The Commissioner Of Income Tax (Tds v. M/S.piramal Healthcare Limited

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (L) NO.1427 OF 2012ANDINCOME TAX APPEAL (L) NO.1428 OF 2012ANDINCOME TAX APPEAL NO.1545 OF 2012ANDINCOME TAX APPEAL NO.1622 OF 2012ANDINCOME TAX APPEAL NO.15 OF 2013 The Commissioner of Income Tax (TDS)VersusM/s.Piramal Healthcare Limited ..Appellant. ..Respondent. Mr.A.R. Malhotra for the appellant.Mr.J.D. Mistri, Senior Advocate with Mr.Niraj Seth and Mr.Atul K Jasani for the respondent. CORAM : J.P. Devadhar &M.S. Sanklecha, JJ. DATE : 16[th] January 2013 P.C. : In all these appeals filed by the Revenue for the assessment years 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12, following common questions of law have been raised for our consideration. “a)Whether, on the facts and circumstances of the case as brought out by the AO and CIT (A) in their orders and in law, the Tribunal was right in holding that the relationship between the assessee and the super stockist is of the nature of principle to principle relationship and not that of appointment of manager by the assessee ?by the AO and CIT (A) in their orders and in law, the Tribunal was right in holding that the relationship between the assessee and the super stockist is of the nature of principle to principle relationship and not that of appointment of manager by the assessee ? b)Whether, on the facts and circumstances of the case as brought out by the AO and CIT (A) in their orders and in law, the Tribunal was right in holding that no payment on account of professional or technical services was made by the assessee to its super stockist, whereas margins made available by the assessee to its super stockist is in substance and effect the payment for managerial services rendered by the super stockist ?”by the AO and CIT (A) in their orders and in law, the Tribunal was right in holding that no payment on account of professional or technical services was made by the assessee to its super stockist, whereas margins made available by the assessee to its super stockist is in substance and effect the payment for managerial services rendered by the super stockist ?” 2.The respondent – assessee is engaged in manufacture and distribution of drugs. The respondent – assessee appointed one M/s.Zivon Marketing Services Private Limited ('M/s.Zivon') under an agreement as its super-stockist. In terms of the agreement, the respondent – assessee sold its manufactured drugs to M/s.Zivon for its onward distribution in the open market. By way of illustration, the Income Tax Appellate Tribunal ('Tribunal') has pointed out the method adopted by the assessee as follows :- Where the M.R.P. of a drug is Rs.100/-, the respondent – assessee sells its goods to M/s.Zivon at 70% of the M.R.P., in turn M/s.Zivon distributes / sells the same amongst the retailers at 80% of the M.R.P. and the retailer in turn sells the drugs to the ultimate purchaser at the M.R.P. 3.Consequent to the survey, the Revenue issued notices to the respondent – assessee seeking to know why M/s.Zivon, the super-stockists should not be treated as a Manager for the purposes of tax deduction at source by the respondent - assessee. The assessing officer by five identical orders dated 25[th] February 2011 (separate for each assessment year) on consideration of the agreement between the respondent – assessee and M/s.Zivon concluded that M/s.Zivon was the manager of the respondent – assessee as the services rendered by M/s.Zivon to the respondent – assessee was managerial in nature. Therefore, he concluded that the respondent – assessee was liable to deduct tax under the provisions of Section 194-J of the Income Tax Act, 1961 ('the Act'). 3.Consequent to the survey, the Revenue issued notices to the respondent – assessee seeking to know why M/s.Zivon, the super-stockists should not be treated as a Manager for the purposes of tax deduction at source by the respondent - assessee. The assessing officer by five identical orders dated 25[th] February 2011 (separate for each assessment year) on consideration of the agreement between the respondent – assessee and M/s.Zivon concluded that M/s.Zivon was the manager of the respondent – assessee as the services rendered by M/s.Zivon to the respondent – assessee was managerial in nature. Therefore, he concluded that the respondent – assessee was liable to deduct tax under the provisions of Section 194-J of the Income Tax Act, 1961 ('the Act'). 4. On appeal, the Commissioner of Income Tax (A) by five identical orders dated 12[th] October 2011 (separate for each assessment year) partly allowed the appeal. The Commissioner of Income Tax (A) held that Section 194-J of the Act was applicable in respect of the payments received by the respondent – assessee from M/s.Zivon as the services rendered by M/s.Zivon was in the nature of managerial services and would be covered by fees for technical services. 5.On further appeal, the Tribunal by its common order dated 9[th ]May 2012, for all the five assessment years, allowed the appeal filed by the respondent – assessee on the following two grounds : (a) that on the basis of the clauses of agreement M/s.Zivon cannot be considered to be an agent / manager of the respondent assessee. The aforesaid conclusion was reached by the Tribunal on the interpretation of clauses of the agreement entered into between the respondent – assessee and M/s.Zivon; and (b) In any view of the matter, in the facts of the case Section 194-J of the Act would have no application as no payment is being made by the respondent – assessee to M/s.Zivon. Thus, the occasion to deduct tax under Section 194-J of the Act would not arise as the condition precedent for its application would be that a person covered must be responsible for paying a particular sum of amount by way of professional or technical fees etc. Further, the Tribunal records the fact that the Revenue does not dispute the fact that the respondent – assessee has received 70% of the M.R.P. from the super-stockist as consideration for the purposes of handing over / selling its drugs to M/s.Zivon for further distribution. In view of the above, the Tribunal held that there would be no question of deduction of tax by the respondent - assessee on receiving 70% of the M.R.P. from M/s.Zivon. 6.Mr.Malhotra appearing for the Revenue states that the entire arrangement of selling goods between the respondent – assessee and M/s.Zivon was a device to get over the liability to pay TDS on the part of the respondent – assessee. According to Mr.Malhotra taking the illustration given by the Tribunal, the drugs are passed on for consideration of Rs.80/- to the retailer by M/s.Zivon as manager / agent of the respondent – assessee. The commission / remuneration payable to M/s.Zivon would be Rs.10/- by the respondent – assessee for its services. To get over the aforesaid obligation of paying TDS on Rs.10/-, the respondent – assessee have shown that the drugs have been sold at Rs.70/- to M/s.Zivon i.e. net of commission. 6.Mr.Malhotra appearing for the Revenue states that the entire arrangement of selling goods between the respondent – assessee and M/s.Zivon was a device to get over the liability to pay TDS on the part of the respondent – assessee. According to Mr.Malhotra taking the illustration given by the Tribunal, the drugs are passed on for consideration of Rs.80/- to the retailer by M/s.Zivon as manager / agent of the respondent – assessee. The commission / remuneration payable to M/s.Zivon would be Rs.10/- by the respondent – assessee for its services. To get over the aforesaid obligation of paying TDS on Rs.10/-, the respondent – assessee have shown that the drugs have been sold at Rs.70/- to M/s.Zivon i.e. net of commission. 7.As against the above, Mr.Mistri, senior counsel for the respondent – assessee submits that the fact of sale of the drugs by the respondent – assessee to M/s.Zivon is undisputed. Though, the drugs are sold to M/s.Zivon at a price lesser than the M.R.P., yet the fact of sale at Rs.70/- is undisputed. Further, it is submitted that the obligation to deduct tax would only arise if some payment is made by them to M/s.Zivon which is admittedly not the case. It is also submitted that M/s.Zivon depending upon market forces is at liberty to sell to the retailer at any price even lesser than Rs.80/-. In support of the above submissions in the facts of this case, there is no obligation to deduct tax, reliance was placed upon the decision of this Court in the matter of Commissioner of Income Tax V/s. Qutar Airways reported in 332 ITR 253 and of the Kerala High Court in the matter of M.S. Hameed Vs. Director of Lotteries reported in 249 ITR 186. 8.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. Once it is accepted / admitted position that there is sale of drugs by the respondent to M/s.Zivon and no amount is paid by the respondent to M/s.Zivon, there can be no occasion to apply Section 194J of the Act. There has admittedly been no credit of any sum to the account of M/s.Zivon in its books of accounts nor any payment made by the respondent either in cash or cheque or draft or any other mode. Where the sales of any goods are covered under the M.R.P. system, the M.R.P. is fixed and the seller is entitled to sell the goods to a stockist at a price lesser that the M.R.P. as mutually agreed between the parties. In such a case, what should be the sale price or what should be the margin available to the stockist is entirely at the discretion of the parties. 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 194-J 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 194-J against the assessee does not arise. Hence, we see no reason to entertain question (b) raised by the Revenue. 9.Once it is held that in the present case, Section 194-J is not attracted, then, the question as to whether there was relationship of principal to principal or relationship of the manager becomes academic and, hence, question (a) needs no consideration. 10.Accordingly, all the appeals are dismissed with no order as to costs. (M.S. Sanklecha, J.)(J.P. Devadhar, J.)