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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAVISH SOOD
O R D E R PER G.S. PANNU, AM :
These are cross-appeals filed by the assessee and the Revenue, against the order of CIT(A)-17, Mumbai dated 31.12.2014, pertaining to the Assessment Year 2009-10, which in turn has arisen from the order passed by the Assessing Officer dated 22.03.2013 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’). Since the cross-appeals involve certain common issues, therefore, they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
First, we may take up appeal of the assessee, wherein the Grounds of appeal raised read as under :-
“1.1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in disallowing under section 40(a)(i) of the Income tax Act, 1961 ('the Act') the fees for technical services paid to Medunet Europe B.V. towards copyright and printable file amounting to Rs. 50,553.
1.2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in disallowing under section 40(a)(i) of the Act the reimbursement of expenses paid to Pfizer Corporation Hong Kong Limited towards various inter-company invoices amounting to Rs.13,67,801.
1.3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not giving any finding on disallowance of scholarship fees paid to doctor under section 40(a)(i) of the Act amounting to Rs. 1,90,315 inasmuch as the same is not taxable by virtue of Article 7 of the Double Taxation Avoidance Agreement in the absence of any Permanent Establishment in India.”
Briefly put, the relevant facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of trading of pharmaceutical products. The return of income filed by the assessee for Assessment Year 2009-10 declaring total income of Rs.19,62,50,782/- was subject to a scrutiny assessment whereby the total income has been assessed at Rs.34,42,08,170/-. The difference between the returned income and assessed income is primarily on account of disallowance made by the Assessing Officer in terms of Sec. 40(a)(ia), 40(a)(i) of the Act and un- reconciled interest income as per TDS Certificate, etc. Insofar as the Grounds raised in the assessee’s appeal are concerned, the dispute arises from the disallowance of expenditure of Rs.27,66,709/- on account of application of Sec. 40(a)(i) of the Act for non-deduction of tax at source on foreign remittances. Notably, the CIT(A) allowed partial relief and not being satisfied, assessee is in further appeal before us.
Insofar as Ground of appeal no. 1.1 is concerned, the same relates to payments made to Medunet Europe B.V for technical services towards copyright and printable file amounting to Rs.50,553/-. The Assessing Officer as well as the CIT(A) have disallowed the expenditure u/s 40(a)(i) of the Act noticing the failure of the assessee to deduct the requisite tax at source. In this context, we find that the CIT(A) in para 2.1.3 of his order has noted that though assessee has deducted TDS on payments under the title “Fees for Technical Services” with description “copyright and printable PDF file” in the case of other like payments, but tax has not been deducted on the sum of Rs.50,553/- paid to Medunet Europe B.V for similarly described nature of payment. Even before us, there is no rebuttal of the aforesaid position, and in the absence of any credible explanation, we affirm the orders of the authorities below and thus, so far as invoking of Sec. 40(a)(i) of the Act with respect to payment made to Medunet Europe B.V of Rs.50,553/- is concerned, the action of the income-tax authorities is sustained, and assessee fails.
Insofar as Ground of appeal no. 1.2 is concerned, the same relates to payment of Rs.13,67,801/- paid to M/s. Pfizer Corporation Hongkong Ltd. In this context, the Assessing Officer held that assessee had failed to deduct tax at source and, therefore, he disallowed the corresponding expenditure u/s 40(a)(i) of the Act. The claim of the assessee has been that the payments in question are merely reimbursement of expenses to M/s. Pfizer Corporation Hongkong Ltd. towards inter-company invoices and there is no element of income so as to require the deduction of tax at source. The CIT(A) in para 2.3.8 of his order noted that though assessee contended that the payments have been made to M/s. Pfizer Corporation Hongkong Ltd. towards various expenses incurred on its behalf, but no such details have been furnished to substantiate that it was merely in the nature of reimbursement of actual expenditure incurred by M/s. Pfizer Corporation Hongkong Ltd.
6. Before us, the learned representative for the assessee pointed out that the disallowance has been upheld by the CIT(A) on a wrong footing inasmuch as the relevant details, copies of which are placed in the Paper Book, were very much on record, which clearly brings out that the payments are in the nature of reimbursement of expenses. In this context, the learned representative has referred to page 23 of the Paper Book wherein is placed the details of the various inter-company invoices raised by M/s. Pfizer Corporation Hongkong Ltd. towards the reimbursement of expenses amounting to Rs.13,67,800/-, i.e., the amount in question. The learned representative pointed out that each invoice raised by M/s. Pfizer Corporation Hongkong Ltd. is backed up and can be co-related with the third party invoices, which clearly depicts the amount invoiced to assessee and demonstrates that M/s. Pfizer Corporation Hongkong Ltd. has been merely reimbursed the expenses incurred by it on behalf of the assessee-company. In this context, the learned representative has taken us through pages 23 to 75 of the Paper Book. It was also pointed out that such details were also available before the Assessing Officer, which were furnished by the assessee vide communication dated 22.02.2013, copy of the same is placed in the Paper Book at pages 76 to 79.
