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TMI Blog2014 (9) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... It is nobodies case that illegal or unauthorized payments of royalty and consequent remittances of foreign exchange has been made by the assessee company. The conclusions drawn by the TPO that the assessee is not required to pay any royalty on the products is against the terms of the agreement - the AO cannot sit in the arm chair of the businessman and determine as to what expenditure is necessary to be incurred by the businessman for the purpose of his business - the arguments of the assessee that similar payments were made by the assessee for the last few years and that the TPO as well as the AO have accepted the genuineness of the payments and have approved the claim that the payments were at arm's length assume significance - as the TPO has accepted that MAM followed by the assessee and approved the arm's length price of royalty rate determined by the asseesee, with respect to royalty paid on the products, the claim of the assessee on the payments of royalty on the variants of the products is to be allowed as per the aspects are concerned – Decided in favour of assessee. Nature of payment – capital or revenue - Whether the royalty paid and the technical guidance f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87,010/- and a technical guidance fee of ₹ 1,53,20,390/-. The AO also noticed that the aseessee has entered into international transactions. Reference was made to the Transfer Pricing Officer. The Transfer Pricing Officer at para 1.1 of his report dated 10.08.2010 listed out the international transactions entered in to by the assessee which is extracted for ready reference. Nature of transaction Method selected Total value of transaction (Rs.) Purchase of raw material and components TNMM 197,145,128 Purchase of spares TNMM 15,666,313 Purchase of Finished Goods TNMM 31,952,529 Sale of Spare Parts TNMM 1,714,373 Sale of finished goods CUP/TNMM 164,197,230 Sale of Software CD TNMM 283,516 Royalty CUP/TNMM 48,387,010 Technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned income thus stands at ₹ 85,150,029/-. 10. The transfer pricing approach in this order may be summarized as below: (i) The issues dealt with in this order are the payment of royalty and payment of export commission by the assessee to its AE. (ii) A show cause was issued to the assessee wherein it was argued that the assessee need not make this payment under the arm's length principle. The show cause notice is reproduced at para 3 of this order. (iii) The assessee's reply and the arguments of this office on that reply are at para 4 onwards. (iv) The arms length price on account of the transaction of payment of royalty amounting to ₹ 47,309,110 has been reduced to nil. The arms length price on account of the transaction related to payment of export commission amounting to ₹ 37,840,919 has been reduced to nil. The cumulative enhancement of the returned income thus stands at ₹ 85,150,029. (v) The assessee was allowed reasonable opportunity of being heard which included personal hearing on various dates mentioned in col.7 of page 1 of this order. (vi) In respect of other tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. 3. Aggrieved the assessee is in appeal before us on the following grounds. 1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of ₹ 44,78,49,600 as against the income of ₹ 31,49,18,923 returned by the appellant. 2. That the assessing officer erred on facts and in law in making adjustment of ₹ 4,73,09,110/- to the income of the assessee on account of international transaction of payment of royalty by the assessee during the previous year. 2.1. That the assessing officer erred on facts and in law in holding that no royalty was required to be paid in respect of products not specifically mentioned in the technical collaboration agreement ('the agreement') between the appellant and the associated enterprise. 2.2. That the assessing officer erred on facts and in law in not appreciating that the payment of royalty was made either in respect of the products specifically mentioned in the agreement or any of its variants as per provisions of the agreement. 2.3. That the assessing officer erred on facts and in law in not appreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt in double disallowance of the same amount. 4. Without prejudice that the Assessing Officer/TPO erred on facts and in law in not allowing depreciation in respect of payment of royalty and technical guidance fee of ₹ 134,87,786/- disallowed as capital expenditure in the preceding previous year. 5. That the assessing officer erred on facts and in law in disallowing export commission paid to M/s Honda Motor Co.Ltd. of Japan of ₹ 3,78,41,000 invoking section 40 (a) (i) of the Act holding the same to be royalty/fee for technical services on which allegedly the assessee had failed to deduct tax at source as per section 195 of the Act. 5.1 That the assessing officer erred on facts and in law in holding that the payments of export commission was towards royalty/fee for technical services as the same was in consideration for (i) right to use trademark, (ii) permission to export and (iii) in lieu of managerial and technical services provided by Honda, and accordingly the assessee was under obligation to deduct tax at source there from as per section 195 of the Act. 5.2. That the assessing officer erred on facts and in law in not appreciating that payment of export c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below, we hold as follows. 