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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘D’
Before: SHRI RAJPAL YADAV & SHRI PRADIP KUMAR KEDIA
PER RAJPAL YADAV, JUDICIAL MEMBER : Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-9, Ahmedabad dated 4.7.2017 passed for the Asstt.Year 2013-14.
The grounds of appeal taken by the assessee are not in consonance with the Rule 8 of the Income Tax (Appellate Tribunal) Rules, 1963 - they are descriptive and argumentative in nature. In brief, it has taken seven grounds of appeal; out of these seven grounds common issue involved in ground nos.1 to 4 and 6. Grievance of the assessee in these grounds of appeal is that the ld.CIT(A) has erred in confirming the
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disallowance of Rs.2,57,73,053/- which was disallowed by the AO under section 40(a)(i) of the Income Tax Act on the ground that the assessee has failed to deduct TDS under section 195 of the Act while making payment to the non-resident commercial agent.
Brief facts of the case are that the assessee has filed his return of income electronically on 30.9.2013 declaring total income at Rs.40,73,120/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Act was issued on 3.9.2014 which was duly served upon the assessee. On perusal of accounts, it revealed to the AO that the assessee has been earning income from salary. He was running a proprietorship concern in the name and style of “Bion Healthcare”. He has traded/exported medicines through this proprietorship concern. The AO thereafter observed that on perusal of the accounts it revealed that the assessee has debited expenditure of Rs.1,79,73,760/- being payment made to CACMILSA/Carlos Avila Guilermo Celi. The ld.AO has noticed details of this payment as under: Nature of expenditure Head of Expenditure in P & L FCN $ 1NR Local Logistic cost at Ecuador Logistic cost @8% 60,765 3,372,438 Supply of goods to Various Distribution & Admin cost @10% 75,956 4,215,547 Hospital across Ecuador Custom clearance at Ecuador Importation & Custom clearing 75,956 4,215,547 Liasoning and Commission Commission @15% 113,9 6,170,229 326,6 17,973,760
Apart from the above, the ld.AO further found that the assessee has debited certain payments viz. Rs.77,99,293.46/- (Rs. 5,56,543.46/- on 16.01.2013 and Rs. 72,42,750/- on 20.02.2013) in ledger of Marketing expenses against Carlos Avila Guilermo Celi. As per narration
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mentioned in the ledger furnished by the assessee during the course of assessment, these payments under the head marketing expense were made for "Market Survey Charges for three months" and "Registration fees, edisseur evaluation & analysis charges, transaction and notorization of dossiers, market analysis & tender survey" respectively. Thus, total payment of Rs. 2,57,73,053/- has been made to CACMILSA/ Carlos Avila Guilermo Celli.
The ld.AO took note of the total payments of Rs.2,57,73,053/-. The ld.AO has confronted the assessee as to why claim of this expenditure should not be disallowed. In response to the query of the AO, the assessee filed detailed submissions. We will take note of the same in subsequent part of this order. The ld.AO has reproduced submissions made by the assessee in para 5.4 on page nos.8 to 16. Thereafter, he disallowed the claim of the assessee by making very brief discussion on page no.17 in para 5.6 to 7. The finding of the AO reads as under:
“5.6 Significant facts from the above agreement are being summarized below:
Shri Ketan Patel, on behalf of Bion Healthcare (referred to as "the guardian" in the agreement) has entered into the agreement with Mr. Carlos G.Avila Cell (referred to as "Commercial counsel/Business advisor" in the agreement).
The commercial advisor has agreed to provide services which consist of all the support management, general advice and other actions required during the hiring process or supply of drugs needed in Ecuador.
In addition to advisory activities the commercial advisor will make efforts to complete administrative process and signing of the contract. Further delivery of stock as per requirement of IESS will a/so be undertaken by the commercial advisor.
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The commercial advisor will receive 45% of the contract amount for the services provided.
