TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

The assessee was a pharmaceutical company. Pursuant to a survey u/s 133A of the Income-tax Act, 1961 carried out at the premises of the assessee, e-mails and other correspondences that ensued between the sales executive and the general manager, seized during the survey operations, suggested that the doctors had acted as the agents of the assessee, by prescribing the medicines of the assessee over a period of time, and therefore, the expenses incurred by the assessee on the doctors towards taxi fares, air fares, etc., for attending regional conferences or scientific conferences were required to be treated as commission received or receivable as contemplated u/s 194H. The Assessing Officer treated the assessee as an assessee-in-default u/s 201(1) for non-deduction of tax at source u/s 194H of the Act on such payments.

The Commissioner (Appeals) restricted the addition to expenditure incurred on the doctors under various heads and held that the expenses incurred on other stakeholders did not fall within the definition of the term commission. Both the Department and the assessee filed appeals before the Tribunal. The Tribunal partly allowed the assessee’s appeals and dismissed the appeals filed by the Department.

On appeals by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) According to the provisions contained in section 194H of the Income-tax Act, 1961 and the Explanation to the section, any payment received or receivable by a person for rendering medical services is excluded from the purview of section 194H. The Explanation to section 194H cannot be interpreted so widely as to include any payment receivable, directly or indirectly for services in the course of buying or selling goods.

ii) In the absence of an element of agency between the assessee and the doctors, the provisions of section 194H could not be invoked. The doctors were not bound to prescribe the medicines as suggested by the assessee. There was no legal compulsion on the part of the doctors to prescribe a particular medicine suggested by the assessee, and therefore, the doctors had not acted as the agents of the assessee.

iii) There was no illegality or infirmity in the order of the Tribunal in holding that the expenditure incurred on the doctors could not be classified as commission. No question of law arose.”