SRL Ranbaxy Ltd vs. ACIT (ITAT Delhi)

S. 194H TDS: Tests to determine “Principal-Agent” Relationship Explained

The assessee entered into agreements with hospitals etc (“collection centres“) in accordance with which the centres collected samples from patients seeking laboratory tests and forwarded it to the assessee. The centres raised a bill on the patient, retained their “discount” and paid the balance to the assessee. The assessee claimed that it had rendered “professional services” & that the centres had rightly deducted TDS u/s 194J. The AO held that in collecting the sample and forwarding it to the assessee, the centres acted as an “agent” of the assessee and that the “discount” retained by it was “commission” and that the assessee ought to have deducted TDS u/s 194H. He consequently disallowed the “discount” u/s 40(a)(i) in the hands of the assessee. This was upheld by the CIT (A). On appeal by the assessee, HELD reversing the AO & CIT(A):

(i) To fall within s. 194-H, the payment must be by a “person acting on behalf of another person“. The element of “agency” has necessarily to be there. If the dealings between the parties is not on a “principal to agent” basis, s. 194-H does not get attracted;

(ii) On facts, the relationship between the assessee and the Centres was not on a “principal & agent” basis because (a) under the agreement, the Centres availed the professional services of the assessee to test the samples and were under no obligation to always forward these samples to the assessee; (b) The Centres issued its own bill to the patient, collected the fees and issued the receipt, (c) the assessee raised its invoice on the Centres after giving a “discount” over the standard price list; (d) the rates charged by the Centres from its customers were not decided by the assessee, (e) there was no privity of contract between the assessee & the patient, (f) the amounts collected by the Centres was not on behalf of the assessee. Consequently, the relationship between the assessee and the Centres was on principal to principal basis and s. 194H did not apply (Ahmedabad Stamp Vendor Association 257 ITR 202 (Guj), Bhopal Sugar Industries AIR 1977 (SC) 1275, Singapore Airlines 319 ITR 29 (Del), Qantas Airways 332 ITR 25 (Bom) considered);

(iii) Further, the obligation of TDS u/s 194 H arises only at the time of “payment” or “credit”. As the assessee had not paid or credited any amount to the account of the Centres, s. 194H had no application. The assessee had only credited the net amount received from the Centres as its income.