INCOME TAX ACT, 1961

--Income deemed to accrue or arise in India under section 9(1)(vii)--Business profitsNo permanent establishment--Assessee-company was engaged in manufacturing and trading of pharmaceuticals bulk drugs and formulations mainly for exports and research and development in the field of pharmaceuticals. In the assessment year under consideration, assessee remitted towards advertisement expenses Switzerland company 'NPS'. in respect of advertisement campaign launched in Russia for introduction of medicine 'Dlianos'. The assessing officer stated that assessee has not deducted TDS under section 195 before making the above remittance. During the course of assessment proceedings, assessee stated that the expenses remitted towards advertisements were the cost of Press/TV/Outdoor advertisement and the cost of making of layouts, films, proofs and videos in connection therewith. Since no part of advertisement was released in India as the product is only for the export market, no income could be deemed to have accrued or arisen in India in the hands of the recipient to whom the payment was made; hence, there is no requirement to deduct TDS under section 195. The assessing officer has stated that payment has been made by the assessee outside India with a view to avoid payment of tax in the country. The assessing officer considered CBDT Circular No. 742, dated 2-5-1996 and stated that even if the foreign telecasting company which are not having branch office or Permanent Establishment (PE) in India, tax has to be deducted at source in accordance with provisions of sections 195 by the persons responsible for paying or remitting the amount to them. as per registration certificate issued by Ministry of Health and Medical Industry of the Russian Federation, the product 'Dlianos' has been registered for sale in the Russian Federation for a period of five years not in the name of the assessee but in the name of M/s. HCGL which has subsequently been re-named as 'NIL' in whose name, product is registered for launching the advertisement. The assessing officer has stated that there is also no agreement between the assessee company and NIL debarring later from selling above product in Russia. The product 'Dlianos' itself is not manufactured by assessee. The same is purchased by the assessee during the previous year relevant to assessment year 1998-99 entirely from NIL for export to Russia. He has stated that\advertisements were launched in Russia Federation by various advertising agencies not under any instruction from the assessee-company but at the behest of its Swiss parent company, i.e., NPS. The assessing officer has stated that there is also no agreement between the assessee company and NPS regarding incurring or sharing of above expenditure. The assessing officer has stated that advertisement expenses have been incurred at the instruction of NPS and the amount has been recovered from the assessee-company without any specific agreement towards its liability or any rights arising to the assessee company from such payment. He has further stated that there is no bar on NIL or NPS from directly exporting said products to Russia. Therefore, the expenditure incurred in this regard cannot be said to be wholly and exclusively for the purpose of assessee's business and the same is disallowed as being unrelated to assessee's business. The assessing officer has further stated that the cost of advertisement for producing films as well as stickers, press TV and outdoor advertisement have a life span of number of years and, therefore, said expenditure on exhibiting the same by paying to various TV channels, cannot be said to be revenue expenditure but it is a capital expenditure. In view of above facts, the assessing officer had disallowed the claim of the assessee. Being aggrieved, assessee filed appeal before the first appellate authority. Held: Amount remitted by assessee to Russian company was though income deemed to assessee's as business profits but due to assessee having no PE in India, income was not taxable and hence, no TDS under section 195 was required to be deducted.