Income Tax Appellate Tribunal - Delhi
Honda Siel Power Products Ltd., Uttar ... vs Assessee on 25 July, 2014
1
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : "I" NEW DELHI
BEFORE SHRI U.B.S.BEDI, JM
AND
SHRI J.SUDHAKAR REDDY, AM
ITA No: 5713/Del/2011
Assessment Year : - 2007-08
Honda Siel Power Products Ltd. vs. DCIT, Circle 12(1)
Plot no.5, Sector 41 (Kasna) New Delhi
Greater Noida Industrial Development Area
Dt. Gautam Budh Nagar, U.P.
PAN: AAACH 8464 L
(Appellant) (Respondent)
Appellant by : Shri Ajay Vohra, Sh.NK Jain, Advs
Sh. Abhishek Agarwal and Ms.Shaily Gupta, C.As
Respondent by: Sh. Peeyush Jain, CIT, D.R.
Sh. Yogesh K.Verma, CIT, D.R.
ORDER
PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
This is an appeal filed by the assessee against the order dt. 31st March, 2007 of Ld.ACIT, T.P.O. I (2), New Delhi pertaining to the Assessment Year 2007-08.
22. Facts in brief:- The assessee company filed its return of income declaring total income of Rs. NIL on 27.10.2007. Subsequently it filed a revised return of income on 29.10.2007 declaring total income of Rs.31,49,18,923/-. During the course of assessment proceedings the AO noticed that the assessee is paying royalty of Rs.4,83,87,010/- and a technical guidance fee of Rs.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 TNMM 197,145,128
and components
Purchase of spares TNMM 15,666,313
Purchase of Finished TNMM 31,952,529
Goods
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 Assistance Fee TNMM 15,320,390
Commission exports TNMM 37,840,919
Reimbursement of ticket CUP/TNMM 2,908,871
cost
Model fee TNMM 4,373,000
2.1. Out of the total royalty payment of Rs.4,83,87,010/-, the AO treated royalty payment of Rs.10,77,900/- as payment at arm's length 3 price, being royalty paid in accordance with the terms of the agreement and on the products specifically mentioned in the agreement. The case of the Transfer Pricing Officer is that, the balance of the royalty has been paid on products which are not specifically mentioned in the Technical Collaboration Agreement entered between the parties "Honda Motors, Japan" and "Shri Ram Power Equipment Ltd.," now called as "Honda Siel Power Products Ltd.," dated 18.10.1985, which is renewed from time to time and the latest amendment, which is the 7th amendment to the technical collaboration contract was entered on 13.09.2009. The most appropriate method chosen by the asesessee for its Transfer Pricing study and the claim made by the assessee in its Transfer Pricing report, that the rate at which royalty is paid is at arm's length. The case of the Transfer Pricing Officer is that the technical collaboration agreement in question does not authorize payment of "royalty" on the "variants of the products", which are not listed in the Technical Collaboration Agreement (TCA) and hence no royalty need to have been paid on the products and hence the payments are not at arm's length price (ALP). At para 9 and 10 of his order the TPO held as follows.
"9. By the application of CUP, the arms length price in respect of payment is determined at 'nil' as against Rs.37,840,919 determined by the assessee. Similarly, in the case of payment of royalty the arms length price of this transaction is determined at Rs.10,77,900 as against Rs.4,83,87,010 determined by the assessee. The Assessing Officer shall enhance the returned income by Rs.47,309,110 on account of the transaction of payment of royalty and by Rs.37,840,919 on account of the 4 transaction related to payment of export commission. The cumulative enhancement of the returned income thus stands at Rs.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 Rs.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 Rs.37,840,919 has been reduced to nil. The cumulative enhancement of the returned income thus stands at Rs.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 transaction no adverse inference is drawn."
2.2. The AO further came to a conclusion that the royalty and technical guidance fees were to be capitalised. He allowed 25% depreciation on these amounts after capitalising the same. On export commission the AO considered the terms and conditions of the agreement, found that the export commission in question is clearly in the nature of royalty/fees for technical services. As no tax was deducted at source, the payment of Rs.3,78,41,000/- was not allowed as a deduction by invoking S.40(a)(i) of the Income Tax Act, 1961. Alternatively the AO held that the expenditure in question is purely for the use of license acquired by the assessee, which was for a long period and thus would constitute a capital asset. Accordingly the payment of export commission was disallowed.
52.3. The assessee carried the matter in appeal before the D.R.P. The D.R.P.-I, New Delhi in its order at page 6, directed the T.P.O. to delete the addition of Rs.3,78,40,919/- being payment of export commission on the following ground.
"The assessee felt that the Assessing Officer made the disallowance not appreciating that payment of export commission was not in the nature of royalty and fee for technical services, and the same did not constitute income which accrues or arises to Honda in India. The Assessing Officer also did not appreciate that payment of export commission was for acquiring any capital asset and did not result in any enduring benefit to the assessee. Without prejudice, it is also stated that payment to the extent of Rs.3,78,40,919/- has already been disallowed in the transfer pricing order and therefore to disallow it again would tantamount to double disallowance.
It is found that in the transfer pricing portion of the order, export commission has been disallowed and therefore its disallowance again would be double disallowance. As the DRP has already upheld the disallowance in the transfer pricing portion, disallowance again would lead to double disallowance. Hence Assessing Officer is directed not to disallow export commission on grounds of capital expenditure or by treating it as royalty/fee for technical service."
2.4. On the issue of determination of arm's length price on international transaction on payment of royalty of Rs.4,73,09,110/- the D.R.P. upheld the Transfer Pricing adjustment.
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 6 Act') at an income of Rs.44,78,49,600 as against the income of Rs.31,49,18,923 returned by the appellant.
2. That the assessing officer erred on facts and in law in making adjustment of Rs4,73,09,110/- 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 appreciating that payment of royalty is a necessary cost, incurred for obtaining the know-how for manufacturing the final products.
2.4. That the assessing officer erred on facts and in law in computing the adjustment on account of international transaction of payment of royalty without applying any of the methods prescribed under section 92C of the Act read with rule 10B of the Rules.
2.5 Without prejudice that the assessing officer / TPO erred on facts and in law in not providing any basis for computation of adjustment for the difference in arm's length price in respect of international transaction of payment of royalty.
3. That the assessing officer erred on facts and in law in disