Appeal details
Counselvise Citation
[2016] 121 COUNSELVISE.COM (IT) 3299 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 6 month(s) 25 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-01-2016
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
F
Assessment Year
2009-2010
Appeal Filed On
04-07-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUM BAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.4592/MUM/2014 ( / ASSESSMENT YEAR: 2009-10) & ./ I.T.A. NO.4593/MUM/2014 ( / ASSESSMENT YEAR: 2010-11) ITO (TDS) 3(4),10 TH FLOOR, ROOM NO. 1011, SMT. K.G.M. AYURVEDIC HOSPITAL BULIDNG, CHARNI ROAD, MUMBAI 400 002. / V. UNICHEM LABORATORIES LTD., UNICHEM BHAWAN, S.V.ROAD, 8, PRABHAT ESTATE, JOGESHWARI (WEST), MUMBAI 400 102. ./ ./PAN/GIR NO. AAACU0551B ( /APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI AIRIJU JAI KARAN(DR) / RESPONDENT BY : SHRI NITIN JOSHI ! / DATE OF HEARING : 12/01/2016 '#$% ! / DATE OF PRONOUNCEMENT : 29/01/2016 2 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. / O R D E R PER RAMIT KOCHAR ACCOUNTANT MEMBER: THESE ARE TWO APPEALS BY THE REVENUE DIRECTED AGAIN ST THE COMMON ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-13, MUMBAI (CIT(A) FOR SHORT) DATED 11/04/2014 , FOR THE ASSESSMENT YEARS 2009-10 AND 2010-11. THE IDENTICAL ISSUES ARE INVOLVED IN BOTH THESE APPEALS AND BOTH THESE APPEA LS ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. WE W OULD FIRST TAKE THE APPEAL IN ITA NO. 4592/MUM/2014 FOR ASSESSMENT YEAR 2009-10 AS TH E LEAD APPEAL AND OUR DECISION IN ITA NO. 4592/MUM/2014 FOR THE ASSESSMENT YEAR 20 09-10 SHALL APPLY MUTATIS MUTANDIS TO THE APPEAL IN ITA NO 4593/MUM/2014 FOR THE ASSESSMENT YEAR 2010-11. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE IN T HE MEMO OF APPEAL FILED WITH THE TRIBUNAL IN ITA NO. 4592/MUM/2014 FOR THE ASSESSMEN T 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 D EDUCT TDS U/S. 194H OF THE I.T. ACT AND THEREBY ERRED IN DELETING THE NON DED UCTION/SHORT DEDUCTION U/S. 201(1) AND INTEREST U/S. 201(1A). (II). ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT (A) ERRED BY HOLDING 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 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 INDI RECTLY 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 O F 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 3 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. NOT DEDUCTING TAX ON SITTING FEES PAID TO DIRECTOR S 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 MA NAGERIAL SERVICES RENDERED BY THE DIRECTORS AND WAS CLEARLY IN THE N ATURE 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 DED UCTED ON DIRECTORS' SITTING FEES AS THE AMENDMENT TO THE PROVISIONS OF SECTION 194J(BA) WERE MADE W.E.F. 01.07.2012 AND IT IS NOT APPLICABLE TO THE RELEVAN T A.Y. WITHOUT APPRECIATING THAT ANY AMENDMENT MADE TO THE PROVISIONS OF INCOM E TAX ACT, 1961, SHOULD BE TAKEN AS CURATIVE IN NATURE AND SHOULD BE GIVEN RE TROSPECTIVE EFFECT. 2. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER A NY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY AT THE TIME OF THE H EARING OF THE CASE OR THEREAFTER. 3. THE ORDER OF THE CIT (A) BEING ERRONEOUS BE SE T ASIDE AND LD. A.O'S ORDER BE RESTORED. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF FORMULATIO NS AND BULK DRUGS. A SURVEY U/S. 133A OF THE INCOME TAX ACT,1961 (HEREINAFTER CALLED THE ACT) WAS CONDUCTED IN THE BUSINESS PREMISES OF THE ASSESSEE COMPANY ON 14/10/ 2011 FOR THE PURPOSES OF VERIFYING PROPER COMPLIANCE OF TAX DEDUCTED AT SOUR CE PROVISIONS AS CONTAINED IN CHAPTER XVIIB OF THE ACT.. THE ASSESSEE COMPANY HAS MANUFACTURING PLANTS AT GOA, GHAZIABAD, BADDI, SIKKIM, ROHA AND PITHAMPUR. THE A SSESSEE COMPANY IS HAVING ITS OWN WAREHOUSE SITUATED AT BHIWANDI, GHAZIABAD AND Z IRAKPUR. THE ABOVE DEPOT/ WAREHOUSE STORE THE FINISHED PRODUCTS FOR FINAL DIS PATCH. FINISHED PRODUCTS ARE DISPATCHED FROM OWN MANUFACTURING LOCATIONS/ WAREHO USE TO DISTRIBUTORS AND CONSIGNMENT AGENTS BASED ON INDENTS/ORDER RECEIVED FROM THEM. THE ASSESSEE COMPANY IS SELLING THE FORMULATIONS PRODUCTS TO DIS TRIBUTORS ON PRINCIPAL TO PRINCIPAL BASIS AND TO STOCKIEST THROUGH CONSIGNMENT AGENTS. THE CONSIGNMENT AGENTS ARE SELLING THE FINISHED