2016 (4) TMI 1117 - AT - Income Tax

Taxability of management charges - fee for technical services(FTS)under Article-13(2)(a)(ii) of the India-UK DTAA r.w.s.9(1)(vii) - Held that - The assessee had received ₹ 14, 78, 35, 401/-as royalty and ₹ 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 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. Disallowance of business loss to be set off against long-term capital gain and income from other sources - Held that - FAA was not justified in denying the setting off of losses arising out of bad 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.

Summary

Issues Involved:
1. Taxability of Management Charges as Fee for Technical Services (FTS).
2. Levy of interest under Section 234B of the Income Tax Act.
3. Disallowance of business loss to be set off against long-term capital gain and income from other sources.

Detailed Analysis:

1. Taxability of Management Charges as Fee for Technical Services (FTS):
Facts:
- Lloyds Register UK, after discontinuing its India operations, entered into agreements with its subsidiaries, Lloyds Register Asia Ltd. (LRA) and Lloyds Register Quality Assurance Ltd. (LRQA), for royalty and management services.
- The Assessing Officer (AO) held that management charges received were taxable in India as FTS under Article 13(2)(a)(ii) of the India-UK DTAA and Section 9(1)(vii) of the Act.

First Appellate Authority (FAA) Decision:
- The FAA held that the term 'managerial' did not fall under the definition of FTS in the India-UK DTAA.
- He concluded that 50% of the management charges should be treated as non-taxable management services and the remaining 50% as taxable FTS.

Tribunal's Findings:
- The Tribunal noted the lack of reasoning by the FAA for taxing 50% of the management charges.
- It emphasized the need for further investigation and verification to determine the nature of services rendered.
- The matter was remanded back to the FAA for fresh adjudication with a directive to provide a clear basis for the decision.

2. Levy of Interest under Section 234B of the Income Tax Act:
Facts:
- The AO levied interest under Section 234B for shortfall in advance tax payment.

Tribunal's Decision:
- Both the Departmental Representative (DR) and the Authorized Representative (AR) agreed that the issue was covered by the Bombay High Court decision in NGSC Network Asia LLC (313 ITR 187).
- The Tribunal confirmed the FAA's order, deciding the issue against the AO.

3. Disallowance of Business Loss to be Set Off Against Long-Term Capital Gain and Income from Other Sources:
Facts:
- The AO disallowed the set-off of business loss against other heads of income, arguing that the assessee had discontinued its business and had no Permanent Establishment (PE) in India.

First Appellate Authority (FAA) Decision:
- The FAA upheld the AO's decision, stating that the business had ceased and no business loss could be set off against other income.

Tribunal's Findings:
- The Tribunal held that the assessee could opt for the provisions of the Act over the DTAA for setting off losses.
- It referred to the Special Bench decision in Sumitomo Mitsui Banking Corporation (136 ITD 66), which allowed such set-offs.
- The Tribunal reversed the FAA's decision, allowing the set-off of business losses against other income.

Conclusion:
- The appeals regarding the taxability of management charges were partly allowed, with the matter remanded to the FAA for further investigation.
- The issue of interest under Section 234B was decided against the AO.
- The disallowance of business loss set-off was reversed in favor of the assessee.
- Appeals for subsequent years were decided based on the findings for AY 2005-06, with similar directions for fresh adjudication and partial allowances.