2016 (1) TMI 1087 - AT - Income Tax

TDS u/s 194H - whether relationship between the assessee and distributors is in the nature of principal to principal and not that of principal to agent? - Held that - As 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 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 01-07-2001. 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. - Decided in favour of assessee. Non deduction of tax at source @10% u/s 194J of the Act on payment of Director s sitting fee - Held that - The amendment to the Section 194J(1) of the Act by insertion of subsection (ba) to Section 194J(1) of the Act has caste an additional burden on the taxpayer with respect to deduction of tax at source on remuneration, fee or commission to Director other than salary which as per memorandum to Finance Bill 2012 was not existing as per specific provisions of the Act prior to the aforesaid amendments and the amendments to Section 194J(1) of the Act by insertion of sub-section (ba) to Section 194J(1) of the Act were made effective from 01-07-2012 which in our considered view is prospective in nature to be applicable only from 01-07-2012 as it has caste an additional burden on the tax-payer by way of deduction of tax at source on remuneration fees or commission to directors other than the salary for which tax is to be deducted at source under Section 192 of the Act. Since the instant appeal is for the assessment year 2009-10 which is prior to the assessment year 2013-14 we hold that no tax was deductible at source on payment of Directors sitting fee paid by the assessee company to its Directors u/s 194J of the Act and the assessee company could not be held as assessee in default u/s 201(1) and 201(1A) of the Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the relationship between the assessee and distributors is principal-to-principal or principal-to-agent, impacting the liability to deduct TDS under Section 194H.
2. Whether the assessee is liable to deduct TDS on directors' sitting fees under Section 194J.

Detailed Analysis:

Issue 1: Relationship Between Assessee and Distributors
The Revenue raised concerns that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in holding that the relationship between the assessee and distributors is principal-to-principal, thereby exempting the assessee from deducting TDS under Section 194H. The Assessing Officer (AO) argued that the pricing structure between the assessee and distributors indicated a principal-agent relationship, necessitating TDS deduction on the margin earned by distributors.

The CIT(A) observed that the assessee company, engaged in manufacturing and trading formulations and bulk drugs, sold products to distributors on a principal-to-principal basis. The distributors bore the risk of loss or damage post-delivery, and the expired products were returned to the assessee as per industry norms. The CIT(A) relied on several judicial precedents, including the decisions of the Mumbai Tribunal in Glenmark Pharmaceutical Limited and the Delhi High Court in Reebok India Company, to conclude that the relationship was indeed principal-to-principal. Consequently, the CIT(A) held that no TDS was required under Section 194H.

Upon appeal, the Tribunal upheld the CIT(A)'s decision, emphasizing that the distributors were independent traders purchasing goods from the assessee and selling them at their own risk. The Tribunal noted that the restrictions imposed by the assessee were standard industry practices for maintaining product quality and did not alter the principal-to-principal nature of the transactions.

Issue 2: TDS on Directors' Sitting Fees
The second issue involved the non-deduction of TDS on directors' sitting fees paid by the assessee. The AO contended that the sitting fees constituted managerial services, necessitating TDS under Section 194J. However, the assessee argued that the sitting fees were honorarium payments and did not fall under professional or technical services as defined in Section 194J.

The CIT(A) ruled in favor of the assessee, noting that the amendment to Section 194J, which explicitly required TDS on directors' remuneration, fees, or commission, was effective from July 1, 2012, and did not apply retrospectively to the assessment year 2009-10. The CIT(A) relied on the Pune Tribunal's decision in Bharat Forge Limited and the Bombay High Court's decision in CIT v. Lady Navajbai R.J. Tata to support this conclusion.

The Tribunal concurred with the CIT(A), affirming that the amendment to Section 194J was prospective and did not impose a retrospective obligation on the assessee to deduct TDS on directors' sitting fees for the assessment year 2009-10. The Tribunal cited the Finance Bill 2012, which clarified that the provision for TDS on directors' remuneration was introduced to address a previously existing gap in the legislation.

Conclusion:
The Tribunal dismissed the Revenue's appeals, confirming the CIT(A)'s decisions that the relationship between the assessee and distributors was principal-to-principal, exempting the assessee from TDS under Section 194H, and that no TDS was required on directors' sitting fees under Section 194J for the relevant assessment years.