Loading judgment…
Facts
The revenue appealed an order from the CIT(A) concerning AY 2017-18. The AO treated the assessee as being in default for non-deduction of TDS on discounts paid to stockists, bonus payments, and provisions for interest to MSMEs. The CIT(A) deleted these additions, relying on previous decisions.
Held
The Tribunal held that discounts paid to stockists were on a principal-to-principal basis and not covered by Section 194H. Provisions made for interest to MSMEs were also not considered interest under Section 2(28A). Regarding TDS default for amounts disallowed under Section 40(a)(i)/(ia), the issue was remitted to the AO for examination.
Key Issues
Whether discounts and bonus payments to stockists are subject to TDS under Section 194H, and if payments for delayed payments on trading liabilities qualify as interest under Section 2(28A). Also, whether TDS can be demanded on amounts already disallowed under Section 40(a)(i)/(ia).
Sections Cited
250, 133A(2A), XVIIB, 194H, 194A, 201(1), 201(1A), 40(a)(i), 40(a)(ia), 2(28A)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SANDEEP SINGH KARHAIL, JM
(Assessment Year: 2017-18) DCIT (OSD)-2(3), Wockhardt Ltd. Room No. 310, 3rd Floor, Wockhardt Tower, Bandra Kurla Vs. Cumbala Hill, MTNL TE Building, Complex, Bandra, Mumbai-400051. Peddar Road, Mumbai-400026 PAN: AAACW2472M Appellant) : Respondent) Appellant /Assessee by : Shri Ayush Chhajed, AR Revenue / Respondent by : Shri Arun Kanti Datta, CIT-DR Date of Hearing : 10.06.2025 Date of Pronouncement : 19.06.2025 O R D E R
Per Padmavathy S, AM:
This appeal by the revenue is against the order of the Commissioner of Income Tax (Appeals)-3, Bengaluru [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 17.02.2025 for AY 2017-18. The revenue raised the following grounds of appeal:
“1. "On the facts and in the circumstances of the case and law, the Ld. Addl/JCIT(A) has erred in holding that the transaction of sale between the assessee company and stockiest was on principal to principal basis and therefore discount offered would not come under ambit of 194H, without appreciating the fact that the entire liability in goods had not been transferred to the stockiest and that the company had to still carry liability in terms of expired goods and quality Wockhardt Ltd. of goods etc. and therefore the stockiest were working as agents of assessee company, to promote and effect sales on behalf of assessee." 2. "On the facts and circumstances of the case and in law, the Ld. Addl/JCIT(A) has erred in holding that bonus and incentive offered by the assessee company to stockiest were also in nature of discount and therefore not covered under Section 194H, without appreciating the fact that such bonus/incentive are offered subsequent to sales and therefore are essentially in nature of commission as envisaged u/s 194H of the Act. 3. "On the facts and circumstances of the case and law, the Ld. Addl/JCIT(A) has erred in holding that provisions made for interest to Medium and Small Enterprises was in nature of liquidation damages and therefore connected to sales or purchase without appreciating the fact that the assessee itself categorized this expenditure as interest and therefore the same is covered u/s 194A of the Act." 4. "On the facts and circumstances of the case and law, the Ld. Addl/JCIT(A) has erred in holding that the assessee is not 'Assessee in default for TDS default reported in Tax Audit Report, without appreciating the fact that the assessee company did not discharge it's duty of deduction of TDS at the time of payment of Rs. 1,09,265/. Further, in assessee's own case for A.Y. 2016-17 the similar grounds has been dismissed by the CIT(A), Pune-12.”
The assessee is a company engaged in the business of manufacturing and trading of pharmaceutical products. The survey under section 133A(2A) was conducted in the premises of the assessee on 14.02.2017 for the purpose of verification of compliance to the provisions of Chapter-XVIIB of the Act. During the course of survey the AO noticed that the assessee has not deducted tax on (i) discounts paid to stockist (ii) payment of bonus to stockist (iii) provision made for interest to medium and small enterprises and (iv) TDS default reported in Tax Audit Report (TAR). The assessee submitted that the issue of non-deduction of tax at source with respect to payments (i) to (iii) are covered by the decision of the Co- ordinate Bench in assessee's own case. The AO did not accept the submissions of the assessee and treated the assessee as assessee in default to the tune of Rs. 34,22,45,206/- towards TDS under section 201(1) and interest under section Wockhardt Ltd. 201(1A). Aggrieved the assessee filed further appeal before the CIT(A). The CIT(A) deleted the addition towards payments made in (i) to (iii) by relying on assessee's own case. With respect to the TDS default reported in TAR deleted the addition by placing reliance on the decision of the Co-ordinate Bench in the case of Pfizer Ltd. vs. ITO (TDS) [2012] 28 taxmann.com where it has been held that once the amount was disallowed under section 40(a)(i) the same amount cannot be subject to the provisions of TDS under section 201(1). The revenue is in appeal against the order of the CIT(A).
We heard the parties and perused the material on record. We notice that the CIT(A) has relied on the decision of the Co-ordinate Bench in assessee's own case for earlier AY. The relevant observations of the Co-ordinate Bench for AY 2011-12 (ITA No. 894/Mum/2022 dated 21.11.2022) where it has been held that “9. We have considered the rival submissions and perused the material available on record. We find that the Co–ordinate Bench of the Tribunal in assessee‟s own case in DCIT v/s Wockhardt Ltd., in ITA no.6803/Mum./2018, vide order dated 11/12/2020, for the assessment year 2010–11, decided similar issue in favour of the assessee by observing as under:– “11. Considered the rival submissions and material placed on record. With the ground no. (a) and (b), we notice that the Coordinate Bench of ITAT in & 4593/Mum/2014 in the case of ITO(TDS) vrs. Unichem Laboratoreis Ltd. has already decided the similar issue on the grounds raised
by the revenue in the present case. For the sake of clarity, which is reproduced below:-
8. We have considered the rival contentions and perused the material on record, we have observed that the perusal of the clauses of the 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-medicine to the distributor which is being paid by the distributor on principal to principal basis and property in goods with all risk and rewards passes to the distributor at the time of selling of the goods by the assessee company Wockhardt Ltd. to the distributor when the goods are delivered by the carrier to the distributor. In-fact the distributors are the customers 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 services. 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 company along with endorsement on Lorry Receipt of the transporter along with shortage certificates by the transporter to claim loss from the assessee company, in other situations the loss or damage to products shall be borne by the distributor. The drugs being medicines contains certain restriction on the sale w.r.1. good governance and conduct by the distributors to follow first expiry and first out basis as the medicines having expiry could not be sold after the stipulated date of expiry, otherwise it will be health hazard to the consumers, the assessee company as normal market practice takes back the said expired drugmedicines from distributors which has expired and pay back the distributors but that does not in our humble opinion is decisive or change the character of dealing between the assessee company and the distributor which primarily 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 drugsmedicine handled by the assessee company otherwise it could have severe health hazard 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 rewards have not passed to the distributor on sale of products by the assessee company to the distributor at the time of delivery by the carrier to the distributor as per stipulated terms of distribution agreement. We have also observed that the assessee company is raising sale invoice's on the distributor M/s Rudra Pharma Distributors Limited 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 also placed in the paper book filed by the assessee company at page 36 to 51. We have also observed that the said distributor M/s Rudra Pharma Distributors Limited is registered with VAT authorities and is raising its invoices (including VAT) to their customers, whereby all the above facts clearly reflects that the distributors is buying 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 the delivery of goods by carrier to the said distributor which is also supported by the clause 5 of the distribution agreement dated 01-07- Wockhardt Ltd. 2001. Thus, we, therefore, hold that the assessee company has paid 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 these 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.”
Therefore, respectfully following the decision of Coordinate Bench of ITAT which is applicable mutatis mutandis in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, the grounds (a) and (b) raised by the revenue are dismissed.”
10. The learned D.R. could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the decision of the Tribunal rendered in assessee‟s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, grounds no. (a) and (b) raised in Revenue‟s appeal are dismissed. 11. to 13.******* 14. We also notice that the Coordinate Bench of ITAT in the case of Sri Venkatesh Paper Agencies (Hyd.) (P.) Ltd. v. Deputy Commissioner of Income- tax, Circle-3(1), Hyderabad [2012] 24 taxmann.com 52 (Hyd.) has decided the similar issue. For the sake of clarity, which is reproduced below:- Held “It is not disputed that the interest paid is not for any loan or debt incurred by the assessee but for the delay in payment of bills for purchases effected from company. Therefore, it has to be seen as to whether such payment is in the nature of interest as envisaged under section 2(28A). As seen from the order of the ITAT Ahmedabad Bench in the case of ITO v. Parag Mahasukhlal Shah [2011] 46 SOT 302 / 12 taxmann.com 37 the Tribunal has held that a payment which has direct link and immediate nexus with the trading liability being connected with the delayed purchase payments will not fall within the category of interest as defined in section 2(28A). The payment made by the assessee in the present appeal being of similar nature also cannot be termed as interest as defined under section 2(28A). Even without entering into the controversy as to whether the payment made on overdue bills will come within the ambit of interest as defined in section 2(28A), the assessee is Wockhardt Ltd. also bound to succeed on its alternative argument Annexure 2 that the entire payment having been made during the previous year relevant to the assessment year under dispute no disallowance could be made under section 40(a)(ia) in view of the ITAT Special Bench decision in the case of Merilyn Shipping & Transports v. Addl. CIT [2012] 136 ITD 23/ 20 taxmann.com 244 (Visakha) . In the afore said view of the matter, the disallowance made under section 40(a)(ia ) cannot be sustained. Therefore, the Assessing Officer is to be directed to delete the same. The appeal is to be allowed.
