No TDS Payable On Pfizer Products' Cost-Sharing Payments To Pfizer Ltd. Without Profit Element: Bombay HC

Holding that reimbursements without any profit element do not attract TDS, the Bombay High Court has dismissed an income tax appeal filed by the Revenue against Pfizer Products India Pvt. Ltd. over cross-charges of Rs.14,51,77,000 paid to its sister concern-Pfizer Ltd.

A Division Bench of Justice M. S. Karnik and Justice S. M. Modak held, "The cross-charge paid by the Assessee-Respondent in terms of the cost-sharing agreement between the Assessee and M/s. Pfizer Ltd, did not have any income/profit component embedded with it and the said transaction was purely in the nature of reimbursement of expenditure incurred by M/s. Pfizer Ltd without any markup and therefore is not liable to TDS"

The dispute pertained to Assessment Year 2009–10, where the Assessing Officer had disallowed the expenditure under Section 40(a)(ia) on the ground of non-deduction of TDS, increasing the assessee's income from Rs.19.62 crore to Rs.34.42 crore.

The Revenue challenged the order of the Income Tax Appellate Tribunal (ITAT), which had upheld the deletion of the disallowance. It argued that the payments were made for business auxiliary services through invoices that included service tax, indicating a profit element.

However, the assessee contended that under a cost-sharing agreement with Pfizer Ltd., it had merely reimbursed actual expenses incurred towards staff costs, traveling, advertising and promotional expenses, and other heads, without any markup. The payments were made for use of Pfizer Ltd.'s field force facility for marketing and promotion.

Accepting this, the court noted that Pfizer Ltd. had already deducted TDS wherever applicable while making payments to third-party vendors or employees and had not claimed any deduction for the same expenditure. It found that the arrangement was strictly on a cost-to-cost basis.

Rejecting the Revenue's reliance on service tax, the Bench observed, “The cost-sharing is on cost-to-cost basis, without any component of income and the said transaction is purely in the nature of reimbursement."

Referring to Union of India vs. Intercontinental Consultants and Technocrats Pvt. Ltd., the court quoted, “In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing 'such' taxable services. As a fortiori, any other amount that is calculated not for providing such taxable service cannot be a part of that valuation as that amount is not calculated for providing such 'taxable service'.”

On the issue of disallowance, the court upheld the retrospective applicability of the second proviso to Section 40(a)(ia), noting that where the payee has filed its return, accounted for the income and paid taxes, the payer cannot be treated as an assessee in default. It observed that such provisions are “beneficial, declaratory, and curative in nature.”

Since Pfizer Ltd. had filed its return and paid taxes, and a Chartered Accountant's certificate was placed on record, the Court held that no disallowance could be made.

“We therefore do not find that the present appeal involves any substantial question of law.” the court said, dismissing the Revenue's appeal.

For  Appellant: Advocate Simran Hadi for  Adv. Suresh Kumar

For Respondent: Advocate Paras Savla al Adv. Pratik Poddar, Adv. Harsh Shah and Adv. Rajnandini Shukla, for the Respondent.