FORMULATIONS TO VARIOUS STOCKI EST. BULK DRUGS AND INTERMEDIATES 4 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. ARE DISPATCHED FROM MANUFACTURING LOCATIONS ROHA & PITHAMPUR TO VARIOUS CUSTOMERS BASED ON ORDERS RECEIVED FROM MARKETING AND COMMUNI CATED TO PLANTS FOR DIRECT DISPATCH TO CONCERNED CUSTOMERS. COLLECTIONS ARE RE CEIVED FROM DISTRIBUTORS, CONSIGNMENT AGENTS AND STOCKIEST IN ASSESSEE COMPAN YS BANK ACCOUNTS. DURING THE COURSE OF SURVEY ACTION U/S 133A(1) OF THE ACT IT W AS FOUND BY THE LEARNED ASSESSING OFFICER(HEREINAFTER CALLED THE AO) THAT THE ASSES SEE COMPANY IS SELLING THE PRODUCTS THROUGH ITS 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 SAM E CANNOT BE SOLD TO THE END USER. THE ASSESSEE COMPANY IS ACCOUNTING ITS SALES THROUG H DISTRIBUTOR AFTER DEDUCTING THE MARGIN EARNED BY THE DISTRIBUTOR/STOCKIEST FROM THE MRP AS PER THE FOLLOWING EXAMPLES:- IF MRP OF PRODUCT IS RS. 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 5 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. SINCE THE ASSESSEE COMPANY IS SHOWING IN ITS BOOKS OF ACCOUNTS ONLY THE SALE PRICE IT HAS EARNED MINUS THE MARGIN, IT WAS NOT DEDUCTING A NY TAX AT SOURCE ON THE MARGIN EARNED BY THE DISTRIBUTORS/STOCKIEST AND SALE THROU GH DISTRIBUTORS WAS ESTIMATED FOR THE PERIOD APRIL 2011 TO 30 TH SEPT. 2011 TO BE TO THE TUNE OF RS.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 R ATE APPLICABLE U/S. 194H OF THE ACT. IT WAS ALSO OBSERVED BY THE AO THAT ASSESSEE COMPA NY HAS GIVEN DISCOUNTS/SCHEMES TO DISTRIBUTORS AND STOCKIEST AND NO TAX IS DEDUCTE D AT SOURCE THEREON. THE STATEMENT ON OATH WAS RECORDED BY THE REVENUE O F THE GENERAL MANAGER FINANCE OF THE ASSESSEE COMPANY ON 14/10/2011 WHO STATED ON OATH THAT THE FORMULATION PRODUCTS ARE SOLD BY THE ASSESSEE COMPANY TO DISTRI BUTORS ON PRINCIPAL TO PRINCIPAL BASIS AND TO STOCKIEST THROUGH CONSIGNMENT AGENTS. CONSIGNMENT AGENTS ARE SELLING THE FINISHED FORMULATIONS TO VARIOUS STOCKIEST. IT WAS STATED THAT THE BULK DRUGS AND INTERMEDIARIES ARE DISPATCHED FROM MANUFACTURING LO CATIONS ROHA AND PITHAMPUR TO VARIOUS CUSTOMERS BASED ON ORDERS RECEIVED FROM MAR KETING AND COMMUNICATED TO PLANTS FOR DIRECT DISPATCH TO THE CONCERNED CUSTOME RS. IT WAS STATED THAT COLLECTIONS ARE RECEIVED FROM DISTRIBUTORS, CONSIGNMENT AGENTS AND STOCKIEST IN THE ASSESSEES BANK ACCOUNT. SIMILARLY FOR PROCUREMENT IT WAS STATED TH AT RAW MATERIAL , PACKING MATERIAL ETC ARE PROCURED AFTER RECEIPT OF APPROVED REQUISIT ION FROM MANUFACTURING LOCATIONS. THE ORDERS ARE PLACED BASED ON REQUISITION AND FORE CAST. 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 PAYM ENTS ARE PROCESSED BY ACCOUNTS DEPARTMENT AT RESPECTIVE LOCATIONS BASED ON TERMS A GREED IN ORDER.SIMILARLY IT WAS STATED THAT FOR THE IMPORT PURCHASES, INDENT /OFFER S ARE ASKED FROM THE OVERSEAS VENDOR. THE TERMS OF PAYMENTS ARE LC, ADVANCE PAYMENT AND D OCUMENTS AT SIGHT. THE SUPPLIER INFORM THE DETAILS OF DOCUMENTS LIKE AIRWAY BILL/BI LL OF LADING, PACKING LIST, INVOICE AND TEST REPORTS ETC.. THE GOODS ARE CLEARED BY THE ASSESSEE COMPANY FROM THE 6 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. PORT/AIRPORT AFTER PAYMENT OF CUSTOM DUTY BY THE AS SESSEE COMPANY AND SENT TO RESPECTIVE LOCATIONS FROM PORT. THE PAYMENTS IN FOR EIGN 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 STA TED DURING RECORDING OF STATEMENT ON OATH ON 14.10.2011 THAT THE ASSESSEE C OMPANY IS EXPORTING FORMULATIONS AND BULK DRUGS TO VARIOUS COUNTRIES. FINISHED GOODS ARE DIRECTLY DISPATCHED FROM MANUFACTURING LOCATIONS TO CUSTOMS PORTS. EXPORT DO CUMENTATION IS CARRIED OUT BY THE COMMERCIAL AND LOGISTIC DEPARTMENT WHO ENSURES ALL LEGAL COMPLIANCES AND REQUISITE DOCUMENTS WITH RESPECT TO PRE AND POST SHIPMENT. CO LLECTIONS FROM OVERSEAS CUSTOMERS ARE BEING RECEIVED DIRECTLY IN COMPANYS BANK ACCOUNT. IT WAS OBSERVED BY THE AO THAT THERE ARE THREE METH ODS FOR THE SALE OF THE DRUGS- MEDICINE BY THE ASSESSEE COMPANY. FIRST THROUGH THE CONSIGNMENT AGENTS WHICH ARE LOCATED IN VARIOUS PARTS OF THE COUNTRY, SECONDLY T HROUGH DISTRIBUTORS AND THIRDLY THROUGH EXPORT OF DRUGS. WITH RESPECT TO THE COMMIS SION 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 DRU GS-MEDICINE WERE SOLD TO THE DISTRIBUTORS WHO THEN