Income Tax Appellate Tribunal - Mumbai
Lloyds Register Uk, Mumbai vs Assessee on 18 March, 2016
आयकर अपीलीय अिधकरण, अिधकरण 'एल' खंडपीठ मुब ं ई INCOME TAX APPELLATE TRIBUNAL,MUMBAI "L" BENCH सव ी राजे , , लेखा सद य एवं राम लाल नेगी, ी, याियक सद य Before S/Sh. Rajendra,Accountant Member & Ram Lal Negi,Judicial Member आयकर अपील सं/.ITA No.3138/Mum/2011,िनधा िनधा रण वष /Assessment Year-2005-06 आयकर अपील सं/.ITA No.6746/Mum/2011,िनधा िनधा रण वष /Assessment Year-2007-08 ADIT-(IT)- Range-4 M/s. Lloyds Register U.K. Mittal Court, Nariman Point (Formerly known as Lloyd's Register of Mumbai-400 021. Vs. Shipping) 63-64, Kalpataru Square, 6th Floor Kondivita Lane, Andheri(E), Mumbai-400 059 PAN:AAACL 2209 B (अपीलाथ /Appellant) ( यथ / Respondent) आयकर अपील सं/.ITA No.3587/Mum/2011,िनधा िनधा रण वष /Assessment Year-2005-06 आयकर अपील सं/.ITA No.6850/Mum/2011,िनधा िनधा रण वष /Assessment Year-2007-08 M/s. Lloyds Register U.K. ADIT Range-4 Mumbai-400 059. Vs. Mumbai-400 021.
(अपीलाथ /Appellant) ( यथ / Respondent) िनधा रती ओर से/Assessee by : S/Shri S.E. Dastur, Nitesh Joshi & Vispi T.Patel राज व क ओर से/ Revenue by : Shri Jasbir Chouhan सुनवाई क तारीख/ Date of Hearing : 10.02.2016 घोषणा क तारीख / Date of Pronouncement : 18.03.2016 आयकर अिधिनयम, अिधिनयम 1961 क धारा 254( 254 ( 1 ) के अ तग त आदे श Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद य राजे के अनुसार PER RAJENDRA, AM-
Challenging the orders dated 21.2.2011 and 19.1.2011 of the CIT(A)-11,Mumbai the assessee and the Assessing Officers (AO.s) have filed cross-appeals for the above mentioned AY.s.
ITA 3138/M/11-AY.2005-06:Brief facts:
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 Register UK and Lloyds Register Asia Ltd. and LRA.The second agreement was termed as management services agreement.As per the agreement 3587/11, 3133/11,6850/11, 6746/11-Lloyds Register,UK 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 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 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 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.
23587/11, 3133/11,6850/11, 6746/11-Lloyds Register,UK 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 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 3 3587/11, 3133/11,6850/11, 6746/11-Lloyds Register,UK 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 asessee.Ground no.1 is decided in favour of the AO,in part.
6.Second ground of appeal deals with levy of interest u/s.234B of the Act.During the course of hearing before us,the DR and the AR agreed that the issue is covered in favour of the assessee by the decision of NGSC Network Asia LLC(313 ITR187),delivered by the Bombay High Court.Following the said judgment,we confirm the order of the FAA.Ground no.2 is decided against the AO.
ITA/3857/Mum/2011-AY.2005-06:
7.First ground of appeal is about treating 50% of MS as taxable income.While adjudicating the appeal,filed by the AO,we have restored back the matter to the file of the FAA for fresh adjudication.Following that,ground no.1 is stands in favour of the asessee,in part.
8.Next Ground is about disallowance of business loss of 38.57 lakhs to be set off against long-term capital gain and income from other sources.During the assessment proceedings the AO held that the assessee had admitted that with effect from 01/04/2004 it had discontinued its business and it had no PE in India,that the business profit could not be tax in India in view of Article 7 of the India-UK DTAA,that the profit included loss and once the assessee had taken the benefit of DTA a the loss arising under the head business income could not be set of against any other head of income, that no business Activity was carried out by the assessee, that business loss could not be adjusted against the taxable royalty income.
9.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA.Before him, it was argued that though the assessee had discontinued its India operations yet it wasn't process of transfer of assets to LRA-IBO and LRAQ-IBO,that it wasn't process of winding up its operation,that it had to incur certain expenses,that these steps were necessary to close the office, that loss arising in process of winding up was incidental to the business Activities though no Activity was carried out in India, that the said loss was claimed against the income from the other sources and capital gain as in the earlier years,that the bad debts had been offered for tax on basis of provision made,that leave encashment provisions were disallowed in the earlier years,that during the year under consideration liabilities were paid off. After considering the submission of the assessee and the assessment order, the FAA held that the business of the assessee had come to an end when it decided to discontinue its India branch and had applied to RBI for winding up business Activities,that during the year no business of the assessee was in existence, that there was no question of having business loss for the year under consideration, that question of set off of business loss from income under the other heads of income was not permissible.Upholding the order of the AO,he dismissed the appeal filed by the assessee.
43587/11, 3133/11,6850/11, 6746/11-Lloyds Register,UK
10.Before us,the AR contended that losses were arising out of the earlier Activities of the assessee, that they were relatable the business of the assessee, that the provisions of Act i.e. section 71(2)were in favour of the assessee,that business losses were to be set off against capital-gains,that the assessee had option to opt for provisions of the Act over the provisions of the tax-treaty.He referred to the case of Sumitomo Mitsui Banking Corporation(136 ITD
66).The DR relied upon the order of the AO and the FAA.
11.We have heard the rival submissions and perused the material before us.We find that the assessee had closed its India office with effect from 01/04/2004, that it had claimed set up of losses against the capital gains. Provisions of section 90 of the Act gives an option to the assessee to opt for the provisions of the DTAA or the Act whichever is beneficial to it. The assessee had claimed that set off of losses should be dealt as per the provisions of section 71 (2)of the Act. The issue of opting for DTAA and provisions of the Act has been discussed at length by the special bench in the case of Sumitomo Mitsui Banking Corporation(supra). Facts of the case were that the assessee was a Foreign Banking Company incorporated in and controlled from Japan carrying on banking business in India.It was noted by the AO that interest was provided by the Indian branch offices of the assessee bank as payable to its Head Office and overseas branches and tax at source was not deducted by the assessee from the said interest.He held that interest payable by the branches of assessee bank in India to its head office and London branch office was chargeable to tax in India and the Indian branches were liable to deduct tax at source.Since no such tax was deducted at source AO disallowed the interest so paid u/s.40(a)(i) of the Act.The FAA deleted the addition and held that interest was allowable as deduction while computing the profits of the Permanent Establishment in India for the purpose of taxation in India as per article 7(2) and 7(3) of India Japan treaty read with paragraph No. 8 of the protocol.Following question were framed by the special bench of the Tribunal,while hearing the appeal:
1. Whether or not on the facts and in the circumstances of the case, the CIT(A) was justified in holding that interest payable by the Indian PE of the foreign bank to its HO and other Overseas Branches, is not deductible in computing its total income.
2. Whether or not, on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that interest income payable by the Indian PE of a foreign bank to its HO and branch offices abroad cannot be taken into account for the purpose of computing the income of HO liable to be taxed in India.
Deciding the appeal,the Tribunal held as under:
"The position under the domestic law is clear that one cannot make profit out of himself and if the payment of interest made by the Indian PE to the foreign GE of which it is a part is payment to self, it cannot give rise to any income which is chargeable to tax in India as per the domestic law..Keeping in view the purpose and scope of article 11(4) of the OECD Model Convention, the provisions of which are pari materia to the provisions of article 11(6) of the Indo-Japanese treaty, the same is not applicable to the facts of the present case inasmuch as the situation as contemplated to make it applicable does not exist in the present case. In the present case, the amount is advanced by the head office of the assessee bank to its PE in India and the same represents liability of the PE in India as reflected in the balance sheet of that PE. Interest paid by the PE on such liability, therefore, cannot be regarded as interest paid in respect of debt claims forming part of the assets of the Permanent Establishment.....Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty, Bench is of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE 5 3587/11, 3133/11,6850/11, 6746/11-Lloyds Register,UK which is taxable in India as per the provisions of article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise. Accordingly question No.1 is answered in favour of the assessee and question No.2 in affirmative i.e. again in favour of the assessee."
Respectfully following the above order,we are of the opinion that FAA was not justified in denying the setting off of losses arising out of bed dates and leave-encashment and that assessee could avail the benefit of provisions of the Act over the provisions of the DTAA for setting off of losses.So,reversing his order,we decide second ground in favour of the assessee.
Ground no.3 was not pressed by the assessee,hence,same stands dismissed as not pressed.
ITA/6748 & 6850/Mum/2011-AY.2007-08:
12.Grounds of appeal filed by the AO and the asessee are identical to the grounds raised for the AY.2005-06-the only difference is that the issue of disallowance of business loss(GOA-
2)is not there in the appeal of the asessee.It did not press ground no.2 for the year under consideration. Hence,same also stands dismissed as not pressed.First ground is decided in its favour,in part.
Following our order for the AY.2005-06,we decide first ground of appeal,filed by the AO,for the year under appeal,in his favour,in part.Second ground is decided against him.
As a result,appeals filed by the AO and the asessee for both the AY.s.stand partly allowed. फलतःिनधा रण अिधकारी और िनधा रती ारा दोन िन.व.के िलए दािखल क ग अपील अंशतः मंजूर क जाती ह .
Order pronounced in the open court on 18th March, 2016.
आदेश क घोषणा खुले यायालय म दनांक 18 माच ,2016 को क गई ।
Sd/- Sd/-
(राम लाल नेगी /Ram Lal Negi) (राजे / RAJENDRA)
याियक सद
य/JUDICIAL MEMBER लेखा सद
य / ACCOUNTANT MEMBER
मुंबई/Mumbai, दनांक/Date: 18.03.2016
व.िन.स.Jv.Sr.PS.
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1.Appellant /अपीलाथ 2. Respondent / यथ
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3587/11, 3133/11,6850/11, 6746/11-Lloyds Register,UK
3.The concerned CIT(A)/संब अपीलीय आयकर आयु , 4.The concerned CIT /संब आयकर आयु
5.DR A Bench, ITAT, Mumbai /िवभागीय ितिनिध, L खंडपीठ,आ.अ. याया.मुंबई
6.Guard File/गाड फाईल स यािपत ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.
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