AI Drafter 
TaxTMI 
TaxTMI 
2020 (9) TMI 665
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....in the circumstances of the case and in law, the Ld. CIT(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. ....
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.... Selling Expenses in the Profit & Loss Act as under- SCHEDULE O: Administrative and Selling expenses- Statement of Selling: 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 Pharmar....
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....ection 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable uder 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:" 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 acc....
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....a P. Ltd. (2014) 369 ITR 63 (Karri) exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria held that the parent company has not made available to the assessee the technology or the technological services which was required 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 Lim....
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....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." > Decision in case of JDIT(Int Tax) Vs.KRUPP VHDE GmbH[2009] 26DTK (Trib) 289 (Mum): [2010] 1ITR 614 (Mum)- "It was, 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 asse....
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....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 tie' > Decision of Kolkata Tribunal in the case of Batllvala&Karani Securities (India) vs. DCIT vide order dated 02.06.2016 held as under: "4.1. It was submitted that the subsidiaries incur certain expenditure on behalf of the assessee which are 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:- ....
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....vs relied upon by the Learned CITA in his order vide paras 7 to 12 were rendered prior to rendering of Hon'ble Supreme Court decision in GE India Technology case on 9.9.2010. Hence we don't deem it fit and appropriate to discuss those case laws for the purpose of adjudication 12.7. In view of the aforesaid findings, we have no hesitation in directing the Learned AO to delete the disallowance mode u/s 40(a)(i) of the Act in respect of payments made to foreign subsidiaries. Accordingly, the Ground Nos. 1 &2 raised by the assessee for the Asst Year 2008-09 are allowed." > '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 a....
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....the Apex Court is that all such payments made to non residents having income character assessable to tax in India are exigible to deduction of tax under the provisions' of section 195 of the Act. The expression used in section 195(1) of the Act is "chargeable under the provisions of the Act." Such payments made to the non resident which have 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. Following the same, we hold that where the assessee has reimbursed the expenditure which has been actually incurred by the payee, no withholding of tax u/s 195 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 Appell....
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....nt. It is submitted that the terms 'managerial', 'technical' or 'consultancy' do not find a definition in the Act. In absence of any specific definition, the said terms shall have to be interpreted based on their understanding in common parlance or a technical definition as is understood by the concerned people in that particular business / industry. In support of the above we rely on the following judicial pronouncements- > Hon'ble Supreme Court in case of DIT vs. A. P. Matter Maersk AS (2016) 383 ITR 1 (SC) has held as under- "Here the assessee succeeded as the HAT, by order dated 14.12.2012, allowed the appeal of the-assessee following decisions of the Madras High Court 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....
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....nagerial services. Further the Hon'ble Tribunal had also given an instance that in case a worker is instructed to place goods on a carrier in a particular manner, then the activities carried on by the worker cannot be held as managerial in nature since the worker is only executing tfie directions in the prescribed way. Further these activities cannot be construed managerial in nature even if the worker is applying his mind for carrying out the activities and is expected to be vigilant in carrying on such activities. > Decision of the Hon'ble Mumbai tribunal in case Rich Graviss Products P. Ltd. Vs. Addl. CIT (ITA No. 7772/Mum/2011) wherein the Hon'ble Tribunal at paragraph 7 relying on the decision rendered by Delhi bench of Tribunal in the case of Adidas Sourcing Ltd. 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. ....
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....w customers from the Russian market. As the services are rendered outside India by a Non Resident company which does not have any business connection in India there is no element of income tax applicable on such payments and thus provisions of section 195 of the Act do not apply: In support of the above we rely on the following judicial pronouncements- The Hon'ble Supreme Court in case of CIT v. Toshoku Ltd (125 ITR 525)(SC) has held that, "commission earned by the non-resident sales agent for the Indian exporter, wherein such non-resident was rendering services from outside India does not accrue in India. Held, That the non-residents did not carry on any business operation in the taxable territories; they acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted 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 e....
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....e from Business & Profession as- i. The payment made by the appellant was towards reimbursement of expenses incurred without any markup has no element of income under the Act and hence not chargeable to tax. ii. The payment made to Non Resident/Foreign company towards services rendered outside India, payee has no business connection in India, thus the said payment is not an income under the Act and hence not liable for tax deduction under section 195 of the Act. iii. 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(1) (vii) of the Act and thus not chargeable to tax as "Fees for technical services " in India, iv. The payment towards export commission made to M/s Pharmark Consulting FZE, is not taxable in India as services are rendered outside India and payee has no business connection 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....
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....se 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 cr 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, " 7.7 The AO in his order observed that as per clause 1 of agreement, the appellant appoints Pharmark as its exclusive agent to organize sales structure by recruiting field personnel's in Russia an take care of their expenses and salaries including local tax laws, which the assessee will reimburse these expenses to Pharmark on monthly basis. As per clause 2 of agreement Pharmark will be responsible for liasioning with all Government authorities for any developmental activity of the business. Further, 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 me....
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....'ble Delhi High Court in case of J.K. (Bombay) Ltd. v. CBDT (118 ITR 312) had referred to an article on 'Management Sciences' in Encyclopedia 747, wherein it is stated that the management in organizations include at least the discovering, developing, defining and evaluating the goals of the and the alternative policies that will lead towards the 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. The activities carried out by M/s Pharmark Consulting FZE, UAE do not fall in the- nature of managerial services or any fees for technical services as per section 9(l)(vii) of the Act. All these services are akin to sales agent services. The said services cannot be treated as managerial in nature but in fact they are in nature of market support services. The reimbursement of sales promotion expenses are on actuals having no element of markup/profit, thus there is no income element included in these payments. Reimbursement of expenses does not partake the nature of income in the hands of the payee ....
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....such activities. 7.11 Further, the Hon'ble Mumbai Tribunal in case of Rich Graviss Products P. Vs. Addl. CIT (ITA No. 7772/Mum/2011) in his decision the Hon'ble Tribunal at paragraph relying on the decision rendered by Delhi bench of Tribunal in the case of Adidas Sourcing Ltd. 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. Decision of the Hon'ble Delhi Tribunal in case of Adidas Sourcing Ltd. Vs. Asst. DIT (2013)(55 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 of J.K. (Bombay) Ltd. v. CBDT (118 ITR 312) 7.12 The assessing officer has relied on the decision of Hon'ble Supreme Court of India in the case of Transmission Corporation of A.P vs CIT 239 ITR 587. In the case of Transmission Corpora....
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.... which is to be considered as business income was not taxable in India. Further the Hon'ble ITAT Chandigarh in case of Fortis Healthcare Ltd., Mohali vs. DDIT(IT) vide ITO No. 1035/Chd/2010 dated 25th December 2010 has also decided these issues after consideration of Transmission Corporation of A.P. It is 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 not 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....
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.... of such payments u/s 195 of the Act. Following the same, we hold that where the assesses has reimbursed the expenditure which has been actually incurred by the payee, no withholding of tax u/s 195 of the Act is warranted, as the same has no element of income embedded in the same." 7.14 Further, he Hon'ble ITAT has also decided similar issue in case of Mahindra and Mahindra Ltd Vs Dy. CIT [2009] 313 ITR (AT) 263 (Mum)(SB) : 22 DTR (Trib) 361 as under- " It was, inter alia, held that reimbursement of expenses cannot be considered to be in the nature of come and therefore, it is not income by way of fees for technical services. It was further held that when a particular amount of expenditure is incurred and that sum is reimbursed as such, that cannot be considered as having any part of it in the nature of income. Any payment in order to be brought within the scope of income by way of fees for technical services under section 9(1)(vii) should be or have at least some element of income in it. Such payment should involve some compensation for the rendering of any services which can be described as income in the hands of the recipient. In other wor....
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....logy Private Limited Vs. CIT 327 (ITR) 456 and issued instructions No. 02/2014, dated 26.02.2014 on applicability of section 195 of the Act. The matter has been examined in the Board and accordingly, in exercise of powers vested under Section 119 of the Act, the Board hereby directs that in a case where the assessee fails to deduct tax under section 195 of the Act, the Assessing Officer shall determine the appropriate proportion of the sum chargeable to tax as mentioned in subsection (1) of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act, and the appropriate proportion of the sum will depend on the facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion. It is clear from said instructions that all such payments made to non residents having income character assessable to tax in India are exigible to deduction of tax under the provisions of section 195 of the The expression used in section 195(1) of the Act is "chargeable under the provision of the Act." Such payments made to the....
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....itted that AO has read the agreement clause-wise and line by line and misinterpreted the main object of the agreement. He submitted that assessee has entered into an agreement with its agent who will coordinate with the team in Russia and achieve the target/turnover for the assessee. The staff appointment by the Payee in Russia is only for managing its commission business. He submitted that the managerial service is different to technical services and in the commission agency there is no requirement of technical knowledge or technical skill. The agent has to procure the order and follow-up with the payment. The managerial skill used by payee is for his business. For this purpose, he relied on the decision in the case of Panalfa Auto electric (2014) 272 CTR 117 (Delhi). Further he submitted that the transaction does not fall under DTAA as it is a business income. He submitted that there is similar issue in assessment year 2014 - 15 and he supported the findings of the Ld CIT(A) in both the assessment years. 11. In the rejoinder, learned DR submitted that if the issue is not falls under section 295 then it will fall under section 40(a)(i) of the Act and submitted that assessee ....