2020 (11) TMI 906 - AT - Income Tax

TDS u/s 194H - expenses incurred under the head Sales Promotion, Marketing development, promotional expenses and MR expenses - HELD THAT - Under Explanation (iv) to Section 194H requires that where any income is credited to any account, whether called 'suspense account' or by any other name, in the books of account of the payer, such crediting shall be deemed to be credit of such income to the account of the payee for purposes of deduction of tax at source. The controversy arises in the given facts and circumstances whether the stakeholders are the payees as contemplated under Explanation (iv) to Section 194H - The answer stands in negative. Undisputedly, the payees in the present facts and circumstances are not the stakeholders but the other parties. There cannot be any question of deducting the TDS under the provisions of Section 194H Act in the present facts and circumstances. In holding so we draw support and guidance from the order of Mumbai tribunal in the case of Industrial Development Bank of India 2006 (7) TMI 248 - ITAT BOMBAY-H which has been reproduced somewhere in the preceding paragraph. Thus, in view of the above detailed discussion and after considering the facts in totality, the grounds of appeal of the assessee are allowed whereas the grounds of appeal of the revenue are dismissed.

Issues Involved:
1. Validity of the order under Section 201(1)/201(1A) beyond the time limit.
2. Classification of expenses as commission under Section 194H.
3. Relationship of principal and agent between the assessee and doctors.
4. Re-characterization of payments towards selling and marketing expenses.
5. Segregation of payments for regional and scientific conferences.
6. Treatment of field participation expenditure as commission.
7. Treatment of meeting and traveling expenses as commission.
8. Treatment of product promotion expenditure as commission.
9. Treatment of MR expenses as commission.
10. Interest and penalty under Sections 201(1A) and 271C.

Detailed Analysis:

1. Validity of the order under Section 201(1)/201(1A) beyond the time limit:
The assessee argued that the order under Section 201(1)/201(1A) was time-barred. However, since the assessee succeeded on the merits of the case, the Tribunal did not adjudicate this issue, dismissing it as infructuous.

2. Classification of expenses as commission under Section 194H:
The assessee contended that various expenses should not be classified as commission. The Tribunal examined whether the expenses incurred under sales promotion, marketing development, promotional expenses, and MR expenses were subject to tax deduction at source under Section 194H. It was found that the relationship between the assessee and the stakeholders (doctors, stockiest, field staff) did not constitute a principal-agent relationship, which is necessary for the application of Section 194H.

3. Relationship of principal and agent between the assessee and doctors:
The Tribunal emphasized that for Section 194H to apply, there must be a principal-agent relationship. The doctors were not legally bound to prescribe the assessee's medicines, indicating no principal-agent relationship. Hence, the provisions of Section 194H were not applicable.

4. Re-characterization of payments towards selling and marketing expenses:
The Tribunal held that the AO could not re-characterize the nature of payments under Chapter XVII-B without detailed verification. The payments made for work assignments to medical experts and various staff functions were not in the nature of commission.

5. Segregation of payments for regional and scientific conferences:
The Tribunal directed the AO to segregate payments made to doctors or on their behalf and treat them as commission under Section 194H after providing credit for the 2% TDS already deducted. Payments made to other parties were not considered commission.

6. Treatment of field participation expenditure as commission:
The Tribunal found that the entire field participation expenditure could not be classified as commission. The AO was directed to verify and segregate the expenses appropriately.

7. Treatment of meeting and traveling expenses as commission:
The Tribunal held that the entire meeting and traveling expenses could not be classified as commission. Only the expenses incurred directly or indirectly for doctors were to be treated as commission.

8. Treatment of product promotion expenditure as commission:
The Tribunal restricted the demand under this head to 20%, treating it as commission under Section 194H, due to the inability to verify the specific recipients of the gifts.

9. Treatment of MR expenses as commission:
The Tribunal noted that the entire MR expenses could not be classified as commission. The demand was restricted to 20% of the expenses, considering the large workforce of the assessee.

10. Interest and penalty under Sections 201(1A) and 271C:
The Tribunal dismissed the grounds relating to interest under Sections 201(1A) and the initiation of penalty under Section 271C as infructuous, given the decision on the merits.

Conclusion:
The appeals filed by the assessee were partly allowed, and the appeals filed by the Revenue were dismissed. The Tribunal emphasized the necessity of a principal-agent relationship for the application of Section 194H and provided detailed directions for the segregation and treatment of various expenses.

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