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2017 (6) TMI 448 - ITAT MUMBAI

2017 (6) TMI 448 - ITAT MUMBAI - TMI - 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 th .....

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rative 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 .....

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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 th .....

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erride 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 .....

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order of the FAA, we decide ground in favour of the assessee. - I. T. A. /389/Mum/2013, I. T. A. /390/Mum/2013, I. T. A. /519/Mum/2013, I. T. A. /520/Mum/2013 - Dated:- 7-6-2017 - Shri Rajendra, Accountant Member And Ram Lal Negi, Judicial Member Revenue by: S/Shri Jasbir Chauhan-CIT and Rajguru M. V. Assessee by: Shri Nitesh Joshi-AR ORDER Per Rajendra, AM Challenging the order, dated 15. 10. 2012 of the CIT(A)-11, Mumbai the Assessee and the Assessing Officer(AO)have filed cross appeals for th .....

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rores 14/02/2012 ₹ 2, 97, 86, 310/- ITA/519/Mum/2013, AY. 2008-09: 2. First ground of appeal, raised by the AO, is about treatment of licence fee, IT recharge and 50%of management services as head officer expenditure covered by section 44C of the Act. During the assessment proceedings, the AO found that as per the licence agreement dated 16/ 07/2003between Lloyds Register(LR)and Lloyds Register Quality Assurance Ltd. (LRQAL) , LR had granted licence to use brand LR for royalty and that lic .....

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ifferent kind of services such as data centre operations, manage - ment of WAN and telecom services, PC management and support services as well as data base-management. He held that payment of management fees and IT recharge by the Indian branch to LRQAL for onward payment to holding company was Head Office (HO) expenses of the assessee, that it s liability was limited by section 44C of the Act, that the payment of management charges and IT recharge was reimbursement of expenses incurred by LR f .....

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paid by India branch to its head office and royalty offered to tax by LR in India was furnished before the FAA. He observed that the debit note was raised by LRQAL, UK that TDS had been done on account of LR and not on account of LRQAL(UK), that the payment to LRQALwas only reimbursement of cost allocated to WAN & Telecom Services, PC management and support Services and Data base management. The assessee relied upon the case of Emirates Commercial Bank Limited (262ITR55) and argued that expe .....

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of the Agreement, that IT recharge and management charges had been allocated mainly on total sales except one item, namely chairman group consolidation. After considering the submission of the assessee, the FAA held that as per the license fee agreement royalty was payable to LRQAL to LR, that royalty was a function of profits as provided in the Schedule, that royalty was payable at different rates, that it was payable to LR through LRQAL (UK) head office. He referred to the Explanation to secti .....

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paid by the assessee was not hit by the definition of HO expenditure as envisaged by section 44C. He directed the AO not to consider royalty/license fee expenditure incurred by the assessee as HO expenditure. With regard to IT recharge, the FAA held that the nature of expenditure included services provided for data centre operation, management of WAN/Telecom services, PC management/support services and data base management, that all these services were technical in nature as per the provisions o .....

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office, CHR activities, insurance, pension provision, regional office expenditure etc. and that same were different than provided in the section, that expenses incurred by the assessee included expenses incurred in chairman s office, CHR group, corporate secretary, insurance, pension department, pension provisions, that items of expenditure in the nature of executive and general administration were to be limited by section 44C of the Act. Referring to the order for the AY. 2006-07 to 2008-09 in .....

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the case of Lloyd s Register Asia a group entity. He referred to pages 214-216 of the PB in this regard. About IT recharge he stated that services rendered by the assessee under the head were in the nature of specialized services, that the same did not fall within the definition of HO expenses as enumerated by clause 4 of Explanation to sec. 44C of the Act. 2. 3. We find that issue of licence fee was deliberated upon and decided by the Tribunal in the case of Lloyds Register Asia(ITA/387/Mum/201 .....

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enditure 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 assessee in India, whichever is less . The meaning of the term head office expenditure for the purpose of section 44CC has been enumerated in clause (iv) of Explanation to section 44CC. The said clause reads as under: iv .....

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anaging 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 prescribed. From the aforesaid 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. The nature of such e .....

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ature 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 are in the following nature: - Provision of sales and marketing materials including brochures and product factsheet. - Provision of market research data and analysis - Provision of training and standards for use by operations and their clients in training surveyors, inspect .....

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er 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 nothing to do with these kind and nature of expenditures. Thus, the entire payment of license fees do not fall within the ambit of section 44CC as illustrated in clauses (a) to (c) of the Explanation and, therefore, the learned CIT(A) has rightly held that royalty or license fees expenditure ca .....

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t 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 t .....

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o 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. 3. .....

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eed to interfere with his order. Ground no. 1 raised by the assessee with regard to management fees is decided against it. In short, grounds regarding management charges raised by the AO and the assessee are decided against them. 4. Ground No. 2, raised by the AO, is about levy of interest u/s. 234B of the Act. It was brought to our notice that the Hon ble Jurisdictional High Court in case of NGC Network Asia LLC (313 ITR 187 )has decided the issue in favour of the assessee. We find that the Hon .....

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he provisions of section 44C of the Act. We have dealt the issue paragraph 3. 2. 3. Considering the discussion held in that paragraph we dismiss Ground no. 2, raised by the assessee. 6. Next effective ground of appeal(GOA -3&4) is about application of section 40(a)(ia) of the Act to management charges. During the assessment proceedings, the AO held that the assesse had to deduct tax at source on all the payments unless he had approached the AO and had obtained certificates for NIL TDS. The F .....

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the payments towards management charge to its HO in UK, that it in turn had made the payment to LR in UK. He further argued that the issue stands decided in favour of the assessee by the judgment of the Hon ble Delhi High Court in the case of Herbalife International India P. Ltd. (384 ITR 276). 6. 2. We have heard the rival submissions and perused the available material. We find that in the case of Herbalife International India P. Ltd. (supra)the Honble Delhi High Court has dealt the issue as u .....

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rce on payments made in India to residents was inserted for the first time by way of section 40(a)(i) of the Act with effect from April 1, 2005. Section 40(a)(i) of the Act in providing for disallowance of a payment made to a non-resident if tax is not deducted at source, is no doubt meant to be a deterrent in order to compel the resident payer to deduct tax at source while making the payment. However, that does not answer the requirement of article 26(3) of the DTAA that the payment to both res .....

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nt of deduction of tax at source. The lack of parity in the allowing of the payment as deduction is what brings about the discrimination. The consequence of non-deduction of tax at source when the payment to a non-resident has an adverse consequence to the payer. Since it is mandatory in terms of section 40(a)(i) for the payer to deduct tax at source from the payment to the non-resident, the latter receives the payment net of tax deducted at source. The object of article 26(3) of the Double Taxa .....

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t ground of appeal (GOA-5) is about exchange rate to be applied. During the assessment proceedings the AO observed that license fee was paid as the percentage of profit and not as percentage of sales, that the assesse had passed on the benefits derived by it on account of its own efficiencies and caused deduction to the licensor, that expenses were paid on the basis of Debit notes in bonds raised on 31/3/2008, that bond was to be multiplied by ₹ 80. 12 for converting it into Indian currenc .....

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