The cost sharing reimbursements do not warrant TDS under section 40(a)(ia) as these are manifested to be reimbursements on actual cost-to-cost basis.

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The cost sharing reimbursements do not warrant TDS under section 40(a)(ia) as these are manifested to be reimbursements on actual cost-to-cost basis.

 

 

Short   Overview  Where assessee made payment of cross charges to its parent company by treating the same as mere reimbursement as per cost sharing agreement and thereby without deducting tax at source under section 194C, disallowance under section 40(a)(ia) was not warranted because such agreement envisaged exact reimbursal of the costs without any mark-up or margin and since there was no default on part of assessee in not deducting tax at source, the CIT(A) was justified in deleting the disallowance made by AO.

Assessee had paid certain group employee and certain common costs to its parent Pfizer Ltd. under a cost sharing agreement. It was the case of the AO that no TDS was done on the same and thus the same deserves disallowance under section 40(a)(ia). On appeal, Commissioner (Appeals) reversed the order of the AO applying assessee s own decision of earlier years. 

It is held that  Commissioner (Appeals) 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. The cost sharing reimbursements do not warrant TDS under section 40(a)(ia) as these are manifested to be reimbursements on actual cost-to-cost basis. Besides this, second proviso to section 40(a)(ia) is to be read retrospective in nature which has been manifested in this case.

Decision: In assessee s favour.

Applied: Order of the Tribunal in assessee s own case for assessment year 2008-09 (ITA No. 6486/Mum/2012) and assessment year 2009-10 (ITA No. 1535/Mum/2015).

 

IN THE ITAT, MUMBAI ‘C’ BENCH

C.N. PRASAD, J.M. & N.K. PRADHAN, A.M.

DCIT v. Pfizer Products (India) (P) Ltd.

ITA No. 2586/Mum/2019

A.Y. 2006-07

11 February, 2021

Revenue by: Shreekala Pardeshi, DR

Assessee by: Vishal Kalra, AR

ORDER

N.K. Pradhan, A.M.

This is an appeal filed by the Revenue. The relevant assessment year is 2006-07. The appeal is directed against the order of the Commissioner (Appeals)-22, Mumbai [in short ‘CIT(A)’] and arises out of assessment completed under section 143(3) read with section 254 the Income Tax Act 1961, (the ‘Act’).

2. The grounds of appeal filed by the Revenue read as under :–

1. Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) was justified in holding that the payment of Cross Charge by the assessee to Pfizer Ltd. was in the nature of reimbursement of expenses, whereas as per the cost sharing agreement, the payment was on estimate basis which cannot be regarded as reimbursement of quantifiable expenses?

2. Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the second proviso to section 40(a)(ia) inserted by Finance Act, 2012, shall be operative retrospectively and therefore the assessee shall not be treated as an assessee in default?

3. The appellant prays that the order of the Commissioner (Appeals) on the above grounds be set aside and that of the assessing officer be restored.

3. Briefly stated, the facts of the case are that the assessee-company filed its return of income for the assessment year (AY) 2006-07 on 29-11-2006 declaring total income at Rs. 13,73,49,521. The assessing officer (AO) disallowed expenses aggregating to Rs. 15,37,60,922 (gross) under section 40a(ia) of the Act on the ground that the assessee failed to prove that the said payment of cross charges is mere reimbursement and therefore, the assessee was liable to deduct tax under section 194C of the Act. In appeal, the learned Commissioner (Appeals) confirmed the disallowance made by the assessing officer. Aggrieved by the order of the learned Commissioner (Appeals), the assessee filed an appeal before the ITAT wherein the Tribunal vide its Order, dated 31-10-2012 restored the matter to the file of the assessing officer for fresh adjudication. During the course of proceedings in connection with the restored matter, the assessee was asked by the assessing officer to show cause as to why disallowance under section 40(a)(ia) of the Act should not be made as no tax has been deducted at source on the cross charges paid/payable under section 194C of the Act. The assessee filed a reply vide Letter, dated 4-7-2014 and 5-2-2015 before the assessing officer. However, the assessing officer was not convinced with the said reply of the assessee and passed an order under section 143(3) read with section 254 holding that TDS should have been deducted on the payment of cross charges made to Pfizer Ltd. and accordingly disallowed Rs. 15,37,60,992 under section 40(a)(ia) of the Act.

4. In appeal, the learned Commissioner (Appeals) observed that similar issue arose before the Tribunal in assessee’s own case for assessment year 2009-10. Facts being identical, he followed the said order of the Tribunal and deleted the disallowance of Rs. 15,37,60,992 made by the assessing officer.

5. Before us, the learned Departmental Representative (DR) relies on the order of the assessing officer. On the other hand, the learned counsel for the assessee relies on the order of the Tribunal in assessee’s own case for assessment year 2008-09 (ITA No. 6486/Mum/2012) and assessment year 2009-10 (ITA No. 1535/Mum/2015) and supports the order passed by the learned Commissioner (Appeals).

6. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.

We find that the assessee paid cross charges amounting to Rs. 15,37,60,922 to Pfizer Ltd. in terms of the cost sharing agreement dated 21-11-2003 (‘original agreement’) for sharing personnel cost and supplemental cost sharing agreement dated 13-12-2004 (‘supplemental agreement’) for sharing the common costs and expenses pertaining to marketing, promotion, sales distribution and administration and other charges. The amount of cross charges recovered/recoverable from Pfizer Ltd. towards shared services/facilities amounted to Rs. 39,91,770, thus the net amount of cross charges paid to Pfizer Ltd. was Rs. 14,97,69,152.

Admittedly, Pfizer Ltd. has deducted appropriate taxes before making payment to the shared employees in accordance with the provisions of section 192 of the Act and as stipulated in para 2.4 of the original agreement. The expenses under dispute represent reimbursement of amount incurred by shared employees while they are on business tours. Shared employees can claim the said amount only after providing documentary evidence. Hence, such expenses are not liable for TDS.

In this regard, we brought to the attention of the learned DR the following certificate dated 30-6-2014 issued by Pfizer Ltd. (Page 36 of the Paper Book) :–

“CERTIFICATE

Pfizer Limited having PAN AAACP3334M hereby certifies that:

(a) Expenses charged to Pfizer Products India Private Limited [‘Pfizer Products’] aggregating to Rs. 15,37,60,992 during the year ended 31-3-2008 are purely in the nature of reimbursement of expenses incurred by Pfizer Limited [‘Pfizer’] on behalf of Pfizer Products;

(b) The said expenses are recovered on cost-to-cost basis without any mark-up;

(c) Pfizer has already deducted tax at appropriate rate on payments made to the vendors/employees wherever applicable in accordance with provisions of the Income Tax Act, 1961, and

(d) Pfizer has not claimed any deduction for the aforesaid expenses in the return of income filed for assessment year 2006-07.

This certificate is issued on the request of Pfizer Products and we hereby certify that information provided herein above is true and correct to our knowledge and belief and no part of it is false and nothing material has been concealed there from.”

When asked by us to comment on the above, the learned DR does not dispute the contents of the certificate.

The disallowance under section 40(a)(ia) of the Act is not warranted in view of the second proviso to section 40(a)(ia) of the Act read with first proviso to section 201(1) inserted vide Finance Act, 2012, provided the payee has (a) furnished return of income under section 139, (b) taken into account the stated sum for computing the income in the return of income and (c) has paid the tax due on the income returned and there is a certificate of a Chartered Accountant to that effect.

In the instant case, since all the conditions/requirements were complied with by the payee ‘Pfizer Ltd.’, the assessee cannot be considered as an assessee-in-default and therefore, disallowance under section 40(a)(ia) is not warranted. In CIT v. Ansal Land Mark Township (P.) Ltd. (2015) 61 taxmann.com 45 (Del) : 2015 TaxPub(DT) 3482 (Del-HC) , ACIT v. Gitanjali Exports Corporation Ltd. (2017) 81 taxmann.com 452 (Mumbai) : 2016 TaxPub(DT) 3225 (Mum-Trib) and Mahindra & Mahindra Ltd. v. DCIT (2019) 107 taxmann.com 134 (Mumbai) : 2019 TaxPub(DT) 4535 (Mum-Trib), it is held that second proviso to section 40(a)(ia) is declaratory and curative in nature and has retrospective effect.

6.1 We may refer here to the order of the Tribunal in assessee’s own case for assessment year 2009-10, wherein it is held that :–

“19. We have carefully considered the rival submissions. Factually speaking, in para 1.3.6 of his order, the Commissioner (Appeals) 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 Commissioner (Appeals) 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 Commissioner (Appeals) by referring to the terms and conditions of the agreement with M/s. Pfizer Ltd. In para 1.3.2 of his order, the Commissioner (Appeals) 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 Commissioner (Appeals) 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 v. Siemens Aktiongesellschaft (supra). Moreover, in a similar situation, the Mumbai Bench of the Tribunal in the case of Bayer Material Science Pvt. Ltd. v. Addl. CIT, (2012) 134 ITD 0582 (Mum) : 2012 TaxPub(DT) 0970 (Mum-Trib) 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 Commissioner (Appeals), 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 v. Siemens Aktiongesellschaft (supra) clearly supports the conclusion drawn by the Commissioner (Appeals) 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 Commissioner (Appeals) in setting-aside the disallowance made by the assessing officer by invoking section 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 Commissioner (Appeals). The Commissioner (Appeals) noted the second proviso to section 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 section 201(1) of the Act, then, no disallowance under section 40(a)(ia) of the Act is required to be made in respect of such expenditure. The Commissioner (Appeals) referred to the first proviso to section 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 under section 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 Commissioner (Appeals) found that all the aforesaid features were complied by the payee, i.e., M/s. Pfizer Ltd. and thus, the first proviso to section 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 under section 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 Commissioner (Appeals) 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. v. DCIT, TDS, (2014) 149 ITD 0023 (Rajkot) : 2014 TaxPub(DT) 2601 (Rkt-Trib). For the said reasons also, he has set-aside the invoking of section 40(a)(ia) of the Act to make the impugned disallowance.

21. Notably, in the Grounds of appeal raised before us, there is no challenge to the aforesaid conclusion of the Commissioner (Appeals). Consequently, even if the Revenue was to succeed on other pleas, in the absence of any challenge to the aforesaid conclusion by the Commissioner (Appeals), 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 Commissioner (Appeals) is fully supported by the decision of the Hon’ble Delhi High Court in the case of CIT v. Ansal Land Mark Township (P.) Ltd., ITA No. 160/2015, dated 26-8-2015 ; 2015 TaxPub(DT) 3482 (Del-HC). The decision of the Mumbai Bench of the Tribunal in the case of R.K.P. Company v. ITO, ITA No. 106/RPR/2016, dated 24-6-2016 : 2016 TaxPub(DT) 3182 (Rai-Trib) is also on the same lines and supports the conclusion drawn by the Commissioner (Appeals).

22. Thus, considering the entirety of facts and circumstances of the case, we find no reason to interfere with the ultimate decision of the Commissioner (Appeals) in deleting the disallowance of Rs. 14,51,77,000 representing cross charges paid to M/s. Pfizer Ltd.”

6.2 In view of the above factual scenario and position of law, we follow the above order of the Co-ordinate Bench in assessee’s own case for assessment year 2009-10 and affirm the order of the learned Commissioner (Appeals).

7. In the result, the appeal filed by the Revenue is dismissed.

 

 

 

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