FURTHER SELL THEM TO THE STOC KIEST/RETAILERS AND FINALLY THEY ARE SOLD TO THE ULTIMATE CUSTOMERS. THE CONTENTION OF T HE ASSESSEE COMPANY IS THAT THE DISTRIBUTORS ARE INDEPENDENT TRADERS AND ARE NOT AG ENTS OF THE ASSESSEE COMPANY. IT WAS OBSERVED BY THE AO DURING THE COURSE OF THE SURVEY THAT THE MRP IS FIXED BY THE ASSESSEE COMPANY AND THE MARGINS TO BE CHARGED BY T HE DISTRIBUTORS/RETAILERS IS ALSO FIXED BY THE ASSESSEE COMPANY. THIS MARGIN DIFFERS WITH REGARD TO THE CONTROLLED DRUGS AND UNCONTROLLED DRUGS. IT WAS FOUND THAT IN CASE O F EXPIRY OF THE MEDICINES THE SAME ARE RETURNED BY THE DISTRIBUTORS TO THE ASSESSEE CO MPANY WHO IN TURN REFUND THE MONIES PAID BY THEM IN FIRST INSTANCE. THUS THE DISTRIBUTO RS PER SE HAS NO RISK AND ALL THE RISK IS BORNE BY THE ASSESSEE COMPANY. FURTHERMORE, IT I S THE ASSESSEE COMPANY WHO 7 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. DECIDE THE MARGINS TO BE CHARGED BY THE DISTRIBUTOR S. THIS FACTORS LEADS TO AN INFERENCE THAT THE NATURE OF THE RELATIONSHIP MAY BE ONE OF P RINCIPAL AND AGENT. THE AO HELD THAT TO ESTABLISH THIS BEYOND DOUBT, ENQUIRIES ARE REQUI RED TO BE MADE WITH RESPECTIVE DISTRIBUTORS WITH REGARD TO THEIR FUNCTION AND DUTI ES TO SEE WHETHER THEY ARE IN FACT TRADERS OR SIMPLE AGENTS OF THE MANUFACTURING COMPA NY. SO THE AO OBSERVED THAT THE SALE THROUGH DISTRIBUTORS STOOD AT RS. 130 CRORES F ROM APRIL, 2011 TO 30.09.2011. ESTIMATED MARGIN @ 3.46% TO THE DISTRIBUTORS WORKS OUT TO RS. 4.5 CRORES ON WHICH IT NEEDS TO BE SEEN WHETHER THIS AMOUNT IS ACTUALLY IN THE NATURE OF COMMISSION ON WHICH TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE U/S 194H OF THE ACT . THE AO FURTHER OBSERVED THAT THE DISCOUNT/INCENTIVES TO THE DISTRI BUTORS WERE BEING GIVEN BY THE ASSESSEE COMPANY TO THE EXTENT OF RS. 10.59 CRORES ON WHICH NO TAX WAS DEDUCTED AT SOURCE WHICH ARE LIKELY TO BE IN THE NATURE OF COMM ISSION PAID TO THE DISTRIBUTORS IN ADDITION TO THE MARGIN ON WHICH TDS SHOULD HAVE BEE N 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 MANUF ACTURING AND TRADING OF FORMULATIONS AND BULK DRUGS. 2. THE ASSESSEE HAS ENTERED INTO AGREEMENTS WITH V ARIOUS PARTIES (DISTRIBUTORS) FOR SALE OF DRUGS MANUFACTURES BY THE COMPANY. SAM PLE COPY OF THE AGREEMENT IS ALREADY ON RECORD. 3. THE KEY 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 HAV E ANY CONTROL OVER GOODS. II) DISTRIBUTOR AFTER PURCHASING GOODS FORM UNICHE M SELL GOODS TO THE END CUSTOMER'S ON ITS OWN AND UNICHEM DOES NOT COME IN PICTURE. 8 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. III) DISTRIBUTORS PURCHASE GOODS FROM UNICHEM AGAI NST ADVANCE OR ON PAYMENT AGAINST DELIVER OR AS PER NORMAL CREDIT POLICY OF THE UNICHEM. THE PAYMENT TERMS OF THE END CUSTOMERS IS INDEPENDENTLY CONTRO LLED BY DISTRIBUTORS AS PER THEIR TRADE POLICY. IV) DISTRIBUTOR ISSUES SALE INVOICE DIRECTLY TO TH E END CUSTOMERS AND SHOWS THE SALES SO EFFECTED IN ITS SALES TAX RETURNS AND ASS ESSED TO SALES TAX. WE UNDERSTAND THAT 'YOU HAVE ALREADY VERIFIED THIS BY ISSUING SUMMONS TO FEW DISTRIBUTORS. WE REQUEST YOU TO KINDLY GIVE ASSESS EE 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 PHAR MACEUTICAL PRODUCTS. VI) THE STOCK OF GOODS LYING WITH DISTRIBUTORS IS NOT SHOWN AS STOCK OF ASSESSEE. INSURANCE ON THESE PRODUCTS IS TAKEN OUT BY DISTRI BUTORS AND NOT ASSESSEE (COPY OF INSURANCE POLICY TAKEN BY ONE OF THE DISTRIBUTO R IS ENCLOSES). THIS ALSO SHOWS THAT TITLE TO THE GOODS VESTS WITH THE DISTRIBUTOR S ONCE SALE IS MADE TO THEM. VII) THE DISTRIBUTOR HAS MAINTAINED REQUISITE INFR ASTRUCTURE AND MANPOWER FOR ITS BUSINESS. VIII) IN CASE OF ANY BREAKAGE, LEAKAGE, ETC, DISTR IBUTOR 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 NO RMS, SINCE; PHARMACEUTICAL PRODUCTS ARE CONSUMED BY THE GENERAL PUBLIC AND AN Y EXPIRED PRODUCT CAN CAUSE SERIOUS HEALTH HAZARDS. THEREFORE, AS PER TH E STOCKIEST AND RETAILERS ASSOCIATION MANUFACTURER IS SUPPOSED TO TAKE BACK THE EXPIRED GOODS FROM THE STOCKIEST AND RETAILERS AND MANUFACTURER NEED TO R EIMBURSE THE COST OF THE EXPIRED GOODS TO THE STOCKIEST AND RECEIVING THE E XPIRED GOODS FROM THE RETAILERS AND STOCKIEST AT DISTRIBUTOR'S END AND D ISTRIBUTORS AFTER DUE VERIFICATIONS ON QUANTITY, QUALITY AND REASONS FOR EXPIRY OF THE PRODUCTS SEND BACK THE GOODS TO ASSESSEE'S GHAZIABAD DEPOT FOR D ESTRUCTION. ON VERIFICATION OF EXPIRED GOODS AT ASSESSEE'S DEPOT AT GHAZIABAD ASSESSEE DESTROY THE EXPIRED GOODS UNDER SUPERVISION OF QUALITY ASSURANCE PERSO N. IN VIEW OF THE ABOVE YOUR GOOD SELF WILL A PPRECIATE 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 COMMISSIO N INCOME. 