1. This is an appeal by M/s Eli Lilly & Company (India) (P) Ltd., (hereinafter referred to as "the appellant"), against the order dt.
13th May, 2003 of CIT(A)-XX, New Delhi, relating to the financial year 2001-02.
2. In this appeal the appellant has challenged order of the CIT(A) confirming the order of the AO, holding the appellant to be in default for not deducting tax at source at the applicable rates resulting in a short-deduction of tax at source and consequently holding the appellant to be in default under the provisions of Section 201(1) of the Act and levying interest on tax not deducted at source under the provisions of Section 201(1A) of the Act.
3. The facts and circumstances under which the appeal arises are as follows. The appellant is a joint venture company between M/s Eli Lilly Inc., Netherlands, and M/s Ranbaxy Ltd., and is engaged in the trading of Pharmaceuticals. It imports these products and undertakes their marketing. The products are sold and marketed throughout the country and the appellant appointed clearing and forwarding agents (C&FR's) to conduct its operation of distribution, sales, packing, repacking, storage, etc. It appointed M/s Ranbaxy Laboratories Ltd. and M/s Centum Pharma Ltd., as its C&FR agents.
4. The appellant filed its annual return of TDS in respect of payments it made to the C&FR agent. The appellant had while deducting tax at source on payments made to the C&FR agent deducted and deposited tax at the rate of 2.3 per cent (including surcharge). Such deduction of tax at source by the appellant was on the basis that the payment made to the C&FR agents were in the nature of payments made to contractors and the applicable provisions for deduction of tax at source was Section 194C of the Act. The Dy. CIT who scrutinized the annual return of TDS called for copies of the agreements between the appellant and the C&FR agents. On examination of the terms of the agreement under which the C&FR agents were appointed by the appellant, he was of the view that in essence the agreement was for safe storage of goods and, therefore, it was a case of payment of rent for warehouse facility provided by the C&FR agent. If the payment is so construed as rent, then the consequences that will follow was that the appellant ought to have deducted tax at source at the rate of 2,0 per cent under Section 194-I of the Act 5.1 The contract with a C&FR agent cannot be regarded as a warehousing contract and that such contracts are contracts for rendering service in the form of booking sales orders, invoicing, dispatching, delivering and collecting the sale proceeds. The agent is to receive consideration equivalent to 1.85 per cent of the amount of invoice raised per month for the gross value of goods sold. In case there is no sale, then the agent will not be entitled to any commission. The use of the premises for storage of goods was only incidental to the business of selling and distribution carried on by the agents under the agreement with the appellant. The appellant, therefore, pointed out that the payment in question cannot be said to be rent, since it is not a payment for use of any land or building.
5.2 On this plea of the appellant, the Dy. CIT made a reference to the various terms of the C&FR agreement and also made a reference to Circular No. 715, dt. 8th Aug., 1995 wherein the CBDT had opined that where there was a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specific percentage of turnover, if the composite arrangement is in essence the agreement for taking the premises on rent, tax will be deducted under Section 194-I from payments thereof. The Dy. CIT referred to the preamble of the agreement between the appellant and the C&FR agents which reads as follows : (i) ELR is engaged in the business of manufacturing and marketing inter alia a range of pharmaceutical formulations and is desirous of appointing a clearing and forwarding representative for storage and distribution of its pharmaceutical formulations for the whole if India and Nepal and (ii) The C&FR has sufficient expertise in the field of providing storage and distribution facilities and organizing movement of its pharmaceutical dosage forms throughout the Republic of India and the Kingdom of Nepal.
According to the Dy. CIT the dominant intention of the agreement was arrangement for storage and distribution. He also referred to the other clauses in the agreement viz., Clause 9 providing for assistance to be provided by the assessee for obtaining drug licenses, Clause 10 viz., the appellant assuming responsibility for obtaining insurance policies, Clause 11 providing for costs of stationery for preparing invoices and other papers being borne by the appellant, Clauses 12 and 13 which provides for reimbursement of costs of freight, transportation and other incidental charges to be reimbursed to the agent by the appellant, clauses 14 to 16 which provides for banking services being undertaken by the agent on behalf of the appellant. From the above terms of the agreement, the Dy. CIT concluded that the dominant or overwhelming intention of the agreement between the parties was providing "Warehousing services".
He also referred to the fact that payment for several other services set out above were separate from the payment mentioned in Clause 33(a) of the agreement which provided that the agent will be paid 1.85 per cent of the amount of invoice raised per month on the gross value of the goods sold. The payment to the agent on the basis of sales was not determinative of the fact that the payment was only for services rendered and not for rent.
