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TMI Blog2018 (7) TMI 2094X X X X Extracts X X X X X X X X Extracts X X X X ..... A No. 2210/Del/2016, 2329/Del/2016 - - - Dated:- 27-7-2018 - Shri Amit Shukla, Judicial Member And Shri L.P. Sahu, Accountant Member Assessee by Sh. S.Vasudevan, Advocate Revenue by Sh. Sujit Kumar, Sr. DR ORDER L.P. Sahu, A.M.: These two cross appeals by the assessee and the Revenue are directed against the order of ld. CIT(A), Gurgaon dated 16.02.2016 for the assessment year 2011-12. Both the parties have raised following grounds in their respective appeals : Grounds raised by assessee : 1. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in confirming the disallowance of reimbursement amounting to ₹ 8,92,572/- under the provisions of Section 40(a)(i) of the Income Tax. Act, 1961. 2. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in dismissing the contention of the Appellant that the Appellant was not liable to deduct tax under Section 195 of the Income Tax. Act, 1961, from the payment made to M/s. Bellsonica Corporation Japan towards reimbursement of expenses as the same was not an income chargeable to tax in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... license agreement, Bellsonica Corpn. Will supply technical knowhow and knowledge of dies, quality control and testing and he will also provide production methodology of the assessee in lieu of which royalty has been paid as per agreement placed on record. It was also submitted that Bellsonica Corpn. Japan has given license information, technical knowhow of YC-5, design information, process, design of machines, dies, fixer for YP-8 and also provided blue prints of products. The Assessing Officer treated the royalty payment as fee for technical knowhow and as per Rule-5, technical knowhow is an intangible capital asset. Therefore, he allowed 25% depreciation on payment of ₹ 2,36,63,834/- and after deducting depreciation, the rest amount was treated as capital in nature. Therefore, the balance amount of royalty paid of ₹ 1,92,26,865/- was capitalized by the Assessing Officer and added to the income of the assessee. In appeal before the ld. CIT(A), who after considering the submissions of the assessee sustained the addition made u/s. 40(a)(ia) and in respect of payment of royalty, the ld.CIT(A) treated 25% of total payment as capital in nature and the balance 75% was treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of Hon ble Delhi High Court in the case of CIT vs. Hero Honda Motors Ltd., 55 taxmann.com 230 (Del). He has also relied on the decision of Chandigarh Bench of Tribunal in DSM Sinochem Pharmaceuticals India (P) Ltd. DCIT, 82 taxmann.com 316 and of Dlhi Tribunal in ACIT vs. Denso India, 89 taxmann.com 139. It is therefore, submitted that the ld. CIT(A) has wrongly held 25% of the payment as capital in nature. 8. On the other hand, the ld. DR relying on the order of the Assessing Officer submitted that the assessee had made agreement in the year 2006 and continuously getting benefit of the license till date. Therefore, it is capital in nature as the assessee is getting enduring benefit there from. The ld. CIT(A) has also wrongly decided the issue partly in favour of the assessee. 9. After hearing both the sides and perusing the entire materials available on record, we find that what we have to decide here is whether the payment made for technical knowhow was capital in nature or revenue. The ownership of the technical knowhow remained with the foreign company. The assessee has made license agreement with the foreign company as on 01.10.2006, which is continuously in force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant third party, and such industrial properties and know-how claims have a material adverse effect on the manufacture, use or sale of Products manufactured strictly in conformity with the Licensed Information, it will make efforts to a reasonable extent to make available to Licensee a technical solution which will not violate the relevant industrial property and know-how. (c) Bellsonica agrees to cooperate with Licensee in the legal defense of any law suits alleging infringement by Licensee of other s industrial property and know-how in respect of Products manufactured by Licensee in conformity with the Licensed Information, by furnishing to Licensee such information and evidence as are available to Bellsonica and are material to the proper defense of such law suits. The further obligations or responsibilities, if any, to be assumed by Bellsonica in any such law suits shall be decided by mutual agreement between Bellsonica and Licenee if and when such a need arises. (d) Bellsonica gives no other warranty express or implied, as to description, quality, merchantability, fitness for a particular purpose, performance, productiveness, or any other matter, of any Products, Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ca agrees to make available to Licensed Information which Bellsonica has the right and capacity, and is free, to disclose and/or grant license to Licensee as contemplated by this Agreement and which is utilized by Bellsonica in its plants where Products are manufactured. Notwithstanding the foregoing provision in the Article 3.01, Bellsonica shall make available to Licensee such Licensed information as, when properly used by Licensee, will be sufficient and complete for the manufacturing, testing and quality control of Products as contemplated by this Agreement. (b) Bellsonica shall supply to Licensee all documentation in Japanese language. The language of documentation, however, shall be in English when Licensee has been so requested. Bellsonica shall further render reasonable assistance to Licensee in converting Japanese technical standards in the Documentation whatever required to Indian standards to enable them to be used by Licensee in India. 