Case Law Details
Wockhardt Limited Vs PCIT (ITAT Pune)
it is seen that the assessee company sold its products to distributors at a price lower than the Maximum Retail Price (MRP), which difference has been opined by the ld. PCIT as Commission requiring deduction of tax at source u/s 194H of the Act. It is simple and plain that a manufacturer would sell his goods to Stockists or Distributors at a price below the MRP, who, in turn, will add up their margin and then sell the products to the retailers. The MRP is the price which is charged by a Retailer from the ultimate consumers. All the intermediaries between the Manufacturer and ultimate consumer are to be compensated within the overall MRP of the product.
The assessee sold its products to Stockists obviously at a price below the MRP, which the Stockists were to sell to Retailers and from Retailers to ultimate consumers. The difference between the MRP and the price sold to Stockists, by no stretch of imagination, can be considered as commission or brokerage paid by the assessee to its Stockists. In order to get covered u/s.194H, it is apparent that principal and agent relation must be established. If the transaction is done on principal-to-principal basis, there can be no scope for payment of commission requiring deduction of tax at source u/s.194H of the Act. Here is a case in which the assessee sold its products to Stockists on principal-to-principal basis, who, in turn, sold the same products to Retailers again on principal-to-principal basis for onward sale to customers again on principal-to-principal basis. In that view of the matter, the relation between the assessee and its stockists cannot be described as that of principal and agent. We, therefore, hold that the ld. PCIT was not justified in holding the assessment order to be erroneous and prejudicial to the interest of the Revenue on account non-deduction of tax at source from such amount warranting any disallowance u/s.40(a)(ia) of the Act. As there is no involvement of any commission payment to Stockists on this score, we hold that the AO correctly accepted the assessee’s claim in this regard even though impliedly. The impugned order is overturned on this score.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee is directed against the order dated 28-03-2019 passed by the Pr.CIT-2, Aurangabad u/s.263 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2012-13.
2. Briefly stated, the facts of the case are that the assessee is engaged in manufacturing and trading of pharmaceutical products. The return was filed on 29-11-2012 declaring total income of Rs.86.68 crore. The assessment was completed u/s.143(3) of the Act on 04-05-2016 determining total income at Rs.109.55 crore. The ld. PCIT, on examination of the relevant material, observed that the Assessing Officer (AO) failed to carry out necessary inquiry and the resultant order passed was erroneous and prejudicial to the interest of Revenue. He, therefore, set-aside the assessment order on certain issues and directed the AO to re-frame the assessment after proper verification. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
3. We have heard the rival submissions and perused the relevant material on record. The ld. PCIT invoked jurisdiction on four counts, which we will take up in seriatim.
4. The first issue is not adding back of the Provision for doubtful debts amounting to Rs.31.73 crore [including Rs.29.35 crore pertaining to provision made for Duty Entitlement Passbook (DEPB)] in the computation of book profit u/s.115JB of the Act. The ld. PCIT noted that the assessee claimed deduction of the above provision in its Profit and loss account but did not add it back in the computation of book profit u/s.115JB of the Act. The assessment order was silent on the point. He, ergo, held the assessment order to be erroneous and prejudicial to the interest of the Revenue for want of verification by the AO. The ld. AR fairly admitted that the AO erred in examining this issue and hence did not press the challenge to the impugned order on this score.
5. The second issue taken up by the ld. PCIT is about the assessee not adding back unascertained provision made for doubtful debts and advances and Corporate Debt Restructuring (CDR) recompense. The assessee claimed deduction of Rs.160 crore towards provision for CDR recompense. The ld. PCIT held that such a deduction was not admissible and the AO did not examine it during the course of the assessment proceedings. He, therefore, declared the assessment order erroneous and prejudicial to the interest of Revenue. On this issue again, the ld. AR candidly admitted the view point of the ld. PCIT about its non-examination by the AO leading to the assessment order becoming amenable to revision. No challenge was pressed on this issue as well.
6.1. The third ground for invoking the revisionary power u/s.263 is that of the AO not making disallowance u/s 40(a)(ia) of the Act on account of non-deduction of tax at source/short deduction of tax at source on payments covered u/s.194A, 194J and 194H. The Audit Report of the assessee divulged that there was non deduction of tax at source and also short deduction of tax at source amounting to Rs.5,39,94,141/-. As against that, the assessee had added back only a sum of Rs.2,37,81,782/- u/s.40(a). This, in the opinion of the ld. PCIT, resulted into allowing excess deduction of Rs.3.02 crore. On being called upon to explain its stand, the assessee submitted that it deducted tax at source on Rs.2.77 crore but deposited the same belatedly on 28-11-2012. The assessee furnished TDS challans evidencing the deposit of TDS amounting to Rs.31,11,341/- (including interest of Rs.3,33,358/-) pertaining to the expense claim of Rs.2.77 crore. It was submitted that the due date for filing of return u/s.139(1) was 30-11-2012 and hence no disallowance was called for u/s.40(a)(ia) to that extent. As regards the remaining sum of Rs.24,32,529/-, the assessee submitted that it was in process of collation of details. However, no further reply was submitted till the passing of the impugned order. This led to the declaration of the assessment order erroneous and prejudicial to the interest of Revenue.
6.2. On a specific query, the ld. AR submitted that the AO in his order u/s.143(3) r.w.s. 263 has allowed deduction of expenses amounting to Rs.2.77 crore on which tax was deposited before the due date. The issue to this extent has, therefore, become infructuous.
6.3. As regards the remaining amount of Rs.24,32,529/-, the ld. AR submitted that it was a case of short deduction of tax at source and not that of non-deduction of tax. Relying on certain judgments including CIT Vs. S.K. Tekriwal (2014) 361 ITR 432 (Cal), the ld. AR submitted that no disallowance can be made u/s.40(a)(ia) for short deduction of tax at source. This argument was countered by the ld. DR who submitted that the assessee failed to furnish any details of short deduction of tax at source either before the ld. PCIT or at the stage of the Tribunal.
6.4. Having heard both the sides and gone through the relevant material on record, we find that the AO in the assessment proceedings pursuant to revisionary order has accepted the assessee’s claim of not making any disallowance u/s.40(a)(ia) in respect of the expenses on which deduction of tax at source was done and payment was also made before the due date of filing return u/s.139(1) of the Act. To that extent, there cannot be any reason for the assessee to be aggrieved. As regards the remaining amount of Rs.24.32 lakh, the ld. AR submitted that it was a case of short deduction of tax at source and not non-deduction and hence, no disallowance could have been made u/s.40(a)(ia) of the Act. There is no dispute on the proposition put forth on behalf of the assessee that short deduction of tax at source did not attract disallowance u/s.40(a)(ia) at the material time in view of the judgment in the case of S.K. Tekriwal (supra). However, it is apposite to mention that the Finance Act, 2012 has inserted second proviso to section 40(a)(ia) w.e.f. 01-04-2013 providing for making disallowance if the assessee fails to deduct whole or any part of tax in accordance with the relevant provisions. Thus, it is graphically overt that the ratio in S.K. Tekriwal (supra) has been said to set at naught by means of statutory insertion. As the assessment year under consideration is 2012-13, the newly added proviso by the Finance Act, 2012 would not apply.
6.5. What is relevant to note from the ratio in S.K. Tekriwal (supra) is that if the assessee deducts tax at source at a lower rate under some misconception about the correct rate, that would not attract the mischief of section 40(a)(ia) of the Act. It does not cover a case, where the assessee deducted tax at source from some payments, while the others came to be made without any tax deduction, with the overall impact of short deduction of tax at source from the transactions taken as a group. This can be understood with the help of an example, where an assessee makes payments of commission to 10 parties and deducts tax at source on the payments made to 3 parties at the appropriate rate without any tax withholding on the payment to the remaining 7 parties. That would not attract the ratio in S.K. Tekriwal (supra) to escape the disallowance in respect of remaining 7 parties. Instantly, we are dealing with the failure of the assessee to deduct tax at source from Commission/brokerage paid by the assessee. On being called upon to produce the details of the parties to whom commission or brokerage was paid and the rate at which deduction of tax at source was made, the assessee failed to furnish any such detail. The same position prevailed at the level of the ld. PCIT as well. In the absence of the assessee having produced details of commission or brokerage, the case of short deduction of tax at source is not established. Be that as it may, it is an admitted position that the assessee reported shortfall on account of lower TDS in its Tax Audit report but the AO did not conduct any inquiry on this point. It is a clear case of non-application of mind by the AO which empowered the ld. PCIT to invoke jurisdiction u/s.263 of the Act.
7.1. The last issue raised by the ld. PCIT is about the non-deduction of tax at source on discount to Stockists/Distributors. On perusal of record, the ld. PCIT observed that the assessee company provided discount to Stockists/Distributors ranging between 0 to 30% of gross sales. He held such amount as an equivalent of commission paid to Stockists/Distributors on which deduction of tax at source ought to have been made. In the absence of the assessee having deducted any tax at source on such amount, the ld. PCIT held the assessment to be erroneous and prejudicial to the interest of Revenue.
7.2. We have heard both the sides and gone through the relevant material on record. Admittedly, the AO did not inquire into this issue nor discussed it in the body of the assessment order. For invoking jurisdiction u/s.263 of the Act, it is essential to first ingrain that the point in question could have been decided against the assessee, which the AO either did not examine or decided wrongly after examination. But if the point is of such a nature that it cannot go against the assessee, even after thorough examination, that would not lead to classifying the assessment order erroneous even if there is no discussion of it in the assessment order. As such, it becomes sine qua non on the part of the PCIT to specifically point out as to how the decision of the AO in expressly or impliedly allowing deduction on a particular point is erroneous.
7.3. Adverting to the factual matrix of the case, it is seen that the assessee company sold its products to distributors at a price lower than the Maximum Retail Price (MRP), which difference has been opined by the ld. PCIT as Commission requiring deduction of tax at source u/s 194H of the Act. It is simple and plain that a manufacturer would sell his goods to Stockists or Distributors at a price below the MRP, who, in turn, will add up their margin and then sell the products to the retailers. The MRP is the price which is charged by a Retailer from the ultimate consumers. All the intermediaries between the Manufacturer and ultimate consumer are to be compensated within the overall MRP of the product.
The assessee sold its products to Stockists obviously at a price below the MRP, which the Stockists were to sell to Retailers and from Retailers to ultimate consumers. The difference between the MRP and the price sold to Stockists, by no stretch of imagination, can be considered as commission or brokerage paid by the assessee to its Stockists. In order to get covered u/s.194H, it is apparent that principal and agent relation must be established. If the transaction is done on principal-to-principal basis, there can be no scope for payment of commission requiring deduction of tax at source u/s.194H of the Act. Here is a case in which the assessee sold its products to Stockists on principal-to-principal basis, who, in turn, sold the same products to Retailers again on principal-to-principal basis for onward sale to customers again on principal-to-principal basis. In that view of the matter, the relation between the assessee and its stockists cannot be described as that of principal and agent. We, therefore, hold that the ld. PCIT was not justified in holding the assessment order to be erroneous and prejudicial to the interest of the Revenue on account non-deduction of tax at source from such amount warranting any disallowance u/s.40(a)(ia) of the Act. As there is no involvement of any commission payment to Stockists on this score, we hold that the AO correctly accepted the assessee’s claim in this regard even though impliedly. The impugned order is overturned on this score.
8. In view of the fact that the order passed by the ld. PCIT is sustainable on three out of four counts as taken note of by him, the impugned order on an overall basis cannot be declared as unlawful. It is, therefore, held that the ld. PCIT was justified in invoking his revisionary power u/s.263 of the Act on the three points as discussed supra.
9. In the result, the appeal is partly allowed.
Order pronounced in the Open Court on 22nd April, 2022.