5.3 It was contended by the assessee that there was no agreement or contract of tenancy. That the agent has been appointed on the basis of their expertise. On this plea the Dy. CIT held that the intention of the agreement was important and not the form of the agreement.
5.4 The appellant pointed out that the agents were appointed because they possessed the requisite drug license in their names which was mandatory for running the business. On this plea the Dy. CIT held that in Clause 2 of the agreement it was mentioned that the "agents own, hold and are in legal possession of storage facilities", and the fact that there was also a covenant whereby the agents were to demarcate an area in its storage facilities for storing the appellant's products. The Dy. CIT was of the view that merely possessing drug license was not enough but possession of storage facility was main criteria.
5.5 The appellant submitted that the C&FR agent apart from storing the goods of the appellant was also storing goods of other pharmaceutical companies in the same premises and, therefore, the payment by the appellant to C&FR agent cannot be termed as rent. It was submitted that since the payment was a variable amount, it could (not) be of the character of a rent, since rent is generally a fixed sum for use of land or building. The assessee relied on the decision of the Hon'ble Privy Council in the case of Indian Radio & Cable Communications Co. Ltd v. CIT (1937) 5 ITR 270 (PC) in this regard.
That there was no contract of tenancy between the appellant and the C&FR agent. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Md. Saleem v. Md. Ali . That the C&FR agent has been showing the. income from the appellant as business income and not as rent receipts.
5.6 On this plea the Dy. CIT held that it was (not) relevant as to under what head the payment is taxed in the hands of the recipient.
That Explanation to Section 194-I was wide enough to cover any arrangement or agreement. The fact that the rent was variable was irrelevant since several multinational companies were deducting tax under Section 194-I even though the payments were variable and based on percentage of sales. He also referred to Circular No. 718, dt.
22nd Aug., 1995, of CBDT wherein it was opined that warehousing charges will be subject to deduction of tax under Section 194-I of the Act. The Dy. CIT ultimately concluded that the payment by the appellant to the C&FR agents were in the nature of payment of rent and consequently there was a short-deduction of tax at source and consequently raised a demand for tax short-deducted and interest on tax short-deducted as per provisions of Sections. 201(1) and 201(1A) of the Act.
6. On appeal, the CIT(A) confirmed the order of the Dy. CIT. Hence, the present appeal before the Tribunal.
7. We have heard the submissions of the learned counsel for the appellant as well as the learned Departmental Representative.
7.1 The learned counsel for the appellant drew our attention to the various clauses in the agreement and submitted that the agreement contemplates rendering of several services by the agents and the storage of goods was only incidental. He referred to the fact that under Clause 33 of the agreement, in consideration of the services to be rendered by the C&FR, remuneration was payable at 1.85 per cent of the amount of invoice raised per month for the gross value of goods sold. In addition to the above, the appellant was to bear the cost of transportation and freight and other charges incidental thereto to actually move the goods from depot to appellant's stockist. Thus according to the learned counsel for the appellant, the above clause r/w Clauses 1 to 28 of the agreement, would show that the payment of consideration was for several services of storing, booking sales orders, invoicing, dispatching, delivering and collecting the sale proceeds. These services were indivisible and according to him it was not open to the Revenue to disregard the terms of an agreement entered into between the parties and overlook the same. Reliance was placed on the following decisions for the above proposition.
According to him the conclusion of the Dy. CIT that the agreement between the appellant and its agent was in the nature of an agreement for warehousing and the consideration paid was in the nature of rent was, therefore, unsustainable.
7.2. It was submitted by him that Explanation to Section 194-I defines rent for the purpose of rent to mean any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee. According to him in the present case there was no lease, sublease or tenancy. As to whether the payment would fall within the expression "any other agreement or arrangement", his plea was that the words "Any other agreement or arrangement" used in the definition of rent has to be read ejusdum generis with the expression lease, sublease or tenancy. In other words, any other agreement or arrangement contemplated by the definition should also be of the same nature as that of lease, sublease or tenancy. According to him the intention of the legislature was to be ascertained by reference to the context and by considering whether the words in question and the surrounding words are, in fact, ejusdem generis and referable to the same subject-matter. According to him, the agreement or arrangement should be for use of land or building and such right to use land or building can be obtained by a person only under a lease, sublease or tenancy and the words "any other arrangement or agreement" has to be construed as making a reference to particular words which precede the above expression. According to him the appellant had no interest either as a lessee or sub-lessee or a tenant in respect of the warehouses where the goods were stored. The fact that in the area where appellants goods are stored is displayed by a sign board and earmarked, the fact that the goods are deemed to be under constructive possession of the appellant will not make the appellant either a lessee or sub-lessee or tenant of the premises.
7.3. It was submitted by him that the agents to whom payments were made had paid taxes on the receipts from the appellant and in such circumstances the purpose of the Revenue having been served, no proceedings against the appellant either for recovery of tax not deducted at source or interest on tax not deducted at source should have been taken. Reliance was placed on the following decisions in this regard :CIT v. Manager, Madhya Pradesh State Co-operative Development Bank Ltd.CIT v. M.P. Agro Morarji Fertilizers Ltd. 7.4 It was further submitted by him that the provisions of Section 201 as it existed prior to its amendment by the Finance Act, 2001, w.e.f.
1st June, 2002, did not contemplate a person being in default for not deducting tax at source, only if he omits fully to deduct tax at source. By the amending Act failure by a person responsible for deducting tax at source either in whole or part was deemed to be a failure and the words that were inserted by the amending Act were "the whole or any part of the tax". The earlier provisions referred only about a failure, meaning thereby a total failure to deduct any tax at source. He pointed out that the appellant deducted tax at source and the dispute was only with regard to the quantum of tax that ought to have been deducted at source. Partial failure to deduct tax at source or short-deduction of tax at source was not a failure within the meaning of Section 201(1) prior to 1st June, 2002. The failure on the part of the appellant in the present case being prior to 1st June, 2002, it was argued by him that there could not be any default at all and, therefore, neither provisions of Section 201(1) nor (201)(1A) applied to the present case. In this regard he placed reliance on the decision of the Hon'ble A.P. High Court in the case of P.V. Rajagopal and Ors. v. Union of India and Ors. .
8. The learned counsel for the Revenue relied on the orders of the Revenue authorities. In particular, it was argued by him that going by the nature of the agreement, it was inconceivable that a G&FR agent would undertake such services. According to him, the fact that the appellant had constructive possession of the goods and that the agent could not remove the goods without written orders was indicative of the fact that the consideration paid was in the nature of rent.
9. We have considered the rival submissions. To appreciate the rival contentions, it would be necessary to refer to the provisions of Section 194C as well as Section 194-I of the Act, in so far as they are relevant to the facts and circumstances of the present case.
Section 194C : Payments to contractors and sub-contractors.-(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour, for carrying out any work) in pursuance of a contract between the contractor and- shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to- Explanation I: For the purposes of sub-Section (2), the expression "contractor" shall also include a contractor who is carrying our any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a foreign enterprise or any association or body established outside India.
Explanation III : For the purposes of this section, the expression "work" shall also include- (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods and passengers by any mode of transport other than by railways; (3) No deduction shall be made under sub-Section (1) or sub-Section (2) from-(i) the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or sub-contractor, if such sum does not exceed twenty thousand rupees : Section : 194-I Rent-Any person, not being an individual or an HUF, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of- Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed one hundred and twenty thousand rupees.
(i) "rent" means any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee .
(ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
10. As can be seen from Explanation to Section 194-I, rent means payment by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for use of any land or any building.
The nature of the agreement between the appellant and the C&FR agents has now to be examined to see if the consideration paid by the assessee to them amounted to making payment of rent as contemplated by provisions of Section 194-I. Under the agreement with the C&FR agents, the C&FR agents have to render the following services for. sales, marketing, distribution, etc. of products of the appellant. Under Clause 1 of the agreement with M/s Ranbaxy Laboratories Ltd., the agent was to act as C&FR agent for storage and distribution of appellant's pharmaceutical dosage forms throughout the Republic of India and the Kingdom of Nepal. Under Clause 2 of the agreement the agent's representation that he is in legal possession of storage facilities in different parts of India is recited. Under Clause 3 the agent was to store the appellant's product in a demarcated area. Under Clauses 4 and 5 title to the goods so stored was to remain with the appellant and that the possession of the agent is deemed to be in constructive possession of the appellant. Under Clause 6, the agent cannot hypothecate, etc., the goods nor shall he remove the goods from the premises, without written orders of the appellant. Under Clause 7, the condition in which the goods were to be stored is set out. Under Clause 8, the agent confirms that it possesses all licenses, permits, etc., under the relevant law as are required for storage and distribution of goods of the appellant. Under Clause 9, the appellant was to obtain the drug license for each location where the agent stores the goods. Under Clause 10, the appellant was to keep the goods insured while in storage and also in transit from the agent to the appellant's stockist. Under Clause 11, the appellant was to prepare invoices for delivery to the stockist and under Clauses 12 and 13, the agent was to deliver within a prescribed period the goods to the stockist/dealers, etc., in a standard pack. Under Clause 14, the agent was to get necessary instruction letters to bankers for negotiation of documents. Under Clauses 15 and 16, the agent was to collect cheques and drafts from local stockist/dealers against delivery of consignments and deposit the realization in bank account. Under Clauses 19 and 20, the agent was to inform the position of stock. Under Clause 27, the agent was to maintain all records/registers as may be required/prescribed under all applicable statutory regulations including the Drugs and Cosmetics Act, 1940, The Shops and Establishments Act, the Provident Fund and Misc.
Provisions Act, etc. Under Clause 28, the agent was to comply to all terms and conditions of standard operating procedures. Under Clause 33, the agent was to be remunerated at 1.85 per cent of the amount of invoice raised per month for the gross value of goods sold. The cost of transportation and freight and other charges incidental to movement of goods from the place where they are stored to the place of stockist/dealers was to be borne by the appellant.
11. A perusal of the above terms of the agreement clearly reveals that the agent not only stores the goods but also renders certain other professional services like inventory management on behalf of the appellant, packing the goods in required quantity according to the requirement of the stockist/dealers, follow up collection, maintain bank accounts of the sale proceeds. It cannot be said that the dominant purpose of the agreement is only warehousing. Even the Revenue authorities accept the fact that the C&FR agent does not render a job of mere warehousing. Their case is that the predominant purpose is warehousing and, therefore, in terms of Circular No. 715, dt. 8th Aug., 1995, wherein the CBDT had opined that where there was a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specific percentage of turnover, and if the composite arrangement is in essence the agreement for taking the premises on rent, tax will be deducted under Section 194-I from payments thereof. We are of the view that the said circular would not be of any assistance to the case pleaded by the Revenue. The agreement, terms of which we have set out above, cannot be said to be a composite arrangement which is in essence an agreement for taking premises on rent. The appellant does not have any interest whatsoever over the various places where his goods are stored. The agreement between the appellant and the agents cannot also be said to be a warehousing agreement.
12. Explanation to Section 194-I defines rent for the purpose of the said Section 194-I to mean any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory-building), together with furniture, fittings and the land appurtenant thereto whether or not such building is owned by the payee. Admittedly in the present case there was no lease, sublease or tenancy. The question is whether the payment would fall as a payment made under "any other agreement or arrangement". The statutory context of Explanation to Section 194-I defining rent contemplates a payment for use of land or building. The right to be in possession of an immovable property (land and building) can be acquired either under a lease or under a licence.
In both cases, there must be transfer of interest in immovable property, viz., right to be in possession. In the light of this statutory context, we are of the view that the words "any other agreement or arrangement" used in the definition of rent has to be read ejusdum generis with the expression lease, sublease or tenancy. In other words, any other agreement or arrangement contemplated by the definition should also be of the same nature as that of lease, sublease or tenancy. The intention of the legislature was to be ascertained by reference to the context and by considering whether the words in question and the surrounding words are, in fact, ejusdem generis and referable to the same subject-matter. In the present case, it cannot be said that the appellant by virtue of the C&FR agreement, has acquired any right to be in possession of any land or building. The appellant had no interest either as a lessee or sub-lessee or a tenant in respect of the warehouses where the goods were stored. The fact that in the area where appellant's goods are stored a signboard is displayed mentioning appellant's name and such place is earmarked, cannot lead to the conclusion that the appellant had any interest as a lessee, sub-lessee or tenant over the various warehouses where these goods were stored. The fact that the goods are deemed to be under constructive possession of the appellant will not make the appellant either a lessee or sublessee or tenant of the premises. As already stated, the right to use any land or building necessarily implies that the appellant must have some interest in the immovable property as a tenant. The existence of a landlord-tenant relationship or a licensor-licensee is a must before a payment in question can be termed as a rent. Considering the vast nature of service rendered by the C&FR agent, it cannot be said that the payment made by the appellant to them is in the nature of rent. Even the test of predominant nature of the payment being rent propounded by the Dy. CIT, in our view, is without any basis. The Dy.
CIT in his order very clearly holds that the C&FR agents not only store the products of the appellant but also act as distributors. The various services performed by the C&FR agent clearly bring out that the payment made to them, cannot be construed as rent.
13. We are, therefore, of the view that the payment by the appellant to its C&FR agents was not in the nature of rent and, therefore, the provisions of Section 194-I were not applicable to the present case.
The orders of the Revenue authorities holding that such payment was in the nature of rent and consequent orders under Sections 201(1) and 201(1A) are, therefore, not valid and are cancelled.
14. In view of our conclusion as above, the other contentions put forth by the learned counsel for the appellant are not considered. In the result, the appeal is allowed.