3.2 Improvement by Licensee If, at any time during the term of this Agreement, Licensee discovers or acquires any improvement with respect to Products, it shall give to Bellsonica full information, instructions, know-how and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith Licensee s company policy and rules) shall be borne by Licensee. Licensee shall not be required to pay any amount to Bellsonica for such in-plant observation and training. The number of persons and the period of training and stay shall be decided by mutual consultation and agreement by Bellsonica and Licensee, on a case by case basis. 3.05 Despatch of Bellsonica s Personnel (a) Bellsonica agrees, during the term of this Agreement, upon written request from Licensee, to dispatch its personnel to the factories of Licensee to provide technical advice and guidance in the use of the Licensed Information for the manufacture, testing and quality control of Products or the same for start-up manufacturing of new model component. The number of personnel to be dispatched, their period of stay at the factory and/or factories of Licensee, the date of departure and all other terms and conditions not set forth hereunder in this Article 3.05 shall be, mutually agreed upon between Bellsonica and Licensee, on a case by case basis and subject to approval by the Government of India. (b) Licensee shall bear, or upon the receipt of Bellsonica s statement reimburse to Bellsonica, the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Licensee s sale which is the value against net sale after deducting all payable duties and taxes, in consideration of; providing and assistance of Licensed Information as specified in Article 3.01(a) and (b) and, assistance with regard to Articles 3 04 and 3.08, furthermore all other technical assistance and cooperation led by productivity increase or production improvement, and/or providing commercial information all of which Licensee is so desired as to Licensee's development, manufacturing and sale of Products. (b) Aforementioned royalty payment is valid as equals to the life of this agreement and such rate of royalty is subject to increase upon mutual agreement between the parties hereto. Such royalty payment shall be made by Licensee within 30 (thirty) days upon closing Licensee s accounting book at every six (6) months within each fiscal year and by means of wire transfer to Bellsonica Licensee further agrees to submit Bellsonica such statement of account for royalty along with profit and loss statement in equivalent period as an evidencing document. (c) All royalty payment by Licensee shall be done in Japanese Yen. Licensee may make payment of royalty to Bellsoni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its employees, suppliers and subcontractors for the purpose solely related to the manufacture and sale of Products, and Licensee shall enter into an agreement with each of such suppliers and subcontractors under which supplier or subcontractors undertake to keep confidential, and not to use for any purpose other than the supply to Licensee of materials of products, any Licensed information disclosed to it by Licensee pursuant to this Article 3.09 and shall take such other steps as may be reasonably required to cause its employees, suppliers and subcontractors to safeguard the confidentiality of such information. Both parties shall not, and shall require their officers, directors and employees not to, at any time, directly or indirectly, during the life of this Agreement or after its termination, divulge to any person, firm or corporation any information furnished by either party which may, in any way, be prejudicial to the best interest of the other party hereto. 3.10: Special Work by Bellsonica In the event Licensee requests Bellsonica to render any advice or assistance relating to Product or any manufacturing and operating preparations including, but not limited to, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intaining the obligations of the parties under this Agreement valid, binding and enforceable (including those Licensee for the remittance by Licensee to Bellsonica of any fees, royalties, expense or any other money provided for in this Agreement as contemplated herein) shall be required by the Government of India or Japan initially upon execution of this Agreement or at any time during the term of this Agreement, each party agrees to take immediately whatever steps as may be required in this respect with its own Government, and any charges incurred or to be incurred by such party in such connection shall be for the account of such party. (b) It is also agreed that unless and until all such validations, approvals and/or registrations which may be required and are capable of being obtained initially upon execution of this Agreement, under the laws of Japan or India, as the case may be, have been received from the Government of Japan and India, respectively, which responsibility Bellsonica and Licensee respectively assume, no party shall be under any obligation to undertake performance of any of its obligations contained herein. (c) Bellsonica shall obtain or complete, if requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided elsewhere herein, either party hereto may, upon its election and in addition to any other legal remedies that it may have, terminate this Agreement by giving a written notice of termination to the other party, in any of the following events: (i) any of the payments covenanted herein to be paid to Bellsonica shall be in arrear and unpaid for a period of 90 (ninety) days after the same shall have become payable; or (ii) the other party hereto shall make a default in the performance or observance of any of the material obligations or covenants contained in this Agreement and on its part to be performed or observed and (except where such default is not capable of remedy) shall not remedy such default within 90 (ninety) days after its receipt of any written notice requiring such remedy given to it by the party terminating this Agreement; or (iii) the other party hereto shall stop payment (within the meaning of any applicable bankruptcy law) or become insolvent or unable to pay its debt when due; or (iv) any proceeding shall have been initiated against the other party hereto under any applicable bankruptcy reorganization or insolvency law and such proceeding shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enter into a new agreement, and neither party shall be entitled to, and each party does not hereby wave, and right to claim from the other party to this Agreement which it may otherwise have due to any goodwill, or otherwise, created during the term of this Agreement or any extension thereof. ARTICLE 7. GENERAL 7.01: Arbitration Any and all claims, disputes, controversies or differences between the parties arising out of or in relation to or in connection with this Agreement, or with a breach thereof, which cannot be satisfactorily settled by correspondence or mutual conference between the parties hereto, shall be determined by arbitration in accordance with the then prevailing commercial Arbitration Rules of the Japan Commercial Arbitration Association upon written request of either party hereto. The arbitration tribunal shall consist of one arbitrator appointed in accordance with such Rules. The arbitration shall be held in Tokyo, Japan in accordance with the Rules and also in accordance with the Japanese laws in respect of the procedures on which the Rules are silent, and may be held, if the Tribunal considers it appropriate, in an informal and summary manner to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration to which, at the same time, substantially all of the property, business and assets of Bellsonica are sold. Licensee shall not sublicense or sublet any of its rights under this Agreement. The obligations set forth articles 2.02, 2.03, 3.09 and 6.05 shall survive any transfer, assignment or other disposal of this Agreement and shall continue in effect perpetually on the parties as originally named in such provisions. 7.06: Governing Law This Agreement shall be governed by and constructed in accordance with the laws of India. 7.07: Notice Any written notice required by any provision of this Agreement or which either party hereto shall deem necessary or desirable shall be given by delivery in person or by registered airmail, postage prepaid, in each case addressed as follows (or to such other address or person as may have been designated by written notice as herein provided): If to Bellsonica Bellsonica Corporation, 630-18 Yamaguchi, Kosai City, Shizuoka Pref. 431-0443, Japan Attention: President/CEO If to Licensee: Bellsonica Auto Component India Private Limited, Plot No, 1, Phase 3A, IMT Manesar, Distt. Gurgaon 122 051, H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of ease of reference only, and in no event shall the substance of any paragraph or the intent of the parties be interpreted or controlled by any such titles or headings. 7.11: Counterpart Originals This Agreement is being executed in duplicate and each copy shall be deemed as original and shall be retained by each party hereto. The two original copies, however, shall constitute one and the same Agreement. 7.12 Entire Agreement The terms and conditions herein contained constitute the entire agreement between the parties hereto in connection with the subject matter of this Agreement and shall supersede all previous negotiations, communications, agreements or arrangements, either oral or written, between the parties hereto pertaining to the subject matter of this Agreement, and no agreement or understanding varying or extending the terms and conditions of this Agreement shall be binding upon any party hereto unless it is made in writing, signed by a duly authorized officer or representative of the parties hereto and, if so required, approved by the Government of Japan and Indian respectively. 10. After going through the terms of agreement dated 01.10.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies did not part with any of their assets absolutely for ever or for a limited period of time, that they continued to have the right to use their knowledge and, even after agreements had run their course, their rights in this behalf was not lost, that assessee had not, therefore, acquired any asset or advantage of an enduring nature for benefit of its business and that payments were, therefore, revenue in nature and were deductible. Similarly, Hon ble Delhi High Court in the case of Hero Honda Motors(supra) after considering the terms of agreement, has also 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 assessee. The ownership 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 term ..... X X X X Extracts X X X X X X X X Extracts X X X X
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