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S/s. 44C, the Act – the scope of head office expenses u/s 44C does not include “license fees” or the “management charges”
Facts:
The taxpayer was an Indian branch of a UK Company (“UKCo”). The holding company of UKCo was engaged in the business of survey and inspection of ships, industrial inspection activity and drawing appraisal. In 2003, holding company entered into a license agreement with all its subsidiaries and granted license to use its brand in consideration of payment of royalty and the license fees. Further, it entered into a separate “Management Services Agreement” for providing certain services.
According to the tax authority, license fees and management charges were in nature of head office expenses u/s. 44C of the Act. However, as per the taxpayer, these payments were merely routed through head office but were not really head office expenses as the said section is only applicable to general and administration expenditure as referred to in Explanation (iv) to section 44C-that too in the nature of executive and general administration expenditure enumerated in clause (a) to (d).
Held:
The payment of ‘license fee’ is purely for using of brand/ trademark and other business intangibles, which are in the nature of intellectual property.
These are neither in the nature of rent, rates, taxes, repairs, insurance, salary, wages, bonus, commission, etc., or travelling by any employee. 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.
Clause (d) of the Explanation mentions “such other matters connected with executive and general administration as may be prescribed”. CBDT has not yet prescribed any such expenditure. “Management charges” are specialised services under various heads. None of these services are in the nature of head office expenditure as illustrated in sub clause (a) to (d).
As neither the “license fees” nor the “management charges” falls within the ambit and purview of section 44C, no adjustment to the total income for the purpose of disallowance was required.
