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2021 (10) TMI 354 - AT - Income TaxTDS u/s 195 - Disallowance of management fee paid by invoking the provisions of section 40(a)(i) - whether payment of management fees cannot be regarded as fees for technical services as per the DTAA between India and the U. K. - only reason given by the DRP to hold the payment under the Management Services agreement as fees for technical services is that the said services are ancillary and subsidiary to the enjoyment of the property for which the payment by way of royalty has been made - HELD THAT - As the test of the object being common is not decisive of the fact that the Management Services agreement is ancillary or subsidiary to the enjoyment of the rights under the License Agreement. The DTAA between India and USA is also similarly worded. As per the Memorandum of Understanding which forms part of the said DTAA, the test of the services being ancillary and incidental to enjoyment of rights under the license agreement would be based on fulfilment of defined conditions. Since none of the aforesaid tests, have been fulfilled in the present case, agreement towards Management Services cannot be regarded as ancillary and subsidiary to enjoyment of the property under the License Agreement. In the preset case we are concerned with deduction of tax at source under section 195 of the Act where the obligation arises only when the sum is chargeable to tax under the Act. For ascertaining chargeability to tax reference to the relevant DTAA is essential - we hold that the assessee s services were managerial in nature and not technical services. Hence, the assessee is not liable to deduct TDS on the same. The disallowance proposed by DRP and made by AO is deleted. This issue of assessee s appeal is allowed. Disallowance u/s 37(1) of the Act in respect of payment of management fees and information technology (IT) charges - HELD THAT - Assessee as well as learned CIT DR agreed that the disallowance of management fee and IT charges u/s 37 of the Act has been accepted in other years and there is no dispute about it. Further, to the extent the position is accepted by the CBDT in the Unilateral Advance Pricing Agreement (UAPA) as payment on the Arm s Length Basis the deduction cannot be denied. Both learned Counsel as well as learned DR agreed that this matter can be referred to the file of the AO for verification whether this is accepted by UAPA as payment on Arm s Length basis. Hence, this issue is restored back to the file of the AO. Short grant of TDS credit - HELD THAT - Both learned counsel for the assessee learned CIT DR agreed that this can be sent back to AO for verification and assessee will produce the relevant certificates of TDS before AO and accordingly, the AO will allow the claim of assessee.
Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act, 1961 regarding management fees paid to Lloyds Register of Shipping, UK (LRS). 2. Addition under Section 37(1) of the Income Tax Act in respect of payment of management fees and IT charges. 3. Short grant of TDS credit. 4. Charging of interest under Sections 234B and 234D of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(i) of the Income Tax Act, 1961: The first common issue across the assessment years 2010-11 to 2015-16 pertains to the disallowance made by the AO regarding the management fee paid by the assessee to LRS by invoking the provisions of Section 40(a)(i) of the Act. The assessee contended that the management fees of ?2,18,73,892/- paid to LRS as per the Management Services Agreement were not subject to TDS, as these fees were not chargeable to tax under the Act. The AO disallowed the management fees by treating them as fees for technical services under Article 13(4) of the DTAA between India and the UK. The DRP upheld this disallowance, treating the management fees as ancillary and subsidiary to the enjoyment of rights under the license agreement. The Tribunal, however, noted that the services provided under the Management Services Agreement, such as corporate communications, corporate finance, group quality assurance, human resources, etc., were managerial in nature and not technical services as per Article 13(4) of the DTAA. The Tribunal relied on the judgment of the Hon’ble Delhi High Court in the case of Steria (India) Ltd. V. CIT and the Mumbai Bench of the Tribunal in DCIT Vs Hyva Holding B.V., which characterized similar services as managerial. The Tribunal concluded that since the services were managerial and not technical, the assessee was not liable to deduct TDS on the same, and thus, the disallowance proposed by DRP and made by AO was deleted. This decision applied to all the assessment years in question. 2. Addition under Section 37(1) of the Income Tax Act: The second issue in ITA No. 7423/Mum/2017 for AY 2013-14 relates to the addition on account of disallowance under Section 37(1) for payment of management fees and IT charges. The AO/DRP made a contingent disallowance of ?5,62,51,978 and ?2,95,05,136 respectively, despite these expenses being expended wholly and exclusively for the business purposes of the assessee. The Tribunal noted that the disallowance under Section 37(1) had been accepted in other years and there was no dispute about it. The Tribunal restored the issue back to the AO for verification of whether the payments were accepted by the Unilateral Advance Pricing Agreement (UAPA) as being on an Arm’s Length Basis. 3. Short Grant of TDS Credit: In ITA No. 7775/Mum/2019 for AY 2015-16, the issue of short grant of TDS credit was raised. Both parties agreed that this matter could be sent back to the AO for verification. The assessee was to produce the relevant TDS certificates before the AO, who would then allow the claim accordingly. 4. Charging of Interest under Sections 234B and 234D of the Income Tax Act: The common ground in all the years regarding the charging of interest under Sections 234B and 234D was deemed consequential and hence dismissed as academic. Conclusion: The appeals were allowed in terms of the above analyses. The Tribunal pronounced the order in the open court on 30.09.2021.
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