5.7. Fees for Technical Services (FTS) have been defined in Section 9 itself under clause [vii] as any consideration (including lump sum) for rendering of any managerial, technical or professional services including the services of technical or other personnel. From the above discussion it is clear that the agreement is basically for hiring of services and it is not a mere case of CACMILSA acting as commission agent of the assessee. Rather. CACMILSA is providing a bunch of services which are predominantly in the nature of managerial, technical and consultancy services, which fall within the ambit of "Fees for Technical Services" for the purpose of Income Tax Act. From the website http://www.cacmilso.com it can be seen that CACMILSA is an agency which specializes in Pharmaceutical Sector. Assessee has booked the payment under various heads rather than making payment in lump sum as stipulated in the agreement. Therefore, TDS was required to be deducted on such payments under section 195. In the absence of the same the concerned expenses are liable to be disallowed under section 40(a)(i) of the Act. Hence, payments of Rs.2,57,73,053/- made to CACMILSA (Mr. Carios G. Avila Celi) are being disallowed. Penalty u/s. 271(1)(c) is separately initiated for furnishing inaccurate particulars of income.”
Dissatisfied with this order of the AO, the assessee carried the matter in appeal before the ld.CIT(A) who reproduced the assessment order as well as submissions of the assessee, but concurred with the AO. Brief finding recorded by the ld.CIT(A) reads as under:
“5.7 In the rejoinder to the remand report, appellant has again mentioned that services that were provided by CACMILSA in the form of commission agent and hence chargeability to tax did not arise as per section 9 of the Act. I do not agree with the contention of the appellant. The services that have been provided by CACMILSA to the appellant have been mentioned in the agreement that was entered between the two. The first clause of the agreement itself mentions that Commercial Advisor that is CACMILSA has agreed to provide the services which consist all the support, management, general advice and other actions required during the process of supply of drugs to the Government of Ecuador,
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Further, CACMILSA was not an ordinary commercial agency. It has specialization in the Pharmaceutical sector. Director himself was person from Pharmaceutical sector and had good contacts in the said sector in Ecuador as well as at International level. As the services provided by CACMILSA were specialized in nature and in the field of Pharmaceutical sector, it had enabled the appellant to fulfill his contractual obligation for providing drugs to the Government of Ecuador. Hence the services are considered to be managerial, technical and consultancy services in nature and hence covered under the definition of "Fees for Technical Services". As per the remand report of A.O. website of CACMILSA also reflects the specialized nature of services in the Pharmaceutical sector. It was not a case that CACMILSA or Mr.Carlos Avila Guilermo Cell were the commission agent of the appellant and had bagged the contract from Government of Ecuador for the appellant but they were providing managerial and consultancy services for fulfilling the contractual obligation of the appellant post awarding of the contract, in return of their services, they were paid as per the agreed terms and commission was paid. Further, it is also noticed that Government of Ecuador has not entered into Double Taxation Avoidance Agreement (DIM) with Government of India till end of the year under consideration. Hence, I am of the considered opinion that appellant should have deducted tax at source on payment of Fees for Technical Services offered by CACMILSA/its director, Carlos Avila Guilermo Celi,
5.8 The second component of the payment made by the appellant is of Rs,77,99,293/-, The A.O, has made addition of this amount u/s.40(a)(i) for the reason that payment made for services obtained were in the nature of Fees for Technical Services. It is seen from the order of assessment that the said payment was debited in the ledger of marketing expenses against the name of Mr.Carios Avila Guilermo Celi. However, A.O. has observed that these payments were under the head marketing expenses but were incurred for market survey charges for three months and Registration fees, edisseur evaluation & analysis charges, transportation and notarization of dossiers, market analysis and tender survey. It is apparent from the narration mentioned that the appellant has spent this amount for market survey as well as consultancy services which lead to the award of contract from Government of Ecuador to the appellant. The expenditure made on market survey and consultancy services purely fall within the domain of 'Fees for Technical Services.' As the agency namely CACMILSA was specialized agency in the Pharmaceutical sector, it was able to provide correct consultancy services to the appellant which has
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resulted into awarding of contract to the appellant by Government of Ecuador. Therefore, I do not think that payment for market survey and consultancy services made to CACMILSA as a commission agent but were made on obtaining consultancy services on marketing of drugs to the said country. In the light of above referred facts, payment made to CACMILSA for Rs.2,57,73,053/- (Rs.1,79,73,760 + Rs.77,99,293} are in the form of payment for Fees for Technical Services the appellant was obliged to deduct tax at source u/s.195 of the Act. On failure of the appellant to deduct tax at source, A.O. has correctly invoked provisions of section 40(a)(i) of the Act and has disallowed the amount of Rs.2,57,73,053/-correctly. Hence, the said addition is hereby confirmed. These ground of appeals are dismissed.”
