2005 (9) TMI 26 - AAR - Income Tax

Fees for technical services - applicant is engaged in the manufacture and sale of pharmaceuticals products - he entered into an agreement with Penser Group (a limited company in USA) held that applicant is required to deduct tax at source in respect of the consultancy fees made to consultant, commission payable on the orders produced by the consultant, reimbursement made to the consultant who had engaged the services of professionals for rendering services to the applicant from time to time

Summary

Issues Involved:
1. Whether the applicant is required to deduct tax at source for monthly consultancy fees paid to a consultant in the U.S.
2. Whether the applicant is required to deduct tax at source for commission payable on orders procured by the consultant.
3. Whether the applicant is required to deduct tax at source for reimbursements made to the consultant who engaged professionals for services.

Analysis:
1. The applicant, a pharmaceutical company, entered into an agreement with a U.S.-based company for consultancy services. The Commissioner argued that if services were rendered in India, tax should be deducted at the source. The applicant contended that as the services were rendered outside India, no tax deduction was necessary. However, it was established that the consultancy services provided, including promoting sales in India, required tax deduction under section 195 of the Income-tax Act, as the benefit was utilized in India.

2. The agreement also included a provision for a 10% commission on orders procured by the consultant. The ruling determined that this commission income was also subject to tax deduction at the source under section 195 of the Act, as it was related to services utilized in India for the applicant's business.

3. Additionally, the agreement involved reimbursements for services provided by professionals engaged by the consultant. Despite the absence of specific terms for reimbursement, it was deemed part of the consultancy services and therefore subject to tax deduction under section 195 of the Act. The ruling concluded that the applicant was required to deduct tax at the source for all three scenarios: monthly consultancy fees, commission on orders, and reimbursements to the consultant.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Authority's ruling on each aspect of tax deduction for payments made to the consultant.