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M/s. Lloyd’s Register Asia (India Branch Office) Versus The Asst. CIT 8 (3) (OSD) , Mumbai

2015 (6) TMI 423 - ITAT MUMBAI

Payment of 'license fees' and 'management services' - Whether are in the nature of 'head office expenses' with the ambit of section 44C? - assessee here is an Indian branch of UK based, Lloyd's Register Asia, which in turn is a subsidiary of a holding company, Lloyd's Register UK. - Held that:- From the definition/illustration of the scope of head office expenditure, it is evident that it is in the nature of executive and general administration expenditure incurred by the assessee outside India. .....

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ibles, which are in the nature of intellectual property. Nowhere such types of expenditure fall within the scope of "head office expenditure" as illustrated in clause (iv).

So far as general, technical and marketing support services are concerned, they again are neither in the nature of rent, rates, taxes, repairs, insurance, salary, wages, bonus, commission, etc., or travelling by any employee. Expenditure under the "License fee" have nothing to do with these kind and nature of expe .....

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rcise for illustrating the said expenditure under the said sub clause has to be prescribed by the CBDT. However, no such illustration has been given or prescribed by the Board, atleast nothing has been brought before us that CBDT has issued any Circular or clarification illustrating "such other matters connected with executive and general administration". Therefore, it cannot be held that the nature of expenses under the head license fees falls even under sub clause (d).

Now coming to .....

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ion given in clause (iv) of Explanation. The learned CIT(A) has held that the 50% of management fees is hit by section 44C, without even analyzing the nature of expenses, as how or how much they fall within the scope and ambit of nature of head office expenditure as defined in Section 44C.

Thus, in our conclusion, neither the payment of "license fees" nor the "management charges", falls within the ambit and purview of section 44C and, accordingly, the nature of adjustment to the tota .....

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A) II, Mumbai, for the quantum of the assessment passed u/s. 143(3) for the A.Y. 2005-06. 2. At the outset, the learned senior counsel, Shri S E Dastur submitted that ground no.3 as raised by the assessee in the memorandum of appeal is not arising out of the order of the CIT(A), therefore, the same is not pressed. Accordingly, ground no.3 is dismissed as not pressed. 3. The effective grounds taken by the assessee reads as under: "1. On the facts and in the circumstances of the case and in l .....

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in the circumstances of the case an din law the learned CIT(A) has erred in holding that 50% of the total Management charges of INR 4,42,92,316/- paid to Lloyd's Register-UK i.e.Rs.2,21,46,158/- are covered in the definition of Head Office Expenditure as per section 44C of the Act and thereby restricting the allowance to the extent of INR 46,73,263/- and disallowing the balance INR 1,74,72,895/-. He ought not to have done so. B. The learned CIT(A) has not appreciated the fact that the assess .....

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0% relief on account of addition made by the A.O. u/s. 44C on account of Licence Fees and allowing 50% relief on the addition made by the A.O. u/s. 44C on account of Management charges ignoring the finding given by AO in his assessment order. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the interest charged u/s. 234B of the I.T.Act as the issue has not been decided on merit." 5. Briefly stated the facts of the case are that, Lloyd's Register .....

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2005-06), it floated a subsidiary company, Lloyd's Register Asia and all the Indian operations thereafter are being carried out through branch of this entity. Lloyd's Register UK entered into a license agreement on 16.07.2003 with all its subsidiaries all over the world, including Lloyds Register Asia UK, whereby it has granted license to use the brand "Lloyd's Register" i.e. use of trademark and trade name owned by Lloyd's Register UK. Besides this, the licensor (Lloyd .....

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K which in turn, allocates the royalty attributable to its Indian branch. The Indian branch pays the same to Lloyd's Register Asia UK, which in turn pays Lloyds Register UK. Further, another "Management Services Agreement" dated 16.07.2003 was entered into between Lloyd's Register UK and Lloyd's Register Asia UK for providing services such as : Corporate communications, Corporate finance and group reporting services, Group quality assurance, Human resources, Information tec .....

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the assessee has paid 'management charges' and 'license fees' of ₹ 18,32,12,834/-to Lloyd's Register Asia UK i.e. its head office, which in turn has been given to Lloyd's Register UK. The break-up of the management and license fees were as under: Particulars Amount in Rs. Management Charges 4,42,92,396 License Fees 13,89,20,438 Total 18,32,12,834 6. In response to the show cause notice by the AO as to why these expenses should not be treated as Head office expenses .....

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a for the said income. These transactions have also been verified by the Transfer Pricing Officer and held that it was at arm's length and, therefore, provisions of section 44C do not arise. Secondly, the license fees and management fees cannot be held to be covered with the definition of 'head office expenses' as defined in section 44C of the Act, as the said section is only applicable to general and administration expenditure as referred to in Explanation (iv) to section 44C, becau .....

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enses are very much in the nature of head office expenses for the purpose so far as assessee is concerned. Lloyd's Register Asia UK i.e. head office is only the intermediary for the accounting purpose and it will not change the real nature of expenses. After going through the management service and license agreement, the learned AO held that both the payments are covered within the definition of head office expenditure as defined under section 44C. Thus he restricted the management and licen .....

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st appeal, the learned CIT(A) after considering the elaborate submissions made by the assessee, which has been discussed by him from para 4.7 to 4.10, held that so far as royalty or license fees is concerned, the same is not hit by the definition of head office expenditure as provided in section 44C. Accordingly, he directed the AO not to consider royalty or license fees expenditure incurred by the assessee as head office expenditure. Thus, the amount of ₹ 13,89,20,438/- was directed not t .....

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and the balance half as expenditure of branch office. 9. Before us, the learned senior counsel, Shri Soli Dastur, after explaining the entire facts of the case submitted that here in this case, it needs to be seen, whether the payment made by the Indian branch to Lloyd's Register Asia UK, which in turn has been paid to Lloyd's Register UK, can be set to be hit by provisions of section 44C. The definition of "head office expenditure" envisages that such an expenditure must have .....

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held that expenses has been incurred by the assessee. Whenever income has been earned by Lloyd's Register UK in the form of license fees etc., the same is being taxed in India. Hence, at the face of it, the provisions of section 44C does not arise at all, as there is no transaction between the head office and the branch. The second limb of the argument was that, the license fees at the face of it do not fall within the definition of section 44C. The royalty has been paid by Lloyd's Regis .....

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ead office expenditure and was legally correct in directing the AO not to consider 'royalty' or 'license fees' as expenditure incurred by the assessee as head office expenditure. He drew our attention to Schedule 6, which provides the license fees payable as per the agreement and also the recitals of the license agreement dated 16.07.2003 in support of his contentions. Thus, such a payment he submitted that, is definitely not covered u/s. 44C. Regarding management charges, he dre .....

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executive expenses. In support of his contention, he relied upon the CBDT Circular No.202 dated 05.07.1976 as reported in (1976) 105 ITR (ST) 17. Even otherwise also, he submitted that if the overall expenditure incurred by the assessee is to be seen, then out of ₹ 31,91,70,684, the management charges and license fees is ₹ 18,32,12,834/-, which is much more than half of the total expenditure. Such a huge quantum of expenditure can never be held to be head office expenditure as mentio .....

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rly provides that in determination of the profits of permanent establishment, expenses incurred for the purpose of business including executive and general administrative expenses shall be allowed as deduction subject to the limitation of domestic law of the contracting state in which the permanent establishment is situated. However, para 7 of Article 7 provides that it will not apply in the case of reimbursement of actual expenses. Here in this case, it has not been disputed that payment of lic .....

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no disallowance can be made under the DTAA. 11. Lastly, again by way of an alternative argument, Shri Dastur submitted that the provisions of section 44C will not apply in view of Article 26, which is a non discrimination clause, as it discriminates the foreign residents. In support of this proposition he relied upon the decision of Metchem Canada Inc. v. DCIT (2006) 100 ITD 251, wherein it has been held that limitation on deduction of head office expenditure as set out in section 44C would not .....

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incidence of tax in India by inflating their claims in respect of head office expenses. So far as the nature of expenses like license fees and management charges is concerned, one has to see, whether such expenditure are in the nature of head office expenditure or not. From the recitals of the license agreement, it can be seen that the licensor is providing general, technical and marketing support services, which can be attributable as head office expenditure. Similarly, in the management servic .....

