LLOYDS REGISTER UK,MUMBAI vs. DDIT RG 4(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य राजे�� के अनुसार PER RAJENDRA, AM- लेखा सद�य राजे�� के अनुसार लेखा सद�य राजे�� के अनुसार लेखा सद�य राजे�� के अनुसार Challenging the order, dated 3/03/2010, the assessing officer (Ao) and the assessee have filed cross appeal for the year under consideration. Assessee- company, engaged in the business of ship classification and survey etc., filed its return of income, on 30/11/2006, declaring total income of Rs.5.60 cores. The AO completed the assessment, u/s. 143(iii) r.w.s 144C (iii) of the Act, determining its income at Rs.23.32 crores.

Name of the Royalty Management Subsidiary Charges Lloyd’s Register 13,89,20,438/- 4,42,92,396/- Asia Ltd.(U.K.) Lloyd’s Register 89,14,963/- 22,40,853/- &3139/Mum/2011(06-07) M/s. Lloyds Register U.K. (Formerly known as Lloyd’s Register of Shipping)

Quality 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.

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 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 &3139/Mum/2011(06-07) M/s. Lloyds Register U.K. (Formerly known as Lloyd’s Register of Shipping) 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 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). 4.Before us,the departmental representative(DR)stated that there was no justification to hold that only 50% of the managerial charges were taxable in India,that the entire receipt should be treated as FTS. The authorised representative(AR)referred to page is 35,38,43, 51, 54, 56 of the paper book and analysed the provisions of various schedules of the agreements i.e. royalty agreement and managerial service agreement.He stated that consideration for use of IPR and consultancy were covered by the other agreement,that intangible rights and technical services were rendered as per the provision of the said agreement,that managerial services were different,that they were not for exploiting intangible properties,that the AO had discussed the managerial services at pages four and five of his order, that the services provided by the assessee were not in the nature of technical or consultancy services,that general,advisory,administrative,supervisory services could be considered MS.Referring to the provisions of Article 13(4)(a) of the DTAA,he argued that services rendered by the assessee could not be taxed under the head MS,that 4 &3139/Mum/2011(06-07) M/s. Lloyds Register U.K. (Formerly known as Lloyd’s Register of Shipping) nothing was made available by the assessee.He referred to the cases of De Beers India Minerals (P.)Ltd.(346ITR467),and Guy Carpenter & Co.Ltd.(346ITR505).He further stated that conditions laid down by sub-Articles a,b,c of Article13(4) of the tax-treaty were not fulfilled.He also referred to case of Indian Airlines (59ITD313).He alternatively argued that taxing 50% of MS was on higher side, that the FAA had not given any reasonable cause for taxing half of the MS,that even if portion of it was to be taxed it should have been restricted to 10-15% of the total receipt. 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 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 assessee 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. First ground of appeal raised by the assessee and the AO stand partly allowed

5. Second ground of appeal, raised by the AO, is above deleting the interest charge u/s. 234 B of the Act. We find that the Hon’ble Bomaby high court in the case of NGC Network Asia LLC.(31 ITR 187) has decided the issue of charging of 234B interest in favour of the assesses and against the AO. Respectfully following the above, we decide the second ground of appeal against the AO

As a result, appeals file by the assessee and the AO stand partly allowed. फलतःिनधा�रण अिधकारी और िनधा�रती �ारा दािखल क� ग� अपील� अंशतः मंजूर क� जाती ह . Order pronounced in the open court on 13th Sep, 2017. आदेश क� घोषणा खुले !यायालय म� #दनांक 13 िसतंबर ,2017 को क� गई । Sd/- Sd/- (राम लाल नेगी /Ram Lal Negi) (राजे�� / RAJENDRA) 5 &3139/Mum/2011(06-07) M/s. Lloyds Register U.K. (Formerly known as Lloyd’s Register of Shipping)