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2016 (4) TMI 1117 - ITAT MUMBAI

2016 (4) TMI 1117 - ITAT MUMBAI - TMI - Taxability of management charges - fee for technical services(FTS)under Article-13(2)(a)(ii) of the India-UK DTAA r.w.s.9(1)(vii) - Held that:- The assessee had received ₹ 14, 78, 35, 401/-as royalty and ₹ 4.65 crores as MS, that it had claimed that managerial-charges, received by it, were not taxable in India, that the AO was of the view that notwithstanding two agreements entire management charges were taxable as FTS, that the FAA had held th .....

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which services were actually rendered by the asessee for the year under consideration and that which could be treated MS or otherwise. Without establishing the primary facts, he should not have decided the issue. We do not find any basis for holding that 50% of the managerial charges should be taxed. In our, opinion, matter needs further investigation and verification, as his order lacks reasoning. Therefore, in the interest of justice, we are restoring back the issue to the file of the FAA for .....

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/2011, ITA No.6746/Mum/2011, ITA No.3587/Mum/2011, ITA No.6850/Mum/2011 - Dated:- 18-3-2016 - Sh. Rajendra, Accountant Member and Ram Lal Negi, Judicial Member For The Assessee : S/Shri S.E. Dastur, Nitesh Joshi and Vispi T.Patel For The Revenue : Shri Jasbir Chouhan PER RAJENDRA, AM Challenging the orders dated 21.2.2011 and 19.1.2011 of the CIT(A)-11, Mumbai the assessee and the Assessing Officers (AO.s) have filed cross-appeals for the above mentioned AY.s. ITA 3138/M/11-AY.2005-06:Brief fact .....

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nsfer to LRA-India Branch office(LRA-IBO) and LRAQIndia Branch Office(LRAQ-IBO).Lloyds Register UK entered into licence agreement on 16.7.2003 with LRA and LRQA and certain rights were transferred to them. During its world-wide corporate-restructuring, Lloyds applied for closure of its Branch vide its application dated 13.10.2003 and RBI granted final approval vide its letter dated 02.12. 2005. Even after closure of its India Branch office, the assessee was filing its return of income from AY.20 .....

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greement. As per the agreement Lloyds register UK and Lloyds Register Asia Ltd. were the service provider and LRQA was service recipient. Both the agreements were valid for the period upto June, 2007.Lloyds Register, UK and Lloyds Register Quality assurance, UK opened their respective branch offices in India. During the year under consideration following amounts were paid by both the subsidiary companies to Lloyds Register UK: Name of the Subsidiary Royalty Management Charges Lloyd s Register As .....

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axable in India as fee for technical services(FTS)under Article-13(2)(a)(ii) of the India-UK DTAA r.w.s.9(1)(vii)of the Act. He was of the opinion that there was no arrangement before 16.7.2003, that earlier technical and managerial services(MS)were considered part of the business activity by the assessee company, that profit arising out of such activities was offered for taxation in India under the head business income. 3. Aggrieved by the order of the AO, the assessee preferred an appeal befor .....

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efined in the Act or in the DTAA, that the dictionary meaning of phrase technical services(TS)was services involving or concerned with mechanical, arts and applied sciences, that consultancy services(CS)meant services which were advisory in nature and which were rendered by a consultant, that CS could be managerial or technical, that services as envisaged under agreement were not technical in nature but same were commercial, that MS were support services conducted by group entities and rendered .....

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AA the word managerial services was not there, that in the license fee agreement it was stated that licensees wished to use the IPR and the technical/marketing services, that in the MS agreement it was mentioned that service provider had specific knowledge and skills in the fields of commerce, finance, law, administration and manage -ment, that these were essential to enable the service recipients as a whole to benefit from such specialised knowledge and skill in order to carry out the objective .....

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word managerial did not find a place in the definition of FTS under India-UK Tax Treaty, that fee paid for MS could not be regarded as FTS. He referred to the case of Temken India Ltd. and observed that the AAR had applied Article 12 of India -tax treaty in respect of MS, that the provisions of India-US treaty and the India-UK DTAA were similar in respect of MS, that the MS signified service for management of affairs or services rendered in performing management functions, that it involved adopt .....

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rred on information technology, hardware maintenance and software maintenance could not be categorised as MS, that providing comprehensive insurance programme for third parties was not managerial function -rather it was a technical service, that it was very difficult to segregate managerial and technical service shown by the assessee because of composite nature of services rendered by assessee to its subsidiaries, that in the earlier years assessee was carrying out its business in India and had .....

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taxable). 4. Before us, the departmental representative(DR)stated that there was no justification to hold that only 50% of the managerial charges were taxable in India, that the entire receipt should be treated as FTS. The authorised representative(AR)referred to page is 35, 38, 43, 51, 54, 56 of the paper book and analysed the provisions of various schedules of the agreements i.e. royalty agreement and managerial service agreement. He stated that consideration for use of IPR and consultancy wer .....

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sidered MS. Referring to the provisions of Article 13(4)(a) of the DTAA, he argued that services rendered by the assessee could not be taxed under the head MS, that nothing was made available by the assessee. He referred to the cases of De Beers India Minerals (P.)Ltd.(346ITR467), and Guy Carpenter & Co.Ltd.(346ITR505).He further stated that conditions laid down by sub-Articles a, b, c of Article13(4) of the tax-treaty were not fulfilled. He also referred to case of Indian Airlines (59ITD313 .....

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greements entire management charges were taxable as FTS, that the FAA had held that half of the MS charges were to be taxed in India, that while deciding the appeal, he had not given any reason as to why 50% of the receipts should be treated as MS, that the asessee as an alternate plea had stated that if any addition was to be made it should have been restricted to 10-15% of the payment. We further find that the FAA had discussed a few services and has stated that same could be treated as MS. Bu .....

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e interest of justice, we are restoring back the issue to the file of the FAA for fresh adjudication who will decide the issue afresh after affording a reasonable opportunity of hearing to the asessee. Ground no.1 is decided in favour of the AO, in part. 6. Second ground of appeal deals with levy of interest u/s.234B of the Act. During the course of hearing before us, the DR and the AR agreed that the issue is covered in favour of the assessee by the decision of NGSC Network Asia LLC(313 ITR187) .....

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8.57 lakhs to be set off against long-term capital gain and income from other sources. During the assessment proceedings the AO held that the assessee had admitted that with effect from 01/04/2004 it had discontinued its business and it had no PE in India, that the business profit could not be tax in India in view of Article 7 of the India-UK DTAA, that the profit included loss and once the assessee had taken the benefit of DTA a the loss arising under the head business income could not be set o .....

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enses, that these steps were necessary to close the office, that loss arising in process of winding up was incidental to the business Activities though no Activity was carried out in India, that the said loss was claimed against the income from the other sources and capital gain as in the earlier years, that the bad debts had been offered for tax on basis of provision made, that leave encashment provisions were disallowed in the earlier years, that during the year under consideration liabilities .....

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e was not permissible. Upholding the order of the AO, he dismissed the appeal filed by the assessee. 10. Before us, the AR contended that losses were arising out of the earlier Activities of the assessee, that they were relatable the business of the assessee, that the provisions of Act i.e. section 71(2)were in favour of the assessee, that business losses were to be set off against capital-gains, that the assessee had option to opt for provisions of the Act over the provisions of the tax-treaty. .....

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he assessee had claimed that set off of losses should be dealt as per the provisions of section 71 (2)of the Act. The issue of opting for DTAA and provisions of the Act has been discussed at length by the special bench in the case of Sumitomo Mitsui Banking Corporation(supra). Facts of the case were that the assessee was a Foreign Banking Company incorporated in and controlled from Japan carrying on banking business in India. It was noted by the AO that interest was provided by the Indian branch .....

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eld that interest was allowable as deduction while computing the profits of the Permanent Establishment in India for the purpose of taxation in India as per article 7(2) and 7(3) of India Japan treaty read with paragraph No. 8 of the protocol. Following question were framed by the special bench of the Tribunal, while hearing the appeal: 1. Whether or not on the facts and in the circumstances of the case, the CIT(A) was justified in holding that interest payable by the Indian PE of the foreign ba .....

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r that one cannot make profit out of himself and if the payment of interest made by the Indian PE to the foreign GE of which it is a part is payment to self, it cannot give rise to any income which is chargeable to tax in India as per the domestic law..Keeping in view the purpose and scope of article 11(4) of the OECD Model Convention, the provisions of which are pari materia to the provisions of article 11(6) of the Indo-Japanese treaty, the same is not applicable to the facts of the present ca .....

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iew all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty, Bench is of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the prov .....

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is position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the inter .....

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