LLOYDS REGISTER UK, MUMBAI V. ASST CIT (IT) RG 4(1), MUMBAI

ITA 5150/MUM/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0995 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 10-07-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 30-10-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Double taxation relief

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI B. R. BASKARAN , A.M. AND SHRI SANDEEP GOSAIN ,J.M. ./ ITA NO. 5150 / MUM/201 5 , / ASSESSMENT YEAR: 2009 - 10 M/S. LLOYD S REGISTER UK C/O. LLOYDS R EGISTER ASIA - INDIA BRANCH OFFICE , 63 - 64 KALPATARU SQUARE, 6TH FLOO R KONDIVITA LANA , ANDHERI (E) MUMBAI - 400 0 59. PAN: AAACL 2209 B VS. THE AC IT INTL TAXN RANGE - 4(1) MUMBAI - 21 ( / APPELLANT ) ( / RESPONDENT ) & ./ ITA NO. 5035 / MUM/2013 , / ASSESSMENT YEAR: 2009 - 10 THE ADIT INTL TAXN RANGE - 4(1) MUMBAI - 38 VS. M/S. LLOYDS REGISTER UK C/O. LLOYDS REGISTER ASIA - INDIA BRANCH OFFICE, 63 - 64 KALP ATARU SQUARE, 6TH FLOOR KONDIVITA LANA, ANDHERI (E) MUMBAI - 400 059. ( / APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI SAMUEL DARSE ASSESSEE BY: SHRI NITESH JOSHI / DATE OF HEARING: 08/11 / 2017 / DATE OF PRONOUNCEMENT: 03/01/2018 , 1961 254(1) ORDER U/S. 254(1)OF THE INCOME - TAX ACT,1961(ACT) 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 2 PER SHRI SANDEEP GOSAIN, JUDICIAL MEMBER: THESE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE ARE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - 57 MUMBAI DATED 04.08.2015 FOR AY 2009 - 10 . 2. SINC E BOTH THE APPEALS HAVE ARISEN OUT OF SAME ORDER PASSED BY LD. CIT(A) AND ALL THE ISSUES INVOLVED ARE COMMON, THEREFORE, THEY HAVE BEEN CLUBBED, HEARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. IT WAS BRO UGHT TO OUR NOTICE BY THE REPRESENTATIVES OF BOTH THE SIDES THAT EFFECTIVE GROUND S OF APPEAL IS ABOUT TREATMENT TO BE GIVE N TO THE MANAGEMENT CHARGES(MS). IT WAS SUBMITTED THAT IDENTICAL ISSUE HAD ARISEN IN EARLIER AY.S. ( ITA/3138,6746,3587 AND 6850/MUM/ 20 11 & ITA NO. 388/MUM/13 AY.S. 2005 - 06, 2007 - 08, DTD.18.03.2016 AND 2008 - 09 DATED 04.07.17) AND THE TRIBUNAL HAD RESTORED BACK THE ISSUE TO THE FILE OF THE FAA FOR FRESH ADJUDICATION. 4 . WE FIND THAT WHILE DECIDING THE APPEA LS FOR THE AY.S 2008 - 09 THE TRI BUNAL HAD DELIBERATED UPON THE FACTS OF THE CASE AND THE OPERATIVE PORTION IS REPRODUCED BELOW : 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 3 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 UN DER: 2. M/S.LLOYDS REGISTER,UK,HAVING AN INDIA OFFICE,HAD FILED THE RETURN OF INCOME IN AS LLOYDS REGISTER - INDIA OFFICE(LRIO).UK PARENT COMPANY HAD SEVERAL SUBSIDIARIES ALL OVER THE WORLD, INCLUDING TWO SUBSIDIARIES IN UK,HAVING THEIR B RANCH OFFICE IN INDIA NAMELY LLOYDS REGISTER ASIA,(LRA)AND LLOYDS REGISTER QUALITY ASSURANCE LTD.(LRQA).ASSESSEE DISCONTINUED ITS INDIA OPERATION AS BRANCH OFFICE W.E.F 1.4.2004.DURING THE PREVIOUS YEAR,ALL THE ASSETS AND LIABILITIES WERE UNDER PROCESS OF TRANSFER TO LRA - INDIA BRANCH OFFICE(LRA - IBO) AND LRAQ - INDIA 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.2005 - 06 ONW ARDS AS IT HAD STARTED EARNING ROYALTY 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 THE INTELLECTUAL PROPERTY AND TECHNICAL AND MARKETING SUPPORT SERVICES TO VARIOUS CLIENTS AGAINST THE PAYMENT OF ROYALTY.THE AGREEMENT WAS ENTERED INTO BETWEEN LLOYDS 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 4 REGISTER UK AND LLOYDS REGISTER ASIA LTD. AND LRA.THE SECOND AGREEMENT WAS TERMED AS MANAGEMENT SERVICES AGREEMENT.AS PER THE AGREEM ENT 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 BR ANCH 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 LLOYDS REGISTER ASIA LTD.(U.K.) 13,89,20,438/ - 4,42, 92,396/ - LLOYDS REGISTER QUALITY ASSURANCE LTD.U.K. 89,14,963/ - 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/ - WERE TAXABLE IN INDIA AS FEE FOR TECHNICAL SERVICES(FTS)UNDER ARTICLE - 13(2)(A)(II) OF T HE 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. 