2015 (1) TMI 873 - HC - Income Tax

Application of Section 194J - sale of drugs - Principle to principle relationship - Held that -The submission on behalf of the Revenue that this a mere device to evade the obligation to deduct tax at source is a mere conjecture as it is not supported by any evidence and/or facts on record. In the present case, the assessee has received the sale price at the rate fixed under the agreement. In such a case, where the assessee has received the amount of sale price, the question of the assessee deducting tax at source under Section 194J of the Act does not arise, because the assessee is not making any payment to the stockist. Therefore, whatever be the margin made available to the stockist, so long as the assessee is not making any payment to the stockist, the question of invoking Section 194J against the assessee does not arise. Once it is held that in the present case, Section 194J is not attracted, then, the question as to whether there was relationship of principal to principal or relationship of the manager becomes academic. - Decided in favour of assessee.

Summary

Issues:
1. Whether the relationship between the assessee and the super stockist is that of a principle to principle relationship or that of appointment of a manager?
2. Whether the payment made by the assessee to its super stockist is for professional or technical services, or is it in substance a payment for managerial services rendered by the super stockist?

Analysis:
1. The respondent, engaged in drug manufacture and distribution, appointed M/s.Zivon as its superstockist. The Tribunal analyzed the agreement method, where goods were sold at 70% of M.R.P. to M/s.Zivon for further distribution. The Revenue contended that M/s.Zivon should be treated as a manager for tax deduction purposes. The AO concluded M/s.Zivon was the manager, requiring tax deduction under Section 194J. The CIT (A) partially allowed the appeal, applying Section 194J to payments received from M/s.Zivon for managerial services.

2. The Tribunal, in a common order for five assessment years, allowed the appeal by the respondent. It held that M/s.Zivon was not an agent/manager based on the agreement's clauses. Moreover, as no payment was made by the respondent to M/s.Zivon, Section 194J did not apply. The Tribunal noted the 70% M.R.P. received by the respondent from M/s.Zivon, concluding no tax deduction obligation existed. The Revenue argued that the arrangement aimed to evade TDS liability, suggesting the sale price to the retailer was lower due to commission. The respondent countered, emphasizing the undisputed sale at Rs. 70 and no payment to M/s.Zivon.

3. The Court rejected the Revenue's conjecture of tax evasion, lacking supporting evidence. As no payment was made to M/s.Zivon, Section 194J did not apply. The Court emphasized the fixed M.R.P. system and the discretion of parties in setting sale prices. Since no payment was made to the stockist, the obligation to deduct tax did not arise. Consequently, the Court dismissed the appeals, as Section 194J was not applicable, rendering the consideration of the relationship between principal and manager academic.