ASST CIT 8(3)(0SD), MUMBAI V. LLOYDS REGISTER ASIA, MUMBAI

ITA 517/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92823 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 31-03-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 18-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA; VIVEK PERMPURNA
• Keywords: Transfer pricing; Double taxation relief; Permanent establishment
• Section: 143(3); 234B; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L, MUMBAI BEFORE SHRI D KARUNAKARA RAO, AM & SHRI AMIT SHUKLA , JM ITA NO.387/MUM/2013 ASSESSMENT YEAR : 2005-06 M/S. LLOYDS REGISTER ASIA (INDIA BRANCH OFFICE) 63-64 KALPATARU SQUARE, 6 TH FLOOR, KONDIVITA LANE, OFF ANDHERI KURLA ROAD, ANDHERI (E),MUMBAI- 400 059 PAN AAACL9741J VS. THE ASST. CIT 8 (3) (OSD) , MUMBAI (APPELLANT) RESPONDENT) ITA NO.517/MUM/2013 ASSESSMENT YEAR : 2005-06 THE ASST. CIT 8(3) (OSD), MUMBAI VS. M/S. LLOYDS REGISTER ASIA (INDIA BRANCH OFFICE) MUMBAI- 400 059 (APPELLANT) RESPONDENT) ASSESSEE BY : S/SHRI S E DASTUR,NITESH JOSHI, VISPIT SHAH REVENUE BY : S/SHRI S D SRIVASTAVA & VIVEK PERMPURN A DATE OF HEARING : 01 .0 4 .2015 DATE OF PRONOUNCEMENT : 10.06. 2015 O R D E R PER AMIT SHUKLA, JUDICIAL MEMBER THE AFORESAID CROSS APPEALS HAVE BEEN FILED BY THE EITHER PARTIES AGAINST THE IMPUGNED ORDER DATED 15.10.2012, PASSED BY THE CIT( A) II, MUMBAI, FOR THE QUANTUM OF THE ASSESSMENT PASSED U/S. 143(3) FOR TH E A.Y. 2005-06. ITA NO.387 & 517/MUM/2013 2 2. AT THE OUTSET, THE LEARNED SENIOR COUNSEL, SHRI S E DASTUR SUBMITTED THAT GROUND NO.3 AS RAISED BY THE ASSESSEE IN THE MEMORA NDUM 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 READ S AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) HAS ERRED IN HOLDING THE TRANSACTION OF LICENSE FEE, MANAGEMENT CHARGES AND IT RECHARGE AS BEING CONSIDE RED BETWEEN THE HEAD OFFICE AND BRANCH. IN DOING SO HE HAS NOT APPRECIATED THE FACT THAT LLOYDS REGISTER-UK IS NO T A HEAD OFFICE OF THE APPELLANT AND LLOYDS REGISTER UK HAS FILED ITS INCOME TAX RETURN IN INDIA DECLARING THE ABOVE SOURCE OF INCOM E RECEIVED FROM THE APPELLANT. HE OUGHT NOT TO HAVE DONE SO. 2. A. WITHOUT PREJUDICE TO GROUND NO.1, ON THE FACT S AND IN THE CIRCUMSTANCES OF THE CASE AN DIN LAW THE LEARNED CI T(A) HAS ERRED IN HOLDING THAT 50% OF THE TOTAL MANAGEMENT CHARGE S OF INR 4,42,92,316/- PAID TO LLOYDS REGISTER-UK I.E.RS.2, 21,46,158/- ARE COVERED IN THE DEFINITION OF HEAD OFFICE EXPENDITUR E AS PER SECTION 44C OF THE ACT AND THEREBY RESTRICTING THE ALLOWANC E 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 ASSESSING OFFICER ERRED IN TAXING A PE OF A UK COMP ANY BY PLACING RESTRICTIONS ON DEDUCTION OF HEAD OFFICE EXPENDITUR E UNDER SECTION 44C. THE SAID RESTRICTION IS NOT APPLICABLE IN CAS E OF RESIDENT COMPANIES THEREBY DISCRIMINATING BY GIVING UNFAVOUR ABLE TAX TREATMENT. HE OUGHT NOT TO HAVE DONE SO. 4. THE GROUNDS RAISED BY THE REVENUE ARE ALSO ON TH E SAME ISSUE, THEREFORE, ARE REPRODUCED HERE UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING 100% RELIEF ON ACCOUNT OF ADDITION MADE BY THE A.O. U/S. 44C ON ACCOUNT OF LICENCE FEE S 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. ITA NO.387 & 517/MUM/2013 3 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N 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, L