No TDS Required on Stockist Discounts Under Section 194H & Trade-Linked Delay Charges Under Section 194A: ITAT Mumbai in JCIT Vs Wockhardt Limited

The Income Tax Appellate Tribunal, Mumbai Bench, in JCIT Vs Wockhardt Limited, has once again examined two recurring TDS controversies in the pharmaceutical trade:

  1. Whether trade discounts and bonus/incentive schemes given to stockists are “commission” attracting TDS under Section 194H; and
  2. Whether amounts termed as “interest” paid to medium and small enterprises (MSEs) for delayed payments constitute “interest” under Section 2(28A) so as to trigger TDS under Section 194A.

The Tribunal delivered a consolidated order for Assessment Years 2011–12 and 2012–13, treating Assessment Year 2011–12 as the lead year, and applied the same reasoning mutatis mutandis to Assessment Year 2012–13. In both years, the Revenue’s appeals were dismissed.

Background of the Dispute

Parties and Business Context

  • The assessee is a Public Limited Company engaged in the trading of pharmaceutical products.
  • A survey under Section 133A(2A) was conducted on 14/02/2017 specifically to check TDS compliance under Chapter XVII-B of the Income Tax Act 1961.

During the survey, the TDS wing identified two alleged defaults:

  1. Non-deduction/short deduction of TDS under Section 194H on discounts and bonus/incentive schemes extended to stockists; and
  2. Non-deduction of TDS under Section 194A on amounts classified as interest payable to medium and small enterprises.

The Assessing Officer (TDS) passed orders under Section 201(1) and Section 201(1A) treating the assessee as an “assessee in default” on both counts. The CIT(A) deleted the demands, relying on the Tribunal’s decision in the assessee’s own case for Assessment Year 2010–11. The Revenue carried the matter to the ITAT.

Issue 1: TDS on Discounts and Incentives to Stockists Under Section 194H

AO’s Stand

The Assessing Officer (TDS) issued a show-cause notice asking why the assessee should not be treated as an “assessee in default” under Section 201(1) / Section 201(1A) for non-deduction of TDS on:

  • Trade discounts allowed to stockists; and
  • Bonus/incentive schemes offered to stockists.

Key points in the AO’s reasoning:

  • The AO rejected the assessee’s contention that the relationship with stockists was on a principal-to-principal basis.
  • It was held that stockists were effectively acting as selling agents.
  • The AO placed weight on the fact that the assessee retained obligations relating to expired medicines and product quality, arguing that this was inconsistent with a complete transfer of risk and reward.
  • Consequently, the AO concluded that:
    • Discounts and post-sale bonus/incentives were in the nature of commission; and
    • TDS was required under Section 194H.

On this basis, the AO quantified:

  • Short deduction under Section 201(1) and interest under Section 201(1A) at approximately Rs. 36,33,95,159 in respect of discounts, and
  • Rs. 30,46,281 in respect of bonus/incentives.

CIT(A)’s Decision

The CIT(A) set aside the AO’s order on this issue purely by following the Tribunal’s ruling in the assessee’s own case for Assessment Year 2010–11 (DCIT v/s Wockhardt Ltd., ITA No.6803/Mum./2018). In that earlier year, the co-ordinate bench had already examined the same distributor model and held:

  • The arrangement with stockists/distributors was on a principal-to-principal basis; and
  • Trade discounts and similar schemes were outside the scope of “commission” under Section 194H.

Accordingly, the demand raised under Sections 201(1) and 201(1A) concerning Section 194H was deleted.

Revenue’s Arguments Before ITAT

Before the Tribunal, the Departmental Representative (DR) essentially reiterated the AO’s reasoning:

  • The assessee continued to bear obligations for expired products and quality issues.
  • According to the Revenue, this indicated that the stockists were functioning as agents and not as independent buyers.
  • Bonus and incentive schemes were granted after completion of sales, which, in the Revenue’s view, made them “commission” as envisaged under Section 194H.

The Revenue contended that the CIT(A) had erred in mechanically following the earlier ITAT decision without appreciating the alleged “agency” character of the relationship.

Assessee’s Counter

The assessee relied squarely on: