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

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. Since 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.

“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 branch 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 onwards 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 3 5150/M/15 & 5035/M/15 (2009-10) Lloyds Register UK Register UK and Lloyds 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.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 branch 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 Lloyd’s Register Asia Ltd.(U.K.) 13,89,20,438/- 4,42,92,396/- Lloyd’s Register Quality 89,14,963/- 22,40,853/- Assurance Ltd.U.K. 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 head ‘management charges’were 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 the 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. 4 5150/M/15 & 5035/M/15 (2009-10) Lloyds Register UK 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 involving 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 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 adoption 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 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 technical/marketing services,that in the MS 5150/M/15 & 5035/M/15 (2009-10) Lloyds Register UK 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 had 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 through the assessment order and the submission of the assessee ,the FAA held that the word ‘managerial’did 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 management 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 Register’s Rules and Regulations was also 6 5150/M/15 & 5035/M/15 (2009-10) Lloyds Register UK 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 function -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 subsidiaries 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 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,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 taxed in India,that while deciding the appeal,he had not given any reason 5150/M/15 & 5035/M/15 (2009-10) Lloyds Register UK 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,opinion,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 reasonable 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.