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TMI Blog2016 (7) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... not justified in making the corporate disallowance of ₹ 18.09 crore which is hereby deleted. At the same time, it is made clear that the disallowance of ₹ 71 lac and odd sustained in MAP proceedings will continue and the AO will make addition for this sum. In other words, the corporate disallowance of ₹ 18.09 crore will stand deleted and the addition on account of transfer pricing adjustment would be reduced to ₹ 71 lac. - Decided in favour of assessee Disallowance on account of payment for technical know-how and trademark/logo - Held that:- All the salient features of transfer of technical know-how, show that the assessee paid 3% of selling price of the Joints sold by it for the ‘use of’ technical know-how provided by the Licensor, which is not a consideration for acquiring any know-how. It is a case of parting by the Licensor, for consideration, with the partial ownership of technical know-how, that is, for allowing only a right to use to the assessee; and not a case of parting with full ownership of technical know-how, that is, for transferring the ownership to the assessee. Hence, the amount so paid is eligible for deduction as a revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : This appeal by the assessee arises out of the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) on 24.09.2012 in relation to the assessment year 2008-09. 2. Ground no. 2 of the appeal is against the corporate addition of ₹ 18,09,04,254/- made by the AO towards payment for Management Consultancy and Business Auxiliary Services. 3. Succinctly, the facts of the case are that the assessee, an Indian company, is a part of GKN Group. It is engaged in the business of manufacture and sale of Constant Velocity Joints (CVJ). The assessee made a payment of ₹ 18.09 crore to its Associated Enterprise, GKN Driveline Headquarters Ltd., UK, on account of Management Consultancy and Business Auxiliary Services including human resources, global operations systems and global quality, global purchasing, global engineering, sales and marketing, information systems/information technology and regional services etc. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determination of the arm s length price (ALP), inter alia, of this internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing adjustment, but, in the instant case, throw a light on the actual availing of the Management Consultancy and Business Auxiliary Services by the assessee along with a proper allocation. The reasons ascribed by the AO in making a corporate disallowance of ₹ 18.09 crore stand defeated by the two Competent Authorities including Indian Competent Authority as well, who have categorically accepted that the assessee did avail these services and, further, the payment for the same on the basis of allocation key with 5% mark-up on costs was in order. The AO has mentioned in his final order that: the assessee company did not produce any new submission before the undersigned in support of claim. This has been mentioned in the assessment order pursuant to the assessee s reply that the detailed submissions were made before the TPO in respect of Management Consultancy and Business Auxiliary Services, whose copy was made available to the AO as well. Such details as placed before the TPO and replaced before the AO, running into more than 600 pages, are available on pages 432 to 1059 of the paper book. This shows that the material produced before the TPO in support of the claim for dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plain as to why such payment be not treated as a capital expenditure, as against the revenue claimed by the assessee, it was submitted that the expenditure did not result into an enduring benefit and fell in the revenue field. The assessee relied on certain decisions to fortify its view. The AO treated the entire payment of ₹ 6.39 crore as a capital expenditure. After allowing depreciation for a sum of ₹ 1,59,96,422, at the rate of 25%, the AO made disallowance of ₹ 4,79,89,269 in the draft order. The AO also referred the matter of determination of the arm s length price (ALP) of the international transactions of payment to its Associated Enterprises, namely, GKN, Germany and GKN, UK for use of know-how and trademarks. The TPO, inter alia , proposed a transfer pricing adjustment for a sum of ₹ 3.46 crore. Since the transfer pricing adjustment recommended by the TPO at ₹ 3.46 crore was less than the addition made by him at ₹ 4.79 crore, the AO did not make any separate addition on account of transfer pricing adjustment. He, however, mentioned in the final assessment order that if the transfer pricing adjustment gets modified at any appellate stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up manufactures or has existing licensing arrangements for Joints, namely:- 9. The term Know-How has been defined in this Agreement to mean: 1. The information and skills available to the Licensor at the Signature date all as defined in Clause 4 hereof concerning the manufacture of Joint components and the assembly of Joints (but excluding any information on forging, forming or extrusion used in the manufacture of components for Joints); and 2. any further information passed from Licensor to Licensee during the term of this Agreement. 10. A perusal of the above clauses of the Agreement reveals that the assessee was given an exclusive right ` to use the know-how to manufacture the joints in its plants and non-exclusive right to sell the products in the defined territory. What follows from this clause is that the assessee was granted a simple user of the know-how during the currency of the Agreement which, as per clause 2.3, is ten years from the Effective date or seven years from the date of commencement of the commercial production. Clause 3.3 of the Agreement provides as under:- Licensee acknowledges that Licensor is the owner of the Copyright and all o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, whichever is earlier. Since this Agreement was entered into on 11.1.2003, these lumpsum payments were made in earlier years. No lumpsum payment was stated to have been made by the assessee during the year, which contention has remained uncontrovered by the ld. DR. Then, there is Clause 9.2 of the Agreement which provides for payment of royalty at the rate of 3% of the selling price of all Joints sold by the Licensee. It is this 3% of the selling price which has been paid by the assessee during the year amounting to ₹ 71 lac. A careful perusal of the above discussed clauses of the Agreement manifests that the assessee was granted the use of know-how by GKN Automotive GmbH, Germany; the assessee admitted the Licensor as the owner of proprietary rights in the know-how; the assessee was prevented from disclosing such know-how to others; the assessee could not assign it to others; and at the termination of the Agreement, the assessee could not use the know-how provided to it. When we consider the nature of payment for use of technical know-how made during the year, which is @ 3% of the selling price for the use of technical know-how , there remains no doubt that this payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determinate period. 13.2 Licensor shall have the right to terminate this Agreement by notice in writing to operate on the date specified in the notice if Licensee shall come under the direct or indirect control whether jointly or otherwise or shall enter into any partnership or joint venture with any concern or concerns interested in or connected with the manufacture, sale or supply of goods which may compete with any of the Joints manufactured, sold or supplied by Licensor or any goods in relation to which Licensor s Know-How or other manufacturing information is or may be used. 13.3 A party having such right may terminate this Agreement by notice in writing to operate on the date specified in the notice, which date may be a date earlier than the date of the notice so as to defeat any title which a trustee in bankruptcy or a receiver or liquidator or other such person might otherwise acquire to the rights conferred hereby. 13.4 No waiver of any antecedent breach and no grant of time or indulgence shall prejudice any subsequent right to terminate this Agreement. 14. Effect of Expiration/Termination. 14.1 In the event that this Agreement expires by effluxion of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Licensee in which case the Licensee may continue to use the know-how free of charge. It is this clause 14.1 of the Agreement which has been greatly emphasized by the ld. DR to bolster his argument that if the assessee-Licensee terminates the Agreement at his volition, say within a short span after signing, he may continue to use the know-how free of charge for an unlimited period, which shows that the payment made by it is for acquisition of know-how and not its mere use and hence lies in the capital field. It is, no doubt, true that if the Licensee lawfully terminates the Agreement, it may continue to use the know-how free of charge, but, the important thing is that a Licensee can lawfully terminate the Agreement only in the situations as have been discussed in Clause 13 of the Agreement. When we peruse Clause 13, it emerges that the Licensee ( each party ) shall have a right to terminate the Agreement if the Licensor ( the other party ) fails to observe any of the terms or fails to perform its duties or becomes insolvent or goes into winding up or liquidation etc. in terms of sub-clauses 13.1.1 to 13.1.4. Thus it is discernible that the Licensee can terminate the Agreement only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee paid 3% of selling price of the Joints sold by it for the use of technical know-how provided by the Licensor, which is not a consideration for acquiring any know-how. It is a case of parting by the Licensor, for consideration, with the partial ownership of technical know-how, that is, for allowing only a right to use to the assessee; and not a case of parting with full ownership of technical know-how, that is, for transferring the ownership to the assessee. Hence, the amount so paid is eligible for deduction as a revenue expenditure. We, therefore, overturn the assessment order on this point and allow deduction of the full amount paid for the use of technical know-how. 17. Now, we take up payment of ₹ 5.19 crore made by the assessee to GKN Holding, UK, towards royalty for trademark/ brand. The assessee entered into an Agreement dated 16.2.2008, with its group company, a copy of which is available on record. Such Agreement has been made effective from 1.1.2007. Recitals of this Agreement provide that the Licensor (GKN Holding, UK) is the proprietor of the trademarks and the Licensor wishes to permit the Licensee (the assessee) to use the trademarks in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion therefor. 7.4 The Licensee will not make any representation or do any act which may be taken to indicate that it has any right, title or interest in or to the ownership or use of any of the Trade Marks except under the terms of this Agreement and acknowledge that nothing contained in this agreement shall give the Licensee any right, title, or interest in or to the Trade Marks save as granted by this Agreement. 19. This Clause makes it palpable that the Licensor is the proprietor of the trademarks and the Licensee undertakes not to do anything which might jeopardize the trade mark in any manner. Clause 9 deals with the termination of the Agreement. Para 9.2 of the Agreement provides as under:- 9.2 Upon the termination of this Agreement for whatever reason the Licensee shall cease to make any use of the Trade Marks save that if the Licensee has a stock of Products existing or in the course of manufacture or unfulfilled orders on hand at the date of termination of this Agreement, the Licensee may, but only with the Licensor s specific permission, sell such stock on the terms hereof or such other terms as may be agreed. 20. This clause provides in unambiguous t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how and trademarks. The TPO, inter alia, proposed a transfer pricing adjustment for a sum of ₹ 3.46 crore. Since the transfer pricing adjustment recommended by the TPO at ₹ 3.46 crore was less than the addition made by the AO at ₹ 4.79 crore, the AO did not make any separate addition on account of transfer pricing adjustment. The assessee, apart from challenging the action of the AO in treating the amount of ₹ 6.39 crore as a capital expenditure, subject to depreciation, also challenged the transfer pricing adjustment in the instant appeal. In the meantime, the assessee took recourse to the Mutual Agreement Procedure (MAP) proceedings for settling the issue of transfer pricing adjustment, inter alia, on account of payment of know-how and trademarks. It has been brought to our notice that such proceedings have attained finality and the transfer pricing adjustment has been reduced. Ergo, the grounds challenging the addition towards transfer pricing adjustment, cannot survive, which have been rightly withdrawn by the ld. AR. As we have held hereinabove that the payment for use of knowhow and trademarks is a revenue expenditure, the disallowance made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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