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but the balance 50% is definitely in the nature of fees for technical service (FTS) and such an expenses has to be seen from the angle, whether they are in the nature of FTS or not. She further submitted that the decision of Metchem Canada Inc. (supra) relied upon by the learned counsel has not considered the true purport of section 44C and the mischief it sought to curb. Thus, she strongly relied upon the order of the AO and submitted that the AO has rightly considered these expenses u/s. 44C .....

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, so as to make the disallowance under the said section. The assessee here is an Indian branch of UK based, Lloyd's Register Asia, which in turn is a subsidiary of a holding company, Lloyd's Register UK. The said companies are into business of survey and inspection of the ships. Lloyd's Register UK had entered into license agreement dated 16.07.2003 with various legal entities, which included Lloyd's Register Asia, who have been referred to as licensees. The licensor (i.e. Lloyd& .....

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eable to an individual licensee will be calculated on the residual profit split method according to the table as set out below. The residual profit percentages are the relevant profits before tax before charging the applicable licence fees ("PBT") PBT percentages Licence Fee (a) No PBT No charge (b) Up to 1% Amount of PBT (c) 1 to 5% 1% of net sales price of external sales (d) 5 to7.5% The result in c) plus 50% of PBT over 5% (e) 7.5% to 9% The result in d) plus 2/3 of PBT over 7.5% (f .....

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unications Corporate finance and group reporting services Group quality assurance Human resources Information technology Integrated business system (IBS project) Internal audit services Legal services Operational management and reporting (mainly provided by regional and area management centres) Risk management and secretarial services and Taxation and treasury services. The determination of fees has been enumerated in Schedule 4 of the said management services agreement. Now in the light of thes .....

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resident, no allowance shall be made in computing the income chargeable under the head "Profits and gains of business or profession", in respect of so much of expenditure in the nature of head office expenditure as is in excess of the amount computed as an amount equal to five percent of the adjusted total income ; or the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assesse .....

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e purposes of the business or profession; (b) salary wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India; (c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and (d) such other matters connected with executive and general administration as may be p .....

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branch, then it will be seen that none of the expenditure under the head "license fees" falls within this category, even remotely. The payment of 'license fee' is purely for using of brand/trademark and other business intangibles, which are in the nature of intellectual property. Nowhere such types of expenditure fall within the scope of "head office expenditure" as illustrated in clause (iv). So far as general, technical and marketing support services are concerned, .....

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tion Assessment Programme procedures and Fuel and Lubricant Analysis procedures - Co-ordination function for marketing and sales activities in relation to major contract opportunities and/or quotations for specialized industrial sectors - Sales support in respect of global customer accounts. These again are neither in the nature of rent, rates, taxes, repairs, insurance, salary, wages, bonus, commission, etc., or travelling by any employee. Expenditure under the "License fee" have noth .....

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tration as may be prescribed". Such an exercise for illustrating the said expenditure under the said sub clause has to be prescribed by the CBDT. However, no such illustration has been given or prescribed by the Board, atleast nothing has been brought before us that CBDT has issued any Circular or clarification illustrating "such other matters connected with executive and general administration". Therefore, it cannot be held that the nature of expenses under the head license fees .....

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ature of head office expenses must fall within the illustration given in clause (iv) of Explanation. If any expenditure itself is beyond the scope of head office expenditure, then needless to say that, it cannot be brought within ambit of section 44C. The learned CIT(A) has held that the 50% of management fees is hit by section 44C, without even analyzing the nature of expenses, as how or how much they fall within the scope and ambit of nature of head office expenditure as defined in Section 44C .....

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. Even in the revenue's grounds of appeal, it has not been challenged that 50% of the management charges/license fees are in the nature of FTS. Thus, we need not go on the issue of FTS as neither it is a case of the AO nor the case of the CIT(A). Otherwise also, the technical fees are not covered under the head office either executive or general administration expenditure as specified in section 44C. This aspect of the matter has been clarified vide Board Circular no.649 dated 31.03.1993, re .....

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