While impugning the orders of the Revenue authorities, the ld.counsel for the assessee contended that Ecquadorian Institute of Social Security (“IESS”) had entered into a contract with the assessee for supply of 62 drugs. He drew our attention towards copy of such agreement available at page no.309 of the paper book. He took us through certain clauses of this agreement which are relevant for adjudicating this controversy. Before construing and assessing impact of this contract on the controversy in hand, we deem it appropriate to take note of certain clauses which were referred by the ld.counsel for the assessee at the time of hearing. Such clauses read as under:
“3.01. The IMPORTER undertakes to carry out all the legal and logistical procedures for the delivery of the imported drugs in the warehouses of the different Health Medical Units of IESS and the Peasant Insurance, in accordance to the schedule it will deliver to the National Management Coordination of the Medical Units of IESS. …. …. …. …. …. …. (a) “IMPORTER" is the company that supplies the drugs, which were authorized by the Public Health Ministry to be imported by the IESS.
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…. …. …. …. …. ….
6.03 Other Obligations: The IMPORTER will pay the notarizing fees, the contract registry fees, the cost of-the copies of the contract that must be delivered to the IESS, the cost of storage, transportation and in general all the expenses derived from the granting of the contract. …. …. …. …. …. ….
14.01 The IMPORTER undertakes to deliver the drugs acquired through this CONTRACT in all Units of IESS in accordance with the Schedule that for the effect will be delivered to the Coordination of Management of the Medical Units of IESS. …. …. …. …. …. ….
The IMPORER must have a physical space specifically for drugs for the proper storage of the medicines that must be distributed to each of the nationwide Medical Units of the IESS in accordance with the schedule; if required, it must have a cold chain and space in accordance with standards. …. …. …. …. …. ….
23.02 All expenses derived from this contract will be home by the IMPORTER. In case of termination of mutual agreement, the payment of the notarial rights and of the copies will be at the expenses of the IMPORTER.
…. …. …. …. …. ….
Taking us through complete agreement, the ld.counsel for the assessee appraised us that basically this agreement contemplates that foreign country has accepted its requirement for import of certain drugs,
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and in order to determine that requirement a brief background has been given in the contract itself as to how the requirement has been assessed by the contractee, and how the contract has been executed. According to the ld.counsel for the assessee, though this aspect is not relevant for adjudication of the controversy in hand, but in order to demonstrate that, this contract was entertained with the assessee by the Government of Ecuador at arm’s length price. Both the parties are independent without having influence over each other, rather one of the parties is Sovereign State. Thereafter, he specifically took us through the role required to be played by the importer i.e. the assessee under the agreement. The assessee undertook to carry out geographical, logistical support for the delivery of imported drugs in the warehouse of different health units of “IESS”, and for this purpose, the ld.counsel for the assessee drew our attention towards clause 3.01 of the agreement extracted (supra). Similarly, the assessee was under the obligation that it would pay notarizing fees, contract registration fees, cost of the copies of the contract, the cost of storage, transportation etc. The fourteenth condition in the contract relates to delivery method and place of reception. The importer, i.e. assessee undertook to deliver the drugs acquired through this contract in all the medical units of “IESS”; in accordance with the schedule that for the effect, will be delivered to the National Coordination of Management of the medical units of “IESS”. The assessee was also required to provide space for storage, repackaging and all other necessary logistic. The ld.counsel for the assessee emphasized that the AO has not raised any dispute about the execution of this contract as well as export of the drugs. The assessee has not claimed any loss, rather shown profit in this activity. Now, in order to
