AI Drafter 
TaxTMI 
TaxTMI 
2026 (5) TMI 1780
X X X X Extracts X X X X
X X X X Extracts X X X X
....the trade margins/discounts earned by stockists and distributors on purchase and resale of pharmaceutical products are liable for deduction of tax at source under section 194H by treating the same as commission; secondly, whether tax was deductible under section 192 at the stage of grant/accounting recognition of Employee Stock Option Plans (ESOPs)/Employee Stock Benefit Plans (ESBPs); and thirdly, whether interest on delayed payments to MSMEs attracts deduction of tax at source under section 194A thereby rendering the assessee liable as an "assessee in default" under section 201(1) along with consequential interest under section 201(1A). 3. Briefly stated, the facts borne out from the record are that the assessee company is engaged in the business of manufacturing and trading of pharmaceutical and healthcare products through an organized distribution network consisting of stockists/distributors. During the course of proceedings under section 201(1)/201(1A), the learned AO formed a view that the margins retained by the stockists represented commission embedded in the pricing mechanism and therefore the assessee ought to have deducted tax under section 194H. The learned AO furthe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... construed to establish a principal-agent relationship. It was further observed that in pharmaceutical business, the manufacturer is naturally expected to maintain strict controls and monitoring because any failure in the supply chain or handling of products may expose the manufacturer to legal and regulatory consequences. Thus, the existence of such business controls by itself cannot alter the essential character of a sale transaction. 7. The learned CIT(A) further observed that the AO himself had adopted inconsistent approaches while determining the alleged commission. On one hand, the AO treated the difference between the agreed invoice price and the resale price as discount/commission and on the other hand arbitrarily computed the alleged commission at 30% of sales made to stockists without any supporting material or rational basis. The learned CIT(A) specifically noted that the AO's ratio decidendi could not support itself because there was no coherence in the very methodology adopted for determination of alleged commission income. The appellate authority also observed that the margin between the mutually agreed sale price and the MRP is a standard trade practice in the pha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d beyond the clear statutory language in seeking to fasten TDS liability at the stage of grant itself. 11. On the issue relating to delayed payment interest to MSMEs, the assessee had explained before the lower authorities that the liability accrued under the MSMED Act represented damages/penalty for delayed payment and was not in the nature of interest arising from monies borrowed or debt incurred. It was further submitted that such amount had already been voluntarily disallowed by the assessee under section 37(1) while filing its return of income and therefore no prejudice whatsoever had been caused to the Revenue. 12. The learned CIT(A), while deciding the issue, analyzed the provisions of section 2(28A), section 194A and the MSMED Act and observed that though the MSMED Act describes the liability as "interest", the same essentially arises from delayed payment for purchase consideration and not from any borrowing of money or debt transaction as contemplated under section 2(28A). The learned CIT(A) further accepted the contention that once the assessee itself had voluntarily disallowed the expenditure under section 37(1), the assessee could not again be treated as an "asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... per MRP mentioned and they only earns their margin, expenditure would be incurred by them and they filed their Income Tax Returns as their "purchases" from company and "sales" to retail customers. e) Reliance is placed on following the Pharma Cases where it was held that TDS provisions as "commission" are not applicable and hence followed : i) Unichem Laboratories ITA No. 4592, 4593/Mum/2014 dated 26.1.2016 (Mum-ITAT) ii) Wockhardt Ltd. ITA No. 182/Mum/2015 dated 8.5.2025 (Mum-ITAT) Novartis Healthcare Private Limited f) The Ld. DR had mentioned that the decisions of Mumbai ITAT of Unichem Labs and Wockhardt are being contested by Revenue in Bombay High Court and the same are pending. g) Hon'ble Bombay High Court in the case of Piramal Healthcare Ltd. (2015) 55 Taxman.com 534 (Bom) addressed this issue and held that in similar circumstances, the relationship is akin to Principal to Principal to Agent, and hence section 194H or 194J are not applicable and hence TDS need not be deducted by appellant company. h) For TDS provisions to be applicable, the appellant must be the one making a payment of commission or brokerage. In o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on interest on delayed payments to MSMEs. 9. On this issue, the Ld. AO held that there is a TDS shortfall of Rs. 40,000/- and interest under section 201(1A) of the Act of Rs. 13,600/-. The Ld. AO held that the Respondent Company ought to have deducted tax under section 194A of the Act on the provisions created by it in respect of interest delayed payments to MSMEs. The failure of doing the same resulted this addition by Ld. AO. The Ld. CIT(A) concurred with the view of Ld. AO. The Respondent company has contended before ITAT that the Ld. AO and Ld. CIT(A) are not correct in interpreting the law as above because the amount so accrued by Respondent company in respect of delayed payments to MSME is not arising from any debt claim or money borrowed by company and hence the provisions of section 194 read with section 2(28A) of the Act are not applicable. Consequent levy of interest under section 201(1A) of the Act should also be deleted, by Ld. AR of the appellant company. 9b. The Ld. DR relied on the orders of lower authorities. 10. Heard both parties. The Bench agrees with the view of Ld. AR of the appellant company because Section 2(28A) of the Ac....