2019 (5) TMI 1372 - AT - Income Tax

Appeal ruling: Payment classification impacts TDS compliance.

The Tribunal partially allowed the appeal, ruling that payments to the non-resident agent for logistical support were not 'Fees for Technical Services' ... TDS u/s 195 - assessee has failed to deduct TDS while making payment to the non-resident commercial agent - addition u/s 40(a)(i) - HELD THAT:- Nature of services rendered by foreign agents required to be determined on the basis of the agreement, and if these services are simplicitor for procurement of some contract, and fulfillment of certain export obligations like logistic, warehousing etc. then these will not be termed as service in the nature of technical services or managerial and consultancy services”. These activities will not generate on invent any information which could be used in India for augmentation of manufacturing of drugs. On an analysis of the services rendered by CACMILSA, we are of the view that no element of managerial consultancy or technical services were being rendered by the commercial agent and the assessee was not required to deduct TDS on receipt - Decided in favour of assessee Allowable revenue expenditure - expenses incurred by the assessee in foreign country for registration of its products for marketing and promoting sales - HELD THAT:- As relying on TORRENT PHARMACEUTICALS LTD. [2013 (4) TMI 570 - GUJARAT HIGH COURT] expenses incurred by the assessee towards registration fees, evaluation and analysis charges, translation & notarization of dossiers require to be allowed to the assessee. TDS liability on Market research of new pharma products and market survey charges debited by the assessee - Held that:- These are the information which will be used by the assessee for exploring new business venture and enhancing its capacity to conduct new business. Certainly, such information will fall within the managerial, technical consultancy services, therefore, the assessee was required to deduct TDS. Since the assessee has failed to deduct TDS on these payments, they deserve to be disallowed. Issues Involved:1. Disallowance under Section 40(a)(i) for non-deduction of TDS under Section 195 on payments to non-resident commercial agent.2. Classification of payments as 'Fees for Technical Services' under Section 9(1)(vii).3. Allowability of marketing expenses and other related costs.Detailed Analysis:Issue 1: Disallowance under Section 40(a)(i) for Non-Deduction of TDS under Section 195The primary grievance of the assessee was the confirmation of disallowance of Rs. 2,57,73,053/- by the CIT(A), which was initially disallowed by the AO under Section 40(a)(i) of the Income Tax Act. The disallowance was based on the failure to deduct TDS under Section 195 while making payments to the non-resident commercial agent, CACMILSA.Issue 2: Classification of Payments as 'Fees for Technical Services' under Section 9(1)(vii)The AO and CIT(A) concluded that the payments made to CACMILSA were in the nature of 'Fees for Technical Services' (FTS) as defined under Section 9(1)(vii). The AO noted that CACMILSA provided a range of services, including managerial, technical, and consultancy services, which fall within the ambit of FTS. Consequently, TDS was required to be deducted on such payments under Section 195. The CIT(A) concurred, emphasizing that the services provided by CACMILSA were specialized in the pharmaceutical sector and were essential for fulfilling the contractual obligations of the assessee with the Government of Ecuador.Issue 3: Allowability of Marketing Expenses and Other Related CostsThe CIT(A) also addressed the marketing expenses debited by the assessee, amounting to Rs. 77,99,293/-. These expenses included payments for market survey charges, registration fees, evaluation and analysis charges, translation and notarization of dossiers, and market analysis and tender survey. The CIT(A) concluded that these payments were also in the nature of FTS and thus required TDS deduction under Section 195. The AO had disallowed these expenses under Section 40(a)(i) for the same reason.Tribunal's Findings:Payments to Non-Resident AgentThe Tribunal examined the nature of the services provided by CACMILSA and the obligations of the assessee under the contract with the Government of Ecuador. It was noted that the services rendered by CACMILSA included logistical support, delivery of goods, custom clearance, and liaisoning, which were essential for fulfilling the contractual obligations. The Tribunal observed that these services did not fall within the scope of 'managerial, technical, or consultancy services' as defined under Section 9(1)(vii). The Tribunal emphasized that the payments were primarily for logistical and operational support and not for any advisory or consultancy services used within India.Marketing ExpensesRegarding the marketing expenses, the Tribunal referred to the judgment of the Hon'ble Gujarat High Court in the case of CIT vs. Torrent Pharmaceuticals Ltd., which allowed expenses incurred for registration of products in foreign countries as revenue expenditure. Applying this principle, the Tribunal allowed the expenses related to registration fees, evaluation and analysis charges, and translation and notarization of dossiers. However, the Tribunal disallowed the expenses related to market research and survey charges, as these were considered managerial and consultancy services requiring TDS deduction under Section 195.Conclusion:The Tribunal partially allowed the appeal of the assessee. It held that the payments made to CACMILSA for logistical and operational support did not constitute 'Fees for Technical Services' and thus did not require TDS deduction. However, expenses related to market research and survey charges were disallowed due to the failure to deduct TDS. The Tribunal's decision highlighted the importance of understanding the nature of services and their classification under the Income Tax Act for TDS purposes.