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TMI Blog2021 (10) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;). 2. The first common issue in these appeals of the assessee for the above refer Assessment Years is as regards to disallowance made by AO in regard to management fee paid by assessee to Lloyds Register of Shipping, UK (in short 'LRS') by invoking the provisions of section 40(a)(i) of the Act. For this issue, the assessee has raised identically worded grounds in all the years, hence, we will take the grounds from AY 2013-14 i.e. Ground No. 2, which read as follows:- "2. Addition on account of disallowance under Sectionn 40(a)(ia) in respect of management fees. The AO/DRP erred in making a contingent disallowance under Section 40(a)(ia) of the Act which is bad in law, in respect of payment of management fees of INR 5,62,51,978/- paid by the assessee to its AE; when in fact the same bas been disallowed fully by the TPO u/s 92CA(3) and is accepted by the AO." 3. The brief facts are that the assessee is engaged in the business of undertaking survey of ships for inspection, classification and certification etc. It also caters to the marine, energy, transportation and automotive industry for provision of survey and certification related services. Its residential status under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the assessee's case inter alia making disallowance of Rs. 2,18,73,892/- being the management fees as a transfer pricing adjustment. However, he also invoked the provision of section 40(a)(i) of the Act holding that TDS ought to have been deducted on the payment by way of management fees treating the same as fees for technical services as per article 13(4) of the DTAA between India and the U. K. For this purpose, he also referred to the assessment Order passed in the case of LRS where the said amount stands added as their income. Since the entire amount had been added as a transfer pricing adjustment, no separate addition was made while computing the business income. Aggrieved, assessee preferred objection before DRP. 6. The DRP passed its order under section 144C(5) of the Act. Insofar as the disallowance of management fees under section 40(a)(i) of the Act is concerned, it treated the management fees as fees for technical services being ancillary and subsidiary to the enjoyment of the rights under the license agreement. We may bring here one fact that final assessment order was passed in the case of LRS by the same AO assessing the assessee, inter alia assessing the manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable when considering the obligation to deduct the tax at source. 9. We have heard the rival contentions and gone through the facts and circumstances of the case. On the aforesaid facts, the reasons why the provisions of section 40(a)(i) of the Act will not apply to payment by way of management fees made by the assessee to LRS, we will deal with the last argument taken by the assessee that whether payment of management fees cannot be regarded as lees for technical services as per the DTAA between India and the U. K.. For this, the learned Counsel for the assessee stated that the said payment is in the nature of managerial services' which is not covered by the definition of fees for technical services as per Article 13(4) of the said DTAA. He further deliberated that the License Agreement and the Management Services Agreement are independent of each other and, hence, payment under the later agreement (for management services) cannot be regarded as ancillary and subsidiary to the enjoyment of the property as per the earlier agreement (for license). 10. We have heard learned CIT DR also, who mainly relied on the order of DRP as well as that of the AO. 11. We noted not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 the following conditions:- i. The extent to which the sen-ices in question facilitate the effective application or enjoyment of the right, property or information described in paragraph 3 (i.e., royalty); ii. The extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3; iii. Whether the amount paid for the services is an insubstantial portion of the combined payments for the services and the right, property or information described in paragraph 3. iv. Whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract (or a set of related contracts); and v. Whether the person performing the services is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards to addition on account of disallowance u/s 37(1) of the Act in respect of payment of management fees and information technology (IT) charges. For this, assessee has raised following ground No. 3:- "3. Addition on account of disallowance under Section 37(1) of the Act in respect of payment of management fees and information technology (IT) charges. 3.1. The AO/ DRP erred in making a contingent disallowance under section 37(1) of the Act for payment of management fee and IT charges amounting to INR 5,62,51,978 and INR 2,95,05,136 respectively which has been expended wholly and exclusively for the purpose of business of the assessee, on a dubious basis, when he himself disallows the same under section 40(a)(ia) and section 92CA(3) of the Act. 3.2. The AO/ DRP erred in ignoring the detailed explanations as well as evidences furnished by the Appellant in respect of services/ benefits availed by Appellant from its AE and also failed to consider business exigencies while determining the allowability of such expenditure made for payment of management fee and IT charges. 3.3. The AO/ DRP erred in ignoring the principle of consistency, as the transaction of payment of management ..... X X X X Extracts X X X X X X X X Extracts X X X X
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