ITO TDS-II, MUMBAI V. NOVARTIS (INDIA) LTD, THANE

ITA 3529/MUM/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7277 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 28-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 05-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Assessee Lawyers: J D MISTRY NITESH JO SHI
• Section: 194C; 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI R.S.SYAL(A.M) AND SHRI N.V.VASUDEVAN(J. M) ITA NO.3529/MUM/2010(A.Y.2006-07) THE ACIT, TDS CIRCLE, 3 RD FLOOR, QURESHI MANSION, GOHALE ROAD, NAUPADA, THANE (W). (APPELLANT) VS. M/S. NOVARTIS (INIDA) LTD. HIRANANDANI ESTATE, GHODBUNDER ROAD, THANE (W), DIST. THANE. PAN:AAACH 2914F (RESPONDENT) APPELLANT BY : SHRI A.K.NAYAK RESPONDENT BY : S/ SHRI J.D.MISTRY/ NITESH JO SHI DATE OF HEARING : 28/07/2011 DATE OF PRONOUNCEMENT : 05/08/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDE R OF THE CIT(A)-II, THANE DATED 4/1/2010 RELATING TO ASSESSMENT YEAR 20 06-07. THE GROUNDS OF APPEAL OF THE REVENUE READ AS FOLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN THE LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE PAYMENT MA DE TOWARDS PROCESSING CHARGES AMOUNTING TO RS. 25,09,71,684/- IS FOR PURCHASE OF GOODS AND THE RELATION BETWEEN ASSESSEE AND THE THI RD PARTY MANUFACTURER IS OF PRINCIPAL TO PRINCIPAL AND NOT THAT OF PRINCIPAL TO AGENT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS THUS FAILED TO APPRECIATE THAT THE P ROVISIONS OF SECTION 194C ARE ATTRACTED ON THE SAID PAYMENT. 2. THE ASSESSEE IS A MANUFACTURER OF PHARMACEUTICAL PRODUCTS. THE ASSESSEE ENTERED INTO TWO SEPARATE AGREEMENTS FOR P URCHASE OF FINISHED ITA NO.3529/MUM/2010(A.Y.2006-07) 2 GOODS. UNDER THE FIRST AGREEMENT WHICH IS TITLED A S SUPPLY OF TECHNOLOGY AND MANUFACTURING AGREEMENT THE ASSESSEE GAVE ENTIRE TE CHNOLOGY TO A THIRD PARTY FOR MANUFACTURE OF PHARMACEUTICAL PRODUCTS. UNDER THE SECOND AGREEMENT THE ASSESSEE AGREED TO PURCHASE THE PHARM ACEUTICAL PRODUCTS MANUFACTURED BY THE THIRD PARTY. THE ASSESSEE EXPL AINED THE SALIENT FEATURES OF THE AGREEMENTS AS UNDER:- (I) IT PLACES ORDER FOR PURCHASE ON A THIRD PARTY MANUFACTURER FOR SUPPLY OF GOODS REQUIRED BY THE ASSESSEE. SAMPLE C OPIES OF PURCHASE ORDERS WERE FILED BEFORE AO. (II) SINCE THE ASSESSEE OPERATES IN THE FIELD OF PH ARMACEUTICALS, THE THIRD PARTY MANUFACTURER IS REQUIRED TO PRODUCE THE GOODS AS PER SPECIFICATION SET OUT BY THE ASSESSEE AND SUPPLY TH E GOODS AS PER QUALITY STANDARDS SET. FOR THIS PURPOSE THE REQUIS ITE TECHNICAL KNOW- HOW IS PROVIDED BY THE ASSESSEE TO THE THIRD PARTY MANUFACTURER. (III) THE RAW MATERIALS REQUIRED FOR PRODUCTION O F GOODS IS PROCURED BY THE THIRD PARTY MANUFACTURER. (IV) ALL THE ACTIVITIES OF OBTAINING LICENSE, PAY MENT OF SALES TAX, EXCISE DUTY, VAT AND OTHER STATUTORY OBLIGATIONS ARE THE D UTY OF THE SUPPLIER OF GOODS. (V) THE MANUFACTURING FACILITY IS OWNED BY THE THIR D PARTY MANUFACTURER. (VI) THE THIRD PARTY MANUFACTURER RAISES AN INVOIC E ON THE ASSESSEE FOR THE GOODS MANUFACTURED BY HIM ACCORDINGLY AND SUPPL IED TO THE ASSESSEE. 3. THE ASSESSEE ALSO SUBMITTED THAT IT IS REGISTER ED UNDER ANY AUTHORITY FOR THE MANUFACTURE OF PRODUCTS MANUFACTURED BY THE THI RD PARTY MANUFACTURER. THE ASSESSEE IS ONLY ENGAGED IN THE ACTIVITY OF TRA DING OF SUCH PRODUCTS. THE ASSESSEE DISCLOSES THE TRANSACTION AS PURCHASE OF TRADED GOODS IN ITS BOOKS OF ACCOUNTS. THE ASSESSEE DOES NOT CARRY OUT ANY FURTHER MANUFACTURE OF GOODS PURCHASED FROM THIRD PARTIES A ND THEY ARE SOLD AS ITA NO.3529/MUM/2010(A.Y.2006-07) 3 SUCH. THE THIRD PARTY MANUFACTURER MANUFACTURES AN D SUPPLY GOODS TO COMPANIES OTHER THAN THE ASSESSEE AND ALSO MANUFACT URES FOR THEMSELVES. 4. THE PLEA OF THE ASSESSEE WAS THEREFORE THAT THE PAYMENT MADE BY IT TO THIRD PARTY MANUFACTURER IS NOT A PAYMENT FOR CARRY ING OUT A WORK ON ITS BEHALF AND THEREFORE THE PROVISIONS OF SEC.194-C OF THE INCOME TAX ACT, 1961 (THE ACT) DO NOT APPLY. CONSEQUENTLY, THE ASSESSEE CONTENDED THAT THERE WAS NO OBLIGATION ON ITS PART TO DEDUCT TAX AT SOURCE W HILE MAKING PAYMENT TO THE THIRD PARTY MANUFACTURER U/S.194-C OF THE ACT. IN OTHER WORDS IT WAS THE SUBMISSION OF THE ASSESSEE THAT THE PAYMENT IN QUES TION IS FOR PURCHASE OF GOODS, AND THE RELATION BETWEEN THE ASSESSEE COMPAN Y AND THE THIRD PARTY MANUFACTURER IS THAT OF PRINCIPAL TO PRINCIPAL AND THAT THE PROVISIONS OF SECTION 194C ARE NOT APPLICABLE ON THE SAID PAYMENT . ALTHOUGH THE ASSESSEES CONTENDED THAT TRANSACTIONS WITH THIRD PA RTY MANUFACTURERS DO NOT ATTRACT TDS, TAX WAS DEDUCTED UNDER SECTION 194 C OUT OF ABUNDANT CAUTION FROM OCTOBER, 2006 IN VIEW OF THE STAND ADO PTED BY THE INCOME-TAX DEPARTMENT. THE THIRD PARTY MANUFACTURER HAS ALSO PAID THE TAX ON THE INCOME INCLUDING THE AMOUNT RECEIVED FROM THE ASSES SEE. 5. ACCORDING TO THE AO THE AMOUNTS PAID BY THE ASS ESSEE TO THE THIRD PARTY MANUFACTURERS WAS IN THE NATURE OF PAYMENT FOR CAR RYING OUT WORK AND, THEREFORE, THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE AS REQUIRED BY SECTION 194C OF THE INCOME TAX ACT 1961(THE ACT). IN THE PRESENT ASSESSMENT YEAR I.E., A.Y 2006-07, THE AO PASSED AN ORDER UNDER SECTION 201(1) AND 201(1A) OF THE ACT, TREATING THE ASSESSE E AS AN ASSESSEE IN DEFAULT FOR NOT DEDUCTING TAX AT SOURCE AS MANDATED BY SEC. 194-C OF THE ACT. . 6. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD THAT T HE RELATIONSHIP BETWEEN THE ASSESSEE AND MANUFACTURERS WAS THAT OF PRINCIPAL TO PRINCIPAL BASIS AND NOT THAT OF PRINCIPAL AND AGENT. IN DOIN G SO THE CIT(A) FOLLOWED THE ITA NO.3529/MUM/2010(A.Y.2006-07) 4 DECISION OF THE ITAT MUMBAI IN THE CASE OF M/S. NO VARTIS HEALTHCARE PVT. LTD. VS. ITO, TDS-I(4), MUMBAI IN ITA NO.132 TO 134 AND 310 TO 312/M/08 ORDER DATED 25/2/2009. 7. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. AT THE TIME OF HEARING IT WAS BROUGHT TO OUR NOT ICE THAT IN ASSESSEES OWN CASE IN A.Y 2007-08 THIS TRIBUNAL CONSIDERED ID ENTICAL ISSUE AND HELD THAT THERE WAS NO OBLIGATION ON THE PART OF THE ASS ESSEE TO DEDUCT TAX AT SOURCE. A COPY OF THE ORDER IN ITA NO.476/M/10 DAT ED 22/7/11 AND THE ORDER IN ITA NO.3169/M/10, A.Y 2005-06 ORDER DATED 29/4/11 IN ASSESSEES OWN CASE WAS ALSO FILED. THE RELEVANT OBSERVATION IN THESE CASES ARE AS FOLLOWS: ITA NO.476/M/2010: 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AU THORITIES BELOW. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION O F TRIBUNAL IN ASESSSEES OWN CASE FOR AY 2005-06 (SUPRA) WHEREIN THE TRIBUNAL HELD AS UNDER:- 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE B Y BOTH THE PARTIES, PERUSED THE ORDERS OF THE AO AND THE L EARNED CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE AS SESSEE. WE HAVE ALSO CONSIDERED THE DECISION OF THE TRIBUNAL I N THE CASE OF SISTER CONCERN OF THE ASSESSEE AND THE DECISION OF THE JURISDICTIONAL HIGH COURT, DISMISSING THE APPEAL FI LED BY THE REVENUE AGAINST THE ORDER OF THE TRIBUNAL. SINCE TH E FACTS OF THE IMPUGNED CASE ARE IDENTICAL TO THAT OF THE FACTS IN THE CASE OF SISTER CONCERN OF THE ASSESSEE NAMELY NOVARTIS HEAL TH CARE (P.) LTD. (SUPRA), AND SINCE THE COORDINATE BENCH OF THE TRIBUNAL HAS ALREADY DECIDED THE ISSUE BY ALLOWING THE APPEA L OF THE ASSESSEE, AND SINCE THE APPEAL AGAINST THE ORDER OF THE TRIBUNAL BY THE REVENUE HAS BEEN DISMISSED BY THE JURISDICTIONAL HIGH COURT, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT, WE HOLD THAT THE PAYMENT MADE TOWARDS PROCESSING CHARGES AMOUNTING T O RS. 17,48,44,484/- IS FOR PURCHASE OF GOODS, THE RELATI ON BETWEEN ITA NO.3529/MUM/2010(A.Y.2006-07) 5 THE ASSESSEE COMPANY AND THE THIRD PARTIES MANUFACT URERS IS THAT OF PRINCIPAL TO PRINCIPAL AND THAT THE PROVISI ONS OF SECTION 194C ARE NOT APPLICABLE ON THE SAID PAYMENT. THE GR OUNDS RAISED BY THE REVENUE ARE ACCORDINGLY, DISMISSED. 8. IN THE CASE OF SISTER CONCERN, NAMELY NOVARTIS H EALTH CARE (P.) LTD. VS. ITO, [2009] 20 SOT 425(MUM), THE TRIBUNAL HELD THAT THE AGREEMENTS OF THE ASSESSEE WITH THE MANUFACTURERS C OULD NOT BE TERMED AS WORKS CONTRACT. THE IMPUGNED ORDER WAS, THEREFORE, SET ASIDE AND THE APPLICABILITY OF SECTION 194C WAS RUL ED OUT. THAT BEING THE POSITION THERE COULD NOT BE ANY QUESTION OF TRE ATING THE ASSESSEE AS IN DEFAULT UNDER SECTION 201(1) OR CHARGING ANY INTEREST U/S 201(1A). IN VIEW OF THE DECISION OF THE ITAT, WE SET ASIDE THE ORDER OF THE CIT(A) AND DELETE THE ADDITION OF RS. 36,17, 828/- AND RS. 7,03,861/- TOWARDS SHORT DEDUCTION AND RS. INTEREST THEREON RESPECTIVELY. ITA NO.3169/M/2010: 8. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUT SET REFERRING TO PAGE NO.6 OF THE ORDER OF THE LD. CIT(A) DREW THE A TTENTION OF THE BENCH TO CLAUSE NO. 3, WHERE IT WAS SUBMITTED BEFORE THE LD. CIT(A) THAT THE RAW MATERIAL REQUIRED FOR PRODUCTION OF GOODS IS PR OCURED BY THE THIRD PARTY MANUFACTURERS. REFERRING TO PARA 7.2 OF THE O RDER OF THE LD. CIT(A), HE SUBMITTED THAT THE LD. CIT(A) HAD GIVEN A FINDING THAT THE RAW MATERIAL FOR PRODUCTION OF GOODS IS PROCURED BY THE THIRD PARTIES MANUFACTURERS THEMSELVES. REFERRING TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SISTER CONCERN OF THE ASSESSEE I.E. NOVARTIS HEALTH CARE (P.) LTD. VS. ITO TDS REPORTED IN 29 SOT 425, HE SUBMITTED THAT UNDER IDENTICAL FACTS AND CIRCUMSTAN CES, THE TRIBUNAL HAS HELD THAT THE PROVISIONS OF SECTION 194C COULD NOT APPLY. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL AT PARA 13 OF THE ORDER WERE BROUGHT TO THE NOTICE OF THE BENCH WHICH READS AS U NDER:- 13. COMING BACK TO OUR CASE WE FIND THAT THERE IS COMPLETE IDENTITY OF FACTS WITH THOSE CONSIDERED BY THE HON' BLE JURISDICTIONAL HIGH COURT INASMUCH AS THAT THE GOOD S WERE MANUFACTURED BY THE MANUFACTURERS IN THEIR OWN ESTA BLISHMENTS, ALBEIT IN ACCORDANCE WITH THE SPECIFICATIONS OF THE ASSESSEE. THE RAW MATERIAL COST AND OTHER ANCILLARY COSTS WERE AL SO INCURRED BY THE MANUFACTURES. EVEN THE EXCISE DUTY WAS PAID BY THEM AND IT WAS ONLY WHEN THE GOODS WERE SOLD TO THE ASSESSEE T HAT THE PROPERTY IN THEM PASSED OVER TO IT. UNDER THESE CIR CUMSTANCES WE ARE OF THE CONSIDERED OPINION THAT THE AGREEMENTS O F THE ASSESSEE ITA NO.3529/MUM/2010(A.Y.2006-07) 6 WITH THE MANUFACTURERS CANNOT BE TERMED AS WORKS C ONTRACT. THE IMPUGNED ORDER IS, THEREFORE, SET ASIDE AND THE APPLICABILITY OF SECTION 194C IS RULED OUT. THAT BEING THE POSIT ION THERE CANNOT BE ANY QUESTION OF TREATING THE ASSESSEE AS IN DEFA ULT UNDER SECTION 201(1) OR CHARGING ANY INTEREST UNDER SECTI ON 201(1A). REFERRING TO THE COPY OF THE ORDER OF THE JURISDICT IONAL HIGH COURT AGAINST THE SAID ORDER OF THE TRIBUNAL (COPY FILED ), HE SUBMITTED THAT THE HON'BLE HIGH COURT HAS DISMISSED THE APPEAL FIL ED BY THE REVENUE, VIDE ORDER DATED 12.03.2010 IN ITA NO. 2071 OF 2009 , ITA NO. 3086 OF 2009 AND ITA NO.3087 OF 2009. HE ACCORDINGLY, SUBMI TTED THAT THIS BEING A COVERED MATTER, THE APPEAL FILED BY THE REV ENUE SHOULD BE DISMISSED. 9. THE LD. DR ON THE OTHER HAND, FAIRLY CONCEDED TO THE ABOVE SUBMISSIONS MADE BY THE LD. COUNSEL FOR THE ASSESSE E. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE B Y BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE LEARNED CIT(APPEALS) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE DECISION OF THE TRIBUNAL IN THE CASE OF SISTER CONCERN OF THE ASSESSEE AND THE DECISION OF THE JURISDICTIONAL HIG H COURT, DISMISSING THE APPEAL FILED BY THE REVENUE AGAINST THE ORDER O F THE TRIBUNAL. SINCE THE FACTS OF THE IMPUGNED CASE ARE IDENTICAL TO THAT OF THE FACTS IN THE CASE OF SISTER CONCERN OF THE ASSESSEE NAMEL Y NOVARTIS HEALTH CARE (P.) LTD. (SUPRA), AND SINCE THE CO-ORDINATE B ENCH OF THE TRIBUNAL HAS ALREADY DECIDED THE ISSUE BY ALLOWING THE APPEA L OF THE ASSESSEE, AND SINCE THE APPEAL AGAINST THE ORDER OF THE TRIBU NAL BY THE REVENUE HAS BEEN DISMISSED BY THE JURISDICTIONAL HIGH COUR T, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDIC TIONAL HIGHT COURT, WE HOLD THAT THE PAYMENT MADE TOWARDS PROCESSING CHARG ES AMOUNTING TO `.17,48,44,484/- IS FOR PURCHASE OF GOODS, AND THE RELATION BETWEEN THE ASSESSEE COMPANY AND THE THIRD PARTIES MANUFACTURER S IS THAT OF PRINCIPAL TO PRINCIPAL AND THAT THE PROVISIONS OF S ECTION 194C ARE NOT APPLICABLE ON THE SAID PAYMENT. THE GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY, DISMISSED. 9. IN VIEW OF THE ABOVE DECISIONS RENDERED ON IDEN TICAL FACTS, WE ARE OF THE VIEW THAT THE CIT(A) WAS FULLY JUSTIFIED IN HOLDING THAT ASSESSEE COULD NOT ITA NO.3529/MUM/2010(A.Y.2006-07) 7 TREATED AS AN ASSESSEE IN FAULT UNDER SECTION 201( 1) AND 201(1A) OF THE ACT. THE ORDER OF THE CIT(A) IS THEREFORE UPHELD AND THE APPEAL OF THE REVENUE IS DISMISSED. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 5 TH DAY OF AUG., 2011. SD/- SD/- (R.S.SYAL) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 5 TH AUG.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RB BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.3529/MUM/2010(A.Y.2006-07) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 28/7/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 29/7/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER