DEDUCTION MECHAN ISM CANNOT BE PUT INTO SERVICE. SECTION 202 LAYS DOWN THAT TAX DEDUCTION AT SOURCE PROVISIONS ARE WITHOUT ANY PREJUDICE TO ANY OTHER MODE OF RECOVERY FROM ASSESSEE, WHICH AGAIN POINTS OUT T O THE TAX DEDUCTION LIABILITY BEING VICARIOUS LIABILITY IN NA TURE. SECTION 203(1) THEN LAYS DOWN THAT FOR ALL TAX DEDUCTIONS A T SOURCE, THE TAD DEDUCTOR HAS TO FURNISH TO THE PERSON TO WHOSE ACCOUNT SUCH CREDIT IS GIVEN OR TO WHOM SUCH PAYMENT IS MAD E OR THE CHEQUE OR WARRANT IT ISSUED WHICH PRESUPPOSES THAT AT THE STAGE OF TAX DEDUCTION THE TAX DEDUCTOR KNOWS THE N AME OF PERSON TO WHOM THE CREDIT IS TO BE GIVEN, THOUGH WH ETHER BY WAY OF CREDIT TO THE ACCOUNT OF SUCH PERSON OR BY W AY OF CREDIT TO SOME OTHER ACCOUNT. THIS AGAIN SHOWS THAT TAX DE DUCTION AT SOURCE LIABILITY IS A VICARIOUS LIABILITY TO PAY TA X ON BEHALF OF THE PERSON WHO IS TO BE BENEFICIARY OF THE PAYMENT OR C REDIT, WITH A CORRESPONDING RIGHT TO RECOVER SUCH TAX PAYABLE FRO M THE PERSON TO WHOM CREDIT IS AFFORDED OR PAYMENT IS MADE. THUS , THE WHOLE SCHEME OF TAX DEDUCTION AT SOURCE PROCEEDS ON THE ASSUMPTION THAT THE PERSON WHOSE LIABILITY IS TO PA Y AN INCOME KNOWS THE IDENTITY OF THE BENEFICIARY OR THE RECIPI ENT OF THE INCOME. IT IS A SINE QUA NON FOR A VICARIOUS TAX DE DUCTION ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 8 OF 14 LIABILITY THAT THERE HAS TO BE A PRINCIPAL TAX LIAB ILITY IN RESPECT OF THE RELEVANT INCOME FIRST, AND A PRINCIPAL TAX LIAB ILITY CAN COME INTO EXISTENCE WHEN IT CAN BE ASCERTAINED AS TO WHO WILL RECEIVE OR EARN THAT INCOME BECAUSE THE TAX IS ON THE INCOM E AND IN THE HANDS OF THE PERSON WHO EARNS THAT INCOME. THEREFOR E, TAX DEDUCTION AT SOURCE MECHANISM CANNOT BE PUT INTO PR ACTICE UNTIL IDENTITY OF THE PERSON IN WHOSE HANDS IT IS INCLUDIBLE AS INCOME CAN BE ASCERTAINED. IT IS INDEED CORRECT THA T EXPLANATION TO SECTION 193 LAYS DOWN THAT EVEN WHEN AN INCOME IS CREDITED TO ANY ACCOUNT IN THE BOOKS OF ACCOUNT OF THE PERSO N LIABLE TO PAY SUCH INCOME, SUCH CREDITING SHALL BE DEEMED TO BE CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE AND THE PRO VISIONS OF THIS SECTION SHALL APPLY ACCORDINGLY, BUT THE FACT THAT THE CREDIT TO ANY ACCOUNT IS TO BE DEEMED TO BE CREDIT TO THE PAYEES ACCOUNT ALSO PRESUPPOSES THAT IDENTIFY OF THE PAYEE CAN BE ASCERTAINED. THEREFORE, THIS DEEMING FICTION CAN ON LY BE ACTIVATED WHEN THE IDENTITY OF THE PAYEE CAN BE ASC ERTAINED. THEREFORE, THE EXPLANATION TO SECTION 193 CANNOT BE INVOKED IN A CASE WHERE THE PERSON WHO IS TO RECEIVE THE INTER EST CANNOT BE IDENTIFIED AT THE STAGE AT WHICH THE PROVISION F OR INTEREST ACCRUED BUT NOT DUE IS MADE. THIS POSITION IS ALSO ACCEPTED BY THE CBDT IN ITS LETTER DATED 5-7-1996 ADDRESSED TO THE TATA IRON & STEEL CO. LTD (LETTER NO.257/126 IT(B). IN T HE INSTANT CASE, THE REGULAR RETURN BONDS BEING TRANSFERABLE O N SIMPLE ENDORSEMENT AND DELIVERY AND THE RELEVANT REGISTRAT ION DATE BEING A DATE SUBSEQUENT TO THE CLOSURE OF BOOKS OF ACCOUNT, ASSESSEE COULD NOT HAVE ASCERTAINED THE PAYEES AT T HE POINT OF TIME WHEN THE PROVISION FOR INTEREST ACCRUED BUT N OT DUE WAS MADE. ACCORDINGLY, NO TAX WAS REQUIRED TO BE DEDUCT ED AT SOURCE IN RESPECT OF THE PROVISION FOR INTEREST PAY ABLE MADE BY ASSESSEE WHICH REFLECTED PROVISION FOR INTEREST AC CRUED BUT NOT DUE IN A SITUATION WHERE THE ULTIMATE RECIPIENT OF SUCH INTEREST ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 9 OF 14 ACCRUED BUT NOT DUE COULD NOT HAVE BEEN ASCERTAINE D AT THE POINT OF TIME WHEN THE PROVISION WAS MADE. ASSESSEE HAD DULY DEDUCTED THE TAX SOURCE AT THE TIME OF PAYMENT I.E. ON 9.6.1994 AND THERE WAS NO LOSS OF REVENUE AS SUCH. THEREFORE , ASSESSEE DID NOT HAVE ANY LIABILITY TO DEDUCT TAX AT SOURCE IN RESPECT OF PROVISION FOR INTEREST ACCRUED BUT NOT DUE IN RESPE CT OF REGULAR RETURN BONDS, MADE ON 31.3.1994. WHEN THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE, THERE COULD NOT BE ANY QUESTION OF LEVY OF PENALTY OR INTEREST. THE NEXT Q UESTION FOR CONSIDERATION IN THE INSTANT CASE WAS AS TO WHETHER AO COULD HAVE IMPOSED THE PENALTY AT ALL UNDER SECTION 221 U PON ASSESSEE. A COORDINATE BENCH OF THE MUMBAI TRIBUNAL IN THE CASE OF ITO V. TITAGARH STEEL LTD (2001) 79 ITD 532 , DEALING WITH THE CONSEQUENCES OF NON-DEDUCTION OR SHORT DED UCTION OF TAX AT SOURCE, HAD HELD THAT POST 1-4-1989, PENALTY FOR NON- DEDUCTION OF TAX AT SOURCE OR SHORT DEDUCTION OF TA X AT SOURCE CAN ONLY BE IMPOSED UNDER SECTION 271C. THE CBDT IT SELF HAD IN CIRCULAR NO.551, DATED 23-1-1990 ACCEPTED THAT U NTIL SECTION 271C WAS INSERTED IN THE ACT, NO PENALTY WAS PROVI DED FOR FAILURE TO DEDUCT TAX AT SOURCE. IT WAS NOT ONLY M ERELY A QUESTION OF MENTIONING A WRONG SECTION, WHICH COULD PERHAPS BE COVERED BY RECOURSE TO SECTION 292B, IT WAS ALSO IMPORTANT TO BEAR IN MIND THAT THE IMPUGNED PENALTY WAS LEVIE D BY AN OFFICER OF THE RANK OF THE INCOME TAX OFFICER, WHER EAS PENALTY UNDER SECTION 271C COULD ONLY HAVE BEEN LEVIED BY A N OFFICE OF THE RANK OF THE DEPUTY (NOW JOINT) COMMISSIONER. TH E ITO WAS, FROM THIS POINT OF VIEW, NOT COMPETENT TO IMPOSE TH E IMPUGNED PENALTY. FURTHER, IN THE INSTANT CASE, EVEN ACCORDI NG TO THE REVENUE, THE DEFAULT WAS ON ACCOUNT OF DEDUCTION OF TAX AT SOURCE. SUCH A DEFAULT COULD NOT BE VISITED WITH PE NALTY UNDER SECTION 221. HENCE, THE IMPUGNED PENALTY UNDER SECT ION 221 WAS UNSUSTAINABLE IN LAW. ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 10 OF 14 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 AMOU NT. FURTHER THE ENTIRE PROVISION HAS BEEN WRITTEN BACK IN THE N EXT 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 PROVI SIONS OF TDS AS AND WHEN THE AMOUNTS ARE PAID/CREDITED TO RESPECTIV E PARTIES. 12. AS ALREADY EXPLAINED AND EVIDENCED FROM THE COMPUTA TION OF INCOME AS WELL AS THE ORDERS OF AO IN THE ASSESSMEN T PROCEEDINGS, THE ENTIRE PROVISION HAS BEEN DISALLOWED UNDER SECT ION 40(A)(IA) AND SECTION 40(A)(I). ONCE THE AMOUNT HAS BEEN DISALLOW ED UNDER THE PROVISIONS OF SECTION 40(A)(I) ON THE REASON THAT T AX HAS NOT BEEN DEDUCTED, IT IS SURPRISING THAT AO HOLDS THAT THE S AID AMOUNTS ARE SUBJECT TO TDS PROVISIONS AGAIN SO AS TO DEMAND THE TAX UNDER THE PROVISIONS OF SECTION 201 AND ALSO LEVY INTEREST UN DER SECTION 201(1A). WE ARE UNABLE TO UNDERSTAND THE LOGIC OF A O IN CONSIDERING THE SAME AS COVERED BY THE PROVISIONS OF SECTION 19 4C TO 194J. ASSESSEE AS STATED HAS ALREADY DISALLOWED THE ENTIR E AMOUNT IN THE COMPUTATION OF INCOME AS NO TDS HAS BEEN MADE. ONCE AN AMOUNT WAS DISALLOWED UNDER SECTION 40(A)(I)/(IA) ON THE B ASIS OF THE AUDIT REPORT OF THE CHARTERED ACCOUNTANT, THE SAME AMOUNT CANNOT BE SUBJECT TO THE PROVISIONS OF TDS UNDER SECTION 201( 1) ON THE REASON THAT ASSESSEE SHOULD HAVE DEDUCTED THE TAX. IF THE ORDER OF AO WERE TO BE ACCEPTED THEN DISALLOWANCE UNDER SECTION 40(A )(I) AND 40(A)(IA) CANNOT BE MADE AND PROVISIONS TO THAT EXTENT MAY BE COME OTIOSE. IN VIEW OF THE ACTUAL DISALLOWANCE UNDER SECTION 40(A) (I) BY ASSESSEE HAVING BEEN ACCEPTED BY AO, WE ARE OF THE OPINION T HAT THE SAME AMOUNT CANNOT BE CONSIDERED AS AMOUNT COVERED BY TH E PROVISIONS OF SECTION 194C TO 194J SO AS TO RAISE TDS DEMAND A GAIN UNDER SECTION 201 AND LEVY OF INTEREST UNDER SECTION 201( 1A). THEREFORE, ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 11 OF 14 ASSESSEES GROUND ON THIS ISSUE ARE TO BE ALLOWED A S THE ENTIRE AMOUNT HAS BEEN DISALLOWED UNDER THE PROVISIONS OF SECTION 40(A)(I)/(IA) IN THE COMPUTATION OF INCOME ON THE R EASON THAT TDS WAS NOT MADE. FOR THIS REASON ALONE ASSESSEES GROU NDS CAN TO BE ALLOWED. CONSIDERING THE FACTS AND REASONS STATED A BOVE ASSESSEES GROUNDS ARE ALLOWED. 13. ASSESSEE HAS RAISED ONE MORE CONTENTION THAT INTERE ST UNDER SECTION 201(1A) SHOULD BE LEVIED TILL THE DATE OF P AYMENT AND NOT TILL THE DATE OF ORDER. ANYHOW THIS ISSUE BECAME ACADEMI C IN NATURE, AS WE HAVE ALREADY HELD THAT DEMAND UNDER SECTION 201 CANNOT BE RAISED ONCE THE ENTIRE AMOUNT HAS BEEN DISALLOWED I N THE COMPUTATION OF INCOME UNDER SECTION 40(A)(I) AND 40 (A)(IA). IN VIEW OF THIS EVEN THOUGH THE CONTENTION IS CORRECT BEING A LEGAL ISSUE, THERE IS NO NEED FOR ADJUDICATING THE MATTER AS THE GROUNDS RAISED HAVE BEEN HELD IN FAVOUR OF ASSESSEE. AO IS DIRECTE D TO DELETE THE SAID DEMAND SO RAISED. APPEAL IS ACCORDINGLY ALLOW ED. ITA NO.1765/MUM/2010 14. AS BRIEFLY STATED ABOVE, AO RAISED DEMAND ON 1.PURC HASE OF TRADED GOODS, 2.PURCHASE OF PACKING 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 C ASE, 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 QUALI TY CONTROL AS AGREED BY THE THIRD PARTY. THIS IS COMMO N 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 T HAT NO RAW MATERIAL IS SUPPLIED BY THE APPELLANT (PURCHASE R) ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 12 OF 14 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 THE CASE IN ITS ENTIRETY, IT IS CONCLUDED THAT THE CONT RACT WITH THE VARIOUS PARTIES ARE CONTRACT FOR PURCHASES OF TRADED GOODS AND NOT OF THE WORKS CONTRACT. I HAVE ALSO NOTED THAT THE ABOVE ISSUE IS COVERED IN THE FAVOUR OF THE APPELLANT BY THE DECISION OF MUMBAI TRIBUNAL IN CASE OF NOVARTIS HEALTHCARE PVT. LTD. V. ITO 29 SOT 425 (MUM) AND GLENMARK PHARMACEUTICALS LTD. V. ITO (TDS) 30 SOT 19 (MUM) WHEREIN THE HON'BLE TRIBUNAL ON IDENTICAL FACTS HAS HELD THAT TDS IS NOT REQUIRE D TO BE DEDUCTED ON PURCHASE OF TRADED GOODS. BASED ON THE ABOVE, I AM OF THE OPINION THAT THE PROVISIONS OF CHAPTER XVIIB OF THE ACT CANNOT BE SAID TO BE APPLICABLE ON PURCHASE OF FINISHED/TRADE D GOODS ACCORDINGLY, THERE IS NO DEFAULT ON THE PART OF TILE APPELLANT IN COMPLYING WITH THE PROVISIONS OF CHAPTER XVII-B OF THE ACT WHILE MAKING PAYMENT FOR PURCHASE OF FINISHED/TRADED G0O.DS WITHOUT DEDUCTING TAX AT SOURCE THIS GROUND OF APPEAL IS ALLOWED IN FAVOUR O F THE APPELLANT. 2.PURCHASE OF PACKING MATERIAL: 13. I HAVE PERUSED THE FACTS OF THE CASE AS WELL A S THE SUBMISSIONS OF THE APPELLANT. I AM OF THE OPINI ON THAT THIS GROUND IS COVERED IN FAVOUR OF THE APPELL ANT BY THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF BDA LTD VS. INCOME TAX OFFICER (TDS) 281 IT R 99 (BOM.) WHEREIN THE HON'BLE HIGH COURT HAS HELD THAT TDS IS NOT REQUIRED TO BE DEDUCTED UNDER SECTION 19CC ON PURCHASE OF PACKING MATERIAL. BASED ON THE ABOVE, I AM OF THE OPINION THAT THE PROVISIONS OF CHAPTER XVII-B OF THE ACT CANNOT BE SAID TO BE APPLICABLE ON PURCHASE OF PACKING MATERIAL. ACCORDINGLY, THERE IS NO DEFAULT ON THE P ART OF THE APPELLANT IN COMPLYING WITH THE PROVISIONS O F CHAPTER XVII-B OF THE ACT WHILE MAKING PAYMENT FOR PURCHASE PACKING MATERIAL WITHOUT DEDUCTING TAX AT SOURCE. IN THE RESULT THIS GROUND IS ALLOWED. ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 13 OF 14 3.CLINICAL TRIALS 15. I HAVE GONE THROUGH THE FACTS OF THE CASE AND SUBMISSIONS OF THE APPELLANT. AS FAR AS THE APPELLANTS CONTENTION THAT THE ABOVE EXPENDITURE O F ` .11,35,14,000/- INCLUDES AN AMOUNT OF ` .3,66,90,204/- ON WHICH TDS IS NOT DEDUCTIBLE ON THE FOLLOWING GROUNDS: A) 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 I TEMS 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 A BOVE BREAK UP OF EXPENDITURE GIVEN BY THE APPELLANT IS F OUND 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 ` .7,68,21,907/- IS CONCERNED, THE APPELLANT HAS DEDUCTED TDS OF ` .42,45,914/- ON THE SAME. HOWEVER, IT IS SEEN THAT PAYMENT IN QUESTION IS IN THE NATUR E OF PROFESSIONAL FEES. IN ORDER TO CARRY OUT CLINIC TRI AL, THE PERSON WHO CARRIES OUT THE TRIAL MUST POSSESS MEDIC AL QUALIFICATION AND THE PERSON SHOULD BE HIGHLY QUALI FIED AND SHOULD POSSESS TECHNICAL EXPERTISE. THEREFORE, PAYMENT MADE IN THIS RESPECT IS NOTHING BUT FEES FO R PROFESSIONAL/TECHNICAL SERVICES. ACCORDINGLY, I HOL D THAT THE ABOVE PAYMENT OF ` .7,68,21,907/- IS A PAYMENT TO PROFESSIONAL FEES, THEREFORE, TAX SHOULD HAVE BEEN DEDUCTED AS PER PROVISIONS OF SECTION 194J. THEREFORE, THE ACTION OF AO IS CONFIRMED SO FAR AS THE APPLICABILITY OF SECTION 194J IS CONCERNED . HOWEVER, AO IS DIRECTED TO CALCULATE TDS LIABILITY UNDER SECTION 194J. WHATEVER TDS LIABILITY COMES UNDER SECTION 194J CREDIT FOR TAXES PAID OF ` .42,45,914/- IS TO BE ALLOWED AND BALANCE AMOUNT NEEDS TO BE RECOVERED FROM THE APPELLANT. THIS GROUND OF APPEAL IS DISPOS ED OFF ACCORDINGLY. 15. AFTER CONSIDERING THE RIVAL CONTENTIONS AND PERUSIN G THE ORDER OF THE CIT (A), WE ARE OF THE OPINION THAT THERE IS NO NEED TO DIFFER FROM THE ORDER OF THE CIT (A). THE LEARNED CIT (A) HAS FOLLOWED THE ITA NOS 1667 & 1765 OF 2010 PFIZER LTD MUMBAI PAGE 14 OF 14 PRINCIPLES ESTABLISHED BY THE HON'BLE HIGH COURT IN THE CASE OF BDA LTD VS. INCOME TAX OFFICER (TDS) 281 ITR 99 (BOM.) AND CIT VS. GLENMARK PHARMACEUTICALS LTD, 324 ITR 199 . SINCE THE ISSUES ARE CRYSTALLIZED IN FAVOUR OF ASSESSEE BY THE ORDERS OF THE JURISDICTIONAL HIGH COURT, RESPECTFULLY FOLLOWING THE SAME WE AFFI RM THE ORDER OF THE CIT (A). 16. IN THE RESULT REVENUE APPEAL IS DISMISSED. 17. IN THE RESULT APPEAL FILED BY ASSESSEE IN ITA NO: 1667/MUM/2010 IS ALLOWED, WHILE THE APPEAL FILED BY THE REVENUE IN ITA NO.1765/MUM/2010 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST OCTOBER, 2012. SD/- SD/- ( D.K.AGARWAL ) (B . RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 31 ST OCTOBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI