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TMI Blog2015 (6) TMI 423X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head office and branch. In doing so he has not appreciated the fact that Lloyd's Register-UK is not a Head Office of the appellant and Lloyd's Register UK has filed its income tax return in India declaring the above source of income received from the appellant. He ought not to have done so. 2. A. Without prejudice to ground no.1, on the facts and in the circumstances of the case an din law the learned CIT(A) has erred in holding that 50% of the total Management charges of INR 4,42,92,316/- paid to Lloyd's Register-UK i.e.Rs.2,21,46,158/- are covered in the definition of Head Office Expenditure as per section 44C of the Act and thereby restricting the allowance to the extent of INR 46,73,263/- and disallowing the balance INR 1,74,72,895/-. He ought not to have done so. B. The learned CIT(A) has not appreciated the fact that the assessing officer erred in taxing a PE of a UK company by placing restrictions on deduction of Head office expenditure under section 44C. The said restriction is not applicable in case of resident companies thereby discriminating by giving unfavourable tax treatment. He ought not to have done so. 4. The grounds raised by the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into between Lloyd's Register UK and Lloyd's Register Asia UK for providing services such as : Corporate communications, Corporate finance and group reporting services, Group quality assurance, Human resources, Information technology, Integrated business system (IBS project) Internal audit services Legal services Operational management and reporting (mainly provided by regional and area management centres) Risk management and secretarial services and Taxation and treasury services. The determination of management service fees has been enumerated in Schedule 4 of the Management Service agreement, the relevant portion of which has been incorporated by the CIT(A) at pages 3 4. During the relevant assessment year, the assessee has paid 'management charges' and 'license fees' of ₹ 18,32,12,834/-to Lloyd's Register Asia UK i.e. its head office, which in turn has been given to Lloyd's Register UK. The break-up of the management and license fees were as under: Particulars Amount in Rs. Management Charges 4,42,92,396 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd License Fees is restricted to 5% of the adjusted total income, which is ₹ 35,65,954/- (i.e. 5% of total income of ₹ 7,13,19,080/-) The difference of ₹ 17,96,46,880/- is added to the total income of the assessee. Penalty proceedings u/s. 271(1)(c) initiated for furnishing of inaccurate particulars of income. 8. In the first appeal, the learned CIT(A) after considering the elaborate submissions made by the assessee, which has been discussed by him from para 4.7 to 4.10, held that so far as royalty or license fees is concerned, the same is not hit by the definition of head office expenditure as provided in section 44C. Accordingly, he directed the AO not to consider royalty or license fees expenditure incurred by the assessee as head office expenditure. Thus, the amount of ₹ 13,89,20,438/- was directed not to be considered for disallowance as per section 44C. Regarding management fees, he held that 50% of such expenditure is hit by section 44C and the balance is not covered by Section 44C being the expenditure of the branch office. For arriving at this conclusion, he has referred to the CIT(A)'s order in the case of Lloyd's Register India Office, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees payable as per the agreement and also the recitals of the license agreement dated 16.07.2003 in support of his contentions. Thus, such a payment he submitted that, is definitely not covered u/s. 44C. Regarding management charges, he drew our attention to the agreement dated 16.07.2003, which has been placed in the paper-book from page 25 onwards and also the various types of services provided by Lloyd's Register, which have been elaborated in Schedule 3 (appearing from pages 48 to 52 of the paper-book). He submitted that looking to the nature of services it can be seen that these are very specialized services and does not fall in the category of expenses as enumerated in Explanation to section 44C which are of general and executive expenses. In support of his contention, he relied upon the CBDT Circular No.202 dated 05.07.1976 as reported in (1976) 105 ITR (ST) 17. Even otherwise also, he submitted that if the overall expenditure incurred by the assessee is to be seen, then out of ₹ 31,91,70,684, the management charges and license fees is ₹ 18,32,12,834/-, which is much more than half of the total expenditure. Such a huge quantum of expenditure can never be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head office which are kept outside India. The said section was brought to curb the mischief of the companies having branches in India to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. So far as the nature of expenses like license fees and management charges is concerned, one has to see, whether such expenditure are in the nature of head office expenditure or not. From the recitals of the license agreement, it can be seen that the licensor is providing general, technical and marketing support services, which can be attributable as head office expenditure. Similarly, in the management services there are wide range of activities carried out by the head office covering areas such as administration, legal, accounting, human resources, information technology, marketing, management and strategy, which in fact concerning head office expenses. Thus, the AO has rightly considered these expenses in the nature of head office expenditure. So far as managerial services, she submitted that the learned CIT(A) though has stated 50% of the expenditure to be in the nature of head office expenditure but the balance 50% is definitely in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 1% Amount of PBT ( c ) 1 to 5% 1% of net sales price of external sales ( d ) 5 to7.5% The result in c) plus 50% of PBT over 5% ( e ) 7.5% to 9% The result in d) plus 2/3 of PBT over 7.5% ( f ) In excess of 9% The result in e) plus 75% of PBT over 9% The Lloyd's Register Asia has allocated the royalty attributable to its Indian branch and the Indian branch pays the same to Lloyd's Register Asia, which in turn has been paid to Lloyd's Register UK. Apart from this, management service agreement dated 16.07.2003 between Lloyd's Register and Lloyd's Register Asia had been entered into for providing host of specialized services under the following heads:- Corporate communications Corporate finance and group reporting services Group quality assurance Human resources Information technology Integrated business system (IBS project) Internal audit services Legal services Operational manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 are in the following nature: - Provision of sales and marketing materials including brochures and product factsheet. - Provision of market research data and analysis - Provision of training and standards for use by operations and their clients in training surveyors, inspectors and assessors - Technical support and advice on the tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. In the appellate order of Lloyd's Register India office, which has been followed by the learned CIT(A), it is seen that 50% of the management charges has been treated as taxable fees for technical services and balance 50% as head office expenses. However, the learned CIT(A) in the impugned case of the assessee has merely stated that 50% of the management fees is hit by section 44C, whereas for the balance he has not held that it is in the nature of FTS and here it is not the case of the AO. Even in the revenue's grounds of appeal, it has not been challenged that 50% of the management charges/license fees are in the nature of FTS. Thus, we need not go on the issue of FTS as neither it is a case of the AO nor the case of the CIT(A). Otherwise also, the technical fees are not covered under the head office either executive or general administration expenditure as specified in section 44C. This aspect of the matter has been clarified vide Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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