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2017 (6) TMI 448 - AT - Income TaxTreatment of licence fee, IT recharge and 50%of management services as head officer expenditure covered by section 44C - Held that - We find that issue of licence fee was deliberated upon and decided by the Tribunal in the case of Lloyds Register Asia 2015 (6) TMI 423 - ITAT MUMBAI thus hold that royalty/licence fee is covered by the provisions of section 44C of the Act. IT recharge - On a combined reading of the Explanatory Memorandum explaining the provisions of the Finance Bill, 1976, introducing section 44C in the Income-tax Act, 1961, as well as Circular No. 202 dated 5/07/ 1976, issued by the Central Board of Direct Taxes, it is clear that the section is intended to be made applicable only in the cases of those non-residents who carry on businesses in India through their branches. The section was introduced with a view to getting over difficulties in scrutinising and verifying claims in respect of general administrative expenses incurred by the foreign head office in so far as such expenses can be related to their business or profession in India having regard to the fact that foreign companies operating through branches in India sometimes try to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. In our opinion, the FAA has rightly held that IT recharge does not fall under the head administrative expenses and therefore provisions of section 44C will not be applicable. Management fees - We find that the FAA had bifurcated the expenses claimed under the said head and had held that part of the expenses were to be limited by the provisions of section 44C of the Act, that he had relied upon the order of his predecessor for the earlier year, that in that order the then FAA had held half of the management charges had to taxed as same was fee for technical services. In our opinion, order of the FAA does not suffer from any legal or factual infirmity as the issue was decided after analysing the schedule 3 of the management services agreement. So, confirming his order we decide the issue against the AO. Levy of interest u/s. 234B - Held that - Hon ble Jurisdictional High Court in case of NGC Network Asia LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT) has decided the issue in favour of the assessee as held that when a duty was cast on the payer to deduct the tax at source, on failure of the payer to do so, no interest could be imposed on the assessee. Decided against the AO. Application of section 40(a)(ia) to management charges - Held that - As decided in case of Herbalife International India P. Ltd. 2016 (5) TMI 697 - DELHI HIGH COURT held that on a plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In light of the above discussion, is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue by holding that Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable in terms of Article 26 (3) of the Indo-US DTAA. - Decided in favour of the assessee. Exchange rate to be applied - excess claim on account of difference in the currency rates - as per CIT-A conversion rate of remittance in foreign currency for TDS purpose was the rate at which such currency was made available to banks through TT - Held that - We find that the assessee had calculated the licence fee expenditure, in the debit notes, at a particular rate, that the AO and the FAA has ignored the provisions of Rule 115 and 26 of the Rules, that the difference in buying and selling rate was rightly calculated by the assessee. Therefore, reversing the order of the FAA, we decide ground in favour of the assessee.
Issues Involved:
1. Treatment of license fee, IT recharge, and management services under section 44C of the Income Tax Act. 2. Levy of interest under section 234B of the Income Tax Act. 3. Application of section 40(a)(ia) to management charges. 4. Exchange rate to be applied for conversion of foreign currency. Detailed Analysis: 1. Treatment of License Fee, IT Recharge, and Management Services under Section 44C: - License Fee: The AO treated the license fee as head office (HO) expenditure under section 44C. The assessee argued that the license fee was for using the brand and services provided by the parent company, and it should not be considered HO expenditure. The FAA agreed with the assessee, noting that the royalty/license fee did not fall under the definition of HO expenditure as per section 44C. The Tribunal upheld this view, referencing a similar case (Lloyds Register Asia) where it was determined that such fees are for intellectual property use and not administrative expenses. - IT Recharge: The AO considered IT recharge as HO expenditure. The FAA disagreed, stating that IT recharge expenses were technical in nature and not administrative. The Tribunal agreed, noting that IT recharge did not fall under the administrative expenses category and thus was not subject to section 44C. - Management Services: The AO included management services as HO expenditure. The FAA partially agreed, stating that 50% of the management fees were administrative and thus subject to section 44C. The Tribunal upheld this decision, affirming the FAA's bifurcation of expenses and the application of section 44C to only part of the management fees. 2. Levy of Interest under Section 234B: - The AO levied interest under section 234B. The assessee cited a High Court decision (NGC Network Asia LLC) which held that if the payer fails to deduct tax at source, the assessee should not be penalized with interest. The Tribunal, following this precedent, decided the issue in favor of the assessee, ruling that no interest under section 234B could be imposed. 3. Application of Section 40(a)(ia) to Management Charges: - The AO held that the assessee should have deducted tax at source on management charges. The FAA upheld this view. The Tribunal, however, referenced the Supreme Court case (GE India Technology Centre P. Ltd.) and the Delhi High Court case (Herbalife International India P. Ltd.), which clarified that tax deduction at source is required only if the amount is chargeable to tax. The Tribunal ruled in favor of the assessee, stating that reimbursement of management charges did not necessitate tax deduction at source. 4. Exchange Rate to Be Applied: - The AO used a different exchange rate for converting foreign currency payments, resulting in a disallowance. The FAA upheld this decision. The Tribunal, however, noted that as per Income Tax Rules 115 and 26, the applicable rate was the telegraphic transfer buying rate. The Tribunal reversed the FAA's order, deciding in favor of the assessee, and applied the correct exchange rate as per the rules. Conclusion: - The appeals by the AO were dismissed, and the appeals by the assessee were partly allowed. The Tribunal upheld the FAA's decisions on the bifurcation of management fees and the non-application of section 44C to license fees and IT recharge. It also ruled in favor of the assessee on the issues of interest under section 234B and the correct exchange rate application.
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