DCIT(TDS)-2(3), MUMBAI vs. NOVARTIS HEALTHCARE PRIVATE LIMITED, MUMBAI

3. "The Ld. CIT(A) has failed to appreciate the fact that there are various restrictions imposed on the stockists/distributors/wholesalers for selling the products, its territory, appointment of stockist, monitoring and controlling the stocks of the product, etc., which clearly establishes that the stockist were working as agents of assessee company, to promote and effect sales on behalf of assessee company and the assessee's contention that the relation of assessee with its stockists is that of principal to principal is invalid.

4. "The Learned CIT(A) has erred in holding that TDS on Employee Stock Ownership Plan (ESOP) will be deducted at the time of exercise of option by the employees, without appreciating the fact that the amount of ESOP was quantified by the assessee in the month of January 2020 therefore the same is accrued to the employees."

, the Ld. DR contends before the Bench that the relationship between Respondent company and 3. Novartis Healthcare Private Limited stockist is that of Principal to Agent and hence the “discounts” offered to the stockist are in the nature of “commission” and section 194H would come into operation. So, the Department’s contention is that the relationship between the Respondent and stockist is not that of Principal to Principal but that of principal to agent because the pricing of goods, margins determination, payment terms and even mode of transaction are decided by Respondent company. Moreover, the Revenue contends that the Respondent company has imposed various restrictions on stockists/distributors/ wholesalers while selling the products. Only Respondent company decides the area in which stockist has to sell, it monitors and controls the stocks and hence the relationship between Respondent company and stockist is that of Principal to Agent. Since the relationship is that of Principal and Agent, TDS provisions under section 194H will come into play. As the Respondent company did not deduct TDS, the Respondent company was treated as “appellant” in default.

4.1 The Ld. CIT(DR) has filed written submissions also, apart from arguing the case, in which it was stated that the relationship between Respondent company and stockist is that of Principal to Agent because of the following circumstances :- • The assessee dictated every aspect of the transaction pricing, invoicing format, margin rates, payment schedules, territorial allocation, and transport methods all of which were controlled by Novartis India. • The stockist agreements conferred NHPL with audit rights, requiring monthly sales and stock reporting, implying that the stockists operated under constant supervision of NHPL. • The stockists were mandated to provide retailer feedback and downstream customer information, further indicating their embedded role in NHPL's distribution and marketing function. • Even cash discounts and payment channels were pre-conditioned and structured by NHPL, without independent negotiation by the stockists. • These factors clearly indicate that the stockists are integrated into distribution mechanism of the company and are not operating independently in the market place. The stockists do not enjoy commercial

4 Novartis Healthcare Private Limited autonomy and are functional agents executing a structured distribution strategy under the control of the assessee. Moreover, the so-called "discount" granted to the stockists is not a volume-based or market-driven incentive, but a pre-decided margin determined by the assessee. This fixed difference between the Maximum Retail Price (MRP) and the price charged to the stockist constitutes compensation for distribution services and is commission in substance, if not in name. It is settled law that what matters is the substance of the transaction.

4.2 The Ld. DR relied on the decision of CIT Vs. Idea Cellular Ltd. (2010) 325 ITR 148 (Delhi High Court), where it was held that the discounts offered to distributors under a tightly controlled relationship amount to commission and attracts section 194H. Since, the facts and circumstances are identical, TDS under section 194H of the Act should have been deducted by Respondent company. So, the ruling of Ld. TDS Officer should be upheld the order of Ld. CIT(A) to be reversed, concluded Ld. DR representing the Revenue.

5 Novartis Healthcare Private Limited 5.1 As a reply to the Revenue’s contention that Respondent company controls pricing etc., Ld. AR has mentioned as follows :- “The department's contention that Novartis India controls pricing, invoicing format, margin rates, payment schedules, territorial allocation and transport methods is baseless as the industry in which NHPL trades is regulatory in nature and thus the products are to be stored and sold considering every kind of risk that can arise in the said sector. Therefore, it is a common business practice in a pharmaceutical industry to impose certain regulations formulated by drug regulators on the stockists.

Further, in wholesale business (especially in pharmaceutical sector) a supplier generally places various terms and conditions before giving its distributorship to any stockists/distributors in order to maintain its goodwill in the market, also from good governance perspective i.e. no health hazards should be caused to the ultimate consumers of the medicines and in order to abide by the various regulations formulated by the drugs regulators.”

5.2 The Ld. AR of appellant company has further stated in its written submission as follows :- The stockists enter into an agreement with NHPL and purchase the products from NHPL at a mutually agreed price. The title of the product passes from NHPL to the stockists upon this transaction and thus the stockists have to bear the risks associated with the storage and sale of the products and take independent decisions on the price at which they want to sell the products to such retailers. NHPL is in no way involved in the same. Thus, the transaction is that of a sale of the products by NHPL for further sale by the stockists in the course of wholesale trade. The said transaction of sale bv NHPL to stockists is subjected to GST. which is evident from invoices raised on by NHPL on the stockists. Resultantiv there is no payment by the Respondent to the stockists nor does the Respondent credit the stockists' account in its books. Therefore, the question of deduction of tax at source does not arise. The stockist records purchase from the respondent which in turn records sale to the stockists. In order to evidence the same, sample invoices raised by the respondent on the stockists were also filed as part of the factual paperbook (refer page nos. 110 and 111) and the same are again being enclosed herewith as Annexure 1.

The Respondent has charged and paid Goods and Service Tax (GST) on the sales so made. The Revenue's contention that Novartis India controls pricing, invoicing format, margin rates, payment schedules, territorial allocation and transport methods is without merit as the industry in which NHPL trades is "regulated" in nature and thus the products are to be stored and sold considering every kind of risk that can arise in the said sector. Therefore, it is a common business practice in a pharmaceutical industry to impose certain regulations formulated by drug regulators on the stockists.

6 Novartis Healthcare Private Limited Further, in wholesale business (especially in pharmaceutical sector) a supplier generally places various terms and conditions before giving its distributorship to any stockists/distributors in order to maintain its goodwill in the market, also from good governance perspective i.e. no health hazards should be caused to the ultimate consumers of the medicines and in order to abide by the various regulations formulated by the drugs regulators.

5.3 The Ld. AR of the appellant company has relied on the following cases-law for the proposition that in these circumstances, the transactions are only sale and not “commission” which attract the provisions of TDS under section 194 of the Act.

• Ahmedabad Stamp Vendors Association vs. Union of India (2002) (257 ITR 202) (Gujarat HC) (refer page No. 150 to 156 of the legal paper book) • Bharti Cellular Limited (now known as Bharti Airtel Limited) [Civil Appeal No. 7257/2011 (SC)] • Unichem Laboratories Ltd. [ITA Nos. 4592 & 4593/Mum/2014 dated 29 January 2016 (Mumbai ITAT)] affirmed in and 220/2017 dated 15 April 2019 (Bombay HC) • Piramal Healthcare Ltd. (2015) (55 taxmann.com 534) (Bombay High Court • Vodafone Idea Ltd. (Formerly known as Idea Cellular Ltd.) [ITA No. 3785/Mum/2016 dated 13 November 2019 (Mumbai ITAT)] • Bajaj Auto Limited [ITA No. 2786/MUM/2025 dated 13 June 2025 (Mumbai ITAT)] • Wockhardt Limited (ITA No. 1821/Mum/2025 dated 8 May 2025) (Mumbai ITAT) (AY2016-17 • Total Energies Marketing India Pvt. Ltd. [ITA Nos. 127 to 133/MUM/2023 dated 16 August 2023 (Mumbai ITAT)] 6. Ld. DR has also filed detailed written submission stating that the cases relied on by appellant-company are not applicable to the facts of the present case and the same is reproduced below :- a. Unichem Laboratories Ltd.: The AO noted that while the distributor in Unichem bore full commercial risk, NHPL stockists were subjected to tight operational controls. Moreover, departmental appeal is pending against this judgment. b. Intervet India Pvt. Ltd.: This case if involved reimbursement of advertising and promotional expenses—not trade margins or discounts— and hence is legally irrelevant. c. Piramal Healthcare Ltd.: This ruling pertained to technical services under Section 194J, not Section 194H.

7 Novartis Healthcare Private Limited d. Bharti Airtel Ltd.: Concerned digitally activated goods (SIM cards) where no storage, transport, or cold chain was required unlike the pharmaceutical industry where NHPL mandates precise compliance and handling. e. Pfizer Ltd. and Wockhardt Ltd.: The AO rightly noted these decisions are under challenge and factually distinguishable as they did not involve pervasive controls or retailer feedback loops. f. Hindustan Coca-Cola Beverages Pvt. Ltd. (293 ITR 226 SC): The AO held this ruling inapplicable since NHPL failed to produce Form 26A as mandated under Rule 31ACB to show that tax has been paid by the recipients. g. CIT v. Qatar Airways (332 ITR 253): Distinction lies in the fact that NHPL collects and monitors data from stockists, unlike Qatar Airways which had no access to downstream agent information. h. Ahmedabad Stamp Vendors Association (257 ITR 202): Inapplicable as that decision was rooted in a statutory scheme where stamp vendors were appointed by the government— not under a private contractual arrangement like in NHPL's case. i. The AO also referred to CIT v. Idea Cellular Ltd. [2010] 325 ITR 148 (Delhi HC) where it was held that discounts offered to distributors under a tightly controlled relationship amount to commission for the purpose of Section 194H. The factual matrix in NHPL's case is strikingly similar—discounts are offered, but terms are dictated by NHPL, and the stockists do not act independently. j. The CIT(A)'s observations that such controls are "natural to pharmaceutical industry" are flawed, as industry practice cannot override statutory definitions. The reasoning adopted by CIT(A) dilutes the legislative intent of Section 194H and (overlooks the commercial, reality of the transactions. By recharacterizing commission as "normal margin' the CIT(A) has failed to appreciate that substance must prevail over form. k. Accordingly, the Revenue respectfully submits that the CIT(A)'s findings on this issue are contrary to law and deserve to be reversed. The AO's disallowance under Section 194H, backed by documentary evidence, legal analysis, and consistent case law, must be restored in full.

8 Novartis Healthcare Private Limited and hence, the TDS provisions are not applicable for the following reasons:- a) The sale invoices of company to stockists clearly show that the goods were forwarded as “sale” and not as “commission” because GST applicable was paid by company. b) Whatever controls exercised by company is only as per the guidelines of Medical Council of India and company is not exercising any other control. The goods once sold to stockists are kept with them at their risk only. c) The stockists are showing the “sales” of company as their “purchases” and as per their Sale Invoices. After deducting the expenditure, the net profit/loss was offered for taxation in their Income Tax Returns. Even presuming that appellant company pays “commission” as contended by Revenue, they would deduct the tax and as per TDS certificate, the sellers would reduce their tax payment. d) The stockists are at liberty to sell the goods as per MRP mentioned and they only earns their margin, expenditure would be incurred by them and they filed their Income Tax Returns as their “purchases” from company and “sales” to retail customers. e) Reliance is placed on following the Pharma Cases where it was held that TDS provisions as “commission” are not applicable and hence followed : i) Unichem Laboratories 4593/Mum/2014 dated 26.1.2016 (Mum-ITAT) dated 8.5.2025 (Mum- ITAT)

9 Novartis Healthcare Private Limited f) The Ld. DR had mentioned that the decisions of Mumbai ITAT of Unichem Labs and Wockhardt are being contested by Revenue in Bombay High Court and the same are pending. g) Hon'ble Bombay High Court in the case of Piramal Healthcare Ltd. (2015) 55 Taxman.com 534 (Bom) addressed this issue and held that in similar circumstances, the relationship is akin to Principal to Principal to Agent, and hence section 194H or 194J are not applicable and hence TDS need not be deducted by appellant company. h) For TDS provisions to be applicable, the appellant must be the one making a payment of commission or brokerage. In our case, the appellant company was receiving sale price and not paying to stockist.

In view of the above detailed discussion and by respectfully following the decisions of Hon'ble Jurisdictional High Court and Coordinate Benches in similar circumstances, the Bench decides that appellant company need not deduct TDS as TDS provisions are not applicable.

8a. Per contra, Ld. DR argues that the appellant company has quantified the grant to the employee in the current year and booked the salary related expenditure in its books in the current year. Hence, TDS should be done in this year itself.

10 Novartis Healthcare Private Limited 8b. Heard both sides. The Bench decides the issue in favour of appellant company for the following reasons :- a) The CBDT Circular No. 9/2007 says that the tax liability on company arises only when the benefit is exercised and actually availed, but not at the stage of mere grant. b) Section 17(2)(vi) of the Act and the Explanation says that on the date of transfer or allotment, the difference between FMV of option on the date of option exercised and price paid by employee is liable to tax in the hands of employee. This issue is squarely covered in favour of the appellant in the following cases : • Total Energies Marketing India Pvt. Ltd. [ITA Nos. 127 to 133/MUM/2023 dated 16 August 2023 (Mumbai ITAT)] • Infosys Technologies Ltd [297 ITR 167 (SC)] • Bharat Financial Inclusion Ltd. [ITA No. 237/Hyd/2017 dated 3 August 2018 (Hyderabad ITAT)] 8c. In view of the above, the addition made by Ld. AO is deleted. The Appeal of the Revenue is DISMISSED.

C.O. No. 121/Mum/2025

The Respondent company filed a Cross Objection by raising following three grounds of appeal on the issue of applicability of section 194A of the Act on interest on delayed payments to MSMEs.

9. On this issue, the Ld. AO held that there is a TDS shortfall of Rs. 40,000/- and interest under section 201(1A) of the Act of Rs. 13,600/-. The Ld. AO held that the Respondent Company ought to have deducted tax under section 194A of the Act on the provisions created by it in respect of interest delayed payments to MSMEs. The failure of doing the same resulted this addition by Ld. AO. The Ld. CIT(A) concurred with the view of Ld. AO.

11 Novartis Healthcare Private Limited 9a. The Respondent company has contended before ITAT that the Ld. AO and Ld. CIT(A) are not correct in interpreting the law as above because the amount so accrued by Respondent company in respect of delayed payments to MSME is not arising from any debt claim or money borrowed by company and hence the provisions of section 194 read with section 2(28A) of the Act are not applicable. Consequent levy of interest under section 201(1A) of the Act should also be deleted, by Ld. AR of the appellant company.

9b. The Ld. DR relied on the orders of lower authorities.