Shri Jogendra L. Bhati, Ahmedabad V. Dy. CIT, Circle-3(1)(1), Ahmedabad

ITA 2136/AHD/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8784 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 26-09-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Transfer pricing; Salary income; Deemed to accrue or arise in india; Permanent establishment; Revenue expenditure; TDS
• Section: 271(1)(c); 40(a)(ia); 195

Judgement Text

, - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ./ ITA NO. 2136/AHD/2017 / ASSESSMENT YEAR: 2013-14 SHRI JOGENDRA L. BHATI 315, NILKANTH PALACE-B 100 FT. ROAD ANANDNAGAR ROAD SATELLITE AHMEDABAD 380 015. PAN : AHCPN 0228 N VS DCIT, CIR.3(1)(1) AHMEDABAD. / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR, AR REVENUE BY : SHRI VINOD TANWANI, SR.DR / DATE OF HEARING : 11/03/2019 /DATE OF PRONOUNCEMENT : 05/04/2019 O R D E R 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. 2. THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE ARE NOT IN CONSONANCE WITH THE RULE 8 OF THE INCOME TAX (APPELLATE TRIBUN AL) 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 I N CONFIRMING THE ITA NO.2136 /AHD/2017 - 2 - DISALLOWANCE OF RS.2,57,73,053/- WHICH WAS DISALLOW ED BY THE AO UNDER SECTION 40(A)(I) OF THE INCOME TAX ACT ON THE GROUN D THAT THE ASSESSEE HAS FAILED TO DEDUCT TDS UNDER SECTION 195 OF THE A CT WHILE MAKING PAYMENT TO THE NON-RESIDENT COMMERCIAL AGENT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA S FILED HIS RETURN OF INCOME ELECTRONICALLY ON 30.9.2013 DECLARING TOTAL INCOME AT RS.40,73,120/-. THE CASE OF THE ASSESSEE WAS SELEC TED FOR SCRUTINY ASSESSMENT AND NOTICE UNDER SECTION 143(2) OF THE A CT 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 H AS BEEN EARNING INCOME FROM SALARY. HE WAS RUNNING A PROPRIETORSHI P CONCERN IN THE NAME AND STYLE OF BION HEALTHCARE. HE HAS TRADED /EXPORTED MEDICINES THROUGH THIS PROPRIETORSHIP CONCERN. TH E AO THEREAFTER OBSERVED THAT ON PERUSAL OF THE ACCOUNTS IT REVEALE D THAT THE ASSESSEE HAS DEBITED EXPENDITURE OF RS.1,79,73,760/- BEING PAYME NT 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 HOSPITAL ACROSS ECUADOR DISTRIBUTION & ADMIN COST @10% 75,956 4,215,547 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 4. APART FROM THE ABOVE, THE LD.AO FURTHER FOUND TH AT 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 LE DGER OF MARKETING EXPENSES AGAINST CARLOS AVILA GUILERMO CELI. AS PER NARRATION ITA NO.2136 /AHD/2017 - 3 - MENTIONED IN THE LEDGER FURNISHED BY THE ASSESSEE D URING THE COURSE OF ASSESSMENT, THESE PAYMENTS UNDER THE HEAD MARKETING EXPENSE WERE MADE FOR 'MARKET SURVEY CHARGES FOR THREE MONTHS' A ND 'REGISTRATION FEES, EDISSEUR EVALUATION & ANALYSIS CHARGES, TRANS ACTION AND NOTORIZATION OF DOSSIERS, MARKET ANALYSIS & TENDER SURVEY' RESPECTIVELY. THUS, TOTAL PAYMENT OF RS. 2,57,73,053/- HAS BEEN M ADE TO CACMILSA/ CARLOS AVILA GUILERMO CELLI. 5. 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 O F 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 REPRO DUCED SUBMISSIONS MADE BY THE ASSESSEE IN PARA 5.4 ON PAGE NOS.8 TO 1 6. 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 AGREEMEN T ARE BEING SUMMARIZED BELOW: 1. SHRI KETAN PATEL, ON BEHALF OF BION HEALTHCARE ( REFERRED TO AS 'THE GUARDIAN' IN THE AGREEMENT) HAS ENTERED INTO THE AGR EEMENT WITH MR. CARLOS G.AVILA CELL (REFERRED TO AS 'COMMERCIAL COU NSEL/BUSINESS ADVISOR' IN THE AGREEMENT). 2. THE COMMERCIAL ADVISOR HAS AGREED TO PROVIDE SER VICES WHICH CONSIST OF ALL THE SUPPORT MANAGEMENT, GENERAL ADVICE AND OTHE R ACTIONS REQUIRED DURING THE HIRING PROCESS OR SUPPLY OF DRUGS NEEDED IN ECUADOR. 3. IN ADDITION TO ADVISORY ACTIVITIES THE COMMERCIA L ADVISOR WILL MAKE EFFORTS TO COMPLETE ADMINISTRATIVE PROCESS AND SIGN ING OF THE CONTRACT. FURTHER DELIVERY OF STOCK AS PER REQUIREMENT OF IES S WILL A/SO BE UNDERTAKEN BY THE COMMERCIAL ADVISOR. ITA NO.2136 /AHD/2017 - 4 - 4. THE COMMERCIAL ADVISOR WILL RECEIVE 45% OF THE C ONTRACT AMOUNT FOR THE SERVICES PROVIDED. 5.7. FEES FOR TECHNICAL SERVICES (FTS) HAVE BEEN DEF INED IN SECTION 9 ITSELF UNDER CLAUSE [VII] AS ANY CONSIDERATION (INCL UDING LUMP SUM) FOR RENDERING OF ANY MANAGERIAL, TECHNICAL OR PROFESSIO NAL 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 W HICH ARE PREDOMINANTLY IN THE NATURE OF MANAGERIAL, TECHNICA L 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 CACMILS A IS AN AGENCY WHICH SPECIALIZES IN PHARMACEUTICAL SECTOR. ASSESSE E HAS BOOKED THE PAYMENT UNDER VARIOUS HEADS RATHER THAN MAKING PAYM ENT 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/- MAD E TO CACMILSA (MR. CARIOS G. AVILA CELI) ARE BEING DISALLOWED. PEN ALTY U/S. 271(1)(C) IS SEPARATELY INITIATED FOR FURNISHING INACCURATE PART ICULARS OF INCOME. 6. DISSATISFIED WITH THIS ORDER OF THE AO, THE ASSE SSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD.CIT(A) WHO REPRODUCE D THE ASSESSMENT ORDER AS WELL AS SUBMISSIONS OF THE ASSESSEE, BUT C ONCURRED WITH THE AO. BRIEF FINDING RECORDED BY THE LD.CIT(A) READS AS UN DER: 5.7 IN THE REJOINDER TO THE REMAND REPORT, APPELLA NT 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 CONT ENTION OF THE APPELLANT. THE SERVICES THAT HAVE BEEN PROVIDED BY CACMILSA TO THE APPELLANT HAVE BEEN MENTIONED IN THE AGREEMENT THAT WAS ENTER ED BETWEEN THE TWO. THE FIRST CLAUSE OF THE AGREEMENT ITSELF MENTIONS T HAT COMMERCIAL ADVISOR THAT IS CACMILSA HAS AGREED TO PROVIDE THE SERVICES WHICH CONSIST ALL THE SUPPORT, MANAGEMENT, GENERAL ADVICE AND OTHER A CTIONS REQUIRED DURING THE PROCESS OF SUPPLY OF DRUGS TO THE GOVERN MENT OF ECUADOR, ITA NO.2136 /AHD/2017 - 5 - FURTHER, CACMILSA WAS NOT AN ORDINARY COMMERCIAL AG ENCY. IT HAS SPECIALIZATION IN THE PHARMACEUTICAL SECTOR. DIRECT OR HIMSELF WAS PERSON FROM PHARMACEUTICAL SECTOR AND HAD GOOD CONTACTS IN THE SAID SECTOR IN ECUADOR AS WELL AS AT INTERNATIONAL LEVEL. AS THE S ERVICES PROVIDED BY CACMILSA WERE SPECIALIZED IN NATURE AND IN THE FIEL D 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 CONSULTA NCY SERVICES IN NATURE AND HENCE COVERED UNDER THE DEFINITION OF 'FEES FOR TECHNICAL SERVICES'. AS PER THE REMAND REPORT OF A.O. WEBSITE OF CACMILS A ALSO REFLECTS THE SPECIALIZED NATURE OF SERVICES IN THE PHARMACEUTICA L SECTOR. IT WAS NOT A CASE THAT CACMILSA OR MR.CARLOS AVILA GUILERMO CELL WERE THE COMMISSION AGENT OF THE APPELLANT AND HAD BAGGED TH E CONTRACT FROM GOVERNMENT OF ECUADOR FOR THE APPELLANT BUT THEY WE RE PROVIDING MANAGERIAL AND CONSULTANCY SERVICES FOR FULFILLING THE CONTRACTUAL OBLIGATION OF THE APPELLANT POST AWARDING OF THE CO NTRACT, IN RETURN OF THEIR SERVICES, THEY WERE PAID AS PER THE AGREED TE RMS AND COMMISSION WAS PAID. FURTHER, IT IS ALSO NOTICED THAT GOVERNMENT O F ECUADOR HAS NOT ENTERED INTO DOUBLE TAXATION AVOIDANCE AGREEMENT (D IM) WITH GOVERNMENT OF INDIA TILL END OF THE YEAR UNDER CONS IDERATION. HENCE, I AM OF THE CONSIDERED OPINION THAT APPELLANT SHOULD HAV E DEDUCTED TAX AT SOURCE ON PAYMENT OF FEES FOR TECHNICAL SERVICES OF FERED 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 OBTAI NED 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 MARKE TING EXPENSES AGAINST THE NAME OF MR.CARIOS AVILA GUILERMO CELI. HOWEVER, A.O. HAS OBSERVED THAT THESE PAYMENTS WERE UNDER THE HEAD MARKETING E XPENSES BUT WERE INCURRED FOR MARKET SURVEY CHARGES FOR THREE MONTHS AND REGISTRATION FEES, EDISSEUR EVALUATION & ANALYSIS CHARGES, TRANS PORTATION AND NOTARIZATION OF DOSSIERS, MARKET ANALYSIS AND TENDE R SURVEY. IT IS APPARENT FROM THE NARRATION MENTIONED THAT THE APPELLANT HAS SPENT THIS AMOUNT FOR MARKET SURVEY AS WELL AS CONSULTANCY SERVICES W HICH LEAD TO THE AWARD OF CONTRACT FROM GOVERNMENT OF ECUADOR TO THE APPEL LANT. THE EXPENDITURE MADE ON MARKET SURVEY AND CONSULTANCY S ERVICES PURELY FALL WITHIN THE DOMAIN OF 'FEES FOR TECHNICAL SERVICES.' AS THE AGENCY NAMELY CACMILSA WAS SPECIALIZED AGENCY IN THE PHARMACEUTIC AL SECTOR, IT WAS ABLE TO PROVIDE CORRECT CONSULTANCY SERVICES TO THE APPELLANT WHICH HAS ITA NO.2136 /AHD/2017 - 6 - 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 COMMISSI ON AGENT BUT WERE MADE ON OBTAINING CONSULTANCY SERVICES ON MARK ETING OF DRUGS TO THE SAID COUNTRY. IN THE LIGHT OF ABOVE REFERRED FA CTS, 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 CORRECT LY INVOKED PROVISIONS OF SECTION 40(A)(I) OF THE ACT AND HAS DISALLOWED TH E AMOUNT OF RS.2,57,73,053/-CORRECTLY. HENCE, THE SAID ADDITION IS HEREBY CONFIRMED. THESE GROUND OF APPEALS ARE DISMISSED. 7. WHILE IMPUGNING THE ORDERS OF THE REVENUE AUTHOR ITIES, THE LD.COUNSEL FOR THE ASSESSEE CONTENDED THAT ECQUADOR IAN INSTITUTE OF SOCIAL SECURITY (IESS) HAD ENTERED INTO A CONTRAC T 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 BOO K. HE TOOK US THROUGH CERTAIN CLAUSES OF THIS AGREEMENT WHICH ARE RELEVANT FOR ADJUDICATING THIS CONTROVERSY. BEFORE CONSTRUING A ND ASSESSING IMPACT OF THIS CONTRACT ON THE CONTROVERSY IN HAND, WE DEE M 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 REA D AS UNDER: 3.01. THE IMPORTER UNDERTAKES TO CARRY OUT ALL TH E LEGAL AND LOGISTICAL PROCEDURES FOR THE DELIVERY OF THE I MPORTED DRUGS IN THE WAREHOUSES OF THE DIFFERENT HEALTH MEDICAL UNIT S OF IESS AND THE PEASANT INSURANCE, IN ACCORDANCE TO THE SCHEDUL E IT WILL DELIVER TO THE NATIONAL MANAGEMENT COORDINATION OF THE MEDI CAL UNITS OF IESS. . . . . . . (A) IMPORTER' IS THE COMPANY THAT SUPPLIES THE DR UGS, WHICH WERE AUTHORIZED BY THE PUBLIC HEALTH MINISTRY TO BE IMPORTED BY THE IESS. ITA NO.2136 /AHD/2017 - 7 - . . . . . . 6.03 OTHER OBLIGATIONS: THE IMPORTER WILL PAY THE NOTARIZING FEES, THE CONTRACT REGISTRY FEES, THE CO ST OF-THE COPIES OF THE CONTRACT THAT MUST BE DELIVERED TO THE IESS, TH E COST OF STORAGE, TRANSPORTATION AND IN GENERAL ALL THE EXPENSES DERI VED 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 WI LL BE DELIVERED TO THE COORDINATION OF MANAGEMENT OF THE MEDICAL UN ITS OF IESS. . . . . . . THE IMPORER MUST HAVE A PHYSICAL SPACE SPECIFICALLY FOR DRUGS FOR THE PROPER STORAGE OF THE MEDICINES THAT MUST B E 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 COPIE S WILL BE AT THE EXPENSES OF THE IMPORTER. . . . . . . 8. TAKING US THROUGH COMPLETE AGREEMENT, THE LD.COU NSEL FOR THE ASSESSEE APPRAISED US THAT BASICALLY THIS AGREEMENT CONTEMPLATES THAT FOREIGN COUNTRY HAS ACCEPTED ITS REQUIREMENT FOR IM PORT OF CERTAIN DRUGS, ITA NO.2136 /AHD/2017 - 8 - AND IN ORDER TO DETERMINE THAT REQUIREMENT A BRIEF BACKGROUND HAS BEEN GIVEN IN THE CONTRACT ITSELF AS TO HOW THE REQUIREM ENT HAS BEEN ASSESSED BY THE CONTRACTEE, AND HOW THE CONTRACT HAS BEEN EX ECUTED. ACCORDING TO THE LD.COUNSEL FOR THE ASSESSEE, THOUGH THIS ASPECT IS NOT RELEVANT FOR ADJUDICATION OF THE CONTROVERSY IN HAND, BUT IN ORD ER TO DEMONSTRATE THAT, THIS CONTRACT WAS ENTERTAINED WITH THE ASSESS EE BY THE GOVERNMENT OF ECUADOR AT ARMS LENGTH PRICE. BOTH THE PARTIES ARE INDEPENDENT WITHOUT HAVING INFLUENCE OVER EACH OTHER, RATHER ON E OF THE PARTIES IS SOVEREIGN STATE. THEREAFTER, HE SPECIFICALLY TOOK US THROUGH THE ROLE REQUIRED TO BE PLAYED BY THE IMPORTER I.E. THE ASSE SSEE UNDER THE AGREEMENT. THE ASSESSEE UNDERTOOK TO CARRY OUT GEO GRAPHICAL, LOGISTICAL SUPPORT FOR THE DELIVERY OF IMPORTED DRUGS IN THE W AREHOUSE 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 UND ER THE OBLIGATION THAT IT WOULD PAY NOTARIZING FEES, CONTRACT REGISTRATION FEES, COST OF THE COPIES OF THE CONTRACT, THE COST OF STORAGE, TRANSPORTATIO N ETC. THE FOURTEENTH CONDITION IN THE CONTRACT RELATES TO DELIVERY METHO D AND PLACE OF RECEPTION. THE IMPORTER, I.E. ASSESSEE UNDERTOOK T O DELIVER THE DRUGS ACQUIRED THROUGH THIS CONTRACT IN ALL THE MEDICAL U NITS OF IESS; IN ACCORDANCE WITH THE SCHEDULE THAT FOR THE EFFECT, W ILL 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 F OR THE ASSESSEE EMPHASIZED THAT THE AO HAS NOT RAISED ANY DISPUTE A BOUT THE EXECUTION OF THIS CONTRACT AS WELL AS EXPORT OF THE DRUGS. T HE ASSESSEE HAS NOT CLAIMED ANY LOSS, RATHER SHOWN PROFIT IN THIS ACTIV ITY. NOW, IN ORDER TO ITA NO.2136 /AHD/2017 - 9 - 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 DOUBT ED INCURRENCE OF EXPENDITURE OR PAYMENT MADE BY THE ASSESSEE. THEY ARE OF THE VIEW THAT SINCE CACMILSA HAS PROVIDED MANAGERIAL AND CONSULTA NCY SERVICES, WHICH FALLS WITHIN THE SCOPE OF MANAGERIAL, TECHNIC AL AND CONSULTANCY SERVICES AS PER THE MEANING OF SECTION 9 OF THE INC OME TAX ACT, AND THEREFORE, ELEMENT OF INCOME ASSESSABLE IN INDIA IS INVOLVED IN SUCH PAYMENTS. THE ASSESSEE SHOULD HAVE DEDUCTED TDS BE FORE MAKING SUCH PAYMENTS. SINCE THE ASSESSEE FAILED TO DEDUCT TDS, THEREFORE, EXPENDITURE DESERVES TO BE DISALLOWED TO THE ASSESS EE. THE LD.COUNSEL FOR THE ASSESSEE CONTENDED THAT BOTH THE REVENUE AU THORITIES 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, T HEN PAYMENT QUA THAT COULD BE AT MOST IN THE FIELD OF MANAGERIAL AND CON SULTANCY 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 AGREEMEN T ENTERED INTO WITH GOVERNMENT OF ECUADOR FOR THE SUPPLY OF DRUGS. TH E CACMILSA IS ONLY A SERVICE PROVIDER IN DIFFERENT FIELDS, I.E. D ELIVERY, LOGISTICS, PACKAGING ETC. THE ASSESSEE HAS BIFURCATED THE PAY MENTS MADE TO SUCH ITA NO.2136 /AHD/2017 - 10 - CACMILSA UNDER FOUR DIFFERENT CATEGORIES I.E. LOCAL LOGISTIC COST AT ECUADOR, SUPPLY OF GOODS TO VARIOUS HOSPITALS, CUST OM CLEARANCE AT ECUADOR, LIAISONING AND COMMISSIONING. THREE OUT O F FOUR COMPONENTS OF THE BIFURCATION EXTRACTED (SUPRA) REPRESENT REIM BURSEMENT. HE POINTED OUT THAT BIFURCATION OF THE EXPENSES HAVE B EEN REPRODUCED BY THE AO. OUT OF FOUR, THREE ARE IN THE NATURE OF R EIMBURSEMENT OF EXPENDITURE VIZ. (A) LOCAL LOGISTIC COST AT ECUADOR , (B) SUPPLY OF GOODS TO VARIOUS HOSPITALS ACROSS ECUADOR, AND (C) CUSTOM CL EARANCE AT ECUADOR. HOW THEY CAN BE PART OF ANY CONSULTANCY OR MANAGERI AL SERVICES ETC.? FOREIGN AGENT HAS NO PERMANENT ESTABLISHMENT IN IND IA. HE HAS NOT PROVIDED ANY SERVICES IN INDIA. THEREFORE, ANY COM MISSION PAID BY THE ASSESSEE TO THE FOREIGN AGENT FOR THE PURPOSE OF DU TY OUTSIDE INDIA WOULD NOT BE TAXABLE IN INDIA AND NO TDS IS REQUIRE D TO BE DEDUCTED. FOR BUTTRESSING HIS CONTENTIONS, HE RELIED UPON THE JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. ORIENT EXP RESS, 56 TAXMANN.COM 331 (MADRAS). IN THIS CASE, THE ASSES SEE WAS MANUFACTURER AND EXPORTER OF LEATHER GARMENTS. IT PROCURED EXPO RT ORDERS OUTSIDE INDIA FROM ITS FOREIGN AGENTS ON COMMISSION BASIS. THE AGENTS HAVE NOT EXTENDED ANY ACTIVITY OR SERVICES IN INDIA. THEREF ORE, HONBLE HIGH COURT HAS HELD THAT SERVICES RENDERED BY NON-RESIDE NT AGENT FOR COMPLETION OF EXPORT COMMITMENTS WOULD NOT FALL WIT HIN THE DEFINITION OF FEE FOR TECHNICAL SERVICES. COPY OF THIS JUDGME NT HAS BEEN PLACED ON RECORD BY THE LD.COUNSEL FOR THE ASSESSEE AT PAGE N O.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). CO PY OF THIS JUDGMENT HAS BEEN PLACED ON PAGE NO.295 OF THE PAPE R BOOK. APART ITA NO.2136 /AHD/2017 - 11 - FROM THESE TWO DECISIONS, THE LD.COUNSEL FOR THE AS SESSEE HAS RELIED UPON THE FOLLOWING DECISIONS: I) DCIT VS. GUJARAT MICROWAX (P) LTD., (2018) 96 TAXMA NN.COM 644 (AHD); II) CIT VS. TORRENT PHARMACEUTICALS LTD., (2013) 29 TAXMANN.COM 405 (GUJ); III) CIT VS. CADILA HEALTHCARE LTD., (2013) 31 TAXAMNN.C OM 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 TH E 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. 9. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND GO NE THROUGH THE RECORD CAREFULLY. THE SHORT QUESTION INVOLVED IS, W HETHER 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 A CCOUNT OF NON-DEDUCTION OF TDS UNDER SECTION 195 OF THE ACT, PAYMENTS ARE N OT ALLOWABLE AS DEDUCTION UNDER SECTION 40(A)(IA) OF THE ACT. IT E MERGES OUT FROM THE RECORD THAT THE ASSESSEE WAS AWARDED TENDER BY MINI STRY OF ECUADOR FOR SUPPLY OF MEDICINES TO ITS 300 HOSPITALS ACROSS COU NTRY. THE ASSESSEE HAD HIRED A LOCAL AGENCY FROM ECUADOR (DIRECTOR CAR LOS AVILA GUILERMO CELI) IN ORDER TO UNDERTAKE VARIOUS ACTIVITIES TO F ULFILL CONDITIONS OF THE TENDER. WE HAVE EXTRACTED EXTENSIVELY DIFFERENT CLA USES OF THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ECUADOR GOVERNMEN T. A PERUSAL OF THOSE CLAUSES ALONG WITH FINDING RECORDED BY THE LD .REVENUE AUTHORITIES, ITA NO.2136 /AHD/2017 - 12 - IT WOULD REVEAL THAT THESE ACTIVITIES INCLUDED LIAI SON WITH THE LOCAL AUTHORITIES, REGISTRATION OF PRODUCTS AT ECUADOR, E XPORT 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 CACMIL SA. AS PER THIS AGREEMENT, APPELLANT WAS REQUIRED TO MAKE 45% OF TH E TOTAL VALUE OF THE ORDER FROM THE GOVERNMENT OF ECUADOR TO CACMILSA IN CONSIDERATION OF THE ACTIVITIES WHICH IT HAS TO UNDERTAKE IN ECUA DOR. 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 EXTENSIV E EXPERTISE IN THE PHARMACEUTICAL COMPANIES AND GOOD CONTACT IN THE SA ID SECTOR. THEREFORE, FOR FULFILLMENT OF THE CONTRACTUAL OBLIG ATION WITH GOVERNMENT OF ECUADOR THE ASSESSEE HAD HIRED SERVICES OF CACMI LSA. ACCORDING TO THE ASSESSEE, THE PAYMENT MADE TO CACMILSA CANNOT B E 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 IN DIA. 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 PROV IDE SERVICES OF SPECIALIZED NATURE IN THE FIELD OF PHARMACEUTICAL S ECTOR, HENCE IT FALLS WITHIN THE AMBIT OF EXPRESSION MANAGEMENT, TECHNIC AL AND CONSULTANCY SERVICES USED IN EXPLANATION 2 TO SECTION 9. 10. AT THIS STAGE AT THE COST OF REPETITION WE WOUL D LIKE TO TAKE NOTE OF THE BIFURCATION OF THE EXPENDITURE GIVEN BY THE ASS ESSEE AND NOTICED BY THE REVENUE: ITA NO.2136 /AHD/2017 - 13 - 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 HOSPITAL ACROSS ECUADOR DISTRIBUTION & ADMIN COST @10% 75,956 4,215,547 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 11. ON BEHALF OF THE ASSESSEE, A LARGE NUMBER OF DE CISIONS 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) HA S 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, 'FE ES FOR TECHNICAL SERVICES' MEANS ANY CONSIDERATION (INCLUDING ANY LU MP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SE RVICES 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 RECIPIEN T CHARGEABLE UNDER THE HEAD 'SALARIES'. 12. A BARE PERUSAL OF THE ABOVE PROVISION WOULD IND ICATE THAT FEE FOR TECHNICAL SERVICES MEANS ANY CONSIDERATION FOR REN DERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES, BU T 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 CA CMILSA FOR HARPING A BELIEF THAT SERVICES RENDERED BY THE FORE IGN AGENT WAS IN THE NATURE OF MANAGERIAL, TECHNICAL OR CONSULTANCY SER VICES. FOR THIS PURPOSE, THE LD.CIT(A) HAS OBSERVED THAT FIRST CLAU SE OF THE AGREEMENT ITSELF MENTION THAT COMMERCIAL ADVISORY I.E. CACMIL SA HAS AGREED TO PROVIDE SERVICES WHICH CONSISTED OF SUPPORT, MANAGE MENT, GENERAL ITA NO.2136 /AHD/2017 - 14 - 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 T HE 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 EXECU TION 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 EN D 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 DELIVE RY. IN ORDER TO FULFILL ALL THESE ACTIVITIES, LIAISON WITH THE LOCA L 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 OB LIGATIONS. THE LD.CIT(A) WITHOUT APPRECIATING THE NATURE OF CONTRA CT 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 SE RVICES MEANS MANAGING THE AFFAIRS BY LAYING DOWN CERTAIN POLICIE S, STANDARDS AND PROCEDURES AND THEN EVALUATING THE ACTUAL PERFORMAN CE IN THE LIGHT OF THE PROCEDURES SO LAID DOWN. THE MANAGERIAL SERVIC ES CONTEMPLATE NOT ONLY EXECUTION BUT ALSO THE PLANNING PART OF THE AC TIVITY 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 PA RTICULAR MANNER, THEN, IT COULD NOT BE SAID THAT THE FORMER IS MANAGING TH AT AFFAIR. SIMILARLY, AS ITA NO.2136 /AHD/2017 - 15 - FAR AS EXPRESSION FEES FOR TECHNICAL SERVICES BEI NG CONSULTANCY ARE CONCERNED, IT WOULD BE APPLICABLE IF SOME CONSIDERA TION IS GIVEN FOR RENDERING SOME ADVICE, OPINION ETC. FOR THE EXECUTI ON 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 HOS PITALS I.E. COST OF DISTRIBUTION AND OPERATION; 10% WAS ALLOCATED TOWAR DS CUSTOM CLEARANCE I.E. 10% OF THE INVOICE VALUE OF IMPORT AND CUSTOM CLEARANCE ETC.; 15% FOR LIAISON AND COMMISSION FOR THE PURPOSE OF FULFILLME NT 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 ASSES SEE HAS NOT DEBITED ANY OTHER EXPENDITURE SEPARATELY IN HIS ACCOUNT, MORE S O, THE AO HIMSELF HAS NOT RAISED ANY DOUBT ABOUT INCURRENCE OF EXPENDITUR E. HOW IT COULD BE SAID THAT THE EXPENDITURE DEBITED UNDER THESE HEADS AMOUNTS TO SOME TECHNICAL SERVICES OR MANAGERIAL SERVICES PAID BY T HE ASSESSEE ? IT IS ALSO PERTINENT TO OBSERVE THAT ALL THESE SERVICES HAVE B EEN RENDERED IN ECUADOR OUT OF INDIAN TERRITORY. NO INFORMATION SU PPLIED BY THE COMMERCIAL AGENT HAS BEEN USED EXCEPT TO SOME EXTEN T THE MARKET RESEARCH OF PHARMA PRODUCTS IN VIETNAM GIVEN BY SAI D ADVISOR. WE WILL BE DEALING WITH THIS ISSUE IN THE LATTER PART OF TH IS 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 EXPENS ES, THERE IS NO OBLIGATION TO DEDUCT TAX AT SOURCE. FOR THIS CONCL USION, ITAT HAS RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN T HE CASE OF CIT VS. SIEMENS. 310 ITR 320 (BOM); ABB LTD., IN RE, 322 IT R 564 (AAR) AND ITO ITA NO.2136 /AHD/2017 - 16 - (INTL. TAXATION) VS. PRASAD PRODUCTIONS LTD., 125 I TD 263 (CHENNAI)(SB). COPY OF THIS DECISION HAS BEEN PLACED ON PAGE NO.24 7. 13. AT THE TIME OF HEARING, THE LD.COUNSEL FOR THE ASSESSEE RELIED UPON THE JUDGMENT OF HONBLE GUJARAT HIGH COURT ALSO IN THE CASE OF ECONOMIC TRADERS (GUJ) PVT. LTD. VS. PR.CIT, TAX AP PEAL NO.713 OF 2016. IN THIS CASE, THE AO HAS DISALLOWED PAYMENT OF VARI OUS COMMISSION WITH AID OF SECTION 40(A)(IA) OF THE ACT FOR NON-DE DUCTION OF TDS UNDER SECTION 195 OF THE ACT. THE TRIBUNAL HAS DELETED S UCH DISALLOWANCE. WHEN THE MATTER WENT UPTO THE HONBLE HIGH COURT, T HE HONBLE HIGH COURT HAS HELD THAT IF FOREIGN COMMISSION IS NOT AS SESSABLE IN INDIA, THEN NO TDS WAS REQUIRED TO BE DEDUCTED. THE HONBLE CO URT PUT RELIANCE UPON THE DECISION OF HONBLE SUPREME COURT IT THE C ASE 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 T HE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. ORIENT EXP RESS, (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, HONBLE COURT REJECTED THE CONTENTIONS OF THE REVENUE. HONBLE COURT HAS RECO RDED 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 STANDIN G COUNSEL APPEARING FOR THE REVENUE THAT COMMISSION PAID BY THE ASSESSEE TO THE NON-RESIDENT ITA NO.2136 /AHD/2017 - 17 - 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 N ON-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 SERVIC E 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 LETT ERS OF CREDIT FOR THE PURPOSE OF COMPLETING EXPORT OBLIGATION IS AN INCID ENT OF EXPORT AND, THEREFORE, THE NON-RESIDENT AGENT IS UNDER AN OBLIG ATION TO RENDER SUCH SERVICES TO THE ASSESSEE, FOR WHICH COMMISSION IS P AID. THE NON-RESIDENT AGENT DOES NOT PROVIDE TECHNICAL SERVICES FOR THE P URPOSES 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 F OR COMPLETION OF THE EXPORT COMMITMENT. WE ARE, THEREFORE, OF THE CONSID ERED OPINION THAT THE COMMISSION PAID TO THE NON-RESIDENT AGENT WILL NOT FALL WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES. 15. APART FROM THE ABOVE, THERE ARE OTHER LARGE NUM BERS OF DECISIONS REFERRED BY THE LD.COUNSEL FOR THE ASSESSEE. UNANI MOUS OPINION OF HONBLE HIGH COURT AS WELL AS ITAT IN ALL THESE DEC ISIONS 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 CE RTAIN EXPORT OBLIGATIONS LIKE LOGISTIC, WAREHOUSING ETC. THEN TH ESE WILL NOT BE TERMED AS SERVICE IN THE NATURE OF TECHNICAL SERVICES OR M ANAGERIAL AND CONSULTANCY SERVICES. IN OTHER WORDS, THESE ACTIV ITIES WILL NOT GENERATE ON INVENT ANY INFORMATION WHICH COULD BE USED IN IN DIA FOR AUGMENTATION OF MANUFACTURING OF DRUGS. ON AN ANAL YSIS OF THE SERVICES RENDERED BY CACMILSA, WE ARE OF THE VIEW THAT NO EL EMENT OF MANAGERIAL CONSULTANCY OR TECHNICAL SERVICES WERE B EING RENDERED BY THE COMMERCIAL AGENT AND THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS ON RECEIPT OF RS.1,79,73,760/-. ITA NO.2136 /AHD/2017 - 18 - 16. AS FAR AS OTHER COMPONENTS OF PAYMENTS ARE CONC ERNED, 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 N OTICED BY THE CIT(A) IN PARA-7 WHICH READS AS UNDER: 6. MARKET EXPENSES DURING THE YEAR UNDER CONSIDERATION ASSESSEE HAS AL SO DEBITED FOLLOWING EXPENSES UNDER THE HEAD MARKETING EXPENSES. PARTY NAME DATE NARRATION IN LEDGER AMOUNT ALLEGENS CO LTD. 03.09.2012 MARKET RESEARCH OF NEW PHARMA PRODUCTS IN VIETNAM 763200 ALELGENS CO LD. 07.12.2012 MARKET RESEARCH OF NEW PHARMA PRODUCTS IN VIETNAM 1192500 CARLOS AVILA GUILEMO CELI 16.01.2013 MARKET SURVEY CHARGES FOR THREE MONTHS 556543 CARLOS AVILA GUILERMO CELI 20.02.2013 REGI STRATION FEES, EDISSEUR EVALUATION & ANALYSIS CHARGES, TRANSLATION & NOTARIZATION OF DOSSIERS, MARKET ANALYSIS & TENDER SURVEY 7242750 17. AT THE TIME OF HEARING, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT HONBLE 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 COUNTR Y FOR REGISTRATION OF ITS PRODUCTS FOR MARKETING AND PROMOTING SALES IS T O BE ALLOWED AS REVENUE EXPENDITURE. HE PLACED ON RECORD JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. TORRENT PHARMACEU TICALS (SUPRA). ITA NO.2136 /AHD/2017 - 19 - HONBLE HIGH COURT TOOK NOTE OF THE FINDING RECORDE D BY THE TRIBUNAL, AND THEREAFTER LAID DOWN AS UNDER: 'FURTHER, THESE PAYMENTS ARE MADE TO DRUG REGULATOR Y AUTHORITIES IN VARIOUS COUNTRIES FOR THE PRODUCTS MARKET IN THE RESPECTIVE COUNTRIES. FURTHERMORE, THESE FEES ARE TO BE PAID O N RECURRING BASIS DEPENDING UPON THE VALIDITY OF THE VARIOUS REGISTRA TIONS. THE FEES HAVE BEEN PAID ON EXPIRY OF THE REGISTRATION AND OU T 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 CROR ES IN FINANCIAL YEAR 2005-2006 AN INCREASE OF MORE THAN 600%. ACCOR DINGLY, THESE EXPENSES ARE RIGHTLY ALLOWED BY CIT(A) AND WE CONFIR M THE SAME.' 5. THE FINDINGS OF THE TRIBUNAL ARE JUSTIFIED ON BO TH THE ISSUES. THE GARDEN EXPENDITURE WAS FOR THE PURPOSE OF MAINTAINI NG GARDEN TO CONTROL THE POLLUTION. THE COMPANY HAD PUT UP AN AFFLUENT T REATMENT PLANT AND POLLUTION USED TO GENERATE BECAUSE OF RELEASE OF PO LLUTANTS. THE MAINTAINING A GARDEN HELPED IN CONTROLLING POLLUTIO N 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 EX PENSES FOR FOREIGN COUNTRY REGISTRATION WAS FOR BUSINESS PURPOSE ONLY, BECAUSE THE SAME HELPED THE ASSESSEE IN MARKETING ITS PRODUCTS IN TH E FOREIGN COUNTRIES AND PROMOTING THE SALES. 18. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF TH E HONBLE HIGH COURT, EXPENSES INCURRED BY THE ASSESSEE TOWARDS RE GISTRATION FEES, EVALUATION AND ANALYSIS CHARGES, TRANSLATION & NOTA RIZATION OF DOSSIERS REQUIRE TO BE ALLOWED TO THE ASSESSEE. 19. SO FAR AS MARKET RESEARCH OF NEW PHARMA PRODUCT S AND MARKET SURVEY CHARGES DEBITED BY THE ASSESSEE ARE CONCERNE D, THOSE ARE THE INFORMATION WHICH WILL BE USED BY THE ASSESSEE FOR EXPLORING NEW BUSINESS VENTURE AND ENHANCING ITS CAPACITY TO COND UCT NEW BUSINESS. ITA NO.2136 /AHD/2017 - 20 - CERTAINLY, SUCH INFORMATION WILL FALL WITHIN THE MA NAGERIAL, TECHNICAL CONSULTANCY SERVICES, THEREFORE, THE ASSESSEE WAS R EQUIRED 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/- PAI D 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. 20. IN VIEW OF OUR ABOVE DISCUSSION, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 21. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 5 TH APRIL, 2019. SD/- SD/- (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER