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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 ..... : Shri Sanjay Goyal, CIT(DR) Assessee By: Shri Deepak Chopra And Shri Amit Srivastava, Adv. ORDER Per Anadee Nath Misshra, AM (A) This appeal by Revenue is filed against the order of Learned Commissioner of Income Tax (Appeals)-LTU, New Delhi, [ Ld. CIT(A) , for short], dated 31.03.2014 for Assessment Year 2009-10. (B) Assessment Order dated 22.03.2013 was passed by the Assessing Officer ( AO , for short) under Section 143(3) r.w.s. 144C of the I.T. Act, 1961 ( I.T. Act , for short) wherein, the total income was assessed ₹ 1665,09,05,642/- as against returned income of Nil. The additions made by the AO included, inter alia, royalty and lump sum fee amounting to ₹ 1,56,32,14,000/-. The relevant portion of the Assessment Order is reproduced below for ease of reference: 2. Disallowance of royalty and model fees As per the terms and 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 hereund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in article 2 and 4 of the agreement was crucial for manufacturing cars in India. M/s Honda Motor Company is also a majority stock holder in the assessee company. Thus it is clear that without this agreement, the assessee company could not carry on its business of manufacturing cars. b. Thus assessee has obtained an advantage of enduring benefit by payment of this lump sum (model fee) as well royalty on turnover basis at a prefixed percentage. This has now been held to be the benchmark for deciding the nature of any expenditure related to foreign technical collaboration etc. in the light of Supreme Court decision in the case of CIT Vs. Ciba of India Limited (1968) 69 ITR 692. Further, on similar facts as are in the assessee's case, the Hon'ble Allahabad High Court has upheld the transfer of technical know-how and payment of Royalty is capital expenditure in the case of Ram Kumar Pharmaceutical Works 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 pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical service to the licensee company for 'which the technical guidance fee has been claimed. It is also again pertinent to mention that the M/s Honda Motor Company Limited, Japan has entered into agreement with the assessee company and agreed that all technical know-how in the shape of design and drawing in documentation, from time to time including providing the technical guidance will be provided to the assessee company. It was also agreed that that Lump sum fee (model fee} and royalty with certain terms and condition mentioned therein was agreed upon to be paid in the manners laid down therein. If the assessee company had not agreed upon on the terms and conditions, there was no possibility of the manufacturing of car and its parts by the assessee company. Therefore, the Royalty as well as know-how fee based on establishment of industry is the capital expenditure. (B.1) Vide appellate order dated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant portion of the aforesaid order dated 09.05.2018 of Hon ble High Court is reproduced as under: The Revenue s grievance is that ITAT without an appropriate analysis of the agreement in question concluded that the payment of royalty and lump sum fee (which the assessee says is running royalty and model fee) falls into capital stream. The assessee after accepting notice relied upon a previous judgment of the Supreme Court for Assessment Year (A.Y.) 1999- 2000, 2001-2002, 2003-2004 and 2005-2006 (reported as Honda Siel Cars India Limited Vs. Commissioner of Income Tax, Ghaziabad (2017) 395 ITR 713). It is submitted that although in respect of the past agreement, the amount paid (towards royalty and technical fee) in that case amounted to capital or revenue expenditure, the Court rejected the assessee s contention that the expenditure was revenue and at the same time in the later part of its judgment, upheld the reasoning of this Court for some other part of the payments made. 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 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an identical issue was involved in assessment on record which show that an identical issue was involved in assessment year 2003-04 wherein Hon ble Tribunal, vide their order dated 16.05.2008 in IT A No. 3173/Del/2007, have decided this issue in favour of the appellant. 20. The Ld. CIT-(DR) in support of the ground, placed reliance on the recent decision of the Hon ble Supreme Court in assessee s own case bearing serial Appeal No. 4918 of 2017 dated 09/06/2017 for assessment year 1999-2000 to 2005-06, wherein it is held that payment of royalty and lump sum fee under the agreement in question was for manufacturing of vehicles would be in the nature of capital expenditure and not revenue expenditure. Accordingly, submitted that given the decision of the Apex Court, the issue was settled in favour of Revenue. 21. On the contrary, the Ld. counsel for the assessee submitted that said case is distinguishable on facts since the assessment years before the Apex court were the formative years and this fact played on the court to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of the product exclusive of excise duties, minus the cost of standard bought out components and the landed cost of imported components irrespective of the source of procurement, including ocean-freight, insurance, custom duties, and other similar charges. The royalty shall be payable fora period of seven (7) years from the date of commencement of Commercial Production. 24. Thus, he submitted that the issue of allowability and nature of expenditure on running royalty on sales was not a subject matter of consideration before the Apex Court. He further submitted that the Hon ble Supreme Court in the said case took note of the order of Delhi High Court in the case of group company in CIT vs. Hero Honda Motors [(2015) 327 ITR 481 (Delhi)] wherein it has been held that payment of technical know-how fee and royalty was in the nature of revenue expenditure and opined as under- Coming to the judgment of the Delhi High Court in the case of this very assessee, it would be noticed that in that case, technical knowhow was obtained for improvising scooter segment, which unit was already in existence. On the contrary, in present case, the TCA was for setting up of new plant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew or FMC model of the Products, as detailed under Exhibit I, by the LICENSEE to the LICENSOR shall be JP 800 Million {Japanese Yen Eight Hundred Million). This fee shall be payable in three instalments as detailed under: i) The first instalment of JP 250 Million (Japanese Yen Two Hundred and Fifty Million) shall be payable within 60 days after the signing of Model Agreement by the LICENSOR and LICENSEE ii) The second instalment of JP 250 Million (Japanese Yen Two Hundred and Fifty Million) shall be payable within 60 days after receipt of the Technical Information necessary for mass production of the Model by the LICENSEE as per Article 4, and iii) The final instalment of JP 300 Million (Japanese Yen Three Hundred Million) shall be payable within 60 days after commencement of Commercial Production of the specific New or FMC model of the Products. b) For each MMC Model The amount of Model fee payable for each MMC of the Products, as detailed under Exhibit I, by the LICENSEE to the LICENSOR shall be JP 400 Million (Japanese Yen Four Hundred Million). This fee shall be payable in two equal instalments as under: The first of such instalments o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le on the basis of sales effected. He reiterated the fact that the year under consideration was the 11th year of production and it was clear from the reading of the Supreme Court s judgment that the only consideration for holding the lump sum payment was that those assessment years were the initial years and the know how was utilized for setting up the manufacturing facility of the assessee. Thus, the judgment of the Supreme Court was not applicable on the facts of the present case. 29. The Ld. Counsel submitted that the facts before Hon ble Delhi High Court in the case of Hero Honda Motors (supra) were identical to the facts and circumstances of the present case. The jurisdictional High Court while holding the payment for technical know-how and royalty to be in the nature of revenue expenditure has held as under: 16. Reading the aforesaid terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical knowhow and information. The ownership and the intellectual property rights in the knowhow or technical information were never transferred or became an asset of the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court:- 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. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment of plant, machinery etc. so as to bring in existence manufacturing unit for the products. Thus, a new business was set up with the technical know-how provided by HMCL, Japan and lump-sum royalty, though in five installments, was paid therefor made under the issue are that payments. ..Since, it is found that the Agreement in question was crucial for setting up of the plant project in que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p 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 analyzing 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. As a consequence, we find no merit in these appeals which are dismissed with coast. 35. The Hon ble Supreme Court has carved out the distinction between the payments at the time of setting u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2005 were not toward setting up of manufacturing facility, hence we hold that royalty/technical knowhow payment made by the assessee during the year under consideration were revenue in nature and the Ld. CIT-A has correctly allowed the said expenditure as revenue. Accordingly, we dismiss the ground of appeal of the Revenue (D.1) The Ld. Counsel for assessee further submitted that Revenue s appeal under Section 260A of I.T. Act for Assessment Year 2010-11 against the aforesaid order dated 18.08.2017 of Co-ordinate Bench of ITAT, Delhi for Assessment Year 2010-11 has already been dismissed by the Hon ble Delhi High Court vide order dated 13.05.2019 in ITA No. 45/2019. The relevant portion of the aforesaid order dated 13.05.2019 of Hon ble Delhi High Court is reproduced as under: 5. The only question, urged by the Revenue in the present case which remains to be considered reads as under: 2.1 Whether the ITAT/C1T(A) erred in deleting the addition of ₹ 1,59,74,53,889/- made by the Assessing officer treating the amount of royalty and lump sum fee paid by the assessee as capital expenditure instead of revenue expenditure as claimed by the Assessee? 6. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said expenditure of payment of royalty and lump sum model fee to be in the nature of revenue expenditure. The said order for assessment year 2008-09 has also been confirmed by the Hon'ble Jurisdictional Delhi High Court in 1TA No. 34 of 2016 dated 18.01.2016. 10. Thereafter, the decision of the Supreme Court decision is discussed and the ITAT concludes that the judgment of the Supreme Court in Honda Siel Car Ltd. v. CTT {supra) which was for AY s 1999-2000 to 2005-06 would not be applicable in the AY under consideration, since, the Assessee was already engaged in the manufacturing of cars, spare parts and payments has given the following reasons: In view of the above discussion, we are of the view that the judgment of the Hon'ble Supreme Court in assessee s own case for assessment year 1999-2000 to 2005-06 would not be applicable in the assessment year under consideration, since the assessee was already engaged in the manufacturing of cars and spare parts and the payments towards royalty/technical knowhow paid in pursuant to agreement dated 01/04/2005 were not toward setting up of manufacturing facility, hence we hold that royalty/technical knowhow payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uade us to take a view different from the view already taken by aforesaid order dated 13.05.2019 of Hon ble Delhi High Court and the aforesaid order dated 18.08.2017 of Co-ordinate Bench of ITAT, Delhi, for Assessment Year 2010-11, in assessee s own case. (F) We have heard both sides. We have perused the materials available on records. We have also referred to the judicial precedents brought to our attention or mentioned in the records. It is not in dispute that facts and circumstances for the present year i.e. Assessment Year 2009-10 are identical with facts and circumstances of Assessment Year 2010-11. It is also not in dispute that the aforesaid Agreement of 2005 have already been considered by Co-ordinate Bench of ITAT, Delhi by Ld. CIT(A), in aforesaid impugned order dated 18.08.2017. It is also not in dispute that the aforesaid Agreement of 2005 has been considered already by in the aforesaid order dated 13.05.2019 Hon ble Delhi High Court for Assessment Year 2010-11 in which Revenue s appeal was distinguishable. Neither side has brought any distinguishing facts and circumstances, legal points or decided precedents for our consideration to persuade us to take a view differ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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