ACIT -25(2), MUMBAI vs. M/S. GEPACH INTERNATIONAL, MUMBAI

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. "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 195 of the Act on payments made to M/s Pharmark consulting FZE, UAE on account of reimbursement of expenses."

6. "The appellant prays that the order of Ld.CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored."

7. "The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary.'

4 & 5942/Mum/2018 M/s Gepach International 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 the year along with agreement entered with its agent in UAE, a non-resident/foreign company and with the justification that why Provision of Section 195 of the Act are not 5 & 5942/Mum/2018 M/s Gepach International applicable in assessee’s case. The assessing officer rejected the submissions of the assessee and proceeded to disallow the reimbursement of expenditure under section 40(a)(i) of the Act.

6. Aggrieved with the above order, assessee preferred an appeal before First Appellate Authority and made detailed submission. For the sake of clarity, it is reproduced below:-

Ground No. 3- Disallowance of Rs. 2,16,41,5567- on account of reimbursement of Sales Promotion expenses under section 40(a)(i) of the act- Facts - The Appellant has claimed sales promotion expenses of Rs. 2,16,41,5 56/- under Schedule O 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 4,80,09,622.27 Total Details of Sales Promotion Expenses- Pharmark Consulting FZE Reimbursement of Expenses 2,15,01,469 Advertisement Expenses 1,12,232 Gepach Representative Office (Russia)

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 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 Rs. 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 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 and also pays commission @ 5% on export sales. During the year the Appellant paid a total sum of Rs. 2,15,01,469/- to M/s Pharmark Consulting FZE towards reimbursement of expenses incurred by them for marketing and sales promotion activities and export commission on sales made in Russia. As regards AO's contention that TDS provisions of section 195 of the Act are applicable on the payment made to M/s Pharmark Consulting FZE, we submit that, no tax is required to be withheld in respect of such payments as the said payment is in the nature of reimbursement of 7 & 5942/Mum/2018 M/s Gepach International expenses and export commission which is not chargeable to tax in India and it is not in nature of fees for technical services. In support of our above contention, we submit as under-Section 195(1) of the Act reads as under-"Other sums. 195. (I) ^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 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 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.

8 & 5942/Mum/2018 M/s Gepach International 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 therefrom, under the provisions of Chapter XV1I- B of the Act. In other words, no tax will be deductible at source at the time of payment or reimbursement of the aforesaid expenses by the payer or the tax-deductor to the payee or tax-deductee. In the case of the Appellant as the payment 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. In support of the above werelv on the following judicial pronouncements- > Decision in case of AT& S India Pvt. Limited vs. DCIT (ITAT Kolkata)dated 29* January 2015 - S. 9(1)(vii): Reimbursement of expenditure under cost-sharing agreement does not constitute "income" and there is no obligation to deduct TDS u/s 195 reads as under- A perusal of the decision of the Supreme Court in Tejaji Farasram KharawaUa Limited (1967) 67 ITR 95 (SC) clearly shows that Supreme Court has categorically held that the reimbursement of the actual expenses would not be taxable in the hands of the person receiving the reimbursements. The Karnataka High Court in a recent judgment in the case o fDIT v. Sun Microsystems India 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.

9 & 5942/Mum/2018 M/s Gepach International > 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 Limited vs. DCIT reported in 10 SOT S96 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, was not of the nature of payment covered under section 194J, requiring the assessee to deduct tax at source therefrom." > Decision in case of Mahindra and Mahindra Ltd VsDy.CIT [2009] 313 ITR (AT) 263 (Mum)(SB) : 22 (Mum)(SB).- It was inter alia, held that reimbursement of expenses cannot be considered to be in the nature of income 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 words, the component of income must be present in the total amount of fees paid for technical services to constitute an item falling under section 9(l)(vii):Where the expenditure incurred is reimbursed as such •without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to 10 & 5942/Mum/2018 M/s Gepach International 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 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." > 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 assessee and do not involve any mark up. Besides, there was reasonable control mechanism in place to ensure that these claims were not inflated and the assessee fad furnished sufficient 11 & 5942/Mum/2018 M/s Gepach International evidence to demonstrate the incurring of expenses. There was, thus, no reason to make any addition to income in respect of the reimbursement of expenses." Without prejudice to the above we further submit that, if in your opinion there exists any element of income the same is not taxable in India, as there is no business connection in India, payee does not have any Permanent Establishment in India and the services have been rendered by payee., entirely outside 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. In support of the above we rely on the following judicial pronouncements- > Hon'ble Supreme Court in the case of G.E. India Technology v. CIT (327 ITR 456) vide order dated 10th September 2010 held as under- "(i)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 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:- (a) The payments are not for fees for technical services within the meaning of Article 13 / 12 of DTAA with UK and Singapore as 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.

12 & 5942/Mum/2018 M/s Gepach International (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 get taxed in India. Hence we hold that the payment made by the assessee to its subsidiaries is not chargeable to tax in India in the hands of the subsidiaries in India. The provisions of section 195(1) of the Act mandates a requirement that the income should be chargeable to tax in India to assume jurisdiction in India. In the instant case, it is proved beyond doubt that the subsidiaries do not have any income chargeable to tax in India and hence the decision rendered by the Hon'ble Apex Court in the case of GE India Technoology Centre P Ltd vs CIT reported in 327 ITR 456_(SC) supports the case of the assessee. This decision has been rendered after duly considering the case law vehemently relied upon by the Learned AO on the decision of the Hon'ble Apex Court in the case of Transmission Corporation of A.P. Ltd vs CIT reported in 239 ITR 587 (SC) vide para 10 of the judgement at pages. 465 & 466. We are also in complete agreement with the arguments advanced by the Learned AR that the various case la\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."

13 & 5942/Mum/2018 M/s Gepach International > '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 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 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 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 non-resident 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 Tribunal in ITO Vs. Prasad Production Ltd (supra) have held that where the payer has a bonqftde belief that no 14 & 5942/Mum/2018 M/s Gepach International part of the payment has income character, section 195 (1) would not apply.

17 & 5942/Mum/2018 M/s Gepach International 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. Vs. Asst. DIT (2013)(S5 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 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 managerial services. It was held that the Explanation to section 9(2) is not applicable. It was further held that the situation contemplated or clarified in the Explanation added by the Finance Act, 2010 was not applicable to the case of the assessee as the agents appointed by the assessee had their offices situated in the foreign country and that they did not provide any managerial services to the assessee. Section 9(l)(vii) deal with technical services and has to be read in that context. "Die agreement of procuring orders would not involve any managerial services. The agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services." Further as stated above, besides re-imbursement of expenses the payment also includes export commission paid to M/s Pharmark Consulting FZE for generating new 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:

18 & 5942/Mum/2018 M/s Gepach International 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 either accrued or arisen in India." The Hon'ble Delhi High Court in the case of CIT vs. EON Technology P. Ltd. (2011)(343 ITR 366)(DeL) has held that, non-resident commission agents based outside India rendering services of procuring orders cannot be said to have a business connection in India and the commission 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 activities, the assessee paid commission to its foreign agents for their services. The assessee submitted that the agents operated out of India and provided their services outside India and none of them had any office or place of profit or any other business connection in India. Thus, no part of the income of 19 & 5942/Mum/2018 M/s Gepach International the foreign agents arose in India and, consequently, no tax was to be deducted from the commission payments. On appeal by revenue, the tribunal held that where the export commission paid to a non-resident agent for services rendered outside India is not chargeable to toxin India favour of assessee. " Therefore considering the above facts, submission and judicial pronouncements the appellant prays to delete the disallowance of Rs. 2,16,41,5567- on account of reimbursement of sales promotion expenses under section 40(a)(i)from Income 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 and written /submission of the appellant, discussion of the AO in the assessment order and material available on record. The AO has disallowed the reimbursement of expense amounting to Rs. 2,16,41, 556/- u/s 40(a)(i) of the Act stating that appellant has not deducted TDS u/s 195 on payment of reimbursement of expenses made to M/s Pharmark Consulting FZE, UAE and hence he has disallowed reimbursement of sales promotion expenses of Rs. 2,16,41,556/-. Section 195(1) of the Act reads as under- 20 & 5942/Mum/2018 M/s Gepach International "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 as under- "5. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from wltatever source derived which — (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. " 7.6 From the aforesaid provisions of section 5(2)(b) of the Act, the place of accrual or arisal of income is the place where 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 cr from any business connection in India, or through or from any property in India, or through or from any asset or source 21 & 5942/Mum/2018 M/s Gepach International 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 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. Pharmark had used the reimbursements received from India to commercially exploit the employed personnel in Russia to maximize profits 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 Pharmark was only acting as an agent on commission basis and has not provided any managerial/technical service. Further the services provided by M/s Pharmark as per the agreement are as under- • To organize sales structure by recruiting field personnel's in Russia and take care of their expenses and salaries including local tax laws. • To liaison with all Government authorities for any development activity of the business.

22 & 5942/Mum/2018 M/s Gepach International • To register new products and make amendments to registered normative documents wherever necessary with the Ministry of Health, Russia and/or any other authority of that country. • To identify new customers, develop relations and generate business and also develop business from existing customers. 7.9 The Hon'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 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 there from, under the provisions of Chapter XVII-B of the Act. In other words, no tax will be deductible at source at the time of payment or reimbursement of the aforesaid expenses by the payer or the tax-deductor to the payee or tax-deductee. In the case of the Appellant as the payment 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 directions of the others for doing a specific 23 & 5942/Mum/2018 M/s Gepach International task. The word managing is wider in scope than the word executing. Accordingly, restricted services (i.e. if only execution is undertaken per the directions provided by another person) cannot qualify as managerial 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 the directions in the prescribed way. Further these activities cannot be construed as 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. 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 Corporation, a non-resident had entered into composite contract with the resident party making the payment. The said composite contract not only comprised supply or 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 arid machinery in India gave rise to income taxable in India. However, in this case M/s Pharmark has no business 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 24 & 5942/Mum/2018 M/s Gepach International 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 impart any information concerning technical, industrial, commercial or scientific knowledge exports or skill, nor rendered any managerial technical or consultancy services. The commission attributable to the services rendered cannot be regarded as royalty or fees for technical services and it was held that the same was not taxable under section 9(l)(vii). Similar issue was also considered by the Hon'ble Delhi Court in the case of Director of Income Tax vs. Sheraton International Inc. 31 JR 267 where certain payments for advertising, publicity, and sales promotion were considered and held that those payments cannot be considered as royalty or for technical services. Since the Non Resident does not have any PE in India, such income 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 (supra) 10. In Transmission Corporation's case [1999] 239 TTR 587 (SC) a non-resident had entered into a composite contract with tlie 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 25 & 5942/Mum/2018 M/s Gepach International 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."

8. Applying the above said ratio to the facts before us, the position of law as settled by 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 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 26 & 5942/Mum/2018 M/s Gepach International 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 words, the component of income must be present in the total amount of fees paid for technical services to constitute an item falling under section 9(l)(vii).Where the expenditure incurred is 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." 7.15 The Hon'ble ITAT, Mumbai also discussed 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 Technology v. CIT (327 ITR 456) the applicability of TDS u/s 195 is only on income part and not on entire amount of remittances. Further the AO relied on Circular No.715 dated 08-08-1995, wherein the Board has clarified various issues relating to TDS in Question and Answer form. However, the aforesaid circular is in nature of clarification on various questions raised on applicability of TDS and the said question pertains to raising of combined invoice for providing services as well as reimbursement of expenses without specifically stating separate amounts on the bill. Further the CBDT subsequently in 2014 accepting the Supreme Court decision in case of GE India Technology 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 27 & 5942/Mum/2018 M/s Gepach International 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 non resident which has 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. 7.17 After considering the totality of facts and judicial decision, it is evident that M/s Pharmark Consulting FZE was to provide marketing support services such as per the marketing and promotion strategies devised by the appellant. The Appellant retains full control over all the marketing activities in Russia, all marketing and promotion strategies and planning 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 Rs. 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 Rs. 2,16,41,556/-. This ground is allowed.

8. Aggrieved with the above order, revenue is in appeal before us.

28 & 5942/Mum/2018 M/s Gepach International 9. Before us learned DR brought to our notice findings of assessing officer at page 7 of the order and findings of Ld CIT(A) at paragraph 7.6 of the order and the conclusions of the Ld CIT(A). He submitted that the agreement submitted by the assessee before tax authorities and it has clauses which clearly indicates that it is to execute the technical services and Ld CIT(A) has not considered and appreciated the facts properly.

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 has not submitted relevant documentary evidences before tax authorities. He vehemently supported the findings of the assessing officer and prayed that the addition may be sustained.