LOYDS REGISTER U K IS HAVING A SUBSIDIARY IN THE NAME LLOYDS REGISTER ASIA UK, WH ICH HAS AN INDIAN BRANCH IN INDIA. IN OTHER WORDS, THE ASSESSEE IS AN INDIAN B RANCH OF LLOYDS REGISTER ASIA UK, WHICH IN TURN IS A SUBSIDIARY OF LLOYDS REGISTER U K. THE MAIN HOLDING COMPANY IS INTO THE BUSINESS OF SURVEY AND INSPECTION OF SHIPS , INDUSTRIAL INSPECTION ACTIVITY AND DRAWING APPRAISAL. EARLIER LLOYDS REGISTER UK WAS OPERATING IN INDIA THROUGH ITS BRANCH. FROM THE RELEVANT FINANCIAL YEAR (I.E. A Y 2005-06), IT FLOATED A SUBSIDIARY COMPANY, LLOYDS REGISTER ASIA AND ALL THE INDIAN O PERATIONS THEREAFTER ARE BEING CARRIED OUT THROUGH BRANCH OF THIS ENTITY. LLOYDS REGISTER UK ENTERED INTO A LICENSE AGREEMENT ON 16.07.2003 WITH ALL ITS SUBSIDIARIES A LL OVER THE WORLD, INCLUDING LLOYDS REGISTER ASIA UK, WHEREBY IT HAS GRANTED LICENSE TO USE THE BRAND LLOYDS REGISTER I.E. USE OF TRADEMARK AND TRADE NAME OWNED BY LLOYD S REGISTER UK. BESIDES THIS, THE LICENSOR (LLOYDS REGISTER UK) ALSO PROVIDES GE NERAL, TECHNICAL AND MARKETING SUPPORT SERVICES TO ALL ITS PRODUCTS, WHICH HAVE BE EN REFERRED IN THE LICENSE AGREEMENT AS INTELLECTUAL PROPERTY RIGHTS. THE R OYALTY AND THE LICENSE FEES WAS PAYABLE AS PER SCHEDULE VI OF THE LICENSE AGREEMENT , WHICH HAS BEEN INCORPORATED AT PAGE 3 OF THE APPELLATE ORDER AND ALSO AT PAGE 2 3 OF THE PAPER-BOOK. AS PER THE WORLDWIDE POLICY, THE INVOICES ARE SENT FROM LLOYD S REGISTER UK TO LLOYDS REGISTER ASIA UK WHICH IN TURN, ALLOCATES THE ROYALTY ATTRIB UTABLE TO ITS INDIAN BRANCH. THE INDIAN BRANCH PAYS THE SAME TO LLOYDS REGISTER ASI A UK, WHICH IN TURN PAYS LLOYDS REGISTER UK. FURTHER, ANOTHER MANAGEMENT SERVICES AGREEMENT DATED 16.07.2003 ITA NO.387 & 517/MUM/2013 4 WAS ENTERED INTO BETWEEN LLOYDS REGISTER UK AND LL OYDS REGISTER ASIA UK FOR PROVIDING SERVICES SUCH AS : CORPORATE COMMUNICATIONS, 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 PROVID ED BY REGIONAL AND AREA MANAGEMENT CENTRES) RISK MANAGEMENT AND SECRETARIAL SERVICES AND TAXATION AND TREASURY SERVICES. THE DETERMINATION OF MANAGEMENT SERVICE FEES HAS BE EN ENUMERATED IN SCHEDULE 4 OF THE MANAGEMENT SERVICE AGREEMENT, THE RELEVANT P ORTION OF WHICH HAS BEEN INCORPORATED BY THE CIT(A) AT PAGES 3 & 4. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAS PAID MANAGEMENT CHARGES AND LIC ENSE FEES OF RS.18,32,12,834/- TO LLOYDS REGISTER ASIA UK I.E. ITS HEAD OFFICE, WHICH IN TURN HAS BEEN GIVEN TO LLOYDS REGISTER UK. THE BREAK-UP OF THE MANAGEMEN T 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 A S TO WHY THESE EXPENSES SHOULD NOT BE TREATED AS HEAD OFFICE EXPENSES U/S. 44C, THE ASSESSEE FILED DETAILED ITA NO.387 & 517/MUM/2013 5 SUBMISSIONS, WHICH HAS BEEN INCORPORATED AT PAGES 2 TO 6 OF THE ASSESSMENT ORDER. THE SUM AND SUBSTANCE OF THE ASSESSEES SUBMISSION WAS THAT, FIRSTLY, IT IS NOT A TRANSACTION BETWEEN THE HEAD OFFICE AND THE BRANCH BUT BETWEEN LLOYDS REGISTER UK AND LLOYDS REGISTER ASIA (INDIA BRANCH OFFICE). THE PAYMENT IS ONLY ROUTED THROUGH THE HEAD OFFICE I.E. LLOYDS REGISTER ASIA UK. LLOYDS REGISTER UK IS FILING SEPARATE INCOME TAX RETURN IN INDIA FOR THE SAID IN COME. THESE TRANSACTIONS HAVE ALSO BEEN VERIFIED BY THE TRANSFER PRICING OFFICER AND HELD THAT IT WAS AT ARMS LENGTH AND, THEREFORE, PROVISIONS OF SECTION 44C DO NOT AR ISE. SECONDLY, THE LICENSE FEES AND MANAGEMENT FEES CANNOT BE HELD TO BE COVERED WI TH THE DEFINITION OF HEAD OFFICE EXPENSES AS DEFINED IN SECTION 44C OF THE A CT, AS THE SAID SECTION IS ONLY APPLICABLE TO GENERAL AND ADMINISTRATION EXPENDITUR E AS REFERRED TO IN EXPLANATION (IV) TO SECTION 44C, BECAUSE THE HEAD OFFICE EXPEND ITURE INCLUDES ONLY EXECUTIVE AND GENERAL ADMINISTRATION EXPENDITURE OF THE NATURE EN UMERATED IN CLAUSE (A) TO (D). 7. HOWEVER, THE LEARNED AO REJECTED THE ASSESSEES CONTENTION AND HELD THAT WHAT IS RELEVANT TO SEE HERE IS, WHO HAS INCURRED T HE EXPENSES AND WHO HAS ACCOUNTED FOR IT AS THEIR EXPENSES. IN THIS CASE T HE EXPENSES WERE INCURRED BY LLOYDS REGISTER UK FOR VARIOUS GROUP COMPANIES, WH ICH WERE REIMBURSED THROUGH LLOYDS REGISTER ASIA UK AND THESE EXPENSES ARE VER Y MUCH IN THE NATURE OF HEAD OFFICE EXPENSES FOR THE PURPOSE SO FAR AS ASSESSEE IS CONCERNED. LLOYDS REGISTER ASIA UK I.E. HEAD OFFICE IS ONLY THE INTERMEDIARY F OR 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 EXPEND ITURE AS DEFINED UNDER SECTION ITA NO.387 & 517/MUM/2013 6 44C. THUS HE RESTRICTED THE MANAGEMENT AND LICENSE FEES TO 5% OF THE ADJUSTED TOTAL INCOME. THE ADDITION WAS MADE BY THE AO IN T HE FOLLOWING MANNER: THUS, RS.18,32,12,834/- OF MANAGEMENT AND LICENSE F EES IS RESTRICTED TO 5% OF THE ADJUSTED TOTAL INCOME, WHICH IS RS.35,65,954 /- (I.E. 5% OF TOTAL INCOME OF RS.7,13,19,080/-) THE DIFFERENCE OF RS.17,96,46, 880/- IS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. PENALTY PROCEEDINGS U/S. 2 71(1)(C) INITIATED FOR FURNISHING OF INACCURATE PARTICULARS OF INCOME. 8. IN THE FIRST APPEAL, THE LEARNED CIT(A) AFTER CO NSIDERING THE ELABORATE SUBMISSIONS MADE BY THE ASSESSEE, WHICH HAS BEEN DI SCUSSED BY HIM FROM PARA 4.7 TO 4.10, HELD THAT SO FAR AS ROYALTY OR LICENSE FEE S IS CONCERNED, THE SAME IS NOT HIT BY THE DEFINITION OF HEAD OFFICE EXPENDITURE AS PRO VIDED IN SECTION 44C. ACCORDINGLY, HE DIRECTED THE AO NOT TO CONSIDER ROY ALTY OR LICENSE FEES EXPENDITURE INCURRED BY THE ASSESSEE AS HEAD OFFICE EXPENDITURE . THUS, THE AMOUNT OF RS. 13,89,20,438/- WAS DIRECTED NOT TO BE CONSIDERED FO R DISALLOWANCE AS PER SECTION 44C. REGARDING MANAGEMENT FEES, HE HELD THAT 50% O F SUCH EXPENDITURE IS HIT BY SECTION 44C AND THE BALANCE IS NOT COVERED BY SECTI ON 44C BEING THE EXPENDITURE OF THE BRANCH OFFICE. FOR ARRIVING AT THIS CONCLUSION , HE HAS REFERRED TO THE CIT(A)S ORDER IN THE CASE OF LLOYDS REGISTER INDIA OFFICE, I.E. THE HOLDING COMPANY, FOR A.Y. 2005-06. THUS, HALF OF THE AMOUNT OF MANAGEMENT CH ARGES OF RS.4,42,92,396/- WAS HELD TO BE COVERED U/S. 44C AND THE BALANCE HAL F 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 THI S CASE, IT NEEDS TO BE SEEN, WHETHER THE PAYMENT MADE BY THE INDIAN BRANCH TO LL OYDS REGISTER ASIA UK, WHICH IN TURN HAS BEEN PAID TO LLOYDS REGISTER UK, CAN B E SET TO BE HIT BY PROVISIONS OF ITA NO.387 & 517/MUM/2013 7 SECTION 44C. THE DEFINITION OF HEAD OFFICE EXPEND ITURE ENVISAGES THAT SUCH AN EXPENDITURE MUST HAVE BEEN INCURRED BY THE ASSESSEE OUTSIDE INDIA. HERE THE ASSESSEE LLOYDS REGISTER ASIA UK, HAS NOT INCURRED ANY SUCH EXPENDITURE BUT HAS ONLY PASSED ON TO LLOYDS REGISTER UK. THIS IS EVI DENT FROM INTERNAL DEBIT NOTES PLACED AT PAGES 58 AND 59 OF THE PAPER-BOOK. THE T RANSACTION IS BETWEEN TWO DIFFERENT ENTITIES I.E. LLOYDS REGISTER UK AND LLO YDS REGISTER ASIA UK. THE SERVICES ARE RENDERED BY LLOYDS REGISTER UK AND NOT BY LLOY DS REGISTER ASIA UK THEREFORE, IT CANNOT BE HELD THAT EXPENSES HAS BEEN INCURRED BY T HE ASSESSEE. WHENEVER INCOME HAS BEEN EARNED BY LLOYDS REGISTER UK IN TH E FORM OF LICENSE FEES ETC., THE SAME IS BEING TAXED IN INDIA. HENCE, AT THE FACE O F IT, THE PROVISIONS OF SECTION 44C DOES NOT ARISE AT ALL, AS THERE IS NO TRANSACTION B ETWEEN 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 LLOYDS REGISTER ASIA UK TO LLOYDS REGISTER UK AND THE BRA NCHES OF LLOYDS REGISTER ASIA UK HAVE BEEN APPORTIONED CHARGES ON PROPORTIONATE BASI S THROUGH AN INTERNAL DEBIT NOTE AND IS REIMBURSED BY THE BRANCH TO THE LLOYDS REGISTER ASIA UK. IF ONE GOES BY THE DEFINITION IN CLAUSE (IV) TO SECTION 44C, TH EN SUCH A PAYMENT OF SAID LICENSE FEES/ROYALTY DOES NOT FALL WITHIN THE AMBIT OF HEAD OFFICE EXPENDITURE. HENCE, THE LEARNED CIT(A) HAS RIGHTLY HELD THAT THE LICENSE FE ES IS NOT IN THE NATURE OF HEAD OFFICE EXPENDITURE AND WAS LEGALLY CORRECT IN DIREC TING 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, SU CH A PAYMENT HE SUBMITTED THAT, ITA NO.387 & 517/MUM/2013 8 IS DEFINITELY NOT COVERED U/S. 44C. REGARDING MANA GEMENT CHARGES, HE DREW OUR ATTENTION TO THE AGREEMENT DATED 16.07.2003, WHICH HAS BEEN PLACED IN THE PAPER- BOOK FROM PAGE 25 ONWARDS AND ALSO THE VARIOUS TYPE S OF SERVICES PROVIDED BY LLOYDS REGISTER, WHICH HAVE BEEN ELABORATED IN SCH EDULE 3 (APPEARING FROM PAGES 48 TO 52 OF THE PAPER-BOOK). HE SUBMITTED THAT LOO KING TO THE NATURE OF SERVICES IT CAN BE SEEN THAT THESE ARE VERY SPECIALIZED SERVICE S AND DOES NOT FALL IN THE CATEGORY OF EXPENSES AS ENUMERATED IN EXPLANATION T O SECTION 44C WHICH ARE OF GENERAL AND EXECUTIVE EXPENSES. IN SUPPORT OF HIS CONTENTION, HE RELIED UPON THE CBDT CIRCULAR NO.202 DATED 05.07.1976 AS REPORTED I N (1976) 105 ITR (ST) 17. EVEN OTHERWISE ALSO, HE SUBMITTED THAT IF THE OVERA LL EXPENDITURE INCURRED BY THE ASSESSEE IS TO BE SEEN, THEN OUT OF RS.31,91,70,684 , THE MANAGEMENT CHARGES AND LICENSE FEES IS RS.18,32,12,834/-, WHICH IS MUCH MO RE THAN HALF OF THE TOTAL EXPENDITURE. SUCH A HUGE QUANTUM OF EXPENDITURE CA N NEVER BE HELD TO BE HEAD OFFICE EXPENDITURE AS MENTIONED IN SECTION 44C, BEC AUSE SECTION 44C CONTEMPLATES EXPENDITURE TO THE TUNE OF GENERALLY 5%. DEFINITE LY SUCH AN AMOUNT OF EXPENDITURE CANNOT BE HELD TO BE OF HEAD OFFICE EXPENDITURE AS CONTEMPLATED IN SECTION 44C. 10. BY WAY OF AN ALTERNATIVE ARGUMENT, SHRI DASTUR SUBMITTED THAT, IT CANNOT BE DISPUTED THAT THE INDIAN BRANCH BEING PERMANENT EST ABLISHMENT OF LLOYDS REGISTER ASIA UK, THE BUSINESS PROFITS HAS TO BE DETERMINED UNDER ARTICLE 7 OF THE INDIA - UK DTAA. PARA 5 OF THE ARTICLE 7 CLEARLY PROVIDES THA T 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 CONTRACTIN G STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED. HOWEVER, PARA 7 OF ARTIC LE 7 PROVIDES THAT IT WILL NOT APPLY ITA NO.387 & 517/MUM/2013 9 IN THE CASE OF REIMBURSEMENT OF ACTUAL EXPENSES. H ERE IN THIS CASE, IT HAS NOT BEEN DISPUTED THAT PAYMENT OF LICENSE FEES AND MANAGEMEN T SERVICES ARE IN THE NATURE OF REIMBURSEMENT. THIS IS NOT ONLY EVIDENT FROM THE O BSERVATIONS OF THE AO IN THE CASE OF THE ASSESSEE BUT HAS ALSO BEEN HELD BY THE AO IN THE CASE OF LLOYDS REGISTER UK IN THE ASSESSMENT ORDER PASSED U/S. 143 (3) FOR A.Y. 2005-06. A COPY OF THE SAID ORDER HAS BEEN FILED SEPARATELY AT THE TIM E OF HEARING. THUS, BY VIRTUE OF ARTICLE 7(7), THE RESTRICTION OF ARTICLE 7(5) OF LI MITATION CLAUSE OF THE DOMESTIC LAW WILL NOT APPLY AND, THEREFORE, NO DISALLOWANCE CAN BE MA DE 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 VIE W OF ARTICLE 26, WHICH IS A NON DISCRIMINATION CLAUSE, AS IT DISCRIMINATES THE FORE IGN RESIDENTS. IN SUPPORT OF THIS PROPOSITION HE RELIED UPON THE DECISION OF METCHEM CANADA INC. VS. DCIT (2006) 100 ITD 251, WHEREIN IT HAS BEEN HELD THAT LIMITATI ON ON DEDUCTION OF HEAD OFFICE EXPENDITURE AS SET OUT IN SECTION 44C WOULD NOT APP LY IN CASE OF NON-RESIDENT COMPANIES IN LIGHT OF NON-DISCRIMINATION CLAUSE IN DTAA, WHEREVER SUCH CLAUSE IS PROVIDED. 12. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THA T SECTION 44C WAS BROUGHT IN THE STATUTE TO OVERCOME THE DIFFICULTY TO SCRUTI NIZE AND VERIFY THE CLAIM OF HEAD OFFICE EXPENSES, PARTICULARLY IN THE ABSENCE OF ACC OUNT BOOKS OF THE HEAD OFFICE WHICH ARE KEPT OUTSIDE INDIA. THE SAID SECTION WAS BROUGHT TO CURB THE MISCHIEF OF THE COMPANIES HAVING BRANCHES IN INDIA TO REDUCE TH E INCIDENCE OF TAX IN INDIA BY INFLATING THEIR CLAIMS IN RESPECT OF HEAD OFFICE EX PENSES. SO FAR AS THE NATURE OF EXPENSES LIKE LICENSE FEES AND MANAGEMENT CHARGES I S CONCERNED, ONE HAS TO SEE, WHETHER SUCH EXPENDITURE ARE IN THE NATURE OF HEAD OFFICE EXPENDITURE OR NOT. FROM ITA NO.387 & 517/MUM/2013 10 THE RECITALS OF THE LICENSE AGREEMENT, IT CAN BE SE EN THAT THE LICENSOR IS PROVIDING GENERAL, TECHNICAL AND MARKETING SUPPORT SERVICES, WHICH CAN BE ATTRIBUTABLE AS HEAD OFFICE EXPENDITURE. SIMILARLY, IN THE MANAGEM ENT SERVICES THERE ARE WIDE RANGE OF ACTIVITIES CARRIED OUT BY THE HEAD OFFICE COVERING AREAS SUCH AS ADMINISTRATION, LEGAL, ACCOUNTING, HUMAN RESOURCES, INFORMATION TECHNOLOGY, MARKETING, MANAGEMENT AND STRATEGY, WHICH IN FACT C ONCERNING HEAD OFFICE EXPENSES. THUS, THE AO HAS RIGHTLY CONSIDERED THES E EXPENSES IN THE NATURE OF HEAD OFFICE EXPENDITURE. SO FAR AS MANAGERIAL SERV ICES, SHE SUBMITTED THAT THE LEARNED CIT(A) THOUGH HAS STATED 50% OF THE EXPENDI TURE TO BE IN THE NATURE OF HEAD OFFICE EXPENDITURE BUT THE BALANCE 50% IS DEFI NITELY 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 SU BMITTED THAT THE AO HAS RIGHTLY CONSIDERED THESE EXPENSES U/S. 44C AND IN ANY CASE PART OF THESE PAYMENTS WILL DEFINITELY FALL WITH THE PURVIEW OF HEAD OFFICE EXP ENSES, WHICH SHOULD BE DIRECTED TO BE CONSIDERED BY THE AO. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS. THE SOLE ISSUE BEFORE US IS, WHETHER THE PAYMENT OF LICENSE FEES AND MANAGEMENT SERVICES FOR SUMS AGGREGATIN G TO RS.18,32,12,834/- ARE IN THE NATURE OF HEAD OFFICE EXPENSES WITH THE AMBIT OF SECTION 44C OR NOT, SO AS TO MAKE THE DISALLOWANCE UNDER THE SAID SECTION. THE ASSESSEE HERE IS AN INDIAN BRANCH OF UK BASED, LLOYDS REGISTER ASIA, WHICH IN TURN IS A SUBSIDIARY OF A HOLDING ITA NO.387 & 517/MUM/2013 11 COMPANY, LLOYDS REGISTER UK. THE SAID COMPANIES A RE INTO BUSINESS OF SURVEY AND INSPECTION OF THE SHIPS. LLOYDS REGISTER UK HAD E NTERED INTO LICENSE AGREEMENT DATED 16.07.2003 WITH VARIOUS LEGAL ENTITIES, WHICH INCLUDED LLOYDS REGISTER ASIA, WHO HAVE BEEN REFERRED TO AS LICENSEES. THE LICENSO R (I.E. LLOYDS REGISTER UK) OWNS TRADEMARK AND TRADE NAME AND OTHER BUSINESS INTANGI BLE, WHICH HAS BEEN REFERRED TO AS INTELLECTUAL PROPERTY RIGHTS. IT ALSO PROVID ES GENERAL, TECHNICAL AND MARKET SUPPORT SERVICES TO ALL THE LICENSEES. FOR THE USE OF INTELLECTUAL PROPERTY RIGHTS AND THE TECHNICAL & MARKETING SUPPORT SERVICES, LICENSE FEES (WHICH IS ROYALTY) IS PAYABLE BY THE LICENSEE TO THE LICENSOR, AS PER THE DETAILS GIVEN IN SCHEDULE 6, WHICH READS AS UNDER:- THE AMOUNT OF LICENSEE FEES CHARGEABLE TO AN INDIV IDUAL LICENSEE WILL BE CALCULATED ON THE RESIDUAL PROFIT SPLIT METHOD ACCO RDING TO THE TABLE AS SET OUT BELOW. THE RESIDUAL PROFIT PERCENTAGES ARE THE REL EVANT 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) IN EXCESS OF 9% THE RESULT IN E) PLUS 75% OF PBT O VER 9% THE LLOYDS REGISTER ASIA HAS ALLOCATED THE ROYALTY ATTRIBUTABLE TO ITS INDIAN BRANCH AND THE INDIAN BRANCH PAYS THE SAME TO LLOYDS REGI STER ASIA, WHICH IN TURN HAS BEEN PAID TO LLOYDS REGISTER UK. APART FROM THIS, MANAGEMENT SERVICE AGREEMENT DATED 16.07.2003 BETWEEN LLOYDS REGISTER AND LLOYD S REGISTER ASIA HAD BEEN ENTERED INTO FOR PROVIDING HOST OF SPECIALIZED SERV ICES UNDER THE FOLLOWING HEADS:- CORPORATE COMMUNICATIONS ITA NO.387 & 517/MUM/2013 12 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 PROVID ED BY REGIONAL AND AREA MANAGEMENT CENTRES) RISK MANAGEMENT AND SECRETARIAL SERVICES AND TAXATION AND TREASURY SERVICES. THE DETERMINATION OF FEES HAS BEEN ENUMERATED IN SC HEDULE 4 OF THE SAID MANAGEMENT SERVICES AGREEMENT. NOW IN THE LIGHT OF THESE FACTS, WE HAVE TO EXAMINE, WHETHER THE AFORESAID NATURE OF EXPENSES C AN BE SAID TO BE IN THE NATURE OF HEAD OFFICE EXPENDITURE WITHIN THE AMBIT OF SECT ION 44C. IF SUCH EXPENDITURES DO NOT FALL WITHIN SECTION 44C, THEN OTHER LIMBS OF TH E ARGUMENTS AS RAISED BY THE EARNED SENIOR COUNSEL BEFORE US, WILL BECOME PURELY ACADEMIC. 14. SECTION 44C, IS A NON OBSTANTE CLAUSE STATING T HAT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTIONS 28 TO 43A IN THE CASE OF AN ASSESSEE, BEING NON-RESIDENT, NO ALLOWANCE SHALL BE MADE IN COMPUTI NG THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION, IN RESPECT OF SO MUCH OF EXPENDITURE IN THE NATURE OF HEAD OFFICE EXPENDI TURE 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 ATTRIBUT ABLE TO THE BUSINESS OR PROFESSION OF THE ASSESSEE IN INDIA, WHICHEVER IS LESS . THE MEANING OF THE TERM HEAD OFFICE ITA NO.387 & 517/MUM/2013 13 EXPENDITURE FOR THE PURPOSE OF SECTION 44C HAS BEE N ENUMERATED IN CLAUSE (IV) OF EXPLANATION TO SECTION 44C. THE SAID CLAUSE READS AS UNDER: IV) HEAD OFFICE EXPENDITURE MEANS EXECUTIVE AND GENERAL ADMINISTRATION EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA, INCLUDING EXPENDITURE INCURRED IN RESPECT OF - (A) RENT, RATES, TAXES, REPAIRS OR INSURANCE OF ANY PRE MISES OUTSIDE INDIA USED FOR THE PURPOSES OF THE BUSINESS OR PROF ESSION; (B) SALARY WAGES, ANNUITY, PENSION, FEES, BONUS, COMMIS SION, GRATUITY, PERQUISITES OR PROFITS IN LIEU OF OR IN ADDITION TO SALARY, WHETHER PAID OR ALLOWED TO ANY EMPLOYEE OR OTHER PERSON EMP LOYED 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 GEN ERAL ADMINISTRATION AS MAY BE PRESCRIBED. FROM THE AFORESAID DEFINITION/ILLUSTRATION OF THE S COPE OF HEAD OFFICE EXPENDITURE, IT IS EVIDENT THAT IT IS IN THE NATURE OF EXECUTIVE AN D GENERAL ADMINISTRATION EXPENDITURE INCURRED BY THE ASSESSEE OUTSIDE INDIA. THE NATURE OF SUCH EXPENDITURE HAS BEEN ILLUSTRATED TO INCLUDE CERTAIN KINDS OF EX PENDITURE. FROM THE NATURE OF EXPENDITURE AS ENUMERATED IN SUB CLAUSE (A) TO SUB CLAUSE (C) OF THE AFORESAID EXPLANATION AND IF COMPARED WITH THE NATURE OF EXPE NDITURE INCURRED BY THE ASSESSEE BRANCH, THEN IT WILL BE SEEN THAT NONE OF THE EXPENDITURE UNDER THE HEAD LICENSE FEES FALLS WITHIN THIS CATEGORY, EVEN REM OTELY. THE PAYMENT OF LICENSE FEE IS PURELY FOR USING OF BRAND/TRADEMARK AND OTHER BU SINESS INTANGIBLES, WHICH ARE IN THE NATURE OF INTELLECTUAL PROPERTY. NOWHERE SUCH TYPES OF EXPENDITURE FALL WITHIN THE SCOPE OF HEAD OFFICE EXPENDITURE AS ILLUSTRAT ED IN CLAUSE (IV). SO FAR AS ITA NO.387 & 517/MUM/2013 14 GENERAL, TECHNICAL AND MARKETING SUPPORT SERVICES A RE CONCERNED, THEY ARE IN THE FOLLOWING NATURE: - PROVISION OF SALES AND MARKETING MATERIALS INCLUDIN G BROCHURES AND PRODUCT FACTSHEET. - PROVISION OF MARKET RESEARCH DATA AND ANALYSIS - PROVISION OF TRAINING AND STANDARDS FOR USE BY OPER ATIONS AND THEIR CLIENTS IN TRAINING SURVEYORS, INSPECTORS AND ASSESSORS - TECHNICAL SUPPORT AND ADVICE ON THE TECHNOLOGY DOCU MENTS INCLUDING PRODUCT UPDATES AND THE MARKETING AND SALE THEREOF - SPECIALISED TECHNICAL SERVICES SUCH AS SHIP EMERGEN CY RESPONSE PROCEDURES, CONDITION ASSESSMENT PROGRAMME PROCEDURES AND FUEL AND LUBRICANT ANALYSIS PROCEDURES - CO-ORDINATION FUNCTION FOR MARKETING AND SALES ACTI VITIES IN RELATION TO MAJOR CONTRACT OPPORTUNITIES AND/OR QUOTATIONS FOR SPECIA LIZED INDUSTRIAL SECTORS - SALES SUPPORT IN RESPECT OF GLOBAL CUSTOMER ACCOUNT S. THESE AGAIN ARE NEITHER IN THE NATURE OF RENT, RATE S, TAXES, REPAIRS, INSURANCE, SALARY, WAGES, BONUS, COMMISSION, ETC., OR TRAVELLI NG BY ANY EMPLOYEE. EXPENDITURE UNDER THE LICENSE FEE HAVE NOTHING TO DO WITH THE SE KIND AND NATURE OF EXPENDITURES. THUS, THE ENTIRE PAYMENT OF LICENSE FEES DO NOT FALL WITHIN THE AMBIT OF SECTION 44C 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 CANNOT BE TREATED AS HEAD OFFICE EXPENDITURE. 15. NOW COMING TO THE NATURE OF HEAD OFFICE EXPENDI TURE UNDER CLAUSE (D) OF THE EXPLANATION I.E. SUCH OTHER MATTERS CONNECTED WITH EXECUTIVE AND GE NERAL ADMINISTRATION AS MAY BE PRESCRIBED . SUCH AN EXERCISE FOR ILLUSTRATING THE SAID EXPENDITURE UNDER THE SAID SUB CLAUSE HAS TO BE PRE SCRIBED BY THE CBDT. HOWEVER, NO SUCH ILLUSTRATION HAS BEEN GIVEN OR PRESCRIBED B Y THE BOARD, ATLEAST NOTHING HAS ITA NO.387 & 517/MUM/2013 15 BEEN BROUGHT BEFORE US THAT CBDT HAS ISSUED ANY CIR CULAR OR CLARIFICATION ILLUSTRATING SUCH OTHER MATTERS CONNECTED WITH EXECUTIVE AND GE NERAL ADMINISTRATION. THEREFORE, IT CANNOT BE HELD THAT THE NATURE OF EXP ENSES UNDER THE HEAD LICENSE FEES FALLS EVEN UNDER SUB CLAUSE (D). 16. NOW COMING TO THE MANAGEMENT CHARGES, IT CAN BE NOTICED FROM THE NATURE OF EXPENSES AS ELABORATED IN SCHEDULE 3 OF MANAGEME NT SERVICES AGREEMENT DATED 16.07.2003, PRIMA FACIE THEY ARE SPECIALIZED SERVIC ES UNDER VARIOUS HEADS AS ENUMERATED ABOVE IN PARA 13. NONE OF THESE SERVICE S ARE IN THE NATURE OF HEAD OFFICE EXPENDITURE AS ILLUSTRATED IN SUB CLAUSE (A) TO (D). FOR COMPUTING THE DEDUCTION OF HEAD OFFICE EXPENDITURE, IT IS SINE-QU A-NON THAT THE NATURE OF HEAD OFFICE EXPENSES MUST FALL WITHIN THE ILLUSTRATION G IVEN 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 S ECTION 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 MUC H THEY FALL WITHIN THE SCOPE AND AMBIT OF NATURE OF HEAD OFFICE EXPENDITURE AS D EFINED IN SECTION 44C. IN THE APPELLATE ORDER OF LLOYDS REGISTER INDIA OFFICE, W HICH HAS BEEN FOLLOWED BY THE LEARNED CIT(A), IT IS SEEN THAT 50% OF THE MANAGEME NT CHARGES HAS BEEN TREATED AS TAXABLE FEES FOR TECHNICAL SERVICES AND BALANCE 50% AS HEAD OFFICE EXPENSES. HOWEVER, THE LEARNED CIT(A) IN THE IMPUGNED CASE OF THE ASSESSEE HAS MERELY STATED THAT 50% OF THE MANAGEMENT FEES IS HIT BY SE CTION 44C, WHEREAS FOR THE BALANCE HE HAS NOT HELD THAT IT IS IN THE NATURE OF FTS AND HERE IT IS NOT THE CASE OF THE AO. EVEN IN THE REVENUES GROUNDS OF APPEAL, I T HAS NOT BEEN CHALLENGED THAT 50% OF THE MANAGEMENT CHARGES/LICENSE FEES ARE IN T HE NATURE OF FTS. THUS, WE ITA NO.387 & 517/MUM/2013 16 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 EXPENDIT URE AS SPECIFIED IN SECTION 44C. THIS ASPECT OF THE MATTER HAS BEEN CLARIFIED VIDE B OARD CIRCULAR NO.649 DATED 31.03.1993, REPORTED IN (1993) 200 ITR (ST) 230. L ASTLY, FEES FOR TECHNICAL SERVICES IN THE CASE OF A NON-RESIDENT COMPANIES HAS TO BE S EEN IN ACCORDANCE WITH THE DTAA READ WITH I T ACT, WHICH HERE IN THIS CASE NEE D NOT BE GONE INTO AS IT IS NOT THE CASE OF THE REVENUE. 17. THUS, IN OUR CONCLUSION, NEITHER THE PAYMENT OF LICENSE FEES NOR THE MANAGEMENT CHARGES, FALLS WITHIN THE AMBIT AND PU RVIEW OF SECTION 44C AND, ACCORDINGLY, THE NATURE OF ADJUSTMENT TO THE TOTAL INCOME FOR THE PURPOSE OF DISALLOWANCE IS NOT REQUIRED. 18. AS REGARDS THE OTHER ARGUMENTS OF THE LEARNED S ENIOR COUNSEL SHRI DASTUR, THAT THESE EXPENDITURE ARE IN THE NATURE OF REIMBUR SEMENT AND HENCE IN VIEW OF ARTICLE 7 READ WITH PARA 5 & 7, NO DISALLOWANCE OF HEAD OFFICE EXPENDITURE IN THE PRESENT CASE CAN BE MADE, THOUGH PRIMA FACIE, WE A GREE WITH THE CONTENTION OF SHRI DASTUR, HOWEVER, IN VIEW OF OUR FINDING GIVEN ABOVE, THIS PLEA HAS BECOME PURELY ACADEMIC. ALL THE OTHER ARGUMENTS AS RAISED BY THE LEARNED SENIOR COUNSEL HAVE ALSO BECOME PURELY ACADEMIC AND ARE LEFT OPEN. 19. ACCORDINGLY, IN VIEW OF OUR FINDING GIVEN ABOVE , WE HOLD THAT LICENSE FEES AND MANAGEMENT CHARGES DO NOT FALL IN THE NATURE OF HEAD OFFICE EXPENSES U/S. 44C AND ACCORDINGLY, THE DISALLOWANCE MADE BY THE A O AND PARTLY CONFIRMED BY THE ITA NO.387 & 517/MUM/2013 17 CIT(A) STANDS DELETED. AS A CONSEQUENCE, THE ASSES SEES GROUNDS ARE TREATED AS ALLOWED AND THE REVENUES GROUNDS ARE DISMISSED. 20. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED AND THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 1 0 TH JUNE 2015. SD/- SD/- (D KARUNAKARA RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED : 10 TH JUNE, 2015. SA COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE C I T(A), MUMBAI. 4. THE C I T 5. THE DR, L BENCH, ITAT, MUMBAI BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI