SRL Ranbaxy Ltd vs. ACIT (ITAT Delhi) – In the present case, no income was found credited to the account of the collection centers. The loss on account of any damage was to be borne by the collection centers. The expenditure on salary/staff of the collection centers was to be borne by the collection centers on their own and the collection centers were free to charge any amount from the customers/patients. In view of the above discussion, we hold that (i) there is no Principal-Agent relationship between the assessee and the Collection Centres and that being so, the provisions of section 194H of the Act have been wrongly invoked; (ii) The provisions of section 194 H of the Act could, even otherwise, not have been met, since no payment has been shown to have been made by the assessee to the Collection Centres; (iii) The payment made to the assessee by the Collection Centres was at the rates agreed to inter se between them; and (iv) The ld. CIT(A) erred in confirming the disallowance of Rs. 11,78,24,030/- made u/s 40(a)(ia) of the Act for the alleged failure of TDS by the assessee u/s 194H of the Act.
PER A.D. JAIN, J.M.
This is assessee’s appeal for assessment year 2006-07 against the order dated 10.11.2010 passed by the Commissioner of Income Tax(Appeals)XII, New Delhi. The following grounds have been raised:-
“1. That on the facts and circumstances of the case and in law the CIT(A) erred in confirming disallowance of Rs. 11,78,24,030/- out of total disallowance of Rs. 16,80,66,667/- made by the Assessing Officer under section 40(a)(ia), for alleged failure of the appellant to deduct tax at source under section 194 H of the Income Tax Act, 1961 (“the Act. ”).
2. That the CIT(A) erred on facts and in law in not appreciating that there existed no principal-agent relationship between the appellant and the Collection Centres, which is sine qua non for invoking section 194 H of the Act.
2.1 That the CIT(A) erred on facts and in law in not appreciating that the amount retained by the Collection Centres was in the nature of discount and not commission.
2.2 Without prejudice that the CIT(A) erred on facts and in law in not appreciating that since no payment was made by the appellant to the Collection Centres, the provisions of section 194 H of the Act, could not, in any case, have been complied with.
3. That the CIT(A) erred on facts and in law in not adjudicating the ground of appeal raised by the appellant assailing the finding of the AO that discount offered by the appellant to Collection Centres was in the nature of payment for ‘work’ on which tax was deductible under section 194C of the Act.”
2. The facts are that for the year under consideration, i.e., assessment year 2006-07, the assessee company filed its return of income declaring nil income after adjustment of brought forward loss of Rs. 8,18,11,190/-. The assessment was completed vide assessment order dated 24.12.08 u/s 143(3) of the Income Tax Act, determining the income at Rs. 25,32,44,857/-. While doing so, the AO made a disallowance of Rs. 16,80,66,667/- concerning discount offered by the assessee company to Collections Centres/Franchisees u/s 40(a)(ia) of the I.T. Act, on the basis that the assessee had not deducted tax thereon under sections 194 H/194 C of the Act.
3. By virtue of the impugned order, the learned CIT(A) restricted the disallowance from Rs. 16,80,66,667/- to Rs. 11,78,24,030/-. However, the ld. CIT(A) affirmed the disallowance in principle, holding that the relationshipbetween the assessee and the Collection Centres/Franchisees was that of Principal and Agent, attracting the provisions of Section 194 H of the Act.4. Before us, the learned counsel for the assessee has contended that existence of a Principal – Agent relationship is a must for the applicability of the provisions of Section 194 H of the Act; that the learned CIT(A) has erred in failing to appreciate that there did not exist any such relationship of Principal and Agent between the assessee company and the Collection Centres; that the ld. CIT(A) failed to consider that since the assessee had not made any payment to the Collection Centres, the provisions of Section 194H of the Act could not, even otherwise, have been complied with; that the method of working between the assessee and the Collection Centres is that the assessee enters into nonexclusive agreements with domestic and international Collection Centres comprising of hospitals, nursing homes, clinics and other laboratories/ entrepreneurs also; that in accordance with these agreements, the Collection Centres collect samples from patients/customers seeking various laboratory testing services; that their request forms to be sent along with the samples to be tested are filled up; that the Centres forward the samples to specialized testing laboratories like the assessee; that the Centres may avail the services of any such specialized testing laboratory, including the assessee; that it is only if the patient/customer insists that the required test be got done from the assessee, that a Centre forwards the sample of that patient/customer to the assessee for testing it; that the Centres issue their own bills/invoices to the patients/customers; that the Centres collect the fees for the tests conducted and issue receipts for the fees collected; that the Collection Centre acts as an Authorized Collector for collecting samples and avails the professional services of the laboratories like the assessee with respect to testing of samples and issuance of necessary reports; that in cases where the tests are done by the assessee, the assessee raises periodical invoices on the Collection Centre; that the Collection Centre, in turn, makes the payment to the assessee after deducting tax at source u/s 194 J of the Act for the professional services rendered; that the assessee, in terms of its agreements with the Collection Centres, extends its laboratory testing services at a discounted price, as compared to the standard price list; that the Authorities below have erred in treating the said discount offered by the assessee to the Collection Centres as commission on which tax was required to be deducted u/s 194 H of the Act; that the provisions of section 194 H of the Act are not attracted, there being no Principal – Agent relationship between the assessee and the Collection Centres; that the Collection Centres act not only for the assessee, but for other laboratories as well; that the choice of laboratory is with the Collection Centre, unless otherwise directed by the patient/customer; that moreover, the Collection Centre charges the customer rates fixed by the Centre itself and not that fixed by the assessee; that the risk of loss or damage of samples during transit is that of the Collection Centre; that the payment of invoice amount by the Collection Centre to the assessee does not depend on the realization of such amount by the Centre from its patient/customer; that so, the risk of loss/profit is that of the Collection Centre; that the Collection Centres have totally different and independent infrastructure, administration and accounts from those of the assessee; that it is the assessee who provides professional services to the Collection Centres and not vice versa; that if the Collection Centres were acting as the agents of the assessee, the entire receipt would be collected by them on behalf of the assessee and so, they would not have to deduct tax at source out of the payments made to the assessee for professional services u/s 194 J of the Act; that in such a situation, the amount retained by the Collection Centres would have been regarded as income of the assessee and the commission allegedly paid by the assessee to the Collection Centres would have been considered as deductible expenditure; that however, it has not so been done; that though it has been so observed by the Authorities below, providing/bailment of packing material by the Collection Centres does not at all establish any Principal – Agent relationship between the assessee and the Collection Centres; that such bailment is to ensure that the samples reach the assessee laboratory in the requisite temperature, under prescribed conditions, so as to assure error free testing; that the Authorities below have erred in observing that the assessee had imposed any geographical restrictions on the Collection Centres; that rather, the Collection Centres are free to engage the services of other laboratories; that the restriction on the Collection Centres is against collaborating with the competitors of the assessee, so as to prevent divulging the specific and confidential know-how of the assessee to the competitors; that such a restriction is necessary to preserve and save the assessee’ s business interest; that even otherwise, such a restriction does not result in any Principal – Agent relationship between the assessee and the Collection Centre; that since the assessee does not pay or gift any amount to the account of the Collection Centre either directly or indirectly, Section 194 H of the Act does not apply; that there was no amount of discount/commission paid by the assessee and/or debited in the accounts of the assessee and therefore, any obligation to deduct tax at source u/s 194 H of the Act even otherwise did not get attracted; that since no payment goes to the Collection Centres from the assessee, there is no question of deduction of any tax at source; that the amount received by the assessee from the Collection Centres is the amount of invoice, net of discount; that this cannot be said to be expenditure incurred by the assessee, liable to attract the provisions of section 40(a)(ia) of the Act; that it has wrongly been held that the transaction/arrangement between the assessee and the Collection Centres is in the nature of “work” for the purpose of Section 194 C of the Act; that in the facts of the case, it has not been proved by the Department that the Collection Centres are carrying out any work for and on behalf of the assessee; that the payments received by the assessee from the Collection Centres are for rendering of professional services by way of testing of samples, subject to with-holding of tax u/s 194 J of the Act; that if the Collection Centres were carrying out any work for and on behalf of the assessee, no tax would have been required to be withheld by the Collection Centres u/s 194 J of the Act; and that also, because no payment is made by the assessee to the Collection Centres and there is no expenditure incurred by the assessee, the provisions of section 194 C read with those of section 40(a)(ia) of the Act are not at all attracted. To support the contentions on behalf of the assessee, the learned counsel for the assessee has relied on various case laws, which shall be dealt with here-under.
5. The learned DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that the learned CIT(A) has correctly confirmed the disallowance of Rs. 11,78,24,030/- out of the total disallowance of Rs. 16,80,66,667/- made by the AO u/s 40(a)(ia) of the Act, since the assessee had failed to deduct tax at source u/s 194 H of the Act; that Section 40(a)(ia) of the Act clearly provides, inter alia, that where any commission is payable to a resident for carrying out any work, on which tax is deductible at source under Chapter XVII –B and such tax has not been deducted, the said commission shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”; and that the expression employed in the section is ‘shall’ and so, whereas in the present case, tax is not deducted on commission paid for carrying out work, it is mandatory that such commission be not deducted. The ld. DR has sought to place reliance on “ACIT, Circle 57, Kolkata v. Bharati Cellular”, 105 ITD 129 (Kolkata) and “Hindustan Coco Cola Beverages Pvt. Ltd. V. ITO, TDS, Range 7”, 97 ITD 105(JP). In “Bharati Cellular”(supra), it was held, inter alia, that the assessee was liable to deduction of tax at source u/s 194 H of the I.T. Act on commission paid to its franchisees and the AO was justified in treating the assessee as a defaulter and then computing TDS and interest thereon and the ld. CIT(A) was not justified in vacating the AO’s order.
6. In “Hindustan Coco Cola Beverages” (supra), it was held, inter alia, that where the relationship between the assessee company and the distributor was on a Principal and Agent basis, the assessee was liable to deduct tax on commission.
7. We have heard the parties and have perused the material on record. The issue before us is the interpretation of section 194 H of the I.T. Act – as to whether it is applicable to the facts of the present case or not. At the outset, it would be appropriate to reproduce the provisions of section 194 H:-
“194H. Commission or brokerage .
Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent :
Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed five thousand rupees :
Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section:
Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.
Explanation.—For the purposes of this section,—
(i) “commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;
(ii) the expression “professional services” means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA;
(iii) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956 ;
(iv) where any income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.”
8. Thus, Section 194 H, brought in from 1.6.2001, provides that any person, other than an individual or a Hindu Undivided Family, responsible for paying commission or brokerage to a resident, shall deduct tax at source; and that the tax shall be deducted at the time of credit of such income to the account of the payee or at the time of payment of such income or by issue of a cheque or draft or by any other mode, whichever is earlier. To fall within the provisions of section 194 H, the payment received or receivable, directly or indirectly, is to be by a person acting on behalf of another person (i) for services rendered, not being professional services, or (ii) for any services in the course of buying or selling of goods or (iii) in relation to any transaction relating to any asset, valuable article or thing. The element of agency is necessarily to be there in cases of all the services or the transactions contemplated by the section, as held in “Mother Dairy India Ltd. V. ITO”, 28 SOT 42 (Del), “Delhi Milk Scheme v. CIT”, 173 Taxmann 54 (Del), and “ABP Pvt. Ltd. V. CIT”, 23 SOT 28 (Kolkata).
11. Now, it has not been shown that these facts, as canvassed on behalf of the assessee, are not the correct facts. It has not been shown that the rates charged by the Collection Centre from its customers are not decided by the Collection Centre, but by the assessee. It has not been shown that the Collection Centre is under any obligation to forward the samples for testing only and only by the assessee and not by other laboratories as well. The set- ups of the Collection Centres are also entirely different from that of the assessee. Their expenditure has also not been shown to be interlacing with that of the assessee. The staff of the two are also distinct and separate. The accounts are not either inter-mixed or inter-twined. On the other hand, there exists a privity of contract between the Collection Centres and their customers. Out of the payment made to the assessee, tax is deducted at source for professional services rendered, u/s 194 J of the Act. The receipt by the Collection Centres is not established to be on behalf of the assessee. The receipt of the Collection Centres, as such, is the income of the Collection Centres themselves and not that of the assessee. To bring home this point, it is enough to consider that the amount, alleged to have been paid by the assessee to the Collection Centres, has not been considered to be deductible expenditure.
12. In “CIT v. Jai Drinks Pvt. Ltd.”, 211 – TIOL-52-HC-DEL-IT, under similar circumstances, similar payments made by “Jai Drinks”, to its distributor, were held to be incentives and discounts and not commission. The distributor had been permitted to sell its product in a specified area exclusively. It was as per the agreement that the distributor was to purchase the products of Jai Drinks and was to be allowed discount per case on the printed maximum retail price. The breakage, leakage, etc., was the liability of the distributor and not that of Jai Drinks. All the approvals, consents, registration, licence, etc., required from Departments or Authorities were to be obtained by the distributor. The purchase of the products by the distributor from Jai Drinks was against one hundred per cent advance payment or, at times, on credit, at the discretion of Jai Drinks. No element of Principal – Agent relationship was found to exist, as is the case herein.
13. The ld. CIT(A) has observed that the submission of the assessee that it provided professional services in the form of medical diagnostic services to the Collection Centres, was not acceptable. For arriving at this observation, the learned CIT(A) noted that the assessee provides professional services to the patients and not to the Collection Centres, which work on behalf of the assessee to collect samples from patients. In this regard, it is seen, as noted hereinabove, that the assessee had appointed Collection Centres under nonexclusive agreements to collect samples and to forward them for testing to the assessee. The professional services in the form of medical diagnostic services were provided to the Collection Centres and not to the patients/customers of the Centres. The Collection Centres and the Patients/customers are the ones which have privity of contract inter se. The Collection Centres deducted tax at source from the payment made to the assessee, for professional services, u/s 194 J of the Act, establishing that the Collection Centres were not the agents of the assessee. Were it otherwise, the entire receipt would have been collected on behalf of the assessee by the Collection Centres. It has not been shown to be so. Moreover, the amount retained by the Collection Centres was not regarded as the income of the assessee and the commission allegedly paid by the assessee to the Collection Centres was not treated as the deductible expenditure.
14. The assessee’ s contention that the Collection Centres have the option to conduct the tests themselves or to out-source their medical services to other laboratories, has been simply brushed aside by the ld. CIT(A) stating it to be of no significance. This, however, to our mind, is not correct. Firstly, this contention has not been disproved. It is borne out from the agreements. Then, if this averment on behalf of the assesssee is correct, the element of agency in the relationship between the assessee and the Collection Centres goes away. True, the Collection Centres have to follow the terms of the contract entered into by them with the assessee. However, no violation of the terms of these agreements has been shown. The ld. CIT(A) has concluded that the assessee’s contention that the Centres can out-source their services to other laboratories, is factually incorrect. This is based on the recital in the agreement that the Collection Centres cannot collaborate with the competitors, even on the termination of the agreement. The assessee’ s stand in this regard has been that such a restriction was imposed simply to prevent the Collection Centres from divulging the assessee’ s specific and confidential know-how which may have come to their notice during their engagement with the assessee, to the competitors of the assessee. This contention has neither been rebutted, nor can be thrown out neck and crop. This is a perfectly plausible explanation. Prudence demands the imposition of such-like restrictions in the agreement, so as to safe-guard the assessee’ s interests. Further, as contended, it has not been shown that there is any restriction on the Collection Centres from continuing to act as such Collection Centres. The assessee has only sought to prevent the Collection Centres from collaborating with the competitors of the assessee. In the event of absence of such a covenant in the agreement, there would be no safe-guard against the Centres divulging the assessee’ s confidential specific know-how to its competitors, thereby prejudicing the assessee’ s business. And not only this, the mere existence of such alleged restriction does not, by itself, establish a Principal – Agent relationship between the assessee and the Collection Centres. In this regard, in “Bhopal Sugar Industries v. STO”, AIR 1977 (SC)1275, it has been observed, inter alia, that the concept of a sale has under-gone a revolutionary change, having regard to the complexities of the modern times and the expanding needs of the society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale, even though the seller may, by virtue of an agreement, impose a number of restrictions on the buyer, e.g., fixation of price, submission of accounts, selling in a particular area or territory and so on; and that these restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions, the transaction would still be a sale and subject to all the incidents of a sale.
17. In this regard, the contention on behalf of the assessee has been that the findings of the ld. CIT(A) is incorrect. It has been reiterated that the Collection Centres are free to charge the desired rates from the customers/patients. It has been submitted that though in the advertisement attached as Annexure-A to the CIT(A)’s order, the rates have been specified, the Collection Centres charge the rates fixed by the Collection Centres themselves and not at those decided by the assessee; that in certain cases, the Collection Centres have charged over and above the standard price list provided by the assessee to the Collection Centres. In this regard, attention has been drawn to pages 96 to 98 and 99 to 102 of the Assessee’s Paper Book.
SRL Test Price
FASTING BLOOD SUGAR
CORONARY RISK PROFILE, SERUM
URIC ACID, SERUM
19. Further, APB 99 to 102 contain the relevant extracts of the standard price list of the assessee. All these documents were placed before the Authorities below. In the impugned order, however, the ld. CIT(A) has not taken those into consideration. In fact, no reference whatsoever has been made to this documentary evidence. Therefore, the contention of the assessee regarding the Collection Centre free to charge the rates as desired by them from the customers/patients does not stand rebutted and the ld. CIT(A) has wrongly based his finding in this regard merely on the advertisement attached with the impugned order as Annexure-A. The rates contained in the said advertisement are, no doubt, the specified rates, but the assessee has been able to show that the Collection Centres do the charge rates over and above such specified rates, as desired by them. The observation of the ld. CIT(A) against the assessee in this regard is, therefore, not correct.
20. The ld. CIT(A) has also observed that the assessee is bound to the Collection Centres in terms of the report issued in respect of samples referred by the Centres to the assessee and tested by the assessee. However, it has not been shown as to how this acts detrimentally to the assessee. No Principal – Agent relationship stands established by this sole fact. Obviously, since the assessee renders professional services, and that too, professional services by way of medical testing, there is a strict professional conduct which has to be abided by the assessee. The assessee is under a strict obligation. If there is any negligence or deficiency on the part of the assessee, it is the assessee who is answerable.
23. Then, the disallowance in terms of section 40(a)(ia) read with section 194 H of the Act can be made only in respect of expenditure in the nature of commission paid/credited to the account of the recipient, or to any other account. In the present case, the assessee receives the amount of the invoice raised, net of discount, from the Collection Centres. This, discount, indisputably, cannot, in any manner, be said to be expenditure incurred by the assessee and so, section 40(a)(ia) of the Act is not attracted.
26. Coming to the case laws referred to on behalf of the Department, these are as follows:-
27. Apropos “CIT v. Singapore Airlines Ltd.” (supra), it was observed, inter alia, that in the area of travel business, the airline appoints agents who are accredited with IATA. These agents maintain blank ticket stock of the airline. The agents are authorized to issue tickets to passengers against collection of consideration. When a ticket is issued by the agent, a contract comes into existence between the passenger and the airline, for carrying the passenger on the scheduled flight(for which the ticket is booked). The amounts collected by the agents are credited to the airlines on a fortnightly basis. The agent receives a pre-agreed commission, which is fixed for the industry as a whole, after deducting tax at source under section 194 H of the Act. In that view of the matter, there is no dispute that there is a Principal – Agent relationship between the airline on the one hand and travel agent on the other.
30. In the present case, however, there is no Principal – Agent relationship that subsists between the assessee and the Collection Centres. On the contrary, it is the assessee which renders lab testing services to the Collection Centres, on which necessary tax is deducted under section 194 J of the Act. Therefore, ‘Singapore Airlines’(supra) is clearly non-applicable hereto.
33. In the facts of the given case, it was observed that the advertising agency was an agent for Prashar Bharti, considering that the agent was entrusted to canvass advertisement on behalf of Doordarshan, the advertisement charges recovered from the customers were also in accordance with the tariff prescribed by Doordarshan, which was incorporated in the agreement, the advertisement material had to conform to the discipline introduced by Doordarshan, Doordarshan was bound by advertisement contract canvassed by advertising agencies and it was under obligation to telecast advertisements in terms of the contract which the agency signed with the customer.
44. Moreover, in the said case, it was found during survey that the assessee had credited ‘commission’ to the account of the distributors in its books of account. It was further found that (a) loss due to reduction in price and due to expiry of goods was borne by the assessee; (b) the assessee met expenses on diesel and petrol, vehicle repair, salary of salesmen, etc., incurred by the distributors in certain cases; (c) the assessee had borne the loss due to leakage and breakage claims made by the distributors; (d) the assessee provided vehicles to distributors, for distribution of its products; and(e) that statements of three distributors recorded by the AO suggested that the distributors were clear in their minds that they were commission agents acting on margin and fixed responsibility.
47. GroundNo.3 states that the ld. CIT(A) erred in not adjudicating the challenge of the assessee to the AO’s findings that the discount offered by the assessee to the Collection Centres was in the nature of payment for work, on which, tax was deductible u/s 194 C of the Act.
48. Since the claim of the assessee has been allowed as above, there remains no requirement to go into this aspect of the matter and we are not doing so. 49. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 16.12.2011.