TMI Blog2020 (9) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... vices 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. - I.T.A. No. 5943 & 5942/Mum/2018 - - - Dated:- 15-9-2020 - Shri Pawan Singh, JM And Shri S. Rifaur Rahman, AM For the Appellant : Ms. Samatha, DR For the Respondent : Shri Vijay Mehta, AR ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary.' 4. The brief facts relating to above grounds are, assessee is a registered firm and is engaged in the business of export of Pharmaceutical and Nutraceutical products. The return of income was filed on 28.09.2013 declaring total income at Rs. Nil. Subsequently, the case was selected for scrutiny and notice under section 143(2) were issued and served on the assessee. In response, assessee filed relevant information as called for. 5. During assessment proceedings, assessing officer observed that assessee has claimed sales promotion expenses of ₹ 2,16,41,556/ in profit and loss account. In the detail submitted by the assessee, it was noticed that assessee has reimbursed the expenses incurred by M/s Pharmark Consulting FZE. AO asked the assessee to substantiate the above reimbursement of expenses and submit the explanation why above said reimbursement of expenses should not be made under section 40(a)(i) of the Act for Non-Deduction of Tax at Source on these payments. In response, assessee filed complete details of sales promotion expenses incurred during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement 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 made disallowance of ₹ 2,16,41,556/- u/s 40(a)(i) of the Act under the head Income from Business Profession stating that the Appellant had failed to deduct TDS on the remittances made to foreign company. Appellant's Submission: The Appellant is a partnership firm engaged in the export of various pharmaceutical products. During the year the Appellant had majority of its exports to Russia where it maintained a team of sales representative. Various responsibilities like appointing field employees for promotion of the assessee's products, identifying new customers, marketing and sales promotion activities, sales expenses like salaries of this team etc were borne by the Appellant through its agent in UAE, M/s Pharmark Consulting FZE, a non-resident/foreign company. The Appellant retains full control over all the marketing activities in Russia, all marketing and promotion strategies are devised by the Appellant and M/s Pharmark Consulting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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- resident. Ordinarily the right to receive the same by a non-resident accrues or arises outside India. Therefore, the same will not be liable to tax in India. For Income deemed to accrue or arise in India, the relevant provisions of section 9 of the Act reads as under- Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issues before the Hon. Bench of the Tribunal, was TDS in respect of reimbursement of conveyance expenses. As per agreement between the assessee company and lndochem Techno Consultants Ltd, a vehicle was to be provided by the assessee company to the said consultant for attending to its work and thus, the assessee company was to bear the vehicle expenses actually incurred by the said party. Bills for such expenses incurred by the said consultant were separately raised by him on the assessee company, in addition to bills for fees payable on account of technical services. It was held that since the amount of bills so raised was towards the actual expenses incurred by the consultant, there was no element of any profit or income involved in the said bills. It was, thus, a clear case of reimbursement of actual expenses incurred by the consultant and the same, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, inter alia, held in this case that the amount paid by the assessee company to its parent company, on account of reimbursement of expenses incurred in respect of global accounts manager, could not be treated as payment of salary, so as to attract the deduction of tax at source. It was a case of reimbursement of common expenses incurred by the parent company for the benefit of all the group concerns, including the assessee company, which do not attract any deduction of tax and disallowance could not be made by invoking the provisions of section 40(a)(iii) for non-deduction of tax from reimbursement. Decision in case of Linkleters LLP Vs ITO (Int Tax) [2011] 9 ITR (Trib) 217 (Mum)- It was, inter alia, held in this case that reimbursements received by the assessee were in respect of specific and actual expenses incurred by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 1.6.1976 vide Finance Act, 2010 and hence, cannot be invoked for imposing TDS obligation in respect of payments already made in F.Y. 2007-08. (e) In any case, payment falls within the exception provided u/s 9(l)(vii)(b) of the Act as the same is made for earning income from a source outside India. (f) In any case, TDS provisions are not applicable to payments which are in the nature of reimbursement of expenses. (g) Since for all the above reasons, payments are not liable to tax in India, there is no TDS obligation u/s 195 of the Act as laid down by the Hon'ble Apex Court in the case of GE India Technology Centre P Ltd vs CIT reported in 327ITR 456 (SC). We find that as per Article 7 of UK and Singapore Treaty, in the absence of PE in India, the business income also would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid 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 chargeable to tax as Fees for technical services in India. In support of the above we reproduce the relevant extracts of Section 9(l)(vii) of the Act which reads as under- Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India:- (vii) income by way of fees for technical services payable by-fa) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or 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 are payable in respect of services utilised i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 denote services catering to the special needs of the person using them and not a facility provided to all. Hon 'ble Allahabad High Court in case of CIT . v. Model Exims (2014) 363 ITR 66 / 222 Taxman 94 / 267 CTR 177 (AIL)(HC) S. 195 : Deduction at source - Non-resident - Agreement for procuring only orders does not involve any managerial services - Explanation to section 9(2) not applicable. [S. Assessee appointed foreign agents for securing orders. Commission paid to agents disallowed on the ground that it is in violation of provisions of section 195 r.w.s. 9(l)(vii). Agreement was only for procuring orders which did not involve any managerial services. Explanation added to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial 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 adopt the policies; (c) scrutinizing the effectiveness of the policies that are adopted and (d) initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervades all organizations. Decision of ITAT Delhi in case of Diwa Creation vs. ACIT (ITAT Delhi) vide order dated 06-07-2017 has held asunder- 21. We find the Hon'ble Allahabad High Court in the case of CIT vs. Model Exims reported in 363 ITR 66 has held that failure to deduct tax at source from payment to non-resident agents, who has their own offices in foreign country, cannot be disallowed, since the agreement for procuring orders did not involve any manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. Ltd. Reported in 367 ITR 155. The decision of the Hon'ble Mumbai Tribunal in case of Armayesh Global v.ACIT (2012)(51 SOT 564) wherein it was held that export commission earned by a foreign commission agent is not taxable in India and it also not in nature of technical or managerial services. Decision of Delhi ITAT in case of Dy. CIT v. Angelique International Ltd. (2013) 55 SOT 226 (Delhi) (Trib.)S.9(1)(i): Income deemed to accrue or arise in India - Business connection- Deduction at source-Commission paid out side India is not liable to deduct tax at source.[S. 40(a) (ia), 195]. held as under- In the course of its export business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E and hence he has disallowed reimbursement of sales promotion expenses of ₹ 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 payment 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 : 7.5 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, the provisions of sec 5(2) of the Act which reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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. Thus it is evident that M/S Pharmark has no authority to conclude the order independently and has to take instructions in writing from the appellant. All the terms of agreement indicate that the M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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. 7.10 The Hon'ble Mumbai Tribunal in case of UPS SCS (Asia) Ltd. v. Asstt. DIT on 22 February, 2012 (50 SOT 268) is held that, services can qualify as managerial services if it involves both planning and execution of the activities to be performed. The Hon'ble Tribunal further held that the term, managerial services cannot be interpreted in a narrow sense to mean simply executing the directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from section 9(1) (vii)(b) that fee payable for the purposes of making or earning income from any source outside India is not included in the definition. The amount has to be considered as business income. Since the services are rendered outside India, that amount is not taxable as it does not accrue or outside India. The same view was considered by the Hon'ble Bombay High Court in the case of CEAT International S.A. vs. CIT 237 ITR 859, where certain export commission was paid to a Non Resident Company and it was held that the assessee did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is not open for the payer to contend that if the amount paid by him to the nonresident is not at all chargeable to tax in India , then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lay down that tax at source is deductible only from sums chargeable under the provisions of the Income- tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income-tax Act. 7. The Special Bench of Chennai Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussed 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 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. , 7.16 Moreover the payee company M/s Pharmark Consulting FZE, UAE has no business connection in India, thus no income is chargeable to tax in India out of the said Sales Promotion Expenses remitted. As per Hon'ble Supreme Court in the case of G.E. India T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning 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 M/s.Pharmark Consulting FZE, UAE has rendered any managerial service to the appellant and the agreement indicates only services on commission basis. Therefore considering the above, provisions of section 195 are not attracted on payments of reimbursement of expenses made to M/s Pharmark Consulting FZE, UAE and as such disallowance of ₹ 2,16,41,556/- u/s 40(a)(i) of the Act cannot be made. Accordingly,, the AO is directed to delete the addition of ₹ 2,16,41,556/-. This ground is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. The 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. Therefore, the payment made for the said services are not co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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