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TMI Blog2016 (9) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... reports prepared by the product promotion team were in respect of brand promotion and were utilized in India by the applicant. He could not produce any. It is also noticed that the Department had conducted a survey u/s 133A of the IT Act in the business premises of the applicant but could not find any such evidence and did not even ask any question relating to this aspect in the statements recorded of senior executives. The services rendered by DRL Russia in respect of agreement for promotion of goods cannot be treated as fees for technical services, it is not necessary to go into the argument whether such services will be covered by exception u/s 9(1)(vii)(b) of the Act though the applicant has argued that his case is covered by exception. However, it is suffice to say that the stand and argument of the applicant is completely faulty mainly because the product promotion agreement dated 30.1.2014 cannot be related with distribution agreement dated 16.2.2012 signed two years ago, under which exports were made. Therefore it cannot be said that service fees under product promotion agreement were paid in order to promote its products for enhancing export in Russian market The se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he answer to Question 1 2 is negative, whether on the facts and circumstances of the cases, the service fee payable by the Applicant to DRL Russia is taxable in India under Article 7 of the India-Russia DTAA? 4) If the answer to the Questions 1, 2 3 are in negative, whether on the facts and circumstances of the case, the service fee payable by the Applicant to DRL Russia is taxable under Article 22 of the India-Russia DTAA? 5) If the answers to any of the Questions 1, 2, 3 or 4 is in negative, whether on the facts and circumstances of the case the provisions of Section 40(a)(i) of the Act are applicable on the payment being made by the Applicant to DRL Russia? 3. In the application the applicant took the stand that DRL Russia is a mere marketing and distribution arm for the applicant in Russia and accordingly service fee could be considered as income arising through or from any business connection in India under the Act. It was also mentioned that the service fee paid did not fall within the ambit of the definition of FTS as these were not managerial, technical or consulting in nature. The applicant further submitted that the service fee received by DRL Russia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) A person who is a non-resident, where the fees payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Explanation 2 For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries. Under section 9(1)(vii) of the Act, any income in the nature of Fees for Technical Services ( FTS ) payable by a resident to a nonresident is deemed to accrue or arise in India . 8. The applicant took the stand that since in pursuance of product promotion agreement the Applicant has engaged DRL, Russia merely for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of a recipient is chargeable to tax in the country where the source of payment is located, where service provider or payee is located and where services are rendered by non-resident. The applicant has also submitted that expenditure on account of service fees was incurred in order to enhance its export in Russian Federation and in his case the ownership of exported goods pass on to the importer only after acceptance of the registration at the customs of the Russian Federation and, thus, export activity is fulfilled or concluded in Russia. Based on this premise the applicant has taken the stand that the source of income is not located in India. 11. In support of its stand the applicant relied on several case laws like Intertek Testing Services India Ltd (307 ITR 418), Linde A G vs ITO (62 ITD 330), R. Dalmia Vs CIT (106 ITR 0895), UPS SCS (Asia) Limited (2012) (50 SOT 268) (Mumbai ITAT), GVK Industries Ltd. V. ITO [2015] (317 ITR 0453), Mahindra Mahindra (2009) (122 TTJ 0577 (SB) (Mumbai ITAT), CIT Vs Bharti Cellular Limited and others (319 ITR 139), UPS SCS (Asia) Limited (2012) (50 SOT 268), Lufthansa Cargo India Pvt Ltd (2015) (375 ITR 0085) 12. The Department of Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to entertain the proposition that the marketing service rendered by the later to the applicant is in connection with actual marketing of any goods in Russia. (d) Marketing of pharmaceutical products is a specialized field. It is quite different from marketing of consumer goods which may involve just brand promotion, advertising, etc and can be done by engaging laymen or even by seeking endorsement by celebrities. According to the applicant, the marketing services are rendered by DRL, Russia by engaging 700+ medical representatives. (e) DRL, Russia has the specified knowledge of the dynamics of the Russian market. This is discernible form the service agreement the relevant part of which is as under: 1.1 The Service provider has the experience and resources to provide services related to the medical affair support and service related to the monitoring of Russian pharmaceutical market; 1.2 The Service Provider has the extensive knowledge of the Russian pharmaceuticals market. (f) The reports were sent by DRL, Russia and were utilized by the applicant for purposes of its own business in India. (g) Two separate agreements were entered into on the same day i.e. 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries vs ITO (2015) 54 taxmann.com 347 (SC) (iii) Wallace Pharmaceuticals (P) Ltd [2005] 278 ITR 97 AAR (iv) Intertek Testing Services India Pvt. Ltd., [2008] (175 Taxman 375) (AAR) 14. We have gone through the facts of the case in detail during the course of hearing spread over several days. It is true that in the application filed by the applicant only one agreement relating to product promotion service was mentioned and the application was silent on other agreements signed by it with DRL Russia. However, later on it disclosed that it had first entered into a contract for supply of goods on 16th February, 2012, called as Distribution Agreement . According to this agreement the applicant was to sell customer medicines and food supply to the Russian company. The research service agreement and product promotion services agreements were signed on much later i.e. on 30th January, 2014. The first agreement was in respect of market research services on study of characteristics of the brand, identifying unsatisfied needs in relation to the brand, identifying the current perception of the image of the goods in a competitive environment. The second agreement was in respect of mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and pharmacies and their activities are executory in nature since such services do not entail the rendering of advice to the applicant. Based on this fact it cannot be said that DRL Russia is providing any consultancy service. The Department has based its arguments merely on the assumptions. They have not been able to establish that the reports prepared by market research team were utilized by medical representatives and their reports, in turn, related to brand promotion which were further utilized by DRL India. On the contrary sample reports submitted by the applicant show that the information collected by medical representatives are in relation to stock availability and demands for product in a pharmacy. If this is so such reports are not relevant to the research team. There is no evidence to suggest that the reports prepared by medical representatives have been utilized by DRL India in respect of brand promotion or for deciding the strategy for sale of goods in Russia. In order to establish that consultancy services have been provided based on work undertaken by medical representatives it is necessary that these services should be utilized by DRL India for brand promotion. Both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services rendered by DRL Russia in respect of agreement for promotion of goods cannot be treated as fees for technical services, it is not necessary to go into the argument whether such services will be covered by exception u/s 9(1)(vii)(b) of the Act though the applicant has argued that his case is covered by exception. However, it is suffice to say that the stand and argument of the applicant is completely faulty mainly because the product promotion agreement dated 30.1.2014 cannot be related with distribution agreement dated 16.2.2012 signed two years ago, under which exports were made. Therefore it cannot be said that service fees under product promotion agreement were paid in order to promote its products for enhancing export in Russian market. Even in the case of exports the issue has already been settled by the Delhi High Court in the case of Havells India Limited 21 taxman.com and the relevant para is reproduced as under:- Section 9(i)(vii)(b) contemplates a source located outside India. It is difficult to conceptualize the place/situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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