Sandu Pharmaceuticals Ltd. vs. Asst. CIT-10(2); date of order: 23rd March, 2016; [ITA. No. 2087/Mum/2012; A.Y.: 2009-10; Mum. ITAT] Section 194H – Tax deduction at source – Manufacture the goods as per the specification – Discount vis-a-vis commission – No principal-agent relationship, hence not liable to deduct tax at source – Consistent view accepted over years

Sandu Pharmaceuticals Ltd. vs. Asst.
CIT-10(2); date of order: 23^rd March, 2016; [ITA. No. 2087/Mum/2012;
A.Y.: 2009-10; Mum. ITAT]

Section 194H – Tax deduction at source –
Manufacture the goods as per the specification – Discount vis-a-vis commission
– No principal-agent relationship, hence not liable to deduct tax at source –
Consistent view accepted over years

The assessee company is engaged in the
manufacture of Ayurvedic medicines. During the assessment proceedings the AO
noted that on the sales turnover of Rs.14.25 crores, the assessee had given
discount of Rs. 7.27 crores. The AO called upon the assessee to furnish details
of the discount given. In response, the respondent pointed out that it was
selling its Ayurvedic medicines to a company called Sandu Brothers Private
Limited (SBPL) at a discount of 51%. This, after taking into account the cost
of distribution, field staff salary, travelling expenses, incentives,
marketing, etc. However, the AO held that 10% was on account of discount and
the balance 41% was the commission involved in selling its product through
SBPL. He therefore held that tax had to be deducted on the commission of Rs.
5.84 crores u/s 194H of the Act. This not being done, the entire amount of Rs.
5.84 crores being the commission at 41% was disallowed in terms of section
40(a)(ia) of the Act.

Being aggrieved, the assessee filed an
appeal before the CIT(A). But the CIT(A) dismissed the appeal.

Being aggrieved by the order, the assessee
filed an appeal to the Tribunal. The Tribunal observed that the assessee had
entered into an agreement with SBPL on 1^st April, 1997 for the sale
of its products. As per clause 1 of the agreement, the assessee is to
manufacture and process certain Ayurvedic drugs and formulations by utilising
the secret formulation given by SBPL and pack them in bulk or in such other
packs as may be stipulated or specified by SBPL to enable them to market the
same by buying the said products on its account. Clause 11 of the agreement
stipulates that the sale of goods to SBPL is on principal-to-principal basis
and none of the parties to the agreement shall hold oneself as agent of the
other under any circumstances. It further stipulates that SBPL shall sell the
products on its own account only and not as an agent or on behalf of the
assessee.

Clause 10(a) of the agreement provides that
the assessee shall manufacture the goods as per the specifications of SBPL and
if the products are not in accordance with the standard, SBPL shall have the
right to reject the products. However, clause 10(b) provides that once SBPL
accepts certain products manufactured by the assessee, any loss suffered by
SBPL subsequently, due to handling, transportation of storage shall be borne by
SBPL itself. Thus, on overall consideration of the agreement between the
parties, it becomes clear that once certain goods are sold to SBPL after
certification by them, ownership of such goods is transferred from the assessee
and vests with SBPL. Thus, once the goods are certified by SBPL and sold to
them the contract of sale concludes as far as the assessee is concerned, as
goods cannot be returned back to the assessee. Therefore, examined in the
aforesaid perspective, it has to be concluded that it is a transaction of sale
between the assessee and SBPL on principal-to-principal basis and there is no
agency between them. Further, on a perusal of the invoices raised, it is clear
that the assessee has given a discount of 51% on the MRP of the goods sold.

These evidences clearly demonstrate that
there is no relationship of principal and agent between the assessee and SBPL.
The Departmental authorities have failed to demonstrate that SBPL was acting as
an agent on behalf of the assessee to satisfy the condition of section 194H. It
is also relevant to note, though, that the agreement with SBPL is subsisting
from the year 1997 and similar trade discount has been given to SBPL on sales
effected over the years; but the Department has not made any disallowance
either in the preceding assessment years or in the subsequent assessment years.
This fact is evident from the assessment orders passed for A.Ys. 2005-06 and
2006-07 u/s 143(3) of the Act. That being the case, when the Department is
following a consistent view by not treating the discount given in the nature of
commission over the years under identical facts and circumstances, a different
approach cannot be taken in the impugned A.Y.

Being aggrieved
by the order, the Revenue filed an appeal before the High Court. The Court
observed that the Tribunal has on facts come to the conclusion that the sale of
goods to Sandu Brothers Private Limited was on principal-to-principal basis and
not through an agent. Thus, no amount of the discount aggregating to Rs. 7.27
crores can be classified as commission. Therefore, section 194H of the Act
calling for deduction of tax of such a commission would have no application to
the present facts. The Revenue has not been able to show that the finding of
fact arrived at by it on the basis of the terms of the agreement is in any
manner perverse, or capable of a different interpretation. Therefore, the
department appeal was dismissed.