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 5 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY( FAA).BEFORE HIM,IT WAS CONTENDED THAT TO ATTRACT SECTION 9(1) (VIII)(C) OF THE ACT TWO CONDITIONS WERE REQUIRED TO BE FULFILLED I.E. RENDERING OF SERVICES IN INDIA AND UTILISATION OF SERVICES IN BUSINESS/PROFESSION CARRIED 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 INVOL VING 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 AGREEME NT 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 ADOPTION AND CARRYING OUT POLICIES OF THE ORGANISATION,THAT EVEN IF SERVI CES WERE TREATED AS TS - IT HAD TO BE MADE AVAILABLE AS PER THE ARTICLE 4(C) OF THE TAX - TREATY,THAT SUCH SERVICES WERE NOT TAXABLE UNDER THE TREATY AND THAT THE FACT WAS ACCEPTED BY THE AO HIMSELF,THAT THE DEFINITION 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 SERVICES WAS NOT THERE,THAT IN THE LICENSE FEE AGREEMENT IT WAS STATED THAT LICENSEES WISHED TO USE THE IPR AND THE TECHN ICAL/MARKETING SERVICES,THAT IN THE MS 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 6 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 OBJECTIVES OF PROMOTING SAFETY ON LAND AND AT SEA AND IN AIR, THAT IT COULD NOT BE BASIS FOR LINKING MS WITH LICENCE FEE,THAT IN TRANSFER PRICING ASSESSMENT NO NEXUS HA D BEEN FOUND BETWEEN LICENSE AGREEMENT AND MANAGEMENT FEE AGREEMENT,THAT THE AO HAD ACCEPTED THE FACT THE SERVICES WERE NOT COVERED UNDER SECTION 9(1)(VI)( C) R.W. EXPLANATION - 2(VI),THAT PROVISIONS OF ARTICLE 13 - (4)(A) HAD NO APPLICATION. AFTER GOING THRO UGH THE ASSESSMENT ORDER AND THE SUBMISSION OF THE ASSESSEE ,THE FAA HELD THAT THE WORD MANAGERIALDID 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 ADOPTION 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 MANAGEMEN T SERVICES PROVED THAT ASSESSEE WAS GETTING MONEY FOR GETTING TECHNICAL SERVICES RATHER THAN MANAGERIAL SERVICES, THAT CERTIFICATION OF MACHINERY OF PRODUCT WAS TECHNICAL SERVICE AND NOT MANAGERIAL SERVICE, THAT LLOYD REGISTERS RULES AND REGULATIONS WAS A LSO 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 7 TECHNICAL SERVICE,THAT SIMILARLY EXPENDITURE INCURRED 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 FUNCTIO N - 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 NOT CLAIMED ANY BIFURCATION UNDER THE RESPECTIVE HEADS,THAT IN THE YEAR UNDER CONSIDERATION BUSINESS PROFIT WAS OFFERED FOR TAXATION BY SUBSIDIARY IN INDIA BESIDES PAYING ROYALTY AND MANAGERIAL SERVICES BY THE S UBSIDIARIES TO THE ASSESSEE,THAT THE 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 TRIBUNAL DECIDED THE ISSUE AS UNDER IN THE APPEAL FILED BY THE AO AS FOLLOW S : 5. WE FIND THAT THE ASSESSEE HAD RECEIVED RS.14,78,35,401/ - AS ROYALTY AND RS. 4.65 CRORES AS MS,TH AT 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 THAT HALF OF THE MS CHARGES WERE TO BE T AXED IN INDIA,THAT WHILE DECIDING THE APPEAL,HE HAD NOT GIVEN ANY REASON 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 8 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. BUT, HE HAS NOT ANALYSED THE BILLS THAT WOULD GIVEN 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 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,OPIN ION,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 FRESH ADJUDICATION WHO WILL DECIDE THE ISSUE AFRESH AFTER AFFORDING A REA SONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE .GROUND NO.1 IS DECIDED IN FAVOUR OF THE AO,IN PART. 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 FOLLOWING 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 THEIR FAVOUR, IN PART. 5 . SINCE THE A S THE FACTS OF BOTH THE APPEALS BEFORE US ARE IDENTICAL TO THE FACTS OF EARLIER AY.S. EXCEPT FOR THE AMOUNTS INVOLVED, SO, RESPECTFULLY FOLLOWING THE ORDERS FOR THOSE YEARS, WE RESTORE BACK THE MATTER TO THE FILE OF THE 5150/M/15 & 5035/M/15 (2009 - 10 ) LLOYDS REGISTER UK 9 FAA WITH THE SAME DIRECTIONS. FIRST GROUND OF APPEAL RAISED BY THE AO AND TH E ASSESSEE, IS DECIDED IN THEIR FAVOUR, IN PART. 6. IN THE NET RESULT, BOTH THE APPEALS FILED BY THE ASSESSES AS WELL AS REVENUE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD JAN , 201 8 SD/ - SD/ - (B. R. BASKARAN ) (SANDEEP GOSAIN) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI ; DATED : 0 3 . 01 .201 8 SR.PS. DHANANJAY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPEL LANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE / BY ORDER, . / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI