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2016 (9) TMI 349 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI

2016 (9) TMI 349 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI - [2016] 387 ITR 337 - Withholding of tax at source under section 195 - Fees for Technical Services - service fee payable by the Applicant to DRL Russia under the Service agreement - India-Russia DTA - Held that:- The stand of the Department is based on the assumption that the reports of medical representatives of DRL Russia are sent to India which is being utilized in India for the purpose of brand promotion in Russia. The Department ha .....

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of hearing we repeatedly asked the CIT (IT & TP), Hyderabad, Mr. Singhania, whether he had any evidence to support his assumptions, particularly the fact that 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 an .....

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etely 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 service fee payable by the applicant to DRL Russia under the agreement for promotion of goods cannot be regarded for the purpose of fees .....

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J Ansari, CIT-DR(AAR), Mr. SS Negi, JCIT -DR(AAR), Mr. Sachin Dhania, DCIT DR(AAR), ND, Mr. P Satya Prasanth, DCIT RULING The applicant is a pharmaceutical company and has filed application before this authority on 10th December, 2013. In the application the applicant mentioned that in order to promote its sales in Russia and develop a local brand plan for the same, it proposed to enter into a Service Agreement with its subsidiary, i.e. DRL Russia, to avail of product promotion services. In the .....

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ame into effect from 30th January 2014. 2. The applicant requested for ruling on the following questions:- 1) Whether, on the facts and circumstances of the case, the service fee payable by the Applicant to DRL Russia under the Service agreement will be regarded as Fees for Technical Services ( FTS ) under Section 9(1)(vii) warranting withholding of tax at source under section 195 of the Act? 2) Whether on the facts and circumstances of the case, the service fee payable under the Service agreeme .....

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ive, 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 di .....

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L Russia was not chargeable to income-tax in India under the India-Russia DTAA. As the service fee, according to the applicant, was business income, it was argued that such income could not be categorized as other income within the scope of Article 22 of India- Russia DTAA. 4. During the course of hearing it was further revealed that the applicant had entered into three separate agreements with DRL Russia (and not only one as disclosed in the application). These agreements are: A. Distribution a .....

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a DTAA, the Department of Revenue also did not come up with any arguments. 6. During the course of hearing before us, the main arguments centered on the following issues:- A. Whether the product promotion services can be treated as Fees for Technical services ( FTS ) under the provisions of Income-tax Act 1961 ( Act ) or under the provisions of India Russia Double Taxation Avoidance Agreement. B. If it is treated as FTS, whether it will be covered by exception under section 9(1)(vii)(b) of the A .....

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Act. Section 9(1)(vii) of the Act reads as below: (vii) income by way of fees for technical services payable by - (a) The Government ; or (b) A person who is a resident, except where the fees are payable in respect of services utilized in a business of profession 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 p .....

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aken 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 marketing and promoting the products of the Applicant, the same did not .....

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e payable by the Applicant for product promotion shall not be regarded as a sum chargeable to tax under the provisions of the Act warranting withholding of tax at source under Section 195 of the Act. 9. It was further submitted by the applicant that DRL Russia does not have a PE in India in terms of Article 5 of the DTAA and the consideration received by DRL Russia from the applicant in relation to the product promotion services rendered in Russia is business income not chargeable to tax in Indi .....

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promotion team of DRL, Russia were purely commercial in nature and its role was that of an executor rather than of a manager managing the business of DRL India in Russia. It was submitted that such services did not require/ involve any expertise or technology and the services did not partake the rendering of any advice or opinion to the Applicant and thus such services did not fall within the ambit of consultancy services under section 9(1)(vii) of the Act. Without prejudice to the above, the a .....

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ent. 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 stan .....

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partment of Revenue in its initial comments dated 11.12.2015 had agreed with the reasonings given by the applicant that the consideration received for product promotion services was not FTS. As regards the issues relating to PE and other income also the Department did not dispute the stand of the applicant. However, later on the Department changed the stand saying that consideration received by DRL Russia was in the nature of FTS. The main points of Department s submissions are as under:- (a) Th .....

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or accountable for selling of the goods in Russia. (b) Almost 2 years after entering into the contract for supply of goods (referred to above), the applicant entered into two separate agreements with the same company, i.e. DRL Russia, for provision of services by the latter. The salient features of the contract are: I. Both the contracts were entered on the same date and are the same except in respect of the Subject of Agreement . II. One agreement is for provision of Consultancy and market res .....

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verse, i.e. DRL Russia is the supplier and the applicant the customer. (c) Considering that the contract for supply of goods by the applicant to DRL Russia, had been entered into in February, 2012 and there is nothing in the contract to suggest that the applicant would be involved in any manner in the actual marketing of those goods in Russia, there is no occasion to entertain the proposition that the marketing service rendered by the later to the applicant is in connection with actual marketing .....

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ernible 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 agreement .....

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Russian market by comparing DRL India with other pharmaceutical companies operating/selling products in Russia, comparing DRL brands/portfolio (trade names) with other brands in the Russian market and submits monthly reports on marketing strategy services to the applicant. The DRL Russia then prepares a yearly Brand Plan for brand/portfolio of the applicant. A brand plan of a portfolio includes the sales summary, region-wise performance, competitor strategy review, prescription audit, current s .....

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All other previous reports - Report on marketing strategy services, Brand Plan and Strategic Competitor Analysis - are submitted in English by DRL Russia to applicant. The presentations prepared by the market research team highlights the advantages that brands of DRL India have over other similar products of the competitors. As per the submission of the applicant, the DRL Russia adopts a two-pronged strategy to increase awareness about the products and thereby enhance sale of goods. The medical .....

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(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 contr .....

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current perception of the image of the goods in a competitive environment. The second agreement was in respect of marketing services related to promotion of goods from the producer to the end-customer by way of meeting with medical and pharmaceuticals experts, participation in pharmaceutical circles, distribution of promotional materials to medical and pharmaceuticals experts. 15. It is true that the second agreement relating to promotion of goods signed on 30th January, 2014 cannot be related t .....

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e Department is based on the assumption that the reports of medical representatives of DRL Russia are sent to India which is being utilized in India for the purpose of brand promotion in Russia. The Department has further assumed that the marketing services for research agreement and marketing services for promotion of goods agreement are interconnected and they together constitute marketing services. According to the Department the marketing research team prepares presentations for the purpose .....

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t. 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. 16. The facts presented by the applicant do not support the assumptions made by the department. The applicant has stated that medical representatives of DRL Russia merely promote the goods by way of m .....

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e 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 .....

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here is no evidence to suggest that DRL India is consulting DRL Russia in pursuance of the agreement for promotion of goods, this agreement cannot be considered for providing consultancy services. As regards other agreement for marketing research services, the applicant has already offered the same for taxation. 17. The Department has also relied on the ruling given by this authority in the case of International Hotel Licensing Company (supra) wherein it was held that services provided in the fo .....

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hin and outside India in the form of advertising, marketing promotion, sales programme and special services. In the instant case it is not possible to derive any such conclusion on the basis of agreement for promotion of goods. The reports prepared by DRL Russia in respect of this agreement are merely statistical in nature and do not support this stand. Therefore, the services relating to promotion of goods cannot be categorized as consultancy services. 18. The alternative argument of the depart .....

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ed pursuant to this agreement cannot be classified as managerial services either. 19. As we have concluded 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 a .....

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