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TMI Blog2019 (11) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... d conditions provided in the Technical Collaboration Agreement, the assessee claimed the royalty 5% / 8%, (net) of the sales made during the year under consideration in respect of technical know-how in view of the new TCA made between the parties subject to taxes. The details thereof is summarized hereunder. The Royalty expenses and allowability thereof is discussed in detail in subsequent Paras. On perusal of the profit and loss a/c, it is seen that the assessee has paid royalty of Rs. 156,32,14,000/-. A further breakup of the royalty is given in the 3CEB report. As per the report, payment of royalty of Rs. 101,45,19,188/- and payment of model fees of Rs. 54,86,95,000/- was made to Honda Motor Japan during the year. As per details furnished by the assessee, royalty has been calculated on domestic sales and on export sales and model fee has been paid on a lumpsum basis. In the earlier years, the payment on account of royalty/ model fee has been treated as capital expenditure in view of the facts mentioned in detail in the orders for earlier assessment years. Accordingly, assessee was asked vide questionnaire and order sheet entry dated 07.03.2013 to explain as to why the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orks Vs. CIT (1979) 119HR 33 (Allahabad) and CIT Vs. Warner Hindustan Limited (1998) 9 sec 533, 534. The Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) Limited. Vs. Commissioner of Income- Tax 224 ITR 342 {Supreme Court} also held that the Royalty payment, which was in terms of the collaboration agreement between the assessee & foreign company, was a composite payment for supply of technical know-how and services for setting up plant and manufacture of products as it was the composite agreement. Further held that the sum disallowed and treated as capital expenditure and not allowable as a revenue expenditure on the ground that the benefit derived is of enduring nature and for longterm. Merely the payment of Lump-sum fee in installments and Royalty at a certain percentage of the gross turnover, it cannot be held as revenue expenditure. The same view has also been held by Hon'ble Kerala High Court in the case of CIT Vs Polyformalin Pvt. Ltd: (1986) 161 ITR 36 in which it was held that royalty paid by the assessee under Technical know-how agreement for right to use Trade Mark and Technical knowhow exclusively is not allowable revenue expenditure. c. Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.03.2014 of Learned Commissioner of Income Tax (Appeals) ["Ld. CIT(A)", for short), deleted this addition vide paragraphs 4.2 to 4.7 of the said order, being reproduced below for ease of reference: (C) Revenue's appeal against aforesaid impugned order dated 31.03.2014 was decided by Co-ordinate Bench of ITAT, Delhi, vide order dated 29.06.2016 wherein the order of the Ld. CIT(A) on this issue was sustained, holding that there is no infirmity in the order of the Ld. CIT(A). The relevant portion of the aforesaid order dated 29.06.2016 of Co-ordinate Bench of ITAT, Delhi is reproduced as under: "24. Dissatisfied with the orders of AO, the assessee carried the matter to Ld. CIT(A). Ld. CIT (A) by following the order of Tribunal in assessee's own case in earlier assessment years, deleted the additions made by the AO. We now dispose of the issue item wise. a) Royalty & lump sum fee The AO had made the additions on the basis that the payment made by assessee had resulted into a benefit of enduring nature and that the expenditure was capital in nature. The Ld. CIT(A) following the order of the Tribunal for assessment year 2003-04 in ITA No.3173/Del/2007, wherein the identica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee furthermore contends that for A.Y. 2010-2011 similar payments were held to be revenue in nature. The discussion of the lower appellate authority i.e. the CIT(A) and the ITAT would disclose that they went by the previous assessment year's decisions for A.Y. 2003- 2004. The assessee entered into a new agreement in 2005. In these given circumstances, the omission by the lower appellate authorities is erroneous. The issue is therefore remitted for reconsideration by the ITAT which shall proceed to decide the question whether the payments made towards model fee/running royalty - characterised - lump sum payment, by the ITAT in the impugned order fall in the revenue or capital stream. The appeal is partly allowed in the above terms." (C.2) It is in this background that the present appeal came up for fresh hearing before us. Although there are several grounds of appeal, only relevant ground of appeal for present purposes is ground no. 1 which is as under: "1. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 1,56,32,14,000/- made by AO treating the amount of royalty and lump sum fee paid by assessee as capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that lump sum fee for acquisition of know-how was for the purpose of setting up the manufacturing facility. He submitted that the Hon'ble Supreme Court had not given any opinion on the issue of allowability of the running royalty as was the payment in the present assessment year. In the said case the assessment year involved were initial assessment years and in those facts it was held that payments are made for setting up of the plant project for manufacturing of cars and thus the expenditure was in the nature of capital expenditure and not revenue expenditure. In the present case the payment of royalty and lump sum model fee was paid in terms of Technical Collaboration Agreement (TCA) dated 01/04/2005, whereas the payments in the relied upon Supreme Court judgment were made under TCA dated 21/05/1996 entered at the time of setting up/commencement of business of the assessee. 22. The Ld. Counsel for the assessee drew our attention to the para of the Apex Courts judgment where the court had confined itself only to answering the question raised regarding the lump sum payment of US Dollars 30.5 million and not on running royalty- The dispute which has arisen is as to whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which unit was already in existence. On the contrary, in present case, the TCA was for setting up of new plant for the first time to manufacture cars. The Delhi High Court specifically noted this fact in para 14 of the judgment. While analysing the agreement in that case which was for providing technical know-how in relation to the product i.e. two wheelers and three wheelers and the purpose was to introduce 'new models' of the said product developed by the Japanese Company, the High Court noted that the agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It referred to the earlier collaboration agreement dated January 24, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufacture assemble, sell, distribute, repair and service two/three wheelers. The aforesaid distinction between the two Agreements has made all the difference in the results. " 25. He further submitted that it was evident and apparent that even the Hon'ble Apex Court wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fee shall be payable in two equal instalments as under: The first of such instalments of JP¥ 200 Million (Japanese Yen 200 Million) shall be payable within 60 days after signing of Model Agreement and receipt of the Technical Information necessary for mass production of the Model by the LICENSEE, as per Article 4, and ii)The second and final instalment of JP¥ 200 Million (Japanese Yen Two Hundred Million) shall be payable within 60 days after commencement of Commercial Production of the specific MMC of the products. Provided that not more than one Model Fee for Minor Model Change (MMC) in respect of any Existing Model or FMC Model or New Model shall be payable a during the term of this Agreement. The model fee shall be payable by LICENSEE in currency of Japanese Yen by bank transfer remittance to the bank account designated by LICENSOR. ROYALTY In consideration of the right and license granted to the LICENSEE under Article 2 hereof, the LICENSEE shall pay to LICENSOR a Royalty on all Products, while this Agreement is effective. The rate of royalty payable by the LICENSEE to the LICENSOR shall be as a. On Domestic Sales: 5% (Five Percent) net remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the respondent assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. In fact, the business was not exactly new. Manufacture and sates had already commenced under the agreement dated 24th January, 1984. After expiry of the first agreement, the second agreement dated 2nd June, 1995, ensured continuity in manufacture, development, production and sale. The period of agreement, 10 years in the present case, would be inconsequential for the agreement merely permitted and allowed use of technology subject to payment of royalty and compliances and the proprietorship and ownership right was never granted or transferred. The factum that after 10 years and after returning the tangible properties, the respondent assessee could still have continued to use technical knowhow and information woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods, the expenditure in the form of royalty paid would be in the nature of capital expenditure and not revenue expenditure.... " 32, He submitted that it becomes clear that the judgment of the Hon'ble Supreme Court is distinguishable on facts and is applicable for the payments made at the time of setting up of plant and is not applicable in the present case. In the present case, there is no dispute that the payments were made pursuant to the agreement dated 01.04.2005. At the time the agreement was executed, the assessee was in existence and in operation for more than 10 years. Thus, in line with the Hon'ble Supreme Court judgement the said agreement dated 01.04.2005 has been entered into by the assessee to improvise the existing business and the said expenditure has to be held as revenue expenditure." 33. We have considered the rival submission and perused the relevant material on record. In the present case, payments are made pursuant to the agreement dated 01/04/2005. At the time of the agreement was executed, the assessee was in existence in operation for more than 10 years. Thus, it cannot be said that the technical knowhow given under the agreement was for setting up of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made once the manufacturing process has already begun. We observe from the facts available on record that the assessee had commenced manufacturing activity in the year 1998 itself and by virtue of the new TCA dated 01/04/2005 the technical information provided to the assessee was in respect of addition of the existing product profile already been manufactured by the assessee. The Hon'ble Delhi High Court in the case of CIT Vs. Hero Honda Motors (supra) in para - 16 of the order (reproduced in para -29 of this order) has held the royalty for carrying on the day-to-day business as revenue expenditure. 36. The Hon'ble Supreme Court in the decision in the case of assessee (supra) has further observed as under: "22) When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the outset, by Mr. Ruchir Bhatia, learned senior standing counsel for the Revenue, that for AY 2009-10, the above issue stands remanded by this Court to the ITAT by the order dated 9lh May 2018 in ITA 480/2017. This is not disputed by Mr. Deepak Chopra, learned counsel for the Assessee. Mr, Bhatia, therefore, submits that for the present AY 2010-11 also, the issue be remanded to the ITAT for a fresh decision, particularly, since, according to him, the ITAT has not given sufficient reasons in arriving at its conclusion. Further although for AY 2008-09, the issue of treatment of the expenditure towards royalty as revenue expenditure has been confirmed by the ITAT and upheld by this Court by dismissing the Revenue's appeal being ITA 34/2016 by the order dated 18lh January 2016, Mr. Bhatia points out that the above order dated 18lh January 2016 was in fact not on merits but on account of the extraordinary delay of over 790 days in the re-filing of the said appeal. 8. On the other hand, Mr. Deepak Chopra, learned counsel for the Assessee, points out that the ITAT has in the impugned order discussed the decision of the Supreme Court in Honda Siel Car Ltd. v. CIT (2019) 409ITR 42 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT-A has correctly allowed the said expenditure as revenue. Accordingly, we dismiss the ground of appeal of the Revenue." 11. Mr. Bhatia then urged that the ITAT has not discussed the clauses of the agreement dated lsl April 2005. The Court in fact finds that in paragraph 26 of the impugned order while setting out the submissions of learned counsel for the Assessee, the clauses of the said agreement have been set out. What appears to have weighed with the ITAT is the distinction between the royalty payments made during the initial phase of the Assessee's operations, which formed subject matter of the judgment of the Supreme Court and the subsequent AYs including the AY in question more than ten years after the Assessee commenced operations. 12. Mr. Chopra has also drawn the attention of the Court to a clarificatory order passed by the Supreme Court on 1.4th November 2018 where as a corollary of Irealing the royalty payment as capital expenditure during the formative years, the Supreme Court permitted the Appellant to claim depreciation thereon. 13. The ITAT has rightly drawn a distinction between the royalty payments made by the Assessee to the principal during its for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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