6.1. Ground no.1 is general in nature. Ground no.2 to 2.3 are on the issue of T.P. adjustments made on account of payment of royalty, on the ground that the royalty in question was paid on products that are not specifically mentioned in the Technical Consultancy Agreement between the assessee and its Associated Enterprises. Mr. Vohra, the Ld.Counsel submits that the agreement in question clearly stipulates payments for not only products mentioned specifically in the technical collaboration contract but also for variants of those products. He relies on the definition of the term products given in the agreement. Further reliance is placed by Mr. Vohra on article 21.3 of the agreement which mandates the payment of royalty on any or all products carried out at the manufacturing facility of licensee. It was submitted that every item of finished product is manufactured by the assessee using the technical know - how and technical information, assistance, etc. provided by the Associated Enterprises. It was further emphasize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see to its AE, even though there is no explicit agreement between the AE and the assessee on the payment of royalty on these products. On res judicata, he submitted that for the AY 2008-09, royalty has been disallowed though on a different ground and that res judicata is not applicable to income tax proceedings and the AO and the TPO have not viewed the issue from this perspective in the earlier AY`s. 6.5. Joining the issue Mr. Ajay Vohra, the Ld.Counsel for the assessee argued that for the AY 2008-09 the disallowance of royalty was on different grounds, but submitted that it is not based on the interpretation of agreement as this year, which means that the A.O. has accepted the claim of the assessee on this limb of argument. 7. After hearing rival contentions and considering the papers on record, we hold as follows. We find that the term product has been defined in the technical consultancy collaboration agreement as follows:- Unless otherwise clearly required by the context, the following terms as used in this Contract shall have the meanings as defined below: The term Products means such models of portable generators and general purpose engines (as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city). LICENSEE agrees to pay royalty in respect of the products manufactured in excess of the said quantity (i.e. licensed/registered capacity plus the aforesaid addition) subject to the prior approval of the Government of India regarding the terms of payment of royalty. Within two (2) calendar months following the last day of February and August of each year and the expiration or termination of this contract for any reason whatsoever, LICENSEE shall pay HONDA the total amount of royalty due to HONDA which has accrued during the six months period ending on such last day of February or August or the other period ending on the date of the expiration or termination of this contract or the expiration date of the royalty period. 7.1. The T.P.O. at para 2.1 listed out the products. He observed as follows: Subsequently the royalty has been continued to be paid by various amendments to the technical collaboration contract. Each of these amendments provided a rate of royalty for existing products and new products. These classes of products are listed by an annexure to the amendment. The latest amendment that contains such an annexure, is the seventh amendment to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No 3. EB 3000 Yes 4. EB 3000 S No. 5. EB 650 GP No 6. EBK 1000 No 7. EBK 2000 Yes 8. EBK 2800 Yes 9. EBK 650 Yes 10. EM 650 Z No 11. EP 650 No 12. EXK 2000 Yes 13. G 200 No 14. G 300 No 15. G 300 QPD No 16. G 200 QA No 17. G 200 PAM No 18. G 200 SA No 19. G 200 VAM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Variant of EBK 650 EBK 650 operates by Kerosene EP 650 operates by Petrol 12. EXK 2000 Generator Included in the list 13. G 200 Engine Variant of GK 200 GK 200 operates by Kerosene G 200 operates by Petrol 14 G 300 Engine Variant of GK 300 GK 300 operates by Kerosene G 300 operates by Petrol 15 G 300 QPD Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 16 G 200 QA Engine Variant of GK 200 GK 200 operates by Kerosene G 200 QA operates by Petrol and differ due to different type of crank shaft used 17 G 200 PAM Engine Variant of GK 200 GK 200 op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 28 G 300 QPY Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 29 G 300 VCS Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 30 G 300 VPY Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 31 G 300 QPID Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 32 GK 200 Engine Included in the list 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is to be accepted that these products are having different features then also, as per the wording, these are nothing but variants of the product. In our opinion the TPO has erred in coming to such a conclusion on facts. Change in type of fuel used or changing the start mechanism, or change in the crank shaft, etc. would be versions of variants of the same products. These are not new products. Even if the product is a result of design change then also the clause authorized payment of royalty. In any event, in the definition given in the collaboration agreement, Product means a model of portable generator and includes variation thereof from design changes and minor model changes made by Honda. Clause 21.3 mandates that the licensee shall have to pay royalty on any and all products carried out of the manufacturing facility of the licensee at such percentage of the ex factory sale price of such products invoiced by the licensee. In our view a plain reading of these two clauses support the argument of the assessee. Though approvals from the Govt. of the Technical Collaboration agreement cannot form the sole basis for coming to a conclusion or for determination of arm's le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the technical guidance fee paid in terms of the Technical Collaboration Agreement are in the capital field or in the revenue field. Both parties argued at length. The sum and substance of the argument of the Ld.Counsel for the assessee is that the issue is covered by the decision of the Tribunal in the case of M/s Hero Motor Corp. Ltd. vs. ACIT in ITA 5130/Del/10, Delhi 'C' Bench of the Tribunal for the Assessment Year 2006-07 vide order dt. 23.11.2012. Mr.Ajay Vohra, the Ld.Counsel for the assessee submits that the terms and conditions in the agreements are para materia. Mr.Peeyush Jain, the Ld.D.R. opposes these contentions and submits that the terms and conditions in the technical collaboration agreement considered in Hero Motor Corp. Ltd. and are different and hence the reasoning given therein cannot be accepted. He supports the order of the Assessing Officer as upheld by the DRP. 7.5. We have considered the covenants of (i) license and technical assistance agreement dt. 2.6.2004 between Honda Motor Co.Ltd., Japan and Hero Honda Motors Ltd. based on which the Delhi 'C' Bench of the Tribunal in ITA no.5130/Del/2010 adjudicated the case of M/s Hero Moto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms hereof, the LICENSOR shall make necessary endeavors so that New Model(s) for the LICENSEE are introduced in a phased and timely manner in order to meet the request from the LICENSEE and such introduction would be on reasonable criteria. 2. Article 27 Maintenance of Secrecy 27.1 LICENSEE shall use or cause to be used the Know-How furnished by HONDA under this Contract only for the purposes of this Contract. Whether during the term of this Contract or after the expiration or termination of this Contract, LICENSEE shall neither use any of the Know-How for any purpose other than those specifically authorized under this Contract nor make known, divulge or communicate any of the Know-How in any way or manner whatsoever to any person, company or other legal entity to whom disclosure is not authorized by this Contract. 27.2 LICENSEE shall take all necessary precautions to. keep the Know-How secret and confidential and to restrict its use as provided in Article 27.1 above. For this purpose LlCENSEE agrees to establish and maintain such procedures for protection of the Know- How as recommended by HONDA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s plant in the territory or the service of the products in accordance with this contract, regardless of whether such aprts are purchased from HONDA, manufactured by LICENSEE, manufactured by the subcontractors or otherwise procured by LICENSEE and subcontractors comply with the provisions of this Article 12. Article 18 (Limitation of use, and other prohibition) 18.1. LICENSEE shall not use or cause or permit to be used by any third party the intellectual property rights and the technical information licensed or provided hereunder, and the licensed parts manufactured by LICENSEE and/or its sub contractors hereunder and the supply parts supplied to LICENSEE and/or its purchasing agencies designated by LICENSEE hereunder, in the manufacture, assembly, servicing, sale or other disposition of any goods other than the products, or for any purpose other than as expressly provided in this agreement. 18.2. LICENSEE shall neither file nor cause to be filed in any country any patent or other intellectual property right application which incorporates or is directed to the Intellectual Property Rights, the Technical Information, the Know-how or the Trademarks disclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty on any and all products carried out of the manufacturing facility of LICENSEE for delivery to any and all purchasers, renters or other transferees whether in the territory or not. Such royalty shall be in the amount equivalent to four percent (4%) of the ex factory sales price (or ex warehouse sales price in case of the products kept in a warehouse immediately before such delivery) of such products invoiced by LICENSEE to the purchasers, renters or other transferees of such products, less: (i) the landed cost (including ocean freights, insurance premiums, customs duties and inland transportation costs) of the parts imported irrespective of source of procurement; (ii) the cost to LICENSEE of the standard bought out component parts listed in Annex 3 attached hereto; (ii) the cost to LICENSEE of the standard bought-out Component Parts listed in Annex 3 attached hereto; (iii) excise duties imposed on LICENSEE by the Government of India and included in said ex-factory sales price or ex-warehouse sales price. The royalty shall be paid on the Products carried out of the manufacturing facility of LICENSEE during the period of five (5) years (the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of royalties) hereunder in full, LICENSEE may continue to use the Know- How and the Industrial Property Rights for the purposes of manufacture, assembly, procurement, sale, delivery and service of the products and the parts. 32.2 In the event of the termination of this Contract: (i) LICENSEE shall at its expense promptly return to HONDA all documents and materials embodying the Know-How or any part thereof supplied by HONDA under or in connection with this Contract together with any and all reproduced copies of such documents and materials; (ii) Except as otherwise expressly stipulated herein or agreed upon by the parties hereto, LICENSEE shall immediately cease to use, and cause its distributors, dealers and Subcontractors to cease to use, the Industrial Property Rights and the Know-How authorized by HONDNA to be used in accordance with this Contract; (iii) LICENSEE shall immediately pay to HONDA all sums owing to HONDA; (iv) Except as otherwise specifically required hereunder, LICENSEE shall forthwith discontinue, and cause its distributors, dealers and Sub- contractors to discontinue, all activities under this Contract; (v) HONDA may at it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is agreement towards the cost of right of use by LICENSEE of technical information for the manufacture, sale, distribution and disposition of products; and (b) the relevant consideration for a term of or any three years from the date of expiry/termination, which shall be half of the current royalty rate(s) as specified under this Agreement (ii) For the avoidance of any doubt, LICENSEE shall not make any further payment beyond the period mentioned in 33.3.2(i)(b) above in respect of such continued right to manufacture, sale, distribution and service of the product(s) and part(s) as envisaged in Article 33.3.1 above. 33.4 LICENSEE shall promptly discontinue the use of the Trademarks licensed by LICENSOR hereunder and shall not claim any right, title and interest whatsoever in the said Trademarks. 33.5 The expiration or any other termination of this Agreement hereunder shall be without prejudice to any right which shall have accrued to either party hereunder prior to such expiration or termination. 33.6 LICENSEE shall, to the extent it is reasonable, and feasible, return to LICENSOR all particular documents and tangible property supplied by LICENSOR in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Power Products Ltd.) Sl.No. Facts of Honda Siel Power Products Ltd. Facts of Hero Moto Corp Ltd. 1. 1. Article 1.1 defines The term Products shall mean all of Portable Generators, General Purpose Engines, Water Pumps and parts thereof, which have been manufactured or assembled by SHPEL in the Union of India under the TIC contract, and shall also include such other models of Portable Generators and other products such as general purpose engines and water pumps as may be decided from time to time by mutual written consent between HONDA and SHPEL, which shall constitute an integral part of this agreement. 1. Article 1.1 defines The term Products to mean two/three wheelers including scooters specifically listed in Exhibit 1. 2. Article 1.2 defines The term Permitted Countries shall mean a country or countries, other than USA, Canada, Islamic republic of Iran, Republic of Iraq, Socialist People's Libyan, Arab Jamahiriya, Korea, Angola, Myanmar, Kingdome of Lesotho, Kingdom of Swaziland, Republic of Botswana Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 4 (Trademarks and Country of Origin) 4.1 Subject to the terms and conditions hereinafter contained, HONDA hereby gives consent that the trademarks to be used for or In connection with the products exported by SHPEL hereunder shall be HONDA and SHRIRAM HONDA , and the provisions of Articles 24.2 through 24.4 of the T/C contract shall mutatis mutandis apply to such trade marks HONDA and SHRIRAM HODNA . 4.2. The country of origin shall be clearly indicated on all products to be export by SHPEL hereunder, if so requested by the distributor. Article 3 (Trade marks and country of origin) 3.1.The products, and wherever designated by LICENSOR, the service parts to be exported by LICENSEE hereunder shall bear the trade mark HERO HONDA or trade marks as may be designated by LICENSOR (the trade mark HERO HONDA and such designated trade marks being hereinafter collectively referred to as Trade mark .. 3.2. The country of origin shall be clearly indicated on all products and service parts to be exported by LICENSEE hereunder and/or on all packages of such products and service parts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f M/s Hero Motor Corp.Ltd. (supra), wherein the issue was considered as follows. 25. From the reading of the agreement, it is evident that various clauses of the agreement do not support the finding of the Assessing Officer. The inference of the Assessing Officer is that the payment under this agreement is for acquisition of technical know-how and technical information for manufacturing of two wheelers and, therefore, he held the payment to be capital in nature for acquisition of intangible asset and allowed depreciation at the rate of 25% thereon. While arriving at the conclusion, he has observed that the assessee has an exclusive right of manufacture, sale and distribution. However, from Article 2 of the agreement, it is evident that the exclusive right is only against the third parties and not against HMSI. Article 17 of the agreement clearly provides that the know-how, technical information and any other business information of licensor shall remain the sole and exclusive property of the licensor and shall be held in trust and confidence by the licensee. Article 18 of the agreement provides that the licensee (i.e. the assessee) shall not permit any third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court allowed the appeal. The facts of the assessee's case are identical because the assessee also in the year 1984 entered into an agreement by which the assessee was provided with technical assistance for setting up of the plant and also for manufacture, assembly and service of the motorcycles. The assessee made lump sum payment of $5,00,000 for the technical assistance for construction of plant and paid a running royalty as a percentage of sales in respect of technical assistance for manufacture, assembly and service of the motorcycles. The running royalty which was paid annually was claimed as revenue expenditure and was disallowed by the Assessing Officer treating the same as capital expenditure. Thus, the facts of the assessee's case are identical to the facts before the Hon'ble Jurisdictional High Court in the case of Climate Systems India Ltd. (supra). 28. Similar were the facts before the Hon'ble Jurisdictional High Court in the case of Sharda Motor Industrial Ltd. (supra). In that case also, SMIL made a lump sum payment and also running royalty at a specified percentage based upon the production. The lump sum payment was treated as capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, the facts in the case of the assessee are distinguishable than the facts before the Hon'ble Apex Court. On the other hand, the facts of the assessee's case are identical to the facts before the Hon'ble Jurisdictional High Court in the case of Climate Systems India Ltd. (supra) and Sharda Motor Industrial Ltd. (supra) and also the decision of ITAT in assessee's own case cited supra. We, therefore, respectfully following the above decisions of Hon'ble Jurisdictional High Court, hold that the annual payment of royalty was a revenue expenditure. Accordingly, ground NO.6 of the assessee's appeal is allowed. 7.7. Though the assessee has relied on a number of decisions, in view of the finding of the Coordinate Bench, we do not deem it necessary to deal with the same. In the result ground no. 3 to 3.5 and ground no.4 are allowed. 7.8. Ground nos. 5 to 5.7 are on the disallowance made on payment of export commission u/s 40(a)(i). After hearing rival contentions we find that the issue in question has been considered by the Delhi 'C' Bench of the Tribunal in the assessee's own case in ITA no.5130/Del/2010 (supra). 7.9. The Tribunal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would pursue the proposal for confirmed orders which were to be executed directly by the applicant. The sale consideration was to be received in India by the applicant and the commission was payable to Zaikog in India. On these facts, the assessee sought the ruling of the Authority on the following questions, inter alia: (a) whether the amounts proposed to be paid by the applicant to Zaikog were subject to deduction of tax at source under section 195 of the Income-tax Act, 1961; (b) whether the amounts to be paid by the applicant to Zaikog were taxable in the hands of Zaikog, which did not have a permanent establishment in India; and (c) whether the amount payable to Zaikog would be taxable as fees for technical services in India. On these facts, the Authority ruled as under:- (i) That, in view of Circular No.23, dated July 23, 1969, and No.786 dated February 7, 2000 ([2000] 241 ITR (St.) 132), which reiterated that circular, issued by the Central Board of Direct Taxes, the payments made to Zaikog towards commission for services rendered by it abroad were not liable to be taxed in India either under the Income-tax Act, 1961, or under the Double Taxation A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (Iv a) and (v). 73. Similarly, 'fee for technical services' has been defined by way of Explanation-2 after Section 9(l)(vii) of the Income-tax Act. From a plain reading of the above definitions of 'royalty' as well as 'fee for technical services', it would be evident that the payment of export commission would not fall in any of the above definitions. By way of technical agreement, the assessee received the technical know-how to manufacture, assemble, sell and distribute the two wheelers within the territory of India. The payment made in pursuance to such agreement was royalty and has been treated by the assessee itself as royalty. By way of second agreement i.e. export agreement, HMCL permitted the assessee to export ~ the specified two wheelers to the specified countries. Therefore, by export agreement, the assessee has not been transferred or permitted to use any patent, invention, model, design or secret formula. Similarly, HMCL. by way of export agreement. has not rendered any manager ..... X X X X Extracts X X X X X X X X Extracts X X X X
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