Where assessee is payee and not payer, no question of its defaulting in TDS deduction u/s 194J arises

IN THE ITAT MUMBAI  

Piramal Healthcare Ltd.

V/s.

Assistant Commissioner of Income-tax (TDS)

IT Appeal Nos. 7789 to 7792 AND 7794 (Mum.) of 2011

[Assessment years 2007-08 to 2011-12]

May 9, 2012

ORDER

J. Sudhakar Reddy, Accountant Member – These four appeals by the assessee are directed against four separate orders of the CIT(Appeals)-14, Mumbai, all dated 12-10-2011, in relation to assessment years 2007-08 to 2011-12.

2. Since the appeals involve common grounds of appeal, same set of facts, they are taken up together and disposed of by this consolidated order, for the sake of convenience.

ITA No.7789/Mum/11 (AY 2007-08):

3. The brief facts of the case are that the assessee company is engaged in manufacturing, trading and distribution of drugs. On 05-09-2005, it entered into an Agreement with M/s. Zivon Marketing Services Pvt. Ltd., appointing the said firm as its ‘super stockist’. The responsibility of the said super stockist as per Agreement was that it would be responsible for getting stock of the manufactured products of the assessee company, for onward transmission to the market, through the retailer.

4. In pursuance of the said Agreement, the assessee company sold the manufactured product to M/s. Zivon Marketing Services P. Ltd. for its onwards sale in the open market. Various stages of trading/supply chain of the products manufactured by the company, to a customer, is depicted down below (as has been stated in the record of the case):

(1)  Manufacturer (Assessee company) (Manufacture of the products in its plant/machinery).

Produce sent to HUB.

(2)  HUB

(Remuneration paid by the assessee company by way of commission). Produce sent to CFA.

(3)  CFA (Clearing & Forwarding Agent) (Remuneration paid by the assessee company by way of commission.

Forwards the produce to Super Stockist.

(4)  Super Stockist (M/s. Zivon Marketing Services P. Ltd.) appointed by way of Agreement but paid nothing by the company. Gets remuneration @ 10% of the Market price of the manufactured produce. Responsible for onward supply of the manufactured produce to the retailer. Hence, the super stockiest neither gets any payment from the manufacturer/assessee company nor it receives any remuneration by way of commission at all. Rather, it purchases the manufactured produce @ 70% of the MRP from the assessee company. Sends the produce to Retailer.

(5)  Retailer (Responsible for direct sale of the produce in the open market to the ultimate consumer. Remuneration payable i.e. 20% of the MRP). Retailer purchases the produce from the super stockist @ 80%. Sells the produce further in the open market to the ultimate consumer at MRP.

(6)  The consumer in the open market buys the products of the assessee for MRP Rs.100/-.

5. On 26-11-2010, a survey u/s.131 was conducted by the Department on the assessee company to examine compliance of TDS provisions under the provisions of Chapter XVII of the Income-tax Act, 1961 (hereafter to be referred as the “Act”). During the course of survey, the statements of General Manager (Finance & Accounts) of the assessee company were recorded on oath. He explained the price structure as well as the abovesaid system of marketing of the products of the company, elaborated the details of entire manufacturing/sale exercise i.e. right from the factory to the ultimate consumer. In addition thereto, the COO of the assessee company also recorded his statement regarding some clarification offered by the assessee.

The Income-tax Department issued notice to the assessee company as to why the super stockiest in question should not be treated as its Manager for the purpose of compliance of TDS provisions for the following :

(i)  In view of the clauses contained in the Agreement in question, the stockist had been performing the managerial nature of duties.

(ii)  The alleged super stockist had been getting remuneration @ 10% of the MRP of the produce manufactured. Therefore, the same was rather turnover based incentive.

6. In response to the said show cause notice, the assessee company filed reply before the Assessing Authority raising the following contentions :

(a)  The nature of the transactions in question was not on Principal to Manager basis. But the same was on principal to principal basis.

(b)  The so-called commission/remuneration of the super stockiest in question was 10% of the MRP of the drugs fixed as per the guidelines of All India Organization of Chemists & Druggists.

(c)  Sale price of the drugs had already been disclosed on the invoices supplies to the distributor i.e. 70% of the MRP which had been duly paid by the super stockiest to the assessee.

(d)  The TDS provisions of the Act are only applicable when the assessee in default pays the remuneration to its employees or technical expert (i.e. managerial, legal, etc.). In the instant case, no such relation was there. In this case, there was no payment by assessee to the stockiest.

Therefore, in view of the abovesaid contentions, the assessee submitted before the A.O. that the TDS provisions were not applicable in the instant case.

7. Thereafter, having heard the assessee, by referring to the details of the Agreement and other evidence vide order dated 22.03.2011 available on record, the pleas of the assessee company were negated. The ld. A.O. held that the super stockist in question was, in fact, the Manager of the assessee company. Therefore, sec. 194J of the Act was applicable. Furthermore, the A.O. also sent a proposal for initiation of penalty proceedings to the Addl. CIT (TDS), Range-2, Mumbai. He raised demand of tax payable by the assessee to the tune of Rs. 13,54,02,632/- [inclusive of tax payable u/s.201(1) of the Act plus interest u/s.201(1A) for 48 months].

8. Aggrieved by the said order, on 13-04-2011, the assessee company filed an appeal before the ld. CIT(A). Vide order dated 12-10-2011, the ld. CIT(A) partly allowed the appeal by observing as under :

(i)  Ground Nos. I & II dismissed. Order of AO qua sec. 194J was upheld.

(ii)  Regarding ground No. III, matter was referred back to the A.O. to find out as to whether the alleged super stockist had included the said amount in its income or not.

9. It is against this order that the instant appeal i.e. ITA No.7789/Mum/2011 has been filed by the assessee before this Tribunal on 17-11-2011 raising the following grounds :

“GROUND I :

1.  On the facts and circumstances of the case and in law, the Hon’ble Commissioner of Income Tax (Appeals)-14, Mumbai (“the CIT(A)”) erred in upholding the action of the Assistant Commissioner of Income Tax (TDS)-2(2) (“A.O.”) in treating the Appellant as “assessee in default” u/s. 201(1A) of the Income Tax Act, 1961, (“the Act”) for non-deduction of tax at source on the alleged remuneration/managerial fees allowed to the Stockists u/s.194J of the Act.

2.  He failed to appreciate and ought to have held that the agreement entered into by the Appellant with the Stockists was on principal-to-principal basis for sale of goods and not for any managerial services.

3.  The Appellant, therefore, prays that it be held that, the appellant is not liable to deduct tax at source and hence the order passed by the A.O. be held as ab-initio void and bad-in-law.

WITHOUT PREJUDICE TO GROUND I GROUND II:

1.  On the facts and circumstances of the case and in law, the Appellant prays that the A.O. be directed to delete or appropriately reduce the interest u/s.201(1A) of the Act.

GROUND III

The Appellant craves leave to add, to alter and/or amend all or any of the foregoing grounds of appeal.”

A bare perusal of the abovesaid grounds makes it amply clear the following question of law and fact has been sought to be raised by the assessee in the instant case :

“Whether the status of the assessee that it is super stockiest is that of principal and Manager or manufacturer-super stockiest of Principle to Principle basis. If that is so, whether the provisions of section 194J are applicable ?

The assessee has filed a paper book before us along with the following particulars running into 123 pages :

Opening his arguments, the ld. AR for the assessee company referred to clause 5.1 of the Agreement and contended that from the Agreement in question, no relationship of principal and Manager emanated. The assessee company has not paid even a single penny to the super stockiest by way of remuneration. Rather, the super stockiest in question had been purchasing the drugs manufactured by the assessee @ 70% of the M.R.P. and further sold the drug to the retailer @ 80% of the MRP. He also referred to Vat invoices (pages 65-66 of the paper book). Further, placed reliance on the Agreement dated 12-05-2009 arrived at between All India Organization of Chemists & Druggists and Indian Drugs Manufacturers Association providing 10% commission to the super stockist.

The ld. AR also referred to sec. 194J of the Act to contend that the said TDS provision contemplates payment of amount by the assessee to the concerned technical expert or service provider. He relied on the following case law in CIT v. Qatar Airways [2011] 332ITR 253 (Bom), CIT v. M.S. Hameed and Others (judgment of division Bench exercising jurisdiction on Letters Patent of Hon’ble Kerala High Court dated 07-04-2004), Judgment of Hon’ble Single Bench of Kerala High Court in Writ Petition No.11573 dated 10-11-2000, Order of Hon’ble Supreme Court dated 03-12-2004 upholding the judgment of Hon’ble Single Bench and Hon’ble Division Bench of the High Court of Kerala.

On the basis of the said contentions, he has submitted that the basic condition for application of sec. 194J is payment from the assessee company to its super stockiest which nowhere exists. Rather, the super stockiest in question had been getting his income by purchasing the goods @ 70% of MRP from the assessee and further, the same are further sold to the retailer @ 80% of MRP. Nowhere there is principal-Manager relation or employer-employee relation. The assessee does not have any control over the super stockiest regarding his activities of sale etc. Contrary to this, it is the super stockiest itself who is paying the cost of the produce purchased from the assessee @ 70% of the MRP. In support, he also placed reliance on the clauses of the Agreement. In view of all the above submissions, he prayed that the orders of ld. AO as well as ld. CIT(A) are against law and fact and, therefore, the same deserve to be set aside.

10. On the other hand, rebutting the arguments of the ld. AR, the ld. DR for the Department relied on clauses 2, 2.4, 7.4 as well as all the other necessary conditions stipulated in the Agreement in question and submitted that the Agreement in question is more in the nature of appointment of stock manager instead of a super stockiest. Therefore, the relationship of Principal-Manager duly existed between the assessee and its super stockiest. Further, clauses 17 to 24 of the Agreements were referred by the ld. DR to contend that the alleged stockist was rather managing the business of the assessee company acting as its Manager. He took us through the order of the Assessing Officer as well as the CIT(A) and relied on the same. Therefore, the provisions of sec. 194J of the Act are duly applicable. Hence, he prayed that appeal of the appellant may be dismissed.

11. We have heard both the Representatives of parties. Since in the instant case the issue involved is of relationship of the parties to the Agreement dated 05-09-2005, in the light of the 6-tier trading chain reproduced above from the paper book submitted by the assessee company, which fact has not been disputed at all by the Department. In our considered opinion, on a perusal of the agreement, invoices and other records, simply because the Agreement talks about appointment of stockiest, who maintains the stock for its onward transmission to the market, it can be said that this is a case of a colour managerial appointment. In this regard, clauses of the Agreement itself are very clear which are reproduced as under :

“3. PURPOSE

The purpose of this Agreement is to set forth the terms and conditions for the appointment and engagement of ZIVON as the super stockiest of NPIL for the sale and distribution of the Products of NPIL on a wholesale and/or retail basis.

5. RELATIONSHIP BETWEEN THE PARTIES

5.1 The relationship between the parties shall be that of a NPIL and buyer and not that of principal and agent and the transaction between the parties is on a “Principal to Principal” basis notwithstanding anything to the contrary that may be contained in this Agreement or any correspondence or letters between the parties hereto. Accordingly ZIVON shall at no point hold himself/itself out as an agent of NPIL and NPIL shall not be responsible for any act omission or commission on the part of ZIVON.

5.2 The Contract does not constitute ZIVON as an employee, agent or legal representative or partner of NPIL for any purpose whatsoever nor shall the Contract be construed or interpreted as a joint venture between the parties of any nature whatsoever. ZIVON is not granted nor shall be represent that it has been granted, any right or authority to assume or create any obligation or responsibility expressed or implied on behalf, or in the name of, NPIL, to incur debts or to make collections for NPIL or to bind NPIL in any manner whatsoever. It is the intent of the parties hereto to create the relationship on the part of ZIVON as an Independent Party, for whose actions or failure to act, NPIL shall not be responsible. The Contract and the transactions entered into between ZIVON and NPIL pursuant to the Contract shall be on a “Principal to Principal” basis.

10. PAYMENT

10.1 In Respect of the Products sold to ZIVON, ZIVON shall make the payment for the Product within Forty five (45) days from the date of Invoice. The discretion of NPIL on choice of mode of payment shall be final and binding upon ZIVON. Such payment against invoice shall always be the essence of the transaction, which NPIL may accept to execute in whole or in part on receipt of the written or oral order of supply from ZIVON.

10.2 For the same of administrative convenience and as a matter of facility and if permitted by NPIL, ZIVON may on its own accord and at its option keep with NPIL duly signed, crossed ‘account payee only’ cheque drawn in the name of NPIL, with the direction to the Company to fill up the amount of the bill/invoice of the Products dispatched/received/and confirmed by ZIVON.

10.3 The signed cheques, until and unless contramanded, shall be deemed to constitute a representative and assurance on the part of ZIVON to NPIL that ZIVON has sufficient funds with his banker to cover the amount of the cheque. When the facility of payment by cheque is extended by NPIL, ZIVON makes a representation that the cheque will be honoured when presented without any delay and ZIVON shall not directly or indirectly involve in delaying payment or the honouring of the cheque. In the event of the Cheque not being deposited by NPIL, ZIVON shall ensure that the Products are held in trust by it and in its custody and inform NPIL about the non presentation for payment of the cheque issued against the Products received by it.

11. LIEN ON GOODS

Till the full payment in respect of the Products sold to ZIVON is received, NPIL shall have a lien on the Products if the Products are in the possession of NPIL or shall have a charge over the Products if the same is in possession of ZIVON or the value thereof and/or any other goods/stocks and other materials which are in possession with ZIVON.”

12. The covenants in the agreement clearly stipulate that the relationship between the parties shall be on a “Principal to Principal” basis and that the super-stockiest shall, at no point, hold itself as an agent of the assessee. It is made amply clear that the super-stickiest is not an employee, agent or legal representative or partner of the assessee for any purpose. The agreement clearly shows that the assessee sells products to the super-stockiest and that the super-stockiest shall make payment for the product sold within 45 days. On the face of these covenants, we are unable to appreciate the conclusions drawn by the Assessing Officer as well as the Commissioner (Appeals). The conclusions of the Revenue authorities of the nature of relationship between the assessee and the super-stockiest and the roles and duties as well as the business model followed is contrary to the facts and material on record. Hence, we have no hesitation in accepting the contentions of the assessee in allowing the appeal. In fact, there is no payment whatsoever, mush less payment of fee for professional services which attracts section 194J of the Act.

13. Further, since the instant dispute has come before us regarding interpretation of sec. 194J of the Act, we also deem it appropriate to reproduce hereunder the said provision :

“194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of –

(a)  fees for professional services, or

(b)  fees for technical services, or

(c)  royalty, or

(d)  any sum referred to in clause (va) of section 28,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein “.

A bare perusal of the above provision makes it clear that for the application of the said provisions, it is necessary that the assessee or the person concerned liable to deduct and pay the TDS must be responsible for paying to a resident any sum, by way of fees for professional services, fees for technical services, royalty or any sum referred to in clause (va) of sec. 28. Whereas just contrary to the said conditions, in the instant case, the assessee company has not paid even a single penny to its super stockiest. Rather, it is just the opposite. The super stockist is paying to the assessee company for the produce of Drugs. In turn, it is selling those goods at the rate of 80% of MRP and is earning income of 10% of MRP which is stipulated in the Memo of Understanding dated 12-05-2009. Therefore, the relationship between the assessee company and its super stockiest is on a Principal to Principal basis. The A.O. as well as the CIT(A) totally misinterpreted the agreement, misread the facts and have come to wrong conclusions.

14. So far as the case law cited by the ld. AR for the assessee is concerned, although the said case has interpreted Sec 194G and 194H of the provisions of TDS in the same Chapter, of Income-tax Act, the proposition are also applicable qua the peculiar facts and circumstances of the case, particularly when it has been held by Hon’ble Courts that in case of no payment by the assessee to its stockiest or agent, the said assessee cannot be held liable to comply with the provisions of TDS.

15. In view of the above stated facts and circumstances, we are of the opinion that the TDS provision of sec. 194J of the Act is not applicable qua the peculiar facts and circumstances of the instant case. Hence, we have no option except to vacate the impugned orders of the ld. AO dated 22-03-2011 as confirmed by the ld. CIT(A) dated 12-10-2011. Consequently, the instant appeal is allowed.

16. Along with the instant appeal, there are also 4 other appeals, namely, ITA Nos.7790,. 7791, 7792 & 7794/Mum/2011. Both, the ld. AR as well as the ld. DR have conceded during the course of arguments of the abovesaid main case that the disputes in the said 4 appeals are the same as the one adjudicated upon. Consistent with the view taken in all the above appeal, we uphold the contentions of the assessee and cancel the order of the A.O. as confirmed by the Ld. CIT(A) and allow all the appeals of the assessee.

17. In the result, all the five appeals are allowed.