9 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. 4. THE AO HELD THAT THE RELATION BETWEEN THE ASSESS EE AND THE DISTRIBUTOR IS OF PRINCIPAL AND AGENT . THE DISCOUNT OR INCENTIVES RE TAINED BY THE DISTRIBUTORS IS NOT DISCOUNT BUT THE PAYMENT FOR SERVICES RENDERED IN T HE COURSE OF BUYING AND SELLING . THE PRICING STRUCTURE BETWEEN THE ASSESSEE COMPANY AND DISTRIBUTORS IS NOTHING BUT A PAYMENT RECEIVED OR RECEIVABLE DIRECTLY OR INDIRECT LY BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED OR FOR ANY SER VICES IN THE 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 TH REE 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/INC ENTIVE/REBATE IS NOT BUT A 'GUISE' FOR THE COMMISSION PAYMENT. THAT THE PAYMENTS ARE N OTHING BUT COMMISSION PAYMENTS EMBEDDED IN MUTUALLY BENEFICIAL PRICING ST RUCTURE. 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 DISTRIBUTO R 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 ASSE SSEE COMPANY AS THE ASSESSEE IN DEFAULT IN TERMS OF SECTION 201(1) & 201(1A) OF TH E 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 DATE D 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 10 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. 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 FIRST APPEAL BEFORE THE CIT(A) . THE CIT(A) OBSERVED THAT THE AO HAS OPINED THAT THE RELATIONSHIP BETWEEN THE ASSESSEE COMPANY AND THE DISTRIBUTORS IS THAT OF PR INCIPAL AND AGENT AND HENCE THE MARGIN/DISCOUNT BEING IN THE NATURE OF COMMISSION W AS LIABLE FOR DEDUCTION UNDER SECTION 194H OF ACT AND THE ASSESSEE COMPANY HAVING FAILED TO DO SO , THE ASSESSEE COMPANY WAS LIABLE TO PAY TAX ON LIABILITY UNDER TH E PROVISION OF ACT. ON THE CONTENTION OF THE AO THAT IN THE CASE OF DAMAGE OF GOODS THE LOSS IS BORNE BY THE ASSESSEE COMPANY AND HENCE THERE IS NO RISK TO DIST RIBUTORS , 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 MU ST BE NOTIFIED TO THE ASSESSEE COMPANY WITHIN SEVEN DAYS OF ARRIVAL OF PRODUCTS AN D FINAL PLACE OF DESTINATION AND THE SHORTAGE, ENDORSEMENT ON L/R OF THE TRANSPORTER ALONG WITH THE SHORTEST CERTIFICATE WILL HAVE TO BE OBTAINED FROM THE TRANSPORTER. IF T HE DISTRIBUTOR FAILED TO COMPLY WITH THE CLAUSE, DISTRIBUTOR SHALL BE DEEMED TO HAVE ACC EPTED THE DELIVERY OF PRODUCTS IN QUESTION AND THE ASSESSEE COMPANY SHALL HAVE NO LIA BILITY TOWARDS DISTRIBUTOR WITH RESPECT TO THE DELIVERY. THE ASSESSEE COMPANY POINT ED OUT AT THE CLAUSE 5.1 WHICH SAYS THAT THE ASSESSEE COMPANY SHALL SELL THE PRODUCTS T O DISTRIBUTORS AND THE DISTRIBUTOR AGREES TO BUY THE PRODUCTS AND THE PRICES AS PER TH E PRICELIST 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 DISTRIBU TION AGREEMENT UNDER WHICH DISTRIBUTOR IS OBLIGATED TO STORE AND MANAGE THE PR ODUCTS BATCH WISE ACCORDING TO 11 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. FEFO IN ACCORDANCE WITH THE DRAFT GUIDELINES ON GOO D DISTRIBUTION PRACTICES FOR PHARMACEUTICALS PRODUCTS ISSUED BY THE CDSCO (CENTR AL DRUGS STANDARD CONTROL ORGANIZATION) AND AS PER WHICH PHARMACEUTICAL PRODU CTS ARE STORED/DISTRIBUTED (FIRST EXPIRY/FIRST OUT, FEFO) .THE ASSESSEE COMPANY SUBMI TTED THAT IF THE DISTRIBUTOR IS MAINTAINING FEFO METHOD AND THERE ARE EXPIRY OF DRU GS, SAME ARE TAKEN BACK AND MONEY REFUNDED. THE ASSESSEE COMPANY RELIED UPON TH E DECISIONS IN THE CASE OF THE MOTHER DIARY 249 CTR 559 AND JAI DRINKS PRIVATE LIM ITED 336 ITR 363 BY HONBLE DELHI HIGH COURT AND IN THE CASE OF FOSTERS INDIA P RIVATE LTD. 29 SOT 32 AND GOVERNMENT MILK SCHEME 39 ITD 306 BY PUNE TRIBUNAL . THE ASSESSEE COMPANY ALSO RELIED UPON THE DECISION OF HONBLE SUPREME COURT I N 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 AS SESSEE COMPANY HAVE THEIR OWN WAREHOUSES WHEREIN THEY STORE MANUFACTURED PRODUCTS . WHEN SURVEY ACTION U/S 133A OF THE ACT WAS CONDUCTED , IT WAS FOUND THAT THE AS SESSEE COMPANY IS SELLING THE PRODUCTS THROUGH THESE DISTRIBUTORS/STOCKIEST AND T HE CONSIGNMENT AGENTS IN DIFFERENT ASSIGNED AREAS AND THE SALES/REVENUE IS CREDITED ON LY FOR THE NET AMOUNT RECEIVED/ RECEIVABLE FROM THE DISTRIBUTORS AFTER DEDUCTING DI SCOUNT AS THE ASSESSEE COMPANY IS GIVING DISCOUNTS/SCHEMES TO THE DISTRIBUTORS AND ST OCKIEST. 