Medicine MRP discounts to distributors and delayed payments to MSME suppliers held not subject to TDS u/s194H/194A

Discount allowed to distributors as a reduction from MRP at the time of sale of medicines constituted a trade discount and not "commission or brokerage" within s. 194H; since the relationship was of principal-to-principal and no income by way of commission arose, no TDS was deductible, and the relief granted to the assessee was upheld. Interest paid to micro and small enterprises for delayed payment of purchase price had a direct nexus with trade liability and did not qualify as "interest" under s. 2(28A) for purposes of s. 194A; consequently, the assessee could not be treated as an assessee-in-default under s. 201, and the assessee's position was sustained.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether reductions given to stockists/distributors described as discount (including bonus/incentive treated as discount) constituted "commission or brokerage" so as to attract deduction of tax at source under section 194H, and consequential liability as "assessee in default" under section 201.

(ii) Whether amounts paid/credited for delayed payment of purchase price to small/medium enterprises, though described as interest, fell within "interest" as defined in section 2(28A) so as to attract deduction of tax at source under section 194A, and consequential liability under section 201.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Applicability of section 194H to discount/bonus/incentive given to stockists/distributors

Legal framework (as applied by the Tribunal): The Tribunal examined whether the impugned payments were in the nature of "commission or brokerage" covered by section 194H, which would arise only if the relationship and transaction indicated an agency-like arrangement rather than a sale on principal-to-principal basis.

Interpretation and reasoning: The Court relied on a co-ordinate bench decision in the assessee's own case on an identical issue. It accepted that the assessee's dealings with distributors were sales transactions on a principal-to-principal basis, and that the discount was allowed at the time of sale of pharmaceutical products. The Tribunal treated such discount (including the disputed bonus/incentive, as considered by the appellate authority) as reduction in sale price rather than consideration for services rendered by an agent. The fact pattern accepted by the Tribunal included that distributors purchased products and bore the commercial risks of onward sale in their own right; the practice of taking back expired medicines was treated as an industry practice linked to the nature of the product and not determinative of an agency relationship.

Conclusion: Discounts on MRP (and related reductions treated as discount) granted to distributors/stockists in such principal-to-principal sale arrangements were held not to be covered under section 194H; therefore, no tax was required to be deducted at source on those amounts, and the finding that the payer was not a defaulter on this count was upheld.

Issue (ii): Applicability of section 194A to payment for delayed payment of purchase price to MSMEs

Legal framework (as applied by the Tribunal): The Tribunal considered whether the impugned payment, though termed interest, was "interest" within section 2(28A) for the purpose of TDS under section 194A. It applied the distinction between payments arising from a borrowing/debt/credit facility versus amounts that are compensatory and directly linked to trading transactions.

Interpretation and reasoning: Following the earlier co-ordinate bench decision in the assessee's own case on the same issue, the Tribunal held that the payment arose due to delay in paying trade dues for purchases of goods and services and had a direct link and immediate nexus with the trade liability. It was therefore treated as compensatory/akin to an adjustment in purchase consideration, rather than interest on money borrowed or a debt incurred in the sense contemplated by section 2(28A) for section 194A purposes. The Tribunal also noted the absence of any change in facts or law for the year under consideration and found no basis to depart from the earlier view.

Conclusion: The impugned delayed-payment charge did not fall within "interest" as defined for section 194A TDS; consequently, the assessee was correctly held not to be a defaulter under section 201 for non-deduction of tax at source on this payment, and the appellate relief on this issue was affirmed.

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