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carry out all these activities/works, the assessee was required a physical presence in Ecuador. Hence, he has entered into a contract with non- resident agent, viz. CACMILSA through its director, Carlos Avila Guilermo Celi. Agreement between the assessee and CACMILSA has been extracted by the AO in the assessment order as well as by the ld.CIT(A). Both Revenue authorities have not doubted incurrence of expenditure or payment made by the assessee. They are of the view that since CACMILSA has provided managerial and consultancy services, which falls within the scope of managerial, technical and consultancy services as per the meaning of section 9 of the Income Tax Act, and therefore, element of income assessable in India is involved in such payments. The assessee should have deducted TDS before making such payments. Since the assessee failed to deduct TDS, therefore, expenditure deserves to be disallowed to the assessee. The ld.counsel for the assessee contended that both the Revenue authorities have failed to construe the meaning of expression “managerial, technical and consultancy services” employed in Explanation to section 9 while harping that such payment involved such services. He pointed out that had any consultancy/opinion given by CACMILSA being used by the assessee within India for enhancing its business, then payment qua that could be at most in the field of managerial and consultancy services. But here the payments have been made for fulfillment of obligations of different services required to be rendered outside India. These obligations were of the assessee under the agreement entered into with Government of Ecuador for the supply of drugs. The CACMILSA is only a service provider in different fields, i.e. delivery, logistics, packaging etc. The assessee has bifurcated the payments made to such
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CACMILSA under four different categories i.e. local logistic cost at Ecuador, supply of goods to various hospitals, custom clearance at Ecuador, liaisoning and commissioning. Three out of four components of the bifurcation extracted (supra) represent reimbursement. He pointed out that bifurcation of the expenses have been reproduced by the AO. Out of four, three are in the nature of reimbursement of expenditure viz. (a) local logistic cost at Ecuador, (b) supply of goods to various hospitals across Ecuador, and (c) custom clearance at Ecuador. How they can be part of any consultancy or managerial services etc.? Foreign agent has no permanent establishment in India. He has not provided any services in India. Therefore, any commission paid by the assessee to the foreign agent for the purpose of duty outside India would not be taxable in India and no TDS is required to be deducted. For buttressing his contentions, he relied upon the judgment of Hon’ble Madras High Court in the case of CIT Vs. Orient Express, 56 taxmann.com 331 (Madras). In this case, the assessee was manufacturer and exporter of leather garments. It procured export orders outside India from its foreign agents on commission basis. The agents have not extended any activity or services in India. Therefore, Hon’ble High Court has held that services rendered by non-resident agent for completion of export commitments would not fall within the definition of fee for technical services. Copy of this judgment has been placed on record by the ld.counsel for the assessee at page no.289 of the paper book. He further relied upon order of the ITAT in the case of UPS SCS (Asia) Ltd. Vs. ACIT, 18 taxmann.com 302 (Mum). Copy of this judgment has been placed on page no.295 of the paper book. Apart
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from these two decisions, the ld.counsel for the assessee has relied upon the following decisions: i) DCIT Vs. Gujarat Microwax (P) Ltd., (2018) 96 taxmann.com 644 (Ahd); ii) CIT Vs. Torrent Pharmaceuticals Ltd., (2013) 29 taxmann.com 405 (Guj); iii) CIT Vs. Cadila Healthcare Ltd., (2013) 31 taxamnn.com 300 (Guj); iv) Sun Pharmaceutical Industries Ltd. Vs. ACIT, (2016) 70 taxmann.com 94 (Ahd);
On the strength of the above, the ld.counsel for the assessee contended that no disallowance deserves to be made in the hands of the assessee. On the other hand, the ld.DR relied upon orders of the Revenue authorities.
We have duly considered rival contentions and gone through the record carefully. The short question involved is, whether payments made to non-resident agency, CACMILSA would fall within the ambit of “fees for technical services” as per definition given in Explanation 2 to section 9(1)(vii) of the Income Tax Act. If yes, then on account of non-deduction of TDS under section 195 of the Act, payments are not allowable as deduction under section 40(a)(ia) of the Act. It emerges out from the record that the assessee was awarded tender by Ministry of Ecuador for supply of medicines to its 300 hospitals across country. The assessee had hired a local agency from Ecuador (Director Carlos Avila Guilermo Celi) in order to undertake various activities to fulfill conditions of the tender. We have extracted extensively different clauses of the agreement entered into by the assessee with Ecuador government. A perusal of those clauses along with finding recorded by the ld.Revenue authorities,
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it would reveal that these activities included liaison with the local authorities, registration of products at Ecuador, export of goods to Ecuador, clearing of goods from custom authorities, storage in warehouse, re-packaging the goods hospital wise and physical delivery of goods to various hospitals across the country. The assessee had entered into an agreement on 21.11.2012 with CACMILSA. As per this agreement, appellant was required to make 45% of the total value of the order from the Government of Ecuador to CACMILSA in consideration of the activities which it has to undertake in Ecuador. While explaining his position before the ld.CIT(A), the assessee has pointed out that the Director, Mr. Carlos Avila Guilermo Celi was an ex-employee of leading pharmaceutical company over there. He had extensive expertise in the pharmaceutical companies and good contact in the said sector. Therefore, for fulfillment of the contractual obligation with Government of Ecuador the assessee had hired services of CACMILSA. According to the assessee, the payment made to CACMILSA cannot be considered as an income or deemed income as defined under section 9 of the Income Tax Act and does not chargeable to income-tax in India. On the other hand, stand of the AO which concurred by the CIT(A) was that a perusal of this agreement would indicate that CACMILSA provide services of specialized nature in the field of pharmaceutical sector, hence it falls within the ambit of expression “management, technical and consultancy services” used in Explanation 2 to section 9.
At this stage at the cost of repetition we would like to take note of the bifurcation of the expenditure given by the assessee and noticed by the Revenue:
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Nature of expenditure Head of Expenditure in P & L FCN $ 1NR Local Logistic cost at Ecuador Logistic cost @8% 60,765 3,372,438 Supply of goods to Various Distribution & Admin cost @10% 75,956 4,215,547 Hospital across Ecuador Custom clearance at Ecuador Importation & Custom clearing 75,956 4,215,547 Liasoning and Commission Commission @15% 113,9 6,170,229 326,6 17,973,760
On behalf of the assessee, a large number of decisions were relied upon by the ld.counsel for the assessee. We find that ITAT, Mumbai in the case of UPS SCS (Asia) Ltd. Vs. ACIT (supra) has made analysis of the scope of Explanation-2 appended to section 9 of the Act. This Explanation reads as under: Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
A bare perusal of the above provision would indicate that “fee for technical services” means any consideration for rendering of any “managerial, technical or consultancy services”, but does not include the consideration for any construction, assembly etc. A perusal of the order of the ld.CIT(A) would indicate that basically, the ld.CIT(A) has construed the agreement between assessee and the CACMILSA for harping a belief that services rendered by the foreign agent was in the nature of “managerial, technical or consultancy services”. For this purpose, the ld.CIT(A) has observed that first clause of the agreement itself mention that commercial advisory i.e. CACMILSA has agreed to provide services which consisted of support, management, general
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advice and other actions require during the process of supply of drugs to the Government of Ecuador. To our mind, the ld.Revenue authorities have lost sight of the scope of agreement between the assessee and the Government of Ecuador. It is pertinent to observe that we have to keep in mind that there is no doubt with regard to execution of the agreement with the Government of Ecuador for supply of drugs. The assessee has earned profit on such export and offered it for tax. In this background, let us evaluate what were the obligations at the end of the assessee to fulfill the contract with the Ministry of Ecuador. It was required to register products in Ecuador, export of goods from India to Ecuador, clearing of all the goods from custom authorities, storage in warehouse, repackaging goods hospital wise and physical delivery. In order to fulfill all these activities, liaison with the local authorities according to the requirement of drugs, has to be kept. Now, the assessee has given bifurcation of the expenditure. There is no doubt that the expenditure must have been incurred for fulfillment of these obligations. The ld.CIT(A) without appreciating the nature of contract with Government of Ecuador and its fulfillment in a sweeping manner took these activities performed by the commercial advisor as “managerial, technical or consultancy services”. Ordinarily, “managerial services” means managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done, and if overall planning aspect is missing, and one has to follow a direction from the other for executing particular job in a particular manner, then, it could not be said that the former is managing that affair. Similarly, as
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far as expression “fees for technical services” being consultancy are concerned, it would be applicable if some consideration is given for rendering some advice, opinion etc. for the execution of any work. Now consideration was equivalent to 45% of the value of the order from Ecuador. Out of this 45%, 8% was allocated towards logistic cost of Ecuador; 10% towards supply of goods to various hospitals i.e. cost of distribution and operation; 10% was allocated towards custom clearance i.e. 10% of the invoice value of import and custom clearance etc.; 15% for liaison and commission for the purpose of fulfillment of these activities. According to the assessee, these are simplicitor reimbursement of actual expenditure as well as commission to foreign agents for performing these activities on behalf the assessee. The assessee has not debited any other expenditure separately in his account, more so, the AO himself has not raised any doubt about incurrence of expenditure. How it could be said that the expenditure debited under these heads amounts to some technical services or managerial services paid by the assessee ? It is also pertinent to observe that all these services have been rendered in Ecuador out of Indian territory. No information supplied by the commercial agent has been used except to some extent the market research of pharma products in Vietnam given by said advisor. We will be dealing with this issue in the latter part of this order. The ITAT in the case of CIT Vs. Mahindra & Mahindra Ltd., in ITA No.2811/MUM/2003 has held that in respect of reimbursement of expenses, there is no obligation to deduct tax at source. For this conclusion, ITAT has relied upon the decision of Hon’ble Bombay High Court in the case of CIT Vs. Siemens. 310 ITR 320 (Bom); ABB Ltd., In re, 322 ITR 564 (AAR) and ITO
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(Intl. Taxation) Vs. Prasad Productions Ltd., 125 ITD 263 (Chennai)(SB). Copy of this decision has been placed on page no.247.
At the time of hearing, the ld.counsel for the assessee relied upon the judgment of Hon’ble Gujarat High Court also in the case of Economic Traders (Guj) Pvt. Ltd. Vs. Pr.CIT, Tax Appeal No.713 of 2016. In this case, the AO has disallowed payment of various commission with aid of section 40(a)(ia) of the Act for non-deduction of TDS under section 195 of the Act. The Tribunal has deleted such disallowance. When the matter went upto the Hon’ble High Court, the Hon’ble High Court has held that if foreign commission is not assessable in India, then no TDS was required to be deducted. The Hon’ble Court put reliance upon the decision of Hon’ble Supreme Court it the case of GE India Technologe Centre P.Ltd. Vs. CIT, 327 ITR 456. In other words, for attracting section 195, there should be an element of income involved in the payment made by the assessee to a foreign agent. If the element of income is not involved, then TDS is not required to be deducted. The ld.counsel for the assessee has made reference to the decision of Hon’ble Madras high Court in the case of CIT Vs. Orient Express, (2015) 56 taxmann.co 331 (Madras). In that case the assessee was engaged in manufacturing and exporting of lather garments. It has paid commission to non-resident agent which was treated as FTS by the ld.AO. While concurring with the Tribunal, Hon’ble Court rejected the contentions of the Revenue. Hon’ble Court has recorded the following finding: “7. On a reading of section 9(1)(vii) of the Act, we are not inclined to accept the plea taken by the learned senior standing counsel appearing for the Revenue that commission paid by the assessee to the non-resident
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agent would come under the term "fees for technical services". In the case on hand, for procuring orders for leather business from overseas buyers - wholesalers or retailers, as the case may be, the non-resident agent is paid 2.5 per cent. commission on FOB basis. That appears to be a commission simpliciter. What is the nature of technical service that the so-called non- resident agent has provided abroad to the assessee is not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing export obligation is an incident of export and, therefore, the non-resident agent is under an obligation to render such services to the assessee, for which commission is paid. The non-resident agent does not provide technical services for the purposes of running of the business of the assessee in India. The services rendered by the non- resident agent can at best be called as a service for completion of the export commitment. We are, therefore, of the considered opinion that the commission paid to the non-resident agent will not fall within the definition of fees for technical services.
Apart from the above, there are other large numbers of decisions referred by the ld.counsel for the assessee. Unanimous opinion of Hon’ble High Court as well as ITAT in all these decisions is 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”. In other words, 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 of Rs.1,79,73,760/-.
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As far as other components of payments are concerned, we find that it is interconnected with ground no.5 wherein the assessee has pleaded that the ld.CIT(A) has erred in confirming the disallowance of Rs.19,55,700/-. The bifurcation of these amounts noticed by the CIT(A) in para-7 which reads as under:
“6. Market Expenses
During the year under consideration assessee has also debited following expenses under the head Marketing expenses.
Party name Date Narration in ledger Amount Allegens Co Ltd. 03.09.2012 Market research of 763200 new pharma products in Vietnam Alelgens Co Ld. 07.12.2012 Market research of 1192500 new pharma products in Vietnam Carlos Avila Guilemo 16.01.2013 Market Survey 556543 Celi charges for three months Carlos Avila Guilermo 20.02.2013 Registration fees, 7242750 Celi edisseur evaluation & analysis charges, translation & notarization of dossiers, market analysis & tender survey
At the time of hearing, the ld.counsel for the assessee submitted that Hon’ble Gujarat High Court in the case of CIT Vs. Torrent Pharmaceuticals Ltd., 29 taxmann.com 405 (Guj) has laid down that expenses incurred by the assessee in foreign country for registration of its products for marketing and promoting sales is to be allowed as revenue expenditure. He placed on record judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Torrent Pharmaceuticals (supra).
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Hon’ble High Court took note of the finding recorded by the Tribunal, and thereafter laid down as under: "Further, these payments are made to drug regulatory authorities in various countries for the products market in the respective countries. Furthermore, these fees are to be paid on recurring basis depending upon the validity of the various registrations. The fees have been paid on expiry of the registration and out of total payment of Rs. 8,03,706/- is in respect of product registration in Poland. Likewise payments have been made in Vietnam, Russia, Ghana and China etc. We find that the exports over the years have increased from the export sale of Rs. 26 crores in financial year 1998-1999 to the exports have grown to Rs. 160 crores in financial year 2005-2006 an increase of more than 600%. Accordingly, these expenses are rightly allowed by CIT(A) and we confirm the same." 5. The findings of the Tribunal are justified on both the issues. The garden expenditure was for the purpose of maintaining garden to control the pollution. The company had put up an affluent treatment plant and pollution used to generate because of release of pollutants. The maintaining a garden helped in controlling pollution arising from the pollutants. It cannot be gainsaid that the expenses for garden had nexus with business activity. It can well be treated for business purpose and can be claimed as revenue expenditure. Similarly the expenses for foreign country registration was for business purpose only, because the same helped the assessee in marketing its products in the foreign countries and promoting the sales.”
Respectfully following the above judgment of the Hon’ble 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.
So far as market research of new pharma products and market survey charges debited by the assessee are concerned, those are the information which will be used by the assessee for exploring new business venture and enhancing its capacity to conduct new business.
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Certainly, such information will fall within the managerial, technical consultancy services, therefore, the assessee was required to deduct TDS on a sum of Rs.11,92,500/-; and Rs.7,63,200/- paid on 7.12.2012 and 3.9.2012 to Allegens Co.Ltd., and Rs.5,56,543/- paid to Mr. Carlos Avila Guilermo Celi on 16.1.2013. Since the assessee has failed to deduct TDS on these payments, they deserve to be disallowed.
In view of our above discussion, appeal of the assessee is partly allowed.
In the result, appeal of the assessee is partly allowed.
Pronounced in the Open Court on 5th April, 2019.
Sd/- Sd/- (PRADIP KUMAR KEDIA) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER