The Mumbai bench of ITAT in Lloyd’s register Quality Assurance Ltd v. Dy. Commissioner of Income Tax held that no disallowance under Section 40(a)(i) can be made in payment of management charges under Section 44C of the Income Tax Act,1961.
In the instant case, the assessee company is the Indian Branch of U.K based company engaged in the business of management system audit, equipment management system audit and other similar services. Assessee had filed return which was accepted under Section 143(3) of IT Act. Subsequently, A.O being of the opinion that management charges debted to the Profit & Loss account is not allowable in terms of Section 40(a)(i) due to non-deduction of tax at source.
While re-opening the assessment, the AO noticed that assessee had paid license charges and management charges. The management charges were paid as per the management services agreement. A.O observed that though management charges were paid at cost plus a mark-up of 8%, no basis of determination of the cost was given. A.O. called upon the assessee to explain why the expenditure claimed should not be restricted to 5% of adjusted total income as per section 40(a)(i) of the Act.
Rejecting assessee’s objection to proposed disallowance, AO restricted the expenditure claimed by assessee to 5% of the adjusted total income. A.O observed that assessee having not deducted tax at source while making such payment, payment made towards management charges is other side not allowable under section 40(a)(i) of the act. A.O also added that the payment is in the nature of fees for technical services and the same is not allowable under section 40(a)(i). Assessee appealed to the commissioner who allowed 50% of the total payment. Being aggrieved by the same, assessee approached ITAT.
The bench comprising of Hon’ble Member (judicial) Shri Saktijit Dey and Hon’ble Member (accountant) relied on Hon’ble Delhi High Court’s judgment in CIT v. Herbalife India International Pvt Ltd and held that provisions of section 40(a)(i) of the act are not applicable to payment of management charges.
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