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 FORM OF LEVY OF TAX U/S. 201 AND INTEREST U/S. 201A OF THE ACT. THE CIT(A) HELD THAT THE SALE BY THE AS SESSEE COMPANY WITH THE DISTRIBUTORS BEING THAT OF A PRODUCT THAT ARE PHARM ACEUTICAL DRUGS IS A CONTRACT OF SALE . THAT IN A CONTRACT OF SALE WHEN THE MANUFACTURER SE LLS THE GOODS TO THEIR DISTRIBUTORS 12 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. WITH ALL THE RISK AND LIABILITIES PASSED ON TO THEM , THOUGH PUTTING SOME LIMITATIONS/RESTRICTIONS REGARDING MAINTENANCE AND STORAGE ETC. AS REGARD TO THE QUALITY AND FAIR PRICES FOR THE MARKET TO ENSURE THEIR REPU TATION, THE RELATIONSHIP IS THAT OF PRINCIPAL TO PRINCIPAL AND NOT OF PRINCIPAL AND AGE NT. THE CIT(A) OBSERVED THAT HE HAS GONE THROUGH THE DE CISIONS 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 THE IR DISTRIBUTORS. THE ASSESSEE COMPANY HAS GIVEN THE DISCOUNT TO THE DISTRIBUTORS ON THE MRP OF THESE MEDICINES, THE RESTRICTIONS AS BROUGHT IN THE AGREEMENT ARE ONLY A S PER THE GUIDELINES OF OPERATIONS IN THE FIELD OF MEDICINES AND THUS ARE THE OPERATING P ROCEDURES. THE CIT(A) HELD THAT THE CASE OF THE ASSESSEE COMPANY IS COVERED BY THE DEC ISION OF THE MUMBAI TRIBUNAL IN THE CASE OF GLENMARK PHARMACEUTICAL LIMITED 30 SOT 19(MUM.) AND HONBLE DELHI HIGH COURT IN CASE OF REEBOK INDIA COMPANY 306 ITR 124(DEL.) IN FAVOUR OF THE ASSESSEE COMPANY. THE CIT (A) HELD THAT THE ACTION OF THE AO TO HOLD THE ASSESSEE COMPANY IN DEFAULT FOR NOT DEDUCTING TAX ON THE COM MISSION PAID AND CONSEQUENTLY LEVY OF TAX AND INTEREST AMOUNTING TO RS.1,81,78,06 2/-, BEING NOT SUSTAINABLE WAS ORDERED TO BE DELETED VIDE ORDERS DATED 11.04.2014. 6. AGGRIEVED BY THE ORDERS OF THE CIT(A) DATED 11.0 4.2014, 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 COVER ED 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 INCENTIV E/DISCOUNTS TO THE DISTRIBUTORS ON WHICH TAX HAS NOT BEEN DEDUCTED AT SOURCE U/S 194H OF THE ACT . THE LD. DR RELIED ON 13 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. THE ORDERS OF THE AO WHILE ON THE OTHER HAND, THE L D. COUNSEL OF THE ASSESSEE COMPANY SUBMITTED THAT THE DEALING BETWEEN THE ASSESSEE COM PANY 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 A ND RELIED UPON THE ORDERS OF THE CIT(A), THAT THERE IS SALE OF THE PRODUCTS BY THE A SSESSEE 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 ASSE SSEE COMPANY WITH RUDRA PHARMA DISTRIBUTORS LTD., THE LD. COUNSEL OF THE AS SESSEE COMPANY SUBMITTED THAT THE TERMS AND CONDITIONS OF THE AGREEMENT CLEARLY STIPU LATE DEALING BETWEEN THE ASSESSEE COMPANY AND THE DISTRIBUTOR IS ON PRINCIPAL TO PRI NCIPAL BASIS, WHEREBY THE ASSESSEE COMPANY IS SELLING THE DRUGS TO THE DISTRIBUTOR AND ALL THE RISKS AND REWARDS OF THE OWNERSHIP OF THE DRUGS-MEDICINE ARE TRANSFERRED TO THE DISTRIBUTOR ON SALE OF THE PRODUCTS I.E. MEDICINE . THE ASSESSEE COMPANY RELIE D UPON THE DECISIONS OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. INT ERVET INDIA PVT LTD. 364 ITR 238 IN ITA NO. 1616 OF 2011 . THE ASSESSEE COMPANY ALS O SUBMITTED THAT THE DISCOUNT IS GIVEN ON THE MRP TO THE DISTRIBUTORS WHICH IS IN TH E 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 SC HEME OF DISCOUNT OFFERED BY THE ASSESSEE COMPANY: IF MRP OF PRODUCT IS RS. 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 14 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. 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 THE ASSESSEE RELIED UPON THE DECISION OF HONBLE DE LHI HIGH COURT IN THE CASE OF MOTHER DIARY IN 358 ITR 218 TO CONTEND THAT DISCOUN T TO MRP IS NOT COMMISSION AND HENCE NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PER USED THE MATERIAL ON RECORD, WE HAVE OBSERVED THAT THE PERUSAL OF THE CLAUSES OF TH E DISTRIBUTOR AGREEMENT DATED 01-07- 2001 ENTERED INTO BY THE ASSESSEE COMPANY 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-MEDICI NE TO THE DISTRIBUTOR WHICH IS BEING PAID BY THE DISTRIBUTOR ON PRINCIPAL TO PRINC IPAL BASIS AND PROPERTY IN GOODS WITH ALL RISK AND REWARDS PASSES TO THE DISTRIBUTOR AT T HE 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 CUSTO MERS 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 S ERVICES. 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 CO MPANY ALONG WITH ENDORSEMENT ON LORRY RECEIPT OF THE TRANSPORTER ALONG WITH SHORTAG E CERTIFICATES BY THE TRANSPORTER TO CLAIM LOSS FROM THE ASSESSEE COMPANY, IN OTHER SITU ATIONS THE LOSS OR DAMAGE TO 15 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. PRODUCTS SHALL BE BORNE BY THE DISTRIBUTOR. THE DRU GS 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 H AVING EXPIRY COULD NOT BE SOLD AFTER THE STIPULATED DATE OF EXPIRY , OTHERWISE IT WILL B E HEALTH HAZARD TO THE CONSUMERS , THE ASSESSEE COMPANY AS NORMAL MARKET PRACTICE TAKES B ACK THE SAID EXPIRED DRUG- MEDICINES FROM DISTRIBUTORS WHICH HAS EXPIRED AND P AY BACK THE DISTRIBUTORS BUT THAT DOES NOT IN OUR HUMBLE OPINION IS DECISIVE OR CHANG E THE CHARACTER OF DEALING BETWEEN THE ASSESSEE COMPANY AND THE DISTRIBUTOR WHICH PRIM ARILY CONTINUES TO BE ON PRINCIPAL TO PRINCIPAL BASIS . SUCH EXCEPTION OF TAKING BACK THE EXPIRED PRODUCTS HAS ITS GENESIS TO THE SENSITIVITY OF THE PRODUCT BEING DRUGS-MEDIC INE HANDLED BY THE ASSESSEE COMPANY OTHERWISE IT COULD HAVE SEVERE HEALTH HAZAR D 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 R EWARDS HAVE NOT PASSED TO THE DISTRIBUTOR ON SALE OF PRODUCTS BY THE ASSESSEE COM PANY TO THE DISTRIBUTOR AT THE TIME OF DELIVERY BY THE CARRIER TO THE DISTRIBUTOR AS PE R STIPULATED TERMS OF DISTRIBUTION AGREEMENT. WE HAVE ALSO OBSERVED THAT THE ASSESSEE COMPANY IS RAISING SALE INVOICES ON THE DISTRIBUTOR M/S RUDRA PHARMA DISTRIBUTORS LI MITED WHICH ARE PLACED ON THE PAPER BOOK FILED BY THE ASSESSEE COMPANY AT PAGE 35 WHILE THE LEDGER ACCOUNT SHOWING INVOICES RAISED AND PAYMENTS RECEIVED FROM DISTRIBUTOR M/S RUDRA PHARMA DISTRIBUTORS LIMITED BY THE ASSESSEE COMPANY IS AL SO PLACED IN THE PAPER BOOK FILED BY THE ASSESSEE COMPANY AT PAGE 36 TO 51. WE HAVE A LSO OBSERVED THAT THE SAID DISTRIBUTOR M/S RUDRA PHARMA DISTRIBUTORS LIMITED IS REGISTERED WITH VAT AUTHORITIES AND IS RAISING ITS INVOICES (INCLUDING VAT) TO THEI R CUSTOMERS , WHEREBY ALL THE ABOVE FACTS CLEARLY REFLECTS THAT THE DISTRIBUTORS IS BUY ING 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 TH E DELIVERY OF GOODS BY CARRIER TO THE SAID DISTRIBUTOR WHICH IS ALSO SUPPORTED BY THE CLA USE 5 OF THE DISTRIBUTION AGREEMENT DATED 01-07-2001. THUS, WE, THEREFORE, HOLD THAT T HE ASSESSEE COMPANY HAS PAID 16 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. 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 THE SE 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 AGGRI EVED IS WITH RESPECT TO NON DEDUCTION OF TAX AT SOURCE @10% U/S 194J OF THE ACT ON PAYMENT OF DIRECTORS SITTING FEE OF RS.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 RS.70,40,000/- PAID BY THE ASSESSEE COMPANY. THE ASSESSEE COMPANY REPLIED AS U NDER: 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 RE NDERED BY THE PERSON. 2. THE NON-EXECUTIVE DIRECTORS HAVE PROVIDED HONOR ARIUM SERVICES AND FOR THE ASSESSEE HAS PAID SITTING FEES TO SUCH DIRECTORS: THE NON-EXECUTIVE DIRECTORS HAVE NOT PROVIDED ANY TECHNICAL OR PROFESSIONAL SE RVICES TO THE ASSESSEE AND THEREFORE PAYMENT OF SITTING FEES DOES NOT CONSTIT UTE PAYMENT OF PROFESSIONAL OR TECHNICAL SERVICES. THUS, THE PAYMENT MADE TO DIRE CTORS IS NOT SUBJECT TO TDS U/ S 194J OF THE INCOME TAX ACT, 1961. 3. MOREOVER, THE AMENDMENT PROPOSED IN BUDGET 2012 RELATING TO TDS ON REMUNERATION OR FEES OR COMMISSION PAYABLE TO DIRE CTOR (NOT BEING IN THE NATURE OF SALARY) WILL ATTRACT TDS U/ S 194J AS FE E FOR PROFESSIONAL OR TECHNICAL SERVICES AT THE RATE OF 10% IS PROSPECTIVE FROM A Y 2013-14 . ONLY MEMORANDUM EXPLAINING THE BILL PRO VIDES AS UNDER; UNDER THE EXISTING PROVISIONS OF THE INCO ME-TAX ACT, A COMPANY, BEING AN EMPLOYER, IS REQUIRED TO DEDUCT TAX AT TH E TIME OF PAYMENT OF SALARY TO ITS EMPLOYEES INCLUDING MANAGING DIRECTOR/W HOLE TIME DIRECTOR. HOWEVER, THERE IS NO SPECIFIC PROVISION FOR DEDUCTION OF T AX ON THE REMUNERATION PAID TO A DIRECTOR WHICH IS NOT IN THE NATURE OF S ALARY. IT IS PROPOSED