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2017 (6) TMI 448

Head Note:
Treatment of licence fee, IT recharge and 50%of management services as head officer expenditure covered by section 44C - Held that:- We find that issue of licence fee was deliberated upon and decided by the Tribunal in the case of Lloyds Register Asia [2015 (6) TMI 423 - ITAT MUMBAI] thus hold that royalty/licence fee is covered by the provisions of section 44C of the Act.

IT recharge - On a combined reading of the Explanatory Memorandum explaining the provisions of the Finance Bill, 1976, introducing section 44C in the Income-tax Act, 1961, as well as Circular No. 202 dated 5/07/ 1976 (105 ITR (St. )17), issued by the Central Board of Direct Taxes, it is clear that the section is intended to be made applicable only in the cases of those non-residents who carry on businesses in India through their branches. The section was introduced with a view to getting over difficulties in scrutinising and verifying claims in respect of ‘general administrative expenses’ incurred by the foreign head office in so far as such expenses can be related to their business or profession in India having regard to the fact that foreign companies operating through branches in India sometimes try to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. In our opinion, the FAA has rightly held that IT recharge does not fall under the head administrative expenses and therefore provisions of section 44C will not be applicable.

Management fees - We find that the FAA had bifurcated the expenses claimed under the said head and had held that part of the expenses were to be limited by the provisions of section 44C of the Act, that he had relied upon the order of his predecessor for the earlier year, that in that order the then FAA had held half of the management charges had to taxed as same was fee for technical services. In our opinion, order of the FAA does not suffer from any legal or factual infirmity as the issue was decided after analysing the schedule 3 of the management services agreement. So, confirming his order we decide the issue against the AO.

Levy of interest u/s. 234B - Held that:- Hon’ble Jurisdictional High Court in case of NGC Network Asia LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT) has decided the issue in favour of the assessee as held that when a duty was cast on the payer to deduct the tax at source, on failure of the payer to do so, no interest could be imposed on the assessee. Decided against the AO.

Application of section 40(a)(ia) to management charges - Held that:- As decided in case of Herbalife International India P. Ltd. [2016 (5) TMI 697 - DELHI HIGH COURT] held that on a plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision.

In light of the above discussion, is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue by holding that Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable in terms of Article 26 (3) of the Indo-US DTAA. - Decided in favour of the assessee.

Exchange rate to be applied - excess claim on account of difference in the currency rates - as per CIT-A conversion rate of remittance in foreign currency for TDS purpose was the rate at which such currency was made available to banks through TT - Held that:- We find that the assessee had calculated the licence fee expenditure, in the debit notes, at a particular rate, that the AO and the FAA has ignored the provisions of Rule 115 and 26 of the Rules, that the difference in buying and selling rate was rightly calculated by the assessee. Therefore, reversing the order of the FAA, we decide ground in favour of the assessee.


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