We have heard rival contentions and perused the material on record. It is not disputed that the interest paid of Rs. 3,12,600 is not for any loan or debt incurred by the assessee but for the delay in payment of bills for purchases effected from M/s. Sinermas Pulp & Papers Ltd. Therefore, it has to be seen as to whether such payment is in the nature of interest as envisaged u/s. 2(28A) of the Act. As seen from the order of the ITAT Ahmedabad Bench in the case of Parag Mahasukhlal Shah (supra) the Tribunal has held that a payment which has direct link and immediate nexus with the trading liability being connected with the delayed purchase payments will not fall within the category of interest as defined in section 2(28A) of the Act. The payment made by the assessee in the present appeal being of similar nature also cannot be termed as interest as defined u/s. 2(28A) of the Act.”
Therefore, respectfully following the decision of Coordinate Bench of ITAT which is applicable mutatis mutandis 24 & CO 51/Mum/2020 M/s. Wockhardt Ltd. in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, the grounds (c) raised by the revenue are dismissed.”
15. The learned D.R. could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the decision of the Tribunal rendered in assessee‟s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground no. (c) raised in Revenue‟s appeal is dismissed.”
Facts pertaining to the year under consideration being identical and arising out of the same survey operation under section 133A(2A). We notice that a similar addition has been made in assessee's case for AY 2010-11 to 2016-17 and therefore, there is merit in the contention of the ld. AR that the issue is recurring in nature. We Wockhardt Ltd. further notice that the Co-ordinate Bench has been consistently holding that the assessee cannot be treated as assessee in default for the purpose of section 201(1) / 201(1A) towards non-deduction of tax on the impugned payments in (i) to (iii). Respectfully following the decision of the Co-ordinate Bench, we hold that the addition made by the AO under section 201(1) / 201(1A) cannot be sustained. Ground no. 1 to 3 of the revenue are dismissed.
With regard to the addition made for non-deduction of tax as reported in TAR, we notice that the Co-ordinate Bench in the case of Pfizer Ltd. (supra) has held that “12. As already explained and evidenced from the computation of income as well as the orders of AO in the assessment proceedings, the entire provision has been disallowed under section 40(a)(ia) and section 40(a)(i) Once the amount has been disallowed under the provisions of section 40(a)(i) on the reason that tax has not been deducted, it is surprising that AO holds that the said amounts are subject to TDS provisions again so as to demand the tax under the provisions of section 201 and also levy interest under section 201(1A) We are unable to understand the logic of AO in considering the same as covered by the provisions of section 194C to 1941. Assessee as stated has already disallowed the entire amount in the computation of income as no TDS has been made. Once an amount was disallowed under section 40(a)(i)/(ia) on the basis of the audit report of the Chartered Accountant, the same amount cannot be subject to the provisions of TDS under section 201(1) on the reason that assessee should have deducted the tax. If the order of AO were to be accepted then disallowance under section 40(a)(i) and 40(a)(ia) cannot be made and provisions to that extent may become otiose. In view of the actual disallowance under section 40(a)(i) by assessee having been accepted by AO, we are of the opinion that the same amount cannot be considered as amount covered by the provisions of section 1940 to 1941 so as to raise TDS demand again under section 201 and levy of interest under section 201(LA) Therefore, assessee's ground on this issue are to be allowed as the entire amount has been disallowed under the provisions of section 40(a)(1)/(ia) in the computation of income on the reason that TDS was not made. For this reason alone assessee's grounds can to be allowed. Considering the facts and reasons stated above assessee's grounds are allowed.”
From the above findings of the Co-ordinate Bench we notice that the issue laid down is that the addition towards TDS default under section 201(1)/ 201(1A)
Wockhardt Ltd. cannot be made when the amount is disallowed under section 40(a)(i) based on the default reported in the Audit Report. The CIT(A) while deleting the disallowance has not recorded any factual finding as to whether the payment on which the AO has levied the tax under section 201(1) has already been disallowed under section 40(a)(ia) in assessee's case. On perusal of the AO's order also we notice that the said fact has not been recorded. Therefore we remit the issue of addition made towards failure to deduct tax as reported in TAR back to the AO for the limited purpose of examining whether the amount reported in TAR has been disallowed under section 40(a)(ia) and if so delete the addition considering the ratio laid down by the coordinate bench in this regard. Needless to say that the assessee be given a reasonable opportunity of being heard. Ground No.4 of the revenue is allowed for statistical purposes.
In result appeal of the revenue is partly allowed.