TO AMEND SECTION 194J TO PROVIDE THAT TAX IS REQUIRED TO BE DEDUCTED ON THE REMUNERATION PAID TO 17 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. A DIRECTOR, WHICH IS NOT IN THE NATURE O F SALARY, AT THE RATE OF 10% OF SUCH REMUNERATION. THIS AMENDMENT WILL TAKE EFFECT FROM 1 ST JULY, 2012. IN VIEW OF THE ABOVE NO TDS U/ S 194J O F THE ACT IS TO BE DEDUCTED ON PAYMENT OF DIRECTORS SITTING FEES FOR THE F. Y. 2008-09 TO 2010-11 AND PERIOD ENDED 30TH SEPTEMBER 2011. THE AO AFTER CONSIDERING THE REPLIES OF THE ASSESSE E COMPANY HELD THAT THE ASSESSEE COMPANY OUGHT TO HAVE DEDUCTED TA X AT SOURCE ON DIRECTORS SITTING FEES WHICH IS NOTHING BUT FEES FOR MANAGE RIAL SERVICES WITHIN THE MEANING ASSIGNED U/S. 194J OF THE ACT. HENCE, T HE AO VIDE ORDERS DATED 30-03-2012 HELD THAT THE ASSESSEE COMPANY HAS DEFAUL TED ON ACCOUNT OF THE NON DEDUCTION OF TAX AT SOURCE ON PAYMENT OF DIRECTOR S FEE OF RS.70,40,000/- U/S 194J OF THE ACT AND IS TREATED AS AN ASSESSEE IN DE FAULT IN TERMS OF SECTION 201(1) & 201(1A) FOR NON DEDUCTION OF TAX AT SOURCE ON PAYMENT OF DIRECTOR FEES AND NON-PAYMENT OF INTEREST THEREON. THE DEFAU LT IS WORKED OUT BY THE AO VIDE ORDERS DATED 30.03.2012 AS UNDER: DIRECTORS REMUNERATION TDS U/S. 194J @ 11.33% INTEREST U/S. 201(1A) 70,40,000/- 7,97,632 3,82,863 TOTAL 1180495 10. AGGRIEVED BY THE ORDERS DATED 30-03-2012 PASSED BY THE AO, THE ASSESSEE COMPANY FILED FIRST APPEAL WITH THE CIT(A) AND CONT ENDED THAT NO TAX WAS DEDUCTED AT SOURCE ON PAYMENT OF DIRECTORS FEE AS THE SAME DOE S 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 AL SO DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. LADY NAVAJBAI R.J. TATA(1947) 15 ITR0008(BOM 18 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. 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 SO URCES. 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 APP EAL IS 2009-10, THE CIT(A) VIDE ORDERS DATED 11.04.2014 HELD THAT THE ASSESSEE COMP ANY 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 SUSTAIN ABLE 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 WHIL E LD. COUNSEL OF THE ASSESSEE COMPANY SUBMITTED THAT AMENDMENT MADE IN SECTION 19 4J OF THE ACT BY INSERTION OF SUBSECTION (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 ASSES SMENT YEAR 2009-10. THE LD. COUNSEL OF THE ASSESSEE COMPANY RELIED UPON THE DECISION OF PUNE TRIBUNAL IN THE CASE OF BHARAT FORGE LIMITED V. ADDL. CIT REPORTED IN (2013 ) 154 TTJ 649(PUNE) WHEREBY PUNE TRIBUNAL HELD AS UNDER: 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER B OOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS D ECISIONS RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE. THE ONLY DISPUTE IN THIS GROUND IS REGARDING DEDUCTION OF TAX AT SOURCE FROM THE SITTI NG FEES PAID TO THE DIRECTORS. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE THE PROVISION OF S. 194J IS NOT APPLICABLE TO SUCH SITTING FEES SINC E FEES DO NOT FALL IN ANY OF 19 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. THE CATEGORIES OF PROFESSIONAL SERVICE AS PER EXPLA NATION TO S. 194J. FURTHER, NO SUCH OBJECTION WAS TAKEN IN THE PAST BY THE DEPA RTMENT FOR SUCH NON- DEDUCTION AND IN VIEW OF INSERTION OF SUB-S. (BA) T O S. 194J(1) TDS IS REQUIRED TO BE MADE OUT OF SUCH DIRECTOR SITTING FE ES W.E.F. 1ST JULY, 2012. THEREFORE, FOR NON-DEDUCTION OF TAX AT SOURCE FROM THE SITTING FEES FOR THE IMPUGNED ASSESSMENT YEAR, THERE IS NO DEFAULT ON TH E PART OF THE ASSESSEE. ACCORDING TO THE REVENUE THE DIRECTOR IS ALSO A MAN AGER UNDER THE PROVISIONS OF THE COMPANIES ACT AND THEREFORE, A TE CHNICAL PERSONNEL AND THEREFORE THE COMPANY IS LIABLE TO DEDUCT TAX AT SO URCE UNDER THE PROVISIONS OF S. 194J. 8.1 AS PER THE EXPLANATION TO PROVISIONS OF S. 194J, P ROFESSIONAL SERVICES MEAN SERVICES RENDERED BY A PERSON IN THE COURSE OF CARRYING ON LEGAL, MEDICAL, ENGINEERING OR ARCHITECTURAL PROFESSION OR THE PROFESSION OF ACCOUNTANCY OR TECHNICAL CONSULTANCY OR INTERIOR DE CORATION OR ADVERTISING OR SUCH OTHER PROFESSION AS IS NOTIFIED BY THE BOAR D. WE, THEREFORE, FIND FORCE IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE AS SESSEE THAT SITTING FEES PAID TO THE DIRECTORS DO NOT AMOUNT TO FEES PAID FO R 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 FIN ANCE BILL, 2012 THAT AS PER CL. NO. 71, IT WAS SPECIFICALLY MENTIONED TH AT 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 PROVISI ONS OF S. 194J(1)(BA) SPEAK OF ANY REMUNERATION OR FEES OR COMMISSION BY WHATEV ER 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 APPL ICABLE RATE AND THE ABOVE PROVISION HAS BEEN INSERTED BY THE FINANCE AC T, 2012 W.E.F., 1ST JULY, 20 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. 2012. WE, THEREFORE, FIND FORCE IN THE SUBMISSION O F 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 RAI SED BY THE ASSESSEE ON THE ISSUE OF TDS ON SITTING FEES PAID TO DIRECTORS IS A LLOWED. THUS, THE LD COUNSEL OF THE ASSESSEE COMPANY CONTENDED THAT THE ASSESSEE COMPANY CANNOT BE HELD AS ASSESSEE IN DEFAULT FOR NON DEDU CTION 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 AN D PUNE TRIBUNAL IN BHARAT FORGE CASE HAS ALREADY HELD THAT NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE U/S 194J OF THE ACT ON PAYMENT OF DIRECTO RS SITTING FEE PRIOR TO THE AMENDMENT CARRIED TO SECTION 194J OF THE ACT W.E.F. 01-07-2012. 13.WE HAVE HEARD THE RIVAL PARTIES AND PERUSED THE MATERIAL ON RECORD AND WE ARE IN RESPECTFUL 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 TH E AMENDMENT W.E.F. 01-07-2012 IN SECTION 194J BY INSERTION OF SUB-SECTION (BA) TO SE CTION 194J(1) OF THE ACT . THE INSERTION OF SUB-SECTION (BA) TO SECTION 194J OF TH E ACT HAS CLEARLY STIPULATED THAT TAX IS TO BE DEDUCTED AT SOURCE ON ANY REMUNERATION OR FEES OR COMMISSION BY WHATEVER NAME CALLED TO A DIRECTOR OF A COMPANY, OTHER THAN THOSE ON WHICH TAX IS DEDUCTIBLE AT SOURCE U/S 192 OF THE ACT . THE SAID AMENDMENT IS B ROUGHT IN BY THE FINANCE ACT, 2012 W.E.F. 01-07-2012 . THE MEMORANDUM TO THE FINA NCE BILL 2012 HAS STIPULATED THAT THERE IS NO SPECIFIC PROVISIONS IN THE ACT PRO VIDING FOR DEDUCTION OF TAX AT SOURCE ON REMUNERATION PAID TO DIRECTORS WHICH IS NOT IN THE NATURE OF SALARY WHEREBY TAX IS DEDUCTIBLE COVERED U/S 192 OF THE ACT, WHICH CLEAR LY INDICATES THAT THERE WAS NO PROVISION FOR DEDUCTION OF TAX AT SOURCE PRIOR TO T HE AMENDMENT BY FINANCE ACT,2012 21 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. W.E.F. 01-07-2012 ON PAYMENT OF REMUNERATION OR FE E 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 SUB- SECTION (BA) TO SECTION 194J(1) OF THE ACT HAS CAST E AN ADDITIONAL BURDEN ON THE TAX- PAYER WITH RESPECT TO DEDUCTION OF TAX AT SOURCE O N REMUNERATION,FEE OR COMMISSION TO DIRECTOR OTHER THAN SALARY WHICH AS PER MEMORAND UM TO FINANCE BILL 2012 WAS NOT EXISTING AS PER SPECIFIC PROVISIONS OF THE ACT PRIO R TO THE AFORESAID AMENDMENTS AND THE AMENDMENTS TO SECTION 194J(1) OF THE ACT BY INS ERTION 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 APPL ICABLE 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 , FEES OR COMMISSION TO DIRECTORS O THER THAN THE SALARY FOR WHICH TAX IS TO BE DEDUCTED AT SOURCE UNDER SECTION 192 OF TH E ACT. SINCE THE INSTANT APPEAL IS FOR THE ASSESSMENT YEAR 2009-10 WHICH IS PRIOR TO THE A SSESSMENT YEAR 2013-14, WE HOLD THAT NO TAX WAS DEDUCTIBLE AT SOURCE ON PAYMENT OF DIRECTORS SITTING FEE PAID BY THE ASSESSEE COMPANY TO ITS DIRECTORS U/S 194J OF THE A CT AND THE ASSESSEE COMPANY COULD NOT BE HELD AS ASSESSEE IN DEFAULT U/S 201(1) AND 201(1A) OF THE ACT. WE ORDER ACCORDINGLY. 14. IN THE RESULT, THE REVENUES APPEAL IN ITA NO.4 592/MUM/2014 IS DISMISSED. 15. OUR DECISION IN ITA NO 4592/MUM/2014 FOR ASSESS MENT YEAR SHALL MUTATIS MUTANDIS APPLY TO THE ITA NO.4593/MUM/2014 AS ISSUE INVOLVED IN BOTH THESE APPEAL ARE IDENTICAL.WE ORDER ACCORDINGLY 16. IN THE RESULT, THE REVENUES APPEAL IN ITA NO.4 593/MUM/2014 IS ALSO DISMISSED. 22 ITA NO.4592 /MUM/2014 & 4593/MUM/2014 ITO V. UNICHEM LABORATORIES LTD. 17. IN THE RESULT, BOTH THE REVENUES APPEAL IN IT A NO.4592/MUM/2014 AND ITA NO. 4593/MUM/2014 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON JANUARY 29, 2 016 SD/- SD/- (SAKTIJIT DEY) (RAMIT KOCHAR ) &' ( / JUDICIAL MEMBER ( / ACCOUNTANT MEMBER MUMBAI; +( DATED : 29 .01.2016 PS:- POOJA K. !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. , ( ) / THE CIT(A) 4. , / CIT CONCERNED 5. /01 ' '23 , ! 23% , / DR, ITAT, MUMBAI 6. 156 / GUARD FILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI
