ITO TDS 3(3), MUMBAI vs. SUPER RELIGARE LABORATORIS LTD, NEW DELHI

On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the assessee company was not liable to deduct TDS u/s. 194H of the I.T. Act and thereby erred in deleting the non deduction/short deduction u/s. 201(1) and interest u/s. 201(1A) without appreciating that all the collection centres are working as agents of the assessee company on the basis of commission only and hence the discounts given to collection centres were in the nature of “commission” within the meaning of section 194H of the Act.”

At the outset, the Ld. Counsel for the assessee submits that an identical issue arose in assessee’s own case for the Assessment Years 2006-07 and 2008-09 and the Tribunal held that the discounts allowed by the assessee to collection centres will not attract the provisions of Sec. 194H because there was no principal agent relationship between assessee and collection centres hence provisions of Sec. 194H have no application. Copies of the decision reported as SRL Ranbaxy Ltd Vs. ACIT (50 SOT 173) and ACIT Vs SRL Ranbaxy Ltd (42 ITR (Trib) 676 are submitted before us. The Ld. Counsel for the assessee further submits that the name of the assessee SRL Ranbaxy Ltd., was changed to Super Religare Laboratories Ltd., on 28th August, 2008 and this was later on changed to SRL Ltd., on 6.7.2012. Copies of fresh certificate of incorporation consequent upon the change of name are furnished before us. Therefore, the Ld. Counsel for the assessee submits that the issue in appeal is squarely covered by the decisions reported (supra).

The Ld. Departmental Representative vehemently supports the order of the Assessing Officer in holding that the assessee is defaulter u/s. 201(1) and 201(1A) for non deduction of TDS u/s. collection centres.

We have heard the rival submissions, perused the orders of the authorities below and the decisions relied on. The assessee is engaged in providing laboratory and testing services to the customers through own collection centres and also through collection centres comprising of hospitals, nursing homes, clinics, other laboratories etc. The assessee allowed discounts to the collection centres other than its own centres. The Assessing Officer treated such discounts as commission paid to collection centres and since the assessee did not deduct TDS u/s. 194H of the Act, he passed order u/s. 201(1) and 201(1A) treating the assessee as defaulter. We find that an identical issue has been decided in assessee’s own case which is reported as SRL Ranbaxy Ltd. Vs ACIT (supra) for Assessment Year 2006-07 wherein it was held that the discounts allowed by the assessee Laboratory to the collection centres is not commission and not attracted by the provisions of Sec. 194H for the reason that there is no principal agent relationship between the assessee and the collection centre and the relationship between assessee and collection centres is only principal to principal relationship therefore the provisions of Sec. 194H have no application. In holding so the Tribunal observed as under:

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).

Where the dealing between the parties is not on a Principal to Agent basis, Section 194 H does not get attracted, as held in “Ahmedabad Stamp Vendor Association v. Union of India”, 257 ITR 202 (Guj), “Kerala Stamp Vendors Association” 282 ITR 7(Ker) and “ACIT v. Samaj”, 77 ITD 358(Cuttack).

In the present case, the business working of the assessee is that it signs agreements with the Collection Centres, on a non-exclusive basis. It is under these agreements, that the regarding testing of samples. These Centres operate as authorized Collectors for collecting the samples. Now, these Collection Centres are working in this manner with various concerns, of which, the assessee is one. The Collection Centre is under no obligation to always forward these samples to the assessee. It is only in case the patient/customer insists that the laboratory testing be done by the assessee, that the Collection Centre forwards the sample of such a patient to the assessee, for testing. The Collection Centre also fills up the necessary test requisition forms to be sent along with the sample. The assessee conducts the test/tests and issues the report with regard thereto, to the Collection Centre. The Collection Centre issues its own bill/invoice to the patient/customer. The fees for the testing is collected by the Collection Centre and the receipt is also issued by the Collection Centre. The assessee raises its periodical invoices on the Collection Centres. The Collection Centre makes the payment to the assessee after TDS u/s 194 J of the Act. Under the Agreement, the services are rendered by the assessee in the form of laboratory testing at a discounted price from the price given in the standard price list. This discount has been considered by the Authorities below as commission and they have held that tax was required to be deducted thereon u/s 194 H of the Act.

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.

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.

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 non-exclusive 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 deductible expenditure.

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.

It has further been the observation of the ld. CIT(A) that there were geographical restrictions imposed on the Collection Centres. However, as rightly contended, it has not been shown that any such restrictions were ever imposed on the Collection Centres. Rather, no restrictions have been shown to have been imposed on the Collection Centres from referring the tests to laboratories other than the assessee. It has been contended on behalf of the assessee that all through, i.e., in the past, as well as in the present, the Collection Centres have been and are engaging the services of other laboratories. This has not been disputed.

The ld. CIT(A) has also objected that it is not true to contend, as done on behalf of the assessee, that the Collection Centres are free to charge a rate as desired by them from their patients; that the advertisement clearly specifies the rate which is to be charged by the Collection Centres; and that from this, it is clear that the assessee has control over the pricing of the test.

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.

Apropos this issue, it is seen that APB 96 shows that Sapra Diagnostic Centre, a Collection Centre, bearing Code No. P 00000075/, is charging Rs. 975/-against SRL DOS price of Rs. 915/-. APB 97 is a copy of receipt issued by Sapra Diagnostic Centre to whom Khanna Renu, for payment of Rs. 975/- for various medical tests. Then, APB 98 contains the copy of price list (Systems)of the assessee, as on 17.12.09. This list reads as follows:-

Further, APB 99 to 102 contain the relevant extracts of the standard pricelist 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.

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 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.

As seen from the above, it is evident that there is no Principal – Agent relationship existing between the assessee and the Collection Centres. The findings of the learned CIT(A) in this regard are, therefore, incorrect and we hold so.

Besides the above, it is patent on record that the assessee does not pay or credit any amount to the account of the Collection Centres, either directly or indirectly. That being so, the provisions of section 194 H of the Act do not get attracted on this score also. It is obvious that the obligation of deduction of tax at source u/s 194 H of the Act comes up only at the time of payment or credit of the amount in the books of account of the payer, whichever is earlier. Herein, the amount received by the assessee has been credited in its books of account. This is based on the invoices raised by the assessee on the Collection Centres. No debit in the books of account of the assessee for any discount and/or commission paid towards the Collection Centres has been shown to exist. On the contrary, the assessee has been taxed on the gross receipt of ` 50.42 crores, which stands reflected in the books of account of the assessee.

Then, the disallowance in terms of section 40(a)(ia) read with section 194H 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.

In “United Exports v. CIT”, 330 ITR 549(Del), it was held, with reference to section 40 A(2) (b) of the Act, that since trade discount offered by the assessee could not be said to be expenditure incurred, there was no question of disallowance under the said section. 25. From this angle also, the Authorities below erred in disallowing the discount offered by the assessee, by invoking the provisions of section 40(a)(ia) of the Act.

Coming to the case laws referred to on behalf of the Department, these are as follows:-

“CIT v. Singapore Airlines Ltd.”, 319 ITR 29 (Del); 2. “CIT v. Director, Prasar Bharti”, 325 ITR 205(Ker); 3. “Delhi Milk Scheme v. CIT”, 301 ITR 373(Del); 4. “ACIT v. Bharti Cellular Ltd.”, 105 ITD 129(Kol); & 5. “Hindustan Coca Cola Beverages v. ITO”, 97 ITD 105(JP).

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.

In the aforesaid background of facts, the question arose whether the supplementary commission retained by the travel agents was in the nature of ‘Commission’ for the purposes of section 194 H of the Act, on which, tax was required to be withheld, or it was in the nature of discount.

In the undisputed position that the approved agent acted vis- à-vis airline in the capacity of an agent, it was held that the supplementary commission received from sale of tickets was no different from the commission normally received by the agent, on which tax was being deducted under section 194 H of the Act.

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.

That apart, it was held by the Hon’ble Bombay High Court in the recent decision of “CIT v. Qantas Airways”, 332 ITR 25(Bom) that the discount offered by the airlines to travel agents on the standard price of tickets could not be said to be income in the nature of commission/brokerage, warranting deduction of tax at source under section 194 H of the Act.

Apropos “CIT v. Director, Prasar Bharti”, (supra), it was held that under the advertising trade too, the advertising agencies, which are accredited with Advertising Standards Council of India (ASCI), release advertisements to the media (print or electronic) and are entitled to commission from the media. The advertising agencies which receive payment from the advertisers retain thecommission and pass on the balance to the media. Tax is deducted under section 194 H of the Act on the amount of commission retained by the advertising agency, in view of the admitted Principal – Agent relationship between the media and the advertising agency.

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.

On the aforesaid facts, it was held that the commission of 15% retained by the agent out of advertisement charges collected by the agent on behalf of Doordarshan was subject to deduction of tax at source under section 194 H of the Act, since Doordarshan in its capacity as Principal of the Agent. It was held that the parties understood their relationship as that of Principal and Agent and what was paid to the agent by Doordarshan was 15per cent of the advertisement charges collected and remitted the agent which was in the form of commission payable to the agent by Doordarshan. Further, it was found on facts that the advertisement contract entered into between the customer and the agency was for telecasting advertisement on Doordarshan channels.

In the present case, on the contrary, the collection center has no authority to bind the assessee in any form. The collection centers, acting in their own right, engage the assessee for lab testing services and do not, in any manner, act as agents of the assessee. That being so, ‘Director, Prasar Bharti’ (supra), does not come to the aid of the revenue.

In “Delhi Milk Scheme” (supra), the assessee appointed a large number of agents/concessionaires all over Delhi to sell milk/ milk products owned by the assessee. The assessee did not charge any rent for the use of booths from the concessionaires. The milk booths were, in fact, owned by the assessee. The assesee had a right to enter the milk booth and take charge thereof at any time, without assigning any reason or without any intimation to the concessionaires. The unsold milk was taken back by the assessee from the concessionaires. The cash collection was daily handed over to the assessee by the concessionaires. The concessionaires only rendered a service to the assessee for selling milk to the customers, and the ownership of the goods did not pass from the assessee to the concessionaires, inasmuch as there was no sale of the milk/milk products to the concessionaires.

It was observed that looking at the facts of the case, namely, that the ownership of the milk booth rests with the assessee who does not charge any rent for the use of the booths from the concessionaires; the unsold milk is taken back by the assessee from the concessionaires who are prohibited from selling any other product of any other brand; the sale collections of the and were being paid a commission for it.

On the basis of the aforesaid undisputed facts, it was held by the Hon’ble High Court, confirming the decision of the Tribunal, that the commission paid to the agents for the goods sold attracted the mischief of section 194H of the Act.

In the present case, however, the collection centre has its own premises, infrastructure, staff and necessary licenses/approvals. The collection centre acts as an authorized collector for collecting samples and avails the professional services of the appellant with respect to testing of samples and issue of necessary reports. The assessee raises periodical invoices on the collection centers. The amount collected by the collection center from the patients is not on account of or on behalf of the assessee. The collection center, in turn, makes payment to the assessee after deducting tax at source u/s 194J of the Act for the professional services rendered. The collection centre has the flexibility and freedom to choose the laboratory to which samples have to be sent for testing, unless the same is mandated by the patient/customer. Moreover, the collection centre charges the customer rates fixed by the collection centre (and not decided by the assessee) though at the same time, keeping in mind the amount that would have to be paid by the collection centre to the assessee or to any other laboratory to which the samples have to be sent for testing. In fact, in certain cases, the collection centers have, as also brought on record before us, charged over and above the standard price list provided by the assessee to all collection centers, which averment has gone unrebutted. Hence, ‘Delhi Milk Scheme’(supra) is also not of any avail to the Department.

In “Bharti Cellular”(supra), the assessee was providing cellular mobile telephone services in specific area through distributors by providing SIM and pre-paid cards at fixed rates below the market price, which were further sold to retailers, who ultimately sold the SIM cards and pre-paid cards to customers. As per the agreement between the assessee and the franchisees, the rights, title, ownership and property rights in the pre-paid cards, at all times, vested with the assessee. The franchisee’s price and payment thereof was decided by the assessee itself, which showed that the difference between price charged by the assessee and that charged by the franchisee was commission and not discount.

In the background of the aforesaid facts, taking into account that there was no transfer of title in the property (SIM cards) by the assessee to the distributor, it was held that the distributor acted as an agent of the assessee and the relationship between the parties was not on a principal to principal basis. It is in these circumstances that the Kolkata Bench of the Tribunal held the provisions of sec. 194H of the Act to be applicable to the amount which was regarded as being in the nature of commission.

The present case, on the other hand, is not one of sale of goods, but one of rendering of services. The assessee renders diagnostics services to the collections centers against payment, on which necessary tax is deducted at source u/s 194 J of the Act. There is no element of agency between the assessee and the collection centers. ‘Bharti Cellular’ (supra), therefore, has no application whatsoever to the facts of the present case”.

In the result, the appeals filed by the Revenue are dismissed.