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TMI Blog2020 (9) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) erred in deleting the addition to the tune of Rs. 2,16,41,556/- made on account of disallowance of reimbursement of sales promotion expenses u/s 40(a)(i) of the IT. Act, 1961." 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the assessee failed to provide documentary evidence in respect of the expenses incurred by M/s Pharmark in Russia." 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the payments made by the assessee to Pharmark are nothing but rendering of a managerial, technical or consultancy skills and hence they are in the nature of fees for technical service within the meaning of explanation 2 to clause (vii) of sub section (1) of section 9 of the Act." 4. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not considering the applicability of provisions of section 40(a)(i) of the Act on payments of Rs. 2,16,41,556/- made to M/s Pharmark consulting FZE, UAE on account of reimbursement of expenses." 5. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g: Clearing & Fonvarding Charges 3,32,605.56 Sales Promotion Expense 2,16,41,556.61 Sub-total 2,19,74,162.17 Statement of Administrative: 2,60,35,460.10 Total 4,80,09,622.27 Details of Sales Promotion Expenses- Pharmark Consulting FZE Reimbursement of Expenses 2,15,01,469 Gepach Representative Office (Russia) Advertisement Expenses 1,12,232 Other Advertisement Expenses 27,855 Total 2,16,41,556 During the course of assessment proceedings, the Appellant was asked to submit details of Sales Promotion expenses and to show cause as to why disallowance of reimbursement expenses should not be made under section 40(a)(i) of the Act for non-deduction of tax at source on these payments. The Appellant in response to the same had submitted vide its submissions dated 14th December 2015, 1st February 2016, 4* February 2016 and if" February 2016, the complete details of Sales Promotion expenses (supra) incurred during the year, along -with copy of agreement entered with its agent in UAE, Ms Pharmark Consulting FZE, a non-resident/foreign company and complete justification as to why provisions of section 195 of the Act were not applicable. However, the AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment 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 rates in force:" From the aforesaid provisions of section 195(1), it can be seen that any person responsible for paying to a non-resident, including a foreign company, any interest or any other sum chargeable under the provisions of the Act, no tax to be deducted at source if the payment is not chargeable to tax in India. In order to examine whether a certain payment to a non-resident entity is chargeable to tax in India, we refer to the provisions of sec 5(2) of the Act which reads as under- "5. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a nonresident includes all income from whatever source derived which- a) is deemed to be received in India in such year by or on behalf of such person; or b) or arises or is deemed to accrue or arise to him in India during such year.". From the aforesaid provisions of section 5(2)(b) of the Act, the place of accrual or arisal of income is the 'e the right to receive that, income accrues or arises in respect of any payment made to a non- res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to . provide the distribution, management and logistic services. We further noticed that in the said order the Tribunal has taken into consideration the decision of the Hon ble Jurisdictional High Court in the case ofCIT v Dunlop Rubber Co. Limited (1983) 142 ITR 493 (Cal) and in the similar circumstances that of the assessee to hold that the reimbursement of the expenditure does not generate any income in the hands of the recipient and consequently there was no requirement of deduction of TDS and consequently the provisions of section 40(a)(ia) could not be invoked. > Decision in case of C.U. Inspections (I) Pvt Ltd v. DCIT (2013) BCAJ-May-P. 54 (Mum,)(Trib.) wherein it isheld that reimbursement of expenses to holding company is not an income under the Act and hence not chargeable to tax. > Decision in case of Mahindra & Mahindra Limited vs. DCIT reported in 10 SOT S96 Mumbai ITAT dated 10.04.2012 has also held that reimbursement of expenses not having the character of income chargeable to tax under the provisions of the IT Act cannot be subject to withholding of tax. > Decision in case of ITO VsDr. Wilmar Schwabe India (P) Ltd. [2005] 95 TTJ 53 (Del) wherein, "one of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , inter alia, held in this case that amounts received by the assessee towards reimbursement of expenses were not liable to tax as fees for technical services." > Decision in case of Nathpa Jhakri Joint Venture Vs ACIT(2010) 5 ITR (Trib) 75 (Mum)- "It was held in this case that reimbursement of expenses was not income in the hands of the non-resident and therefore, not liable to TDS under section 195 of the Act. It was further held that it is axiomatic that tax is charged on income and not on receipts. The reimbursement of expenses by the Indian assessee to the non-resident was not taxable in the hands of the non-resident. Only if the-sum paid or credited is chargeable to tax in the hands of the payee, the assessee is liable to deduct tax at source. If the assessee payer did not move application under sub-section (2) of section 195 of the Act, it could not be held that the liability to deduct tax at source had automatically arisen. As the reimbursement of expenses was not taxable in the hands of the payee, the assessee was not liable to deduct tax at source." > Decision in case of Expediters International (India) P.Ltd Vs Addl CIT [2010] 2 ITR (Trib) 153 (Del)- "It was, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursed by the assessee at cost. It was submitted that such reimbursement does not give rise to income in the hands of the subsidiaries as a result no IDS is required to be deducted on the amount paid as reimbursement. In order to support the said contention, reliance was placed on the decision of the Hon'ble Supreme Court in the case of G.E. India Technology v. CIT(327ITR 456). 8. In essence, it was argued that the services rendered by both the subsidiaries are in the nature of marketing support services and not in the nature of fees for technical services' as alleged by the lower authorities. The Learned AR made his arguments based on the following propositions:- (a) The payments are not for fees for technical services within the meaning of Article 13 / 12 of DTAA with UK and Singapore as the case may be. (b) As there is no permanent establishment of UK and Singapore Subsidiaries in India, payments made to them are not taxable in India under Article 7 of DTAA with UK and Singapore. (c) In any case, payments are not for fees for technical services as per the provisions of the IT Act. (d) Explanation to section 9(2) has been inserted retrospectively w.e.f. 1.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed." > 'Decision of Chandigarh Tribunal in case of Fortis Healthcare Ltd., Mohali vs. DDIT(IT) vide ITO No. 1035/Chd/2010 dated 25* December 2010 has held as under- "The issue of payment to non-residents and the obligation to deduct tax u/s 195 of the Act on such payments viz a viz the taxability of'the remittance has been deliberated upon the Hon'ble Supreme Court in GE India Technology Centre (P) Ltd Vs. C IT &Anr (supra) Samsung Electronics Co Ltd Vs. CIT (supra). The Hon'ble Supreme Court has held that the payer is bound to deduct tax at source only if the sum paid is assessable to tax in India. The Hon'ble Supreme Court held as under:- . "The most important expression in section 195(1) consists of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is hot liable to deduct tax if such sum is not chargeable to tax under the Income-tax Act. Applicability of the judgment in the case of Transmission Corporation (supra) 10. In Transmission Corporation's case (1999) 239 ITR 587 (SC) a non-resident had entered into a composite contract with the resident party making the payments. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act is warranted, as the same has no element of income embedded in the same." In case of the Appellant as per the agreement M/s Pharmark Consulting FZE was to provide marketing support services such as to appoint field employees for promotion of the appellant's products, identifying new customers, marketing and sales promotion activities, sales expenses like salaries of this team etc as per the marketing and promotion strategies devised by the Appellant and instructed to M/s Pharmark Consulting FZE. As such the Appellant retains full control over all the marketing activities in Russia, all marketing and promotion strategies and planning are devised by the Appellant and M/s Pharmark Consulting FZE simply implements the same. The said agent incurs these expenses on behalf of the Appellant and the appellant reimburses the same to M/s Pharmark Consulting FZE in the nature of reimbursement of expenses. Therefore considering the above none of the expense incurred by M/s Pharmark Consulting FZE were in the nature of managerial services or any fees for technical services and hence the payment for the said services were not covered u/s 9(1) (vii) of the Act and thus not cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Skycell Communications Ltd. & Anr. v. Deputy Commissioner of Income Tax & Ors., and the Delhi High Court in Commissioner of Income Tax v. Bharti Cellular Ltd.2. The High Court has further held that the principles involved in the decision of The Director of Income Tax (International Taxation)-! v. M/s. Safmarine Container Lines NV3 will also govern the present case and that the Maersk Net used by the agents of the assessee entailed certain costs reimbursement. 11. It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax. This Court in Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited4 has categorically held that use of facility does not amount to technical services, as technical services d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . vrs. Asst. DIT (2013) (55 SOT 245) has held that payment made for marketing and sales promotion activities would not fall in the category of 'Fee for technical services" as defined u/s 9(l)(vii) of the Act. A similar view was held by the Authority for Advance Rulings in Oxford University Press (AAR No. 1110 of 2011). Decision of the Hon'ble Delhi Tribunal in case of Adidas Sourcing Ltd. Vs. Asst. DIT (2013)(S5 SOT 245) wherein the Hon'ble Tribunal has considered the expressions "managerial", "technical" and "consultancy" services used in the context of Explanation 2 to section 9(l)(vii) of the Act. The Hon'ble Tribunal whilst interpreting the meaning of the word "managerial" has relied upon the decision of the Hon 'ble Delhi High Court in case ofJ.K. (Bombay) Ltd. v. CBDT (118ITR 312) wherein the Hon'ble High Court had referred to an article on 'Management Sciences' in Encyclopedia 747, wherein it is stated that the management in organizations include at least the following: (a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead towards tlie goals; (b) getting the organization to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or caused to the remitted by the purchasers from abroad did not amount to an operation carried out by the nonresident in India as contemplated by cl. (a) of Hie Explanation to s. 9(l)(i) of the I.T. Act, 1961. The Commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India." The Hon'ble Delhi High Court in the case of CIT vs. EON Technology P. Ltd. (2011)(343 ITR 366)(DeL) has held that, non-resident commission agents based outside India rendering services of procuring orders cannot be said to have a business connection in India and the commission payments to them cannot be said to have been either accrued or arisen in India. In vie\v of the decisions cited above (supra), we are of the considered opinion that the assessee is not liable to deduct tax under the provisions of section 195 of the I.T.,Act on account of foreign agency commission paid outside India for promotion of export sales outside India. A similar view has been taken by the Hon'ble Madras High Court in the case of CIT vs. Kikani Exports id. Reported in 3(9 .TC 96 and CIT vs. Faizan Skoes Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection in India." 7. After considering the submissions of the assessee and observation of assessing officer in assessment order, Ld CIT(A) deleted the addition with the following observation:- 7.4 I have carefully considered the facts of the case, oral contentions and written /submission of the appellant, discussion of the AO in the assessment order and material available on record. The AO has disallowed the reimbursement of expense amounting to Rs. 2,16,41, 556/- u/s 40(a)(i) of the Act stating that appellant has not deducted TDS u/s 195 on payment of reimbursement of expenses made to M/s Pharmark Consulting FZE, UAE and hence he has disallowed reimbursement of sales promotion expenses of Rs. 2,16,41,556/-. Section 195(1) of the Act reads as under- "Other sums, 195, (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, clause 6 of agreement mentions that "Pharmark will at all times take a confirmation in writing before confirming the rates and terms of payment for any order" and clause 7 mentions, that "during the continuation of this agreement, Pharmark shall not engage itself for any other company / organization with similar products" which clearly implies that Pharmark is dependent on the decision making of the assessee in terms of action needs to be taken. Pharmark had used the reimbursements received from India to commercially exploit the employed personnel in Russia to maximize profits for the assessee in India. There is no merit in the contention of the assessee that the payments made to M/s. Pharmark, UAE are in the nature of reimbursement of expenses incurred by them on behalf of sales team in Russia and commission on export sales Thus the AO concluded that the payment to M/S Pharmark Consulting FZE, UAE is nothing but payment of Fees for Technical Services and as such liable for TDS under section 195 of the Act. 7.8 It is observed from the assessment order that the AO in his order has accepted the fact that "clause 6 of the said agreement mentions that "Pharmark will at all times ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no income element included in these payments. Reimbursement of expenses does not partake the nature of income in the hands of the payee of such expenses. An expenditure incurred by the payee cannot form part of income in his hands and therefore, no tax will be deductible at source there from, under the provisions of Chapter XVII-B of the Act. In other words, no tax will be deductible at source at the time of payment or reimbursement of the aforesaid expenses by the payer or the tax-deductor to the payee or tax-deductee. In the case of the Appellant as the payment made by the appellant