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2020 (9) TMI 665 - AT - Income TaxTDS u/s 195 - disallowance of reimbursement of sales promotion expenses - Addition u/s 40(a)(ia) - HELD THAT - Assessee has entered into an agreement with M/s Pharmark Consulting FZE, UAE and appointed them as their agent for the business in Russia. The agents appointed the employees/staffs for promotion of assessee s products, for identifying new customers and carry out marketing and sales promotion in Russia. Expenses incurred by the agent in Russia, the assessee has reimbursed to its agent operating from UAE. CIT(A) appreciated the total fact and judicial precedents and came to the conclusion that the agent provided the marketing support service as per marketing and promotion strategies devised by the assessee. The assessee retains full control over all the marketing activities in Russia and the agent was simply implemented the same. The above said agent incurs the expenses on behalf of the assessee and assessee reimburses the same to the agent i.e., M/s Pharmark Consulting FZE in the nature of reimbursement of expenses Payment made to non-resident/foreign company towards services rendered outside India, payee has no business connection in India and the services provided by the agents are not managerial in nature - payment made for the said services are not covered under section 9 (1)(vii) and not chargeable to tax as fees for technical services in India - there is no evidence that the non-resident agent has rendered any managerial service to the assessee and the agreement indicates only services on commission basis. Accordingly, provisions of section 195 are not attracted on payment of reimbursement of expenses made to its agent in UAE. Disallowance under section 40(a)(i) of the Act cannot be made in the case of the assessee. Accordingly, he directed the assessing officer to delete the addition. After considering the complete facts and the judicial precedents, we are in agreement with the findings of the Ld CIT(A) and we do not see any reason to interfere with the decision. Accordingly, the ground raised by the revenue are dismissed.
Issues Involved:
1. Deletion of disallowance of reimbursement of sales promotion expenses under section 40(a)(i) of the Income Tax Act, 1961. 2. Failure to provide documentary evidence for expenses incurred by M/s Pharmark in Russia. 3. Classification of payments to Pharmark as fees for technical services under section 9(1)(vii) of the Act. 4. Applicability of section 40(a)(i) on payments made to M/s Pharmark Consulting FZE, UAE. 5. Applicability of section 195 on payments made to M/s Pharmark Consulting FZE, UAE. Issue-wise Detailed Analysis: 1. Deletion of Disallowance of Reimbursement of Sales Promotion Expenses under Section 40(a)(i) of the Income Tax Act, 1961: The revenue was aggrieved by the deletion of the disallowance of ?2,16,41,556/- made on account of reimbursement of sales promotion expenses under section 40(a)(i). The assessee argued that the payments were reimbursements of expenses incurred by M/s Pharmark Consulting FZE, UAE, and not fees for technical services. The Ld. CIT(A) accepted the assessee's contention, noting that the payments were purely reimbursements without any markup and thus did not constitute income chargeable to tax in India. The Tribunal upheld this view, agreeing with the Ld. CIT(A) that the reimbursements did not have an element of income and were not subject to TDS under section 195. 2. Failure to Provide Documentary Evidence for Expenses Incurred by M/s Pharmark in Russia: The revenue contended that the assessee failed to provide documentary evidence for the expenses incurred by M/s Pharmark in Russia. However, the assessee had submitted detailed information and agreements justifying the reimbursements. The Ld. CIT(A) found the documentation satisfactory and concluded that the expenses were genuine and incurred on behalf of the assessee. The Tribunal concurred with this finding, noting that the assessee had provided sufficient evidence to substantiate the expenses. 3. Classification of Payments to Pharmark as Fees for Technical Services under Section 9(1)(vii) of the Act: The revenue argued that the payments to Pharmark were in the nature of fees for technical services. The assessee countered that the services provided by Pharmark were not managerial or technical but were related to sales promotion and marketing support. The Ld. CIT(A) and the Tribunal both held that the services provided by Pharmark did not qualify as managerial or technical services under section 9(1)(vii). The Tribunal noted that the services were akin to those of a sales agent and did not involve any specialized technical or managerial skills. 4. Applicability of Section 40(a)(i) on Payments Made to M/s Pharmark Consulting FZE, UAE: The revenue asserted that the provisions of section 40(a)(i) were applicable as the assessee failed to deduct TDS on payments made to Pharmark. The assessee argued that since the payments were reimbursements and not income, section 40(a)(i) did not apply. The Ld. CIT(A) agreed with the assessee, stating that the payments were not chargeable to tax in India and thus did not attract TDS under section 195. The Tribunal upheld this view, affirming that the disallowance under section 40(a)(i) was not warranted. 5. Applicability of Section 195 on Payments Made to M/s Pharmark Consulting FZE, UAE: The revenue contended that the payments to Pharmark were subject to TDS under section 195. The assessee maintained that the payments were not chargeable to tax in India and thus did not require TDS deduction. The Ld. CIT(A) and the Tribunal both concluded that the payments were reimbursements of expenses and not income, and therefore, section 195 was not applicable. The Tribunal noted that the payments did not contain any income element and were purely reimbursements, thus not attracting TDS provisions. Conclusion: The Tribunal upheld the Ld. CIT(A)'s decision to delete the disallowance of ?2,16,41,556/- under section 40(a)(i), concluding that the payments were reimbursements of expenses without any income element and did not attract TDS under section 195. The Tribunal dismissed the revenue's appeals, affirming that the services provided by Pharmark were not managerial or technical and that the payments were not chargeable to tax in India.
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