2012 (11) TMI 164 - AT - Income Tax

Non deduction of TDS - levy of tax u/s 201(1) and interest u/s 201(1A) - Held that - The entire provision has been disallowed under section 40(a)(ia) and section 40(a)(i). Once the amount has been disallowed under the provisions of section 40(a)(i) on the reason that tax has not been deducted, it is surprising that AO holds that the said amounts are subject to TDS provisions again so as to demand the tax under the provisions of section 201 and also levy interest under section 201(1A). Unable to understand the logic of AO in considering the same as covered by the provisions of section 194C to 194J. Once an amount was disallowed under section 40(a)(i)/(ia) on the basis of the audit report of the Chartered Accountant, the same amount cannot be subject to the provisions of TDS under section 201(1) on the reason that assessee should have deducted the tax. Therefore, assessee s ground on this issue are to be allowed as the entire amount has been disallowed under the provisions of section 40(a)(i)/(ia) in the computation of income on the reason that TDS was not made - in favour of assessee. Finished/Traded Goods - Held that - After going through the agreement and its various clauses it is concluded that the contract with the various parties are contract for purchases of traded goods and not of the works contract - as decided in Glenmark Pharmaceuticals Ltd. Versus Income-tax Officer (TDS)-1(3), Mumbai 2009 (3) TMI 648 - ITAT MUMBAI on identical facts that TDS is not required to be deducted on purchase of traded goods - in favour of assessee. Purchase of Packing Material - Held that - As decided in BDA Ltd vs. Income Tax Officer (TDS) 2004 (3) TMI 11 - BOMBAY HIGH COURT TDS is not required to be deducted under section 194C on purchase of packing material - in favour of assessee. Clinical Trials - Held that - In order to carry out clinic trial, the person who carries out the trial must possess medical qualification and the person should be highly qualified and should possess technical expertise. Therefore, payment made in this respect is nothing but fees for professional/technical services. According the above payment of ₹ 7,68,21,907/- is a payment to professional fees, therefore, tax should have been deducted as per provisions of section 194J. AO is directed to calculate TDS liability under section 194J. Whatever TDS liability comes under section 194J credit for taxes paid of ₹ 42,45,914/- is to be allowed and balance amount needs to be recovered from the appellant.

Issues Involved:
1. Levy of tax under Section 201(1) and interest under Section 201(1A) for non-deduction of TDS on provisions made for expenses.
2. Non-deduction of TDS on the purchase of traded goods.
3. Non-deduction of TDS on the purchase of packing material.
4. Non-deduction of TDS on clinical trial expenses.

Detailed Analysis:

1. Levy of Tax and Interest for Non-Deduction of TDS on Provisions Made for Expenses:
- The proceedings under section 133A were conducted on the assessee's premises on 8.9.2008, and the AO passed the order under sections 201(1) and 201(1A) on 30.12.2008.
- The AO determined that the assessee made provisions for expenses amounting to Rs.10,01,98,450/- without deducting TDS, leading to a short deduction of Rs.2,06,45,686/-.
- The CIT (A) upheld the AO's decision regarding the provision made but tax not deducted, determining tax and interest under sections 201(1) and 201(1A).
- The assessee contended that the provision for expenses was made at the end of the year due to multifarious locations and transactions, and TDS was deducted when actual payments were made.
- The ITAT referred to the case of Industrial Development Bank of India vs. Income Tax Officer, 107 ITR 45 (Mum), where it was held that TDS provisions are not applicable if the payee is not identifiable at the time of making the provision.
- The ITAT concluded that since the payee was not identifiable at the time of making the provision and the entire provision was written back the next year with TDS deducted on actual payments, the provisions of TDS were not applicable.
- The ITAT allowed the assessee's appeal, directing the AO to delete the demand raised under sections 201(1) and 201(1A).

2. Non-Deduction of TDS on the Purchase of Traded Goods:
- The CIT (A) concluded that the contract with third parties was for the purchase of traded goods and not a works contract.
- The CIT (A) referred to the decisions in the cases of Novartis HealthCare Pvt. Ltd. v. ITO and Glenmark Pharmaceuticals Ltd. v. ITO (TDS), where it was held that TDS is not required to be deducted on the purchase of traded goods.
- The ITAT affirmed the CIT (A)'s order, agreeing that the provisions of Chapter XVII-B of the Act are not applicable to the purchase of finished/traded goods.

3. Non-Deduction of TDS on the Purchase of Packing Material:
- The CIT (A) referred to the decision of the jurisdictional High Court in BDA Ltd vs. Income Tax Officer (TDS), 281 ITR 99 (Bom.), which held that TDS is not required to be deducted on the purchase of packing material.
- The ITAT upheld the CIT (A)'s order, confirming that the provisions of Chapter XVII-B of the Act are not applicable to the purchase of packing material.

4. Non-Deduction of TDS on Clinical Trial Expenses:
- The CIT (A) directed the AO to verify the breakup of clinical trial expenses provided by the assessee, which included items on which TDS was not deductible.
- For the balance expenditure, the CIT (A) held that the payments were in the nature of professional fees and TDS should have been deducted under section 194J.
- The ITAT agreed with the CIT (A)'s order, confirming the applicability of section 194J to the clinical trial expenses and directing the AO to calculate the TDS liability accordingly.

Conclusion:
- The ITAT allowed the appeal filed by the assessee regarding the non-deduction of TDS on provisions made for expenses.
- The ITAT dismissed the appeal filed by the Revenue, affirming the CIT (A)'s orders on the non-deduction of TDS on the purchase of traded goods, packing material, and clinical trial expenses.

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