LLOYDS REGISTER ASIA (INDIA BRANCH OFFICE,MUMBAI vs. DCIT (IT) 3(1)(2), MUMBAI

The AO/DRP erred in making a contingent disallowance under Section 40(a)(ia) of the Act which is bad in law, in respect of payment of management fees of INR 5,62,51,978/- paid by the assessee to its AE; when in fact the same bas been disallowed fully by the TPO u/s 92CA(3) and is accepted by the AO.”

The brief facts are that the assessee is engaged in the business of undertaking survey of ships for inspection, classification and certification etc. It also caters to the marine, energy, transportation and automotive industry for provision of survey and certification related services. Its residential status under the Act is that of a non-resident and as per the DTAA between India and U. K. is that of a resident of the U. K. and incorporated in U.K. Lloyds Register Shipping, U.K. (LRS) has been carrying on the business of survey, inspection, classification and certification of ships for more than 250 years in the past. Based on its experience, it has developed and has been regularly updating the exhaustive Rules for carrying out the survey and activity as well as

The assessee also availed of management services from LRS for which Management Services Agreement was entered into which is enclosed at pages 94 to 126 of assessee’s Paper book-I. In the list of Service Recipients as per Schedule 2, the assessee’s name appears as second last item on page 107. As per Clause 2 of the said Agreement the services shall be as described in Schedule -3 thereof. The broad heads of services as per the said schedule included corporate communications, corporate finance and group reporting services, group quality assurance, human resources, information technology, integrated business system, internal audit services, legal services, operational management and reporting, risk management and secretarial services and taxation and treasury services. The payment made by the assessee to LRS in respect of the management services availed by it for the year under consideration was Rs. 2,18,73,892/-. With the approval of the Reserve Bank of India, the assessee has established a branch office in

The assessee filed its return of income and claimed deduction inter alia of the license fees, management fees and IT recharge paid to LRS, U.K. as enclosed in assessee’s paper book at pages 66 to 68. The AO passed the draft assessment order in the assessee’s case inter alia making disallowance of Rs.2,18,73,892/- being the management fees as a transfer pricing adjustment. However, he also invoked the provision of section 40(a)(i) of the Act holding that TDS ought to have been deducted on the payment by way of management fees treating the same as fees for technical services as per article 13(4) of the DTAA between India and the U. K. For this purpose, he also referred to the assessment Order passed in the case of LRS where the said amount stands added as their income. Since the entire amount had been added as a transfer pricing adjustment, no separate addition was made while computing the business income. Aggrieved, assessee preferred objection before DRP.

The DRP passed its order under section 144C(5) of the Act. Insofar as the disallowance of management fees under section 40(a)(i) of the Act is concerned, it treated the management fees as fees for technical services being ancillary and subsidiary to the enjoyment of the rights under the license agreement. We may bring here one fact that final assessment order was passed in the case of LRS by the same AO assessing the assessee, inter alia assessing the management fees as received from the assessee and Lloyds Register Quality Assurance Ltd.

The learned counsel for the assessee Shri Nitesh Joshi first of all stated the fact that the Management fees of Rs. 2,18,73,892/- has been paid by the assessee to LRS as per the Management Services Agreement. No TDS has been deducted on the same, as according to it, the said amount is not chargeable to tax under the Act. The said amount has been assessed in the hands of LRS in an assessment Order passed under section 143(3) of the Act and their appeal is presently pending before the CIT(A) pursuant to set aside by the Tribunal. The issues which arise for consideration of the Tribunal in the said ground, which are in the alternative and without prejudice to any others and as argued by the learned counsel are as under:

On the other hand, the Revenue has relied on the judgement of Hon’ble Supreme Court in the case of PILCOM Vs. CIT (425 ITR 312) for the proposition that provision of DTAA are not applicable when considering the obligation to deduct the tax at source.

We have heard the rival contentions and gone through the facts and circumstances of the case. On the aforesaid facts, the reasons why the provisions of section 40(a)(i) of the Act will not apply to payment by way of management fees made by the assessee to LRS, we will deal with the last argument taken by the assessee that whether payment of management fees cannot be regarded as lees for technical services as

We have heard learned CIT DR also, who mainly relied on the order of DRP as well as that of the AO.

We noted noted the facts and also gone through the DTAA between India and UK, which shows that the Article 13(4) deals with fees for technical services and it has been defined to mean consideration for rendering any technical and consultancy services. The expression 'managerial services' is not included in the said definition. The nature of services as covered by the Management Services agreement i.e. corporate communications, corporate finance and group reporting services, group quality assurance, human resources, information technology, integrated business system, internal audit services, legal services, operational management and reporting, risk management and secretarial services and taxation and treasury services would fall in the category of managerial services which does not form part of fees for technical services. In this regard, Tribunal's attention was drawn to judgment of the Hon’ble Delhi High Court in the case of

In the present case before us, the only reason given by the DRP to hold the payment under the Management Services agreement as fees for technical services is that the said services are ancillary and subsidiary to the enjoyment of the property for which the payment by way of royalty has been made. According to them, this test is fulfilled in the present ease because the objective of the License agreement and the Management service agreement is the same i.e. to promote safety on land and at sea and in the air. The assessee before us stated that if the services referred to in the Management Services Agreement is accepted as for managerial services, then, the said aspect would not arise in the absence of the services falling in the main part of the definition of fees for technical services as per article 13(4) of the DTAA between India and the U. K.

We noted that the test of the object being common is not decisive of the fact that the Management Services agreement is ancillary or subsidiary to the enjoyment of the rights under the License Agreement. The DTAA between India and USA is also similarly worded. As per the i. The extent to which the sen-ices in question facilitate the effective application or enjoyment of the right, property or information described in paragraph 3 (i.e., royalty);

The second issue in AY 2013-14 is as regards to addition on account of disallowance u/s 37(1) of the Act in respect of payment of management fees and information technology (IT) charges. For this, assessee has raised following ground No. 3:-

At the outset, learned counsel for the assessee as well as learned CIT DR agreed that the disallowance of management fee and IT charges u/s 37 of the Act has been accepted in other years and there is no dispute about it. Further, to the extent the position is accepted by the CBDT in the Unilateral Advance Pricing Agreement (UAPA) as payment on the Arm’s Length Basis the deduction cannot be denied. Both learned Counsel as well as learned DR agreed that this matter can be referred to the file of the AO for verification whether this is accepted by UAPA as payment on Arm’s Length basis. Hence, this issue is restored back to the file of the AO.

The other issue in for AY 2015-16 is as regards to short grant of TDS credit. Both learned counsel for the assessee learned CIT DR agreed that this can be sent back to AO for