2015 (6) TMI 423 - AT - Income Tax

Payment of license fees and management services - Whether are in the nature of head office expenses with the ambit of section 44C? - assessee here is an Indian branch of UK based, Lloyd s Register Asia, which in turn is a subsidiary of a holding company, Lloyd s Register UK. - Held that - From the definition/illustration of the scope of head office expenditure, it is evident that it is in the nature of executive and general administration expenditure incurred by the assessee outside India. The nature of such expenditure has been illustrated to include certain kinds of expenditure. 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 expenditure 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 remotely. The payment of license fee is purely for using of brand/trademark and other business intangibles, which are in the nature of intellectual property. Nowhere such types of expenditure fall within the scope of head office expenditure as illustrated in clause (iv). So far as general, technical and marketing support services are concerned, they again are neither in the nature of rent, rates, taxes, repairs, insurance, salary, wages, bonus, commission, etc., or travelling by any employee. Expenditure under the License fee have nothing to do with these 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. Now coming to the nature of head office expenditure under clause (d) of the Explanation i.e. such other matters connected with executive and general administration as may be prescribed . Such an exercise for illustrating the said expenditure under the said sub clause has to be prescribed by the CBDT. However, no such illustration has been given or prescribed by the Board, atleast nothing has been brought before us that CBDT has issued any Circular or clarification illustrating such other matters connected with executive and general administration . Therefore, it cannot be held that the nature of expenses under the head license fees falls even under sub clause (d). Now coming to the management charges , it can be noticed from the nature of expenses as elaborated in Schedule 3 of management services agreement dated 16.07.2003, prima facie they are specialized services under various heads as enumerated above in para 13. None of these services 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-qua-non that the nature of head office expenses must fall within the illustration given in clause (iv) of Explanation. 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 much they fall within the scope and ambit of nature of head office expenditure as defined in Section 44C. Thus, in our conclusion, neither the payment of license fees nor the management charges , falls within the ambit and purview of section 44C and, accordingly, the nature of adjustment to the total income for the purpose of disallowance is not required.- Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the transaction of License fee, Management charges, and IT Recharge between Lloyd's Register UK and Lloyd's Register Asia (India Branch) is considered as head office expenditure under Section 44C.
2. Whether the CIT(A) erred in allowing 100% relief on License Fees and 50% relief on Management charges.
3. Whether the interest charged under Section 234B of the I.T. Act should be deleted.

Issue-wise Detailed Analysis:

1. Transaction of License fee, Management charges, and IT Recharge:
The primary issue is whether the payments made by the Indian branch to Lloyd's Register Asia UK, which in turn were paid to Lloyd's Register UK, can be considered as head office expenditure under Section 44C. The assessee argued that the transactions were not between the head office and the branch but between Lloyd's Register UK and Lloyd's Register Asia (India Branch). The payments were routed through the head office, and Lloyd's Register UK filed separate income tax returns in India for the said income. The AO, however, considered these expenses as head office expenses, arguing that the expenses were incurred by Lloyd's Register UK for various group companies and reimbursed through Lloyd's Register Asia UK.

2. Relief on License Fees and Management charges:
The CIT(A) held that the royalty or license fees were not covered under the definition of head office expenditure as per Section 44C. However, for management charges, the CIT(A) held that 50% of such expenditure was covered by Section 44C. The assessee contended that the license fees and management charges did not fall within the definition of head office expenditure, which includes only executive and general administration expenditure. The AO disagreed, stating that the expenses were very much in the nature of head office expenses. The Tribunal found that the license fees and management charges did not fall within the ambit of head office expenditure as defined in Section 44C.

3. Interest charged under Section 234B:
The Revenue's ground included the deletion of interest charged under Section 234B, arguing that the issue was not decided on merit. The Tribunal did not specifically address this issue in detail, focusing primarily on the nature of the expenses and their classification under Section 44C.

Conclusion:
The Tribunal concluded that neither the payment of license fees nor the management charges fell within the ambit of head office expenditure under Section 44C. Consequently, the disallowance made by the AO and partly confirmed by the CIT(A) was deleted. The assessee's appeal was allowed, and the revenue's appeal was dismissed. The Tribunal also noted that other arguments raised by the learned senior counsel became purely academic in light of this conclusion.