LLOYDS REGISTER UK, MUMBAI V. ADIT-INT, RAX.-RG.4(1), MUMBAI

ITA 388/MUM/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0264 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 04-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 11-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JASBIR CHA UHAN
• Keywords: Business income; Transfer pricing; Double taxation relief

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUM BAI , , BEFORE S/SHRI RAJENDRA, A.M. AND SANDEEP GOSAIN,J.M . ./ ././ ./ ITA NO. 388/MUM/2013 / ASSESSMENT YEAR: 2008-09 M/S. LLOYDS REGISTER UK C/O. LLOYDS REGISTER ASIA-INDIA BRANCH OFFICE, 63-64 KALPATARU SQUARE, 6TH FLOOR KONDIVITA LANA, ANDHERI (E) MUMBAI-400 059. PAN: AAACL 2209 B VS. THE ADIT INTL TAXN RANGE -4(1) MUMBAI. ( / // / APPELLANT ) ( / RESPONDENT ) ./ ././ ./ ITA NO. 518/MUM/2013 / ASSESSMENT YEAR: 2008-09 THE ADIT INTL TAXN RANGE -4(1) MUMBAI. VS. M/S. LLOYDS REGISTER UK MUMBAI-59. ( / // / APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI JASBIR CHAUHAN ASSESSEE BY: SHRI NITESH JOSHI / // / DATE OF HEARING: 04/07/2017 !' / DATE OF PRONOUNCEMENT: 04/07/2017 , ,, , 1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , ,, , -PER RAJENDRA,AM: CHALLENGING THE ORDER DATED 08.10.2012 OF THE CIT(A )-11,MUMBAI THE ASSESSEE AND THE ASSESSING OFFICER(AO)HAVE FILED CROSS-APPEAL FOR TH E ABOVE MENTIONED ASSESSMENT YEAR (AY). 2. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)DID NOT PRESS GROUND NO.2.HENCE,SAME STANDS DISMISSED,AS NOT PRES SED. 3. IT WAS BROUGHT TO OUR NOTICE BY THE REPRESENTATIVES OF BOTH THE SIDES THAT EFFECTIVE GROUND OF APPEAL IN BOTH THE APPEALS IS ABOUT TREATMENT TO BE GIVEN TO THE MANAGEMENT CHARGES(MS),THAT IDENTICAL ISSUE HAD ARISEN IN EARL IER AY.S. ( ITA/3138,6746,3587 AND 6850/MUM/ 2011 AY.S. 2005-06 AND 2007-08,DTD.18.03. 2016), THAT THE TRIBUNAL HAD RESTORED BACK THE ISSUE TO THE FILE OF THE FAA FOR FRESH ADJ UDICATION. 4. WE FIND THAT WHILE DECIDING THE APPEALS FOR THE AY. S 2005-06 AND 2007-08 THE TRIBUNAL HAD DELIBERATED UPON THE FACTS OF THE CASE AS UNDER: 2. M/S.LLOYDS REGISTER,UK,HAVING AN INDIA OFFICE,HAD F ILED THE RETURN OF INCOME IN AS LLOYDS REGISTER-INDIA OFFICE(LRIO).UK PARENT COMPANY HAD S EVERAL SUBSIDIARIES ALL OVER THE WORLD, INCLUDING TWO SUBSIDIARIES IN UK,HAVING THEIR BRANC H OFFICE IN INDIA NAMELY LLOYDS REGISTER 388/M/13&518/M/13(08-09) LLOYDS REGISTER UK 2 ASIA,(LRA)AND LLOYDS REGISTER QUALITY ASSURANCE LTD .