2020 (12) TMI 1233 - AT - Income Tax

TDS u/s 194H - discount to MRP given by the assessee company to the distributors at the time of sale of drugs-medicine to the distributors - HELD THAT - As 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. 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. TDS u/s 194A - Interest delay in payment of bills for purchases effected - HELD THAT - 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 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 2011 (6) TMI 148 - ITAT, AHMEDABAD 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) - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the transaction of sale between the assessee company and stockist was on a principal-to-principal basis, and if the discount offered falls under Section 194H.
2. Whether bonus and incentive offered by the assessee company to stockist are in the nature of discount or commission under Section 194H.
3. Whether the provision of interest made was in the nature of liquidation damages and thus connected to sales or purchases, and if it falls under Section 194A.

Issue-wise Detailed Analysis:

1. Principal-to-Principal Basis and Discount under Section 194H:
The revenue contended that the relationship between the assessee (a pharmaceutical company) and its stockists was not on a principal-to-principal basis, arguing that the stockists acted as agents because they received discounts and bonuses on the sale of products. The revenue emphasized that the stockists could return expired goods, indicating an agency relationship. However, the assessee argued, supported by the Ld. CIT(A) and case law, that the transaction was on a principal-to-principal basis. The ITAT referred to the case of ITO(TDS) v. Unichem Laboratories Ltd., where it was held that such transactions were indeed on a principal-to-principal basis, and discounts given did not fall under Section 194H. The ITAT concluded that the relationship was on a principal-to-principal basis, and the discounts did not constitute commission under Section 194H.

2. Bonus/Incentive as Discount or Commission under Section 194H:
The revenue argued that bonuses and incentives offered to stockists were essentially commissions as they were given post-sale. However, the assessee, supported by previous rulings, contended that these bonuses/incentives were in the nature of discounts. The ITAT referred to the same case of Unichem Laboratories Ltd., where it was established that such bonuses/incentives were discounts and not commissions. Consequently, the ITAT dismissed the revenue's contention, affirming that these payments did not fall under Section 194H.

3. Provision of Interest as Liquidation Damages under Section 194A:
The revenue argued that the interest provision made by the assessee was in the nature of liquidation damages connected to sales/purchases and should be categorized under Section 194A. The assessee countered, citing case law, that the interest was penal in nature and not covered under Section 194A. The ITAT referred to the case of Income-tax Officer, Ward-2(2), Ahmedabad v. Parag Mahasukhlal Shah, which held that payments with a direct link to trading liabilities and delayed purchase payments do not fall under the definition of interest as per Section 2(28A). The ITAT concluded that the provision of interest in this case was not covered under Section 194A, dismissing the revenue's claim.

Conclusion:
The ITAT dismissed the revenue's appeal on all grounds, affirming that the transactions between the assessee and the stockists were on a principal-to-principal basis, and the discounts and bonuses/incentives offered did not fall under Section 194H. Additionally, the provision of interest was not considered under Section 194A. The cross-objection filed by the assessee was also dismissed as not pressed. The order was pronounced in the open court on 11.12.2020.