was towards reimbursement of expense incurred without any markup is not an income under the Act and hence not chargeable to tax. As per Hon'ble Supreme Court in the case of DIT vs. A. P. Moller Maersk AS (2016) 383 ITR 1 (SC) It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India in the case of Transmission Corporation of A.P vs CIT 239 ITR 587. In the case of Transmission Corporation, a non-resident had entered into composite contract with the resident party making the payment. The said composite contract not only comprised supply or plant, machinery and equipment in India but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant arid machinery in India gave rise to income taxable in India. However, in this case M/s Pharmark has no business connection in India, thus no generation of income in India. Therefore, this case is entirely different from Transmission Corporation of A.P. These issues were decided by Hon'ble Supreme Court in the case of G.E. India Technology v. CIT (327 ITR 456) vide order dated 10th September 2010. It is held that S. 195(1) uses the expression "sum chargeable under the provisions of the Act". This means that a person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax. If the payment does not contain the element of income the payer cannot be made liable, 7.13 It is evident fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of the judgment in the case of Transmission Corporation (supra) 10. In Transmission Corporation's case [1999] 239 TTR 587 (SC) a non-resident had entered into a composite contract with tlie resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In our view, the above observations of this court in Transmission Corporation case [1999] 239 ITR 587 (SC) which are put in italics have been completely, with respect, misunderstood by the Karnataka High Court to mean that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other words, the component of income must be present in the total amount of fees paid for technical services to constitute an item falling under section 9(l)(vii).Where the expenditure incurred is reimbursed as such without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to accrue or arise in India and accordingly, there was no obligation to deduct tax at source therefrom under section 195 of the Act." 7.15 The Hon'ble ITAT, Mumbai also discussed on identical issue in case of Nathpa Jhakri Joint Venture Vs ACIT [2010] 5 ITR (Trib) 75 (Mum). It was held in this case that reimbursement of expenses was not income in the hands of the non-resident and therefore, not liable to IDS under section 195 of the Act. It was further held that it is axiomatic that tax is charged on income and not on receipts. The reimbursement of expenses by the Indian assesses to the non-resident was not taxable in the hands of the non-resident. Only if the sum paid or credited is chargeable to tax in the hands of the payee, the assessee is liable to deduct tax at source. If the assessee payer did not move application under sub-section (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has no elements of income embedded in them are not be subjected to withholding of tax in respect of such payments u/s 195 of the Act. 7.17 After considering the totality of facts and judicial decision, it is evident that M/s Pharmark Consulting FZE was to provide marketing support services such as per the marketing and promotion strategies devised by the appellant. The Appellant retains full control over all the marketing activities in Russia, all marketing and promotion strategies and planning are devised by the Appellant and M/s Pharmark Consulting FZE simply implements the same. The said agent incurs these expenses on behalf of the Appellant and the appellant reimburses the same to M/s Pharmark Consulting FZE in the nature of reimbursement of expenses. The payment made to Non Resident/Foreign company towards services rendered outside India, payee has no business connection in India. The services provided by M/s Pharmark Consulting FZE, are not .managerial in nature and hence the payment for the said services are not covered u/s 9(l)(v:j) of the Act and thus not chargeable to tax as "Fees for technical services" in India. Since, there is no evidence that then or President ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idences before tax authorities. He vehemently supported the findings of the assessing officer and prayed that the addition may be sustained. 12. In rejoinder, Ld AR submitted that all the evidences were already submitted before assessing officer and he brought to our notice page 11 and page 15 of assessment order. Once again, he supported the findings of Ld CIT(A). 13. Considered the rival submissions and material on record. We notice 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. For the above said expenses incurred by the agent in Russia, the assessee has reimbursed to its agent operating from UAE. We notice that Ld 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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