(LRQA).ASSESSEE DISCONTINUED ITS INDIA OPERATION AS BRANCH OFFICE W.E.F 1.4.2004.DUR ING THE PREVIOUS YEAR,ALL THE ASSETS AND LIABILITIES WERE UNDER PROCESS OF TRANSFER TO LRA-I NDIA BRANCH OFFICE(LRA-IBO) AND LRAQ- INDIA BRANCH OFFICE(LRAQ-IBO).LLOYDS REGISTER UK EN TERED INTO LICENCE AGREEMENT ON 16.7.2003 WITH LRA AND LRQA AND CERTAIN RIGHTS WERE TRANSFERRED TO THEM. DURING ITS WORLD-WIDE CORPORATE-RESTRUCTURING,LLOYD S APPLIED FOR CLOSURE OF ITS BRANCH VIDE ITS APPLICATION DATED 13.10.2003 AND RBI GRANTED FI NAL 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.2005-06 ONWARDS AS IT HAD STARTED EARNING R OYALTY INCOME FROM ITS TWO SUBSIDIARIES I.E.LRA AND LRQA.AS STATED EARLIER,IT ENTERED INTO TWO TYPES OF AGREEMENTS.FIRST AGREEMENT I.E.LICENCE AGREEMENT DEALT WITH THE RIGHT TO USE T HE INTELLECTUAL PROPERTY AND TECHNICAL AND MARKETING SUPPORT SERVICES TO VARIOUS CLIENTS AGAIN ST THE PAYMENT OF ROYALTY.THE AGREEMENT WAS ENTERED INTO BETWEEN LLOYDS REGISTER UK AND LLO YDS REGISTER ASIA LTD. AND LRA.THE SECOND AGREEMENT WAS TERMED AS MANAGEMENT SERVICES AGREEMENT.AS PER THE AGREEMENT LLOYDS REGISTER UK AND LLOYDS REGISTER ASIA LTD.WER E THE SERVICE PROVIDER AND LRQA WAS SERVICE RECIPIENT.BOTH THE AGREEMENTS WERE VALID FO R THE PERIOD UPTO JUNE,2007.LLOYDS REGISTER,UK AND LLOYDS REGISTER QUALITY ASSURANCE,U K OPENED THEIR RESPECTIVE BRANCH OFFICES IN INDIA.DURING THE YEAR UNDER CONSIDERATIO N FOLLOWING AMOUNTS WERE PAID BY BOTH THE SUBSIDIARY COMPANIES TO LLOYDS REGISTER UK: NAME OF THE SUBSIDIARY ROYALTY MANAGEMENT CH ARGES LLOYDS REGISTER ASIA LTD.(U.K.) 13,89,20,438/- 4,42,92,396/- LLOYDS REGISTER QUALITY ASSURANCE LTD.U.K. 89,14,9 63/- 22,40,853/- TOTAL 14,78,35,401/- 4,65,33,249/- OUT OF THE ABOVE AMOUNT,LLOYDS REGISTER UK,OFFERED ROYALTY INCOME OF RS.14.78 CRORES FOR TAXATION,HOWEVER RS.4.65CRORES RECEIVED UNDER THE H EAD MANAGEMENT CHARGESWERE CLAIMED TO BE NON CHARGEABLE IN INDIA.THE AO DID NOT AGREE WITH THE ASSESSEE AND HELD THAT MANAGEMENT CHARGES,AMOUNTING TO RS.4,65,33,249/- WE RE TAXABLE IN INDIA AS FEE FOR TECHNICAL SERVICES(FTS)UNDER ARTICLE-13(2)(A)(II) OF THE INDI A-UK DTAA R.W.S.9(1)(VII)OF THE ACT.HE WAS OF THE OPINION THAT THERE WAS NO ARRANGEMENT BE FORE 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 PRE FERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY( FAA).BEFORE HIM,IT WAS CONTEND ED THAT TO ATTRACT SECTION 9(1)(VIII)(C) OF THE ACT TWO CONDITIONS WERE REQUIRED TO BE FULFILLE D I.E. RENDERING OF SERVICES IN INDIA AND UTILISATION OF SERVICES IN BUSINESS/PROFESSION CARR IED OUT BY THE PAYER IN INDIA,THAT THE MS WERE NOT COVERED BY DEFINITION OF FTS,THAT SERVICES WERE RENDERED FROM OUTSIDE INDIA,THAT AS PER THE ARTICLE 13 OF DTAA FTS WERE NOT MS,THAT THE TERMS MS AND TECHNICAL AND CONSULTANCY HAD NEITHER BEEN DEFINED IN THE ACT OR IN THE DTAA,THAT THE DICTIONARY MEANING OF PHRASE TECHNICAL SERVICES(TS)WAS SERVICES INVOLV ING OR CONCERNED WITH MECHANICAL,ARTS AND APPLIED SCIENCES,THAT CONSULTANCY SERVICES(CS)M EANT 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 AS PER THE INDEPENDENT AGREEMENTS,THAT MS WAS TOWARDS ADOP TION AND CARRYING OUT POLICIES OF THE ORGANISATION,THAT EVEN IF SERVICES WERE TREATED AS TS-IT HAD TO BE MADE AVAILABLE AS PER THE ARTICLE 4(C) OF THE TAX-TREATY,THAT SUCH SERVICES W ERE NOT TAXABLE UNDER THE TREATY AND THAT THE FACT WAS ACCEPTED BY THE AO HIMSELF,THAT THE DEFINI TION OF FTS IN THE ACT AND IN THE DTAA IS NOT THE SAME,THE DEFINITION OF FTS IN SECTION 9 HAD A SPECIFIC MEANING OF THE EXPRESSION MS, THAT IN THE INDIA-UK-DTAA THE WORD MANAGERIAL SERVI CES WAS NOT THERE,THAT IN THE LICENSE FEE AGREEMENT IT WAS STATED THAT LICENSEES WISHED TO US E THE IPR AND THE TECHNICAL/MARKETING 388/M/13&518/M/13(08-09) LLOYDS REGISTER UK 3 SERVICES,THAT IN THE MS AGREEMENT IT WAS MENTIONED THAT SERVICE PROVIDER HAD SPECIFIC KNOWLEDGE AND SKILLS IN THE FIELDS OF COMMERCE, FIN ANCE, LAW,ADMINISTRATION AND MANAGE - MENT, THAT THESE WERE ESSENTIAL TO ENABLE THE SERVI CE RECIPIENTS AS A WHOLE TO BENEFIT FROM SUCH SPECIALISED KNOWLEDGE AND SKILL IN ORDER TO CARRY O UT THE OBJECTIVES OF PROMOTING SAFETY ON LAND AND AT SEA AND IN AIR, THAT IT COULD NOT BE BA SIS FOR LINKING MS WITH LICENCE FEE,THAT IN TRANSFER PRICING ASSESSMENT NO NEXUS HAD BEEN FOUND BETWEEN LICENSE AGREEMENT AND MANAGEMENT FEE AGREEMENT,THAT THE AO HAD ACCEPTED T HE FACT THE SERVICES WERE NOT COVERED UNDER SECTION 9(1)(VI)( C) R.W. EXPLANATION-2(VI),T HAT PROVISIONS OF ARTICLE 13-(4)(A) HAD NO APPLICATION. AFTER GOING THROUGH THE ASSESSMENT ORDER AND THE SU BMISSION OF THE ASSESSEE ,THE FAA HELD THAT THE WORD MANAGERIALDID NOT FIND A PLACE IN T HE DEFINITION OF FTS UNDER INDIA-UK TAX TREATY,THAT FEE PAID FOR MS COULD NOT BE REGARDED A S FTS.HE REFERRED TO THE CASE OF TEMKEN INDIA LTD.AND OBSERVED THAT THE AAR HAD APPLIED ART ICLE 12 OF INDIA TAX TREATY IN RESPECT OF MS,THAT THE PROVISIONS OF INDIA-US TREATY AND THE I NDIA-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 AD OPTION OR TO CARRYOUT OUT POLICIES OF ORGANIZATION AS A WHOLE.HE GAVE A LIST OF SERVICES WHICH WOULD NOT QUALIFY UNDER THE HEAD MANAGERIAL SERVICE AND FURTHER HELD THAT SCHEDULE 3 OF MANAGEMENT SERVICES PROVED THAT ASSESSEE WAS GETTING MONEY FOR GETTING TECHNICAL SE RVICES RATHER THAN MANAGERIAL SERVICES, THAT CERTIFICATION OF MACHINERY OF PRODUCT WAS TECH NICAL SERVICE AND NOT MANAGERIAL SERVICE, THAT LLOYD REGISTERS RULES AND REGULATIONS WAS ALS O TECHNICAL SERVICE,THAT SIMILARLY EXPENDITURE INCURRED ON INFORMATION TECHNOLOGY, HAR DWARE MAINTENANCE AND SOFTWARE MAINTENANCE COULD NOT BE CATEGORISED AS MS,THAT PRO VIDING COMPREHENSIVE INSURANCE PROGRAMME FOR THIRD PARTIES WAS NOT MANAGERIAL FUN CTION -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 R ENDERED BY ASSESSEE TO ITS SUBSIDIARIES,THAT IN THE EARLIER YEARS ASSESSEE WAS CARRYING OUT ITS BUSINESS IN INDIA AND HAD NOT CLAIMED ANY BIFURCATION UNDER THE RESPECTIVE HEADS,THAT IN THE YEAR UNDER CONSIDERATION BUSINESS PROFIT WAS OFFERED FOR TAXATION BY SUBSIDIARY IN INDIA BE SIDES PAYING ROYALTY AND MANAGERIAL SERVICES BY THE SUBSIDIARIES TO THE ASSESSEE,THAT T HE AO AND THE ASESSEE HAD SOME MERITS IN THEIR ARGUMENTS ABOUT TAXABILITY/NON-TAXABILITY OF MS,THAT OUT OF TOTAL MANAGEMENT CHARGES OF RS.4.65 CRORES 50% HAD TO BE ALLOWED AS MANAGEMENT CHARGES(NON TAXABLE)AND BALANCE 50% WAS TO BE TREATED AS FTS(TAXABLE). AFTER CONSIDERING THE RIVAL SUBMISSIONS,THE TRIBUNA L DECIDED THE ISSUE AS UNDER IN THE APPEAL FILED BY THE AO AS FOLLOWS: 5. WE FIND THAT THE ASSESSEE HAD RECEIVED RS.14,78,35, 401/-AS ROYALTY AND RS. 4.65 CRORES AS MS,THAT IT HAD CLAIMED THAT MANAGERIAL-CHARGES,RECE IVED BY IT,WERE NOT TAXABLE IN INDIA, THAT THE AO WAS OF THE VIEW THAT NOTWITHSTANDING TWO AGR EEMENTS 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 GIV EN ANY REASON AS TO WHY 50% OF THE RECEIPTS SHOULD BE TREATED AS MS,THAT THE ASESSEE A S AN ALTERNATE PLEA HAD STATED THAT IF ANY ADDITION WAS TO BE MADE IT SHOULD HAVE BEEN RESTRIC TED 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. BUT, HE HAS NOT ANALYSED THE BILLS THAT WOULD G IVEN HIM A CLEAR AND FAIR IDEA AS TO WHICH SERVICES WERE ACTUALLY RENDERED BY THE ASESSEE FOR THE YEAR UNDER CONSIDERATION AND THAT WHICH COULD BE TREATED MS OR OTHERWISE.WITHOUT ESTA BLISHING 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 RESTORI NG BACK THE ISSUE TO THE FILE OF THE FAA FOR FRESH ADJUDICATION WHO W ILL DECIDE THE ISSUE AFRESH AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEARING TO THE ASESSEE.GR OUND NO.1 IS DECIDED IN FAVOUR OF THE AO,IN PART. 388/M/13&518/M/13(08-09) LLOYDS REGISTER UK 4 AS THE FACTS OF THE CASE FOR THE YEAR UNDER APPEAL ARE IDENTICAL TO THE FACTS OF EARLIER AY.S.- EXCEPT FOR THE AMOUNTS INVOLVED,SO,RESPECTFULLY FOL LOWING THE ORDERS FOR THOSE YEARS,WE RESTORE BACK THE MATTER TO THE FILE OF THE FAA WITH THE SAME DIRECTIONS.FIRST GROUND OF APPEAL RAISED BY THE AO AND THE ASSESSEE,IS DECIDED IN THE IR FAVOUR,IN PART. AS A RESULT,APPEALS FILED BY THE AO A ND THE ASSESSEE STAND PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH JULY, 2017. 4 2017 SD/- SD/- ( /SANDEEP GOSAIN) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; #$ /DATED : 04 .7.2017 . JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR L BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.