7. On the other hand, the ld. DR has merely relied upon the order of the CIT(A) in this context, which has been already noted by us in the earlier paras, and is not being repeated for the sake of brevity.
Having considered the rival stands and perused the material placed in the Paper Book, in our view, there was sufficient material before the lower authorities which justify the assertions of the assessee that the payments made to M/s. Pfizer Corporation Hongkong Ltd. to the extent of Rs.13,67,800/- was towards reimbursement of expenses incurred on behalf of the assessee. At the time of hearing, we had examined the papers placed in the Paper Book on a test check basis. For instance, in relation to an invoice raised by M/s. Pfizer Corporation Hongkong Ltd. for USD 948 for production and shipment cost of SEAGIG II Glaucoma Guideline and CDs, the same is based on overall invoices raised by one Scientific Communications International Ltd., Hongkong which is for a consolidated figure of USD 22625 and USD 9162. In terms of the said invoices, the amount relatable to the Indian entity is quantified at USD 948, which has been invoiced by M/s. Pfizer Corporation Hongkong Ltd. to the assessee-company. Similar is the situation with other invoices and, in our view, the assertions being made by the assessee are borne out of record. Thus, where the payments are merely towards reimbursement of expenses incurred by M/s. Pfizer Corporation Hongkong Ltd. on behalf of the assessee, there is justifiably no reason to deduct tax at source.
Moreover, insofar as the proposition that a mere reimbursement of expenses does not attract deduction of tax at source is concerned, the CIT(A) has otherwise accepted the same while dealing with the disallowance out of cross charges paid, which was disallowed by the Assessing Officer for non-deduction of tax at source. In any case, this aspect of the matter we shall discuss in detail while taking-up the cross appeal of the Revenue a little later.
Be that as it may, having regard to the objection of the CIT(A) that there was non-substantiation of the payments to M/s. Pfizer Corporation Hongkong Ltd. being reimbursements, a plea which we have not found tenable on the basis of the material on record, we direct that the disallowance of Rs.13,67,800/- made u/s 40(a)(i) of the Act be set-aside. We hold so.
The issue in Ground of appeal no. 1.3 relates to a disallowance of Rs.1,90,315/-, which represents scholarship fee paid to Doctor. The said expenditure has been disallowance u/s 40(a)(i) of the Act on the ground of absence of requisite deduction of tax at source. The plea of the assessee has been that the said amount is not taxable in India so as to require tax deduction at source because of Article 7 of the Double Taxation Avoidance Agreement in the absence of any Permanent Establishment of the recipient in India.
12. On this aspect, the learned representative for the assessee pointed out that though there was a Ground before the CIT(A), but the same has inadvertently remained un-adjudicated and, therefore, submitted that the assessee would be satisfied if the matter is restored back to the file of the CIT(A) on this aspect. We have perused the order of the CIT(A) and find that though the CIT(A) has tabulated in the list of payments the amount of scholarship fee paid for Dr. Avinash Pophali of Rs.1,90,315/-, but there is no adjudication on the same. Therefore, we restore the matter back to the file of the CIT(A) who shall examine the disallowance made by the Assessing Officer of the said scholarship fee u/s 40(a)(i) of the Act. Needless to mention, the CIT(A) shall allow the assessee a reasonable opportunity of being heard before passing the order. Thus, on this aspect, assessee succeeds for statistical purposes only.
In the result, appeal of the assessee is partly allowed, as above.
Now, we may take up the appeal of the Revenue, wherein the following Grounds of appeal have been raised :-
“1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of cross charges of Rs.14,51,77,000/- for non-deduction of TDS u/s.40(a)(ia) holding that these charges represent mere reimbursement without appreciating the fact that these payments were made for rendering business auxiliary services through invoices inclusive of the service tax and therefore, includes profit component and thus cannot be said to be pure reimbursement charges not liable for deduction of TDS.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of cross charges of Rs.14,51,77,000/- for non-deduction of TDS u/s.40(a)(ia) holding that these charges represent mere reimbursement without appreciating the fact that the assesse has estopped itself from taking stand that these payments are mere reimbursement as it has taken a contrary stand before the Service Tax Authorities that the payments were made for providing business auxiliary services on which service tax has been paid.”
2. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored.”
As the Grounds of appeal reveal, the only grievance of the Revenue is against the action of the CIT(A) deleting the disallowance of cross charges of Rs.14,51,77,000/- which had been made by the Assessing Officer by invoking Sec. 40(a)(ia) of the Act. In brief, the relevant facts are that in the course of assessment proceedings, assessee-company was required to explain the nature of payment of cross charges of Rs.14,51,77,000/- to M/s. Pfizer Ltd. Assessee was also required to explain as to why the expenditure was not liable to be disallowed u/s 40(a)(ia) of the Act in the absence of requisite deduction of tax at source. In response, it was explained that the assessee- company was using the field force facilities of M/s. Pfizer Ltd., a sister concern, in order to promote its products in the market, and that the impugned sum represented the expenses reimbursed to M/s. Pfizer Ltd. It was also pointed out that the assessee had entered into a cost sharing agreement with M/s. Pfizer Ltd. and the sum of Rs.14,51,77,000/- reflected the expenses incurred on account of personnel cost, travelling, advertising & promotion and miscellaneous expenses and that the impugned payment was in the nature of reimbursement of expenses without any mark-up. It was, therefore, explained that no tax was deductible at source in the absence of any mark-up and, in any case, the other concern, namely M/s. Pfizer Ltd. had deducted the requisite tax at source wherever required. The Assessing Officer was not satisfied with the explanation furnished by the assessee. As per the Assessing Officer, a sample copy of the Debit note raised by M/s. Pfizer Ltd. showed that the bill amount was inclusive of service tax. For the said reason, the Assessing Officer was not satisfied that it was a case of mere reimbursement of costs. Secondly, as per the Assessing Officer, the payment was made in pursuance to an agreement defining the contractual relationship between the assessee-company and M/s. Pfizer Ltd. and thus, the payments were required to be subjected to tax deduction at source in terms of Sec. 194C of the Act. In the absence of deduction of requisite tax at source, the entire amount of Rs.14,51,77,000/- was disallowed and added to the total income.
16. In appeal before the CIT(A), assessee assailed both the aspects brought out by the Assessing Officer. Firstly, it was canvassed that it was a case of pure reimbursement of expenses incurred on its behalf and further that there was no profit element embedded so as to justify deduction of tax at source. The CIT(A) has made a detailed analysis of the fact-situation and the legal position on the subject and has disagreed with the Assessing Officer. On facts, the CIT(A) referred to the cost sharing agreement between the assessee-company and M/s. Pfizer Ltd. and concluded that it was a case of reimbursement of cost without any mark-up. The CIT(A) also took note of the confirmation from M/s. Pfizer Ltd. that it had deducted tax at source at the appropriate rate on payments made to various persons and also the fact that so far as the impugned sum is concerned, it had not claimed any deduction in its return of income filed for the impugned assessment year. The CIT(A) has also referred to a Certificate issued by the Chartered Accountant in this behalf. On the point of law, the CIT(A) has referred to the various decisions for the proposition that there was no requirement to deduct tax at source on pure reimbursement of expenses without any mark-up and thus, he concluded that there was no justification to invoke Sec. 40(a)(ia) of the Act in the context of payment of Rs.14,51,77,000/- made to M/s. Pfizer Ltd. Notably, the CIT(A) also referred to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom.) as well as the judgment of the Hon'ble Delhi High Court in the case of CIT vs Industrial Engineering Projects, 202 ITR 1014 (Delhi) in coming to his decision to delete the addition. Against such a decision of the CIT(A), Revenue is in appeal before us.
17. Before us, the ld. DR contended that the arrangement with M/s. Pfizer Ltd. clearly showed that assessee was availing of administrative and other services and, therefore, the payments made were liable to be subjected to tax deduction at source. For the said reasons, he has assailed the decision of the CIT(A).
18. On the other hand, the learned representative for the respondent-assessee has taken support of the findings arrived at by the CIT(A) and pointed out that in the assessee’s own case for Assessment Year 2007-08, vide dated 09.10.2013 read with order in MA No. 291/Mum/2014, it has been held that there is no element of profit in cases where there is reimbursement of travelling expenses. On the same analogy, the impugned expenses being in the nature of reimbursement and does not involve any profit element; thus, no tax was required to be deducted at source in the absence of any income in the hands of the recipient.
19. We have carefully considered the rival submissions. Factually speaking, in para 1.3.6 of his order, the CIT(A) has tabulated details of the expenditure of Rs.14,51,77,000/- which is under the heads ‘staff cost’, ‘travelling’, ‘advertising & promotional expenses’ and ‘other miscellaneous expenses’. Thereafter, the CIT(A) has noted the nature of the expenses under each of the four heads. The cross charges have been incurred by the assessee in terms of a cost sharing agreement with M/s. Pfizer Ltd. In terms of the agreement with M/s. Pfizer Ltd., assessee was sharing services of certain employees and other facilities which belonged to M/s. Pfizer Ltd. The reimbursement of such expenses due or paid to M/s. Pfizer Ltd. amounts to Rs.14,51,77,000/- and has been included under the aforesaid expenditure heads in the account books of the assessee. Detailed explanation has been filed by the assessee for each of the heads of expenditure and a common point is that the same was on account of reimbursement towards the expenses incurred by M/s. Pfizer Ltd. for and on behalf of the assessee. The aforesaid factual assertions of the assessee have been accepted by the CIT(A) by referring to the terms and conditions of the agreement with M/s. Pfizer Ltd. In para 1.3.2 of his order, the CIT(A) records the confirmation by M/s. Pfizer Ltd. that it had deducted tax at source at the appropriate rates on the payments made to outside vendors/employees wherever applicable and also the fact that M/s. Pfizer Ltd. has not claimed any deduction for the expenditure in question. As a consequence, the CIT(A) has proceeded to conclude that in the absence of any element of income embedded in the reimbursement of expenses to M/s. Pfizer Ltd., there was no requirement of deducting tax at source. Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra). Moreover, in a similar situation, the Mumbai Bench of the Tribunal in the case of Bayer Material Science Pvt. Ltd. vs. Addl CIT, (2012) 134 ITD 0582 has noted that where the cost sharing agreement envisaged exact reimbursal of the costs without any mark-up or margin, there was no element of income in the hands of the payee so as to require the payer to deduct tax at source. In our considered opinion, having regard to the fact- situation brought out by the CIT(A), which is not assailed, the ratio of the decision of the Mumbai Bench of the Tribunal in the case of Bayer Material Science Pvt. Ltd. (supra) as well as the reasoning approved by the Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra) clearly supports the conclusion drawn by the CIT(A) that there was no default on the part of the assessee in not deducting tax at source on the impugned payments to M/s. Pfizer Ltd. In this view of the matter, we, therefore, find no reasons to interfere with the ultimate conclusion of the CIT(A) in setting-aside the disallowance made by the Assessing Officer by invoking Sec. 40(a)(ia) of the Act. Thus, on this aspect, Revenue fails in its appeal.
20. Before parting, we may also refer to another aspect noted by the CIT(A). The CIT(A) noted the second proviso to Sec. 40(a)(ia) of the Act inserted by the Finance Act, 2012 which prescribes that if an assessee fails to deduct tax at source, but is not deemed to be an assessee in default as per the first proviso to Sec. 201(1) of the Act, then, no disallowance u/s 40(a)(ia) of the Act is required to be made in respect of such expenditure. The CIT(A) referred to the first proviso to Sec. 201(1) of the Act as inserted by the Finance Act, 2012 and noted that a person who has failed to deduct tax at source in respect of a sum paid shall not be treated as an assessee in default where the payee has (a) furnished return of income u/s 139; (b) taken into account the stated sum for computing the income in the return of income; and (c) paid the tax due on the income returned and there is a Certificate of a Chartered Accountant to this effect. The CIT(A) found that all the aforesaid features were complied by the payee, i.e. M/s. Pfizer Ltd. and thus, the first proviso to Sec. 201(1) of the Act stood complied, which implies that the assessee-company could not be considered as an assessee in default. On this basis also, he concluded that there was no question of making any disallowance u/s 40(a)(ia) of the Act in respect of the cross charges paid by the assessee to M/s. Pfizer Ltd. The aforesaid amendments were understood by the CIT(A) to be retrospective and applicable for the instant year also, following the ratio of the decision of the Rajkot Bench of the Tribunal in the case of Gujarat Pipavav Port Ltd. vs. DCIT, TDS, (2014) 149 ITD 0023 (Rajkot). For the said reasons also, he has set-aside the invoking of Sec. 40(a)(ia) of the Act to make the impugned disallowance.
Notably, in the Grounds of appeal raised before us, there is no challenge to the aforesaid conclusion of the CIT(A). Consequently, even if the Revenue was to succeed on other pleas, in the absence of any challenge to the aforesaid conclusion by the CIT(A), the disallowance made by the Assessing Officer would not survive. Be that as it may, it is notable that the aforesaid proposition advanced by the CIT(A) is fully supported by the decision of the Hon'ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township (P.) Ltd., dated 26.08.2015. The decision of the Mumbai Bench of the Tribunal in the case of R.K.P. Company vs. ITO, ITA No. 106/RPR/2016 dated 24.06.2016 is also on the same lines and supports the conclusion drawn by the CIT(A).
22. Thus, considering the entirety of facts and circumstances of the case, we find no reason to interfere with the ultimate decision of the CIT(A) in deleting the disallowance of Rs.14,51,77,000/- representing cross charges paid to M/s. Pfizer Ltd.
Thus, on this aspect, Revenue fails.
Resultantly, whereas the appeal of the assessee is partly allowed, that of the Revenue is dismissed.
Order pronounced in the open court on 1st September, 2017.