By Geeta Jani | Dhishat B. Mehta
Chartered Accountants
6. TS-183-ITAT-2019 (Ahd) Jogendra L. Bhati vs. DCIT ITA No.: 2136/Ahd/2017 A.Y.s.: 2013-14 Dated: 5th April, 2019
Sub-sections 9(1)(vii), 40(a)(i) of the Act
– payments made to foreign agent for services rendered outside India, which
assessee was contractually required to perform, were not covered within section
9(1)(vii); hence, payments were not subject to tax withholding; payment for
market survey, being for managerial, technical or consultancy services, was
subject to tax withholding
FACTS
The assessee had a sole proprietary business
of trading and export of medicines. The assessee had procured an order from the
Government of Ecuador for supply of medicines to 300 hospitals in Ecuador.
The assessee had hired a local agency of
Ecuador (FCo) to undertake various activities to fulfil the conditions of the
order. Such activities included liaising with the local authorities,
registration of products at Ecuador, export of goods to Ecuador, clearing of
goods from customs authorities, storage in warehouse, and physical delivery of
goods to various hospitals across the country; the assessee did not withhold
taxes on such payments.
Further, the assessee also made certain
payments towards market survey for new products or territory to other non-resident
entities (FCo1). However, it did not withhold tax while making payments for
such services.
According to the AO, since the services
rendered by FCo were specialised services in the field of pharmaceuticals, they
were covered within the expression “management technical or consultancy
services” used in Explanation 2 to section 9(1)(vii) of the Act. Since
the assessee had not withheld tax from such payments, the AO disallowed the
expenditure u/s. 40(a)(i) of the Act.
However, the assessee contended that payments
made to FCo and FCo1 did not accrue or arise in India and hence were not taxable in India. Aggrieved, the assessee appealed before
the CIT(A) who upheld the order of the AO.
Aggrieved, the assessee appealed before the
Tribunal.
HELD
- Section 9 of the Act
defines FTS as any consideration for rendering of any ‘managerial, technical or
consultancy services’, but does not include the consideration for any
construction, assembly, etc.
- ‘Managerial’ service means
managing the affairs by laying down certain policies, standards and procedures
and then evaluating the actual performance in the light of the procedure so
laid down. The ‘managerial’ services contemplate not only execution but also
planning of the activity. If one merely follows directions of the other for
executing a job in a particular manner without planning, it could not be said
that the former is ‘managing’. Similarly, for ‘consultancy’ some consideration
should be given to rendering of advice, opinion, etc.
- The activities of FCo included
liaison with local authorities, registration of products in Ecuador, clearing
of goods from customs, storage in warehouse and physical delivery of the goods
to various hospitals across the country. The assessee necessarily had to carry
out these activities to fulfil its obligation under the agreement with the
Government of Ecuador. The assessee had appointed FCo to render these services
and incur the expenses. The assessee had also not debited any other expenditure
separately for these activities.
- Thus, the payments made to
FCo were simplicitor reimbursement of actual expenditure as well as
commission to FCo for performing the activities that the assessee was obligated
to perform. All the services were rendered in Ecuador.
- Section 195 would apply if payment
has an element of income. If there is no element of income, tax is not required
to be withheld.
- In several decisions, High
Courts as well as ITAT have held that the nature of services of foreign agents
should be determined on the basis of the agreement. If they are services simplicitor
for procurement of a contract and fulfilment of certain obligations like
logistics, warehousing, etc., then such services could not be classified as
technical, managerial or consultancy services.
However, as the expenses incurred by the
assessee towards market survey for new products or territory would provide the
assessee with information which would be used by the assessee for exploring new
business opportunity, provision of such information would thus qualify as
managerial, technical or consultancy services. Hence, the assessee was required
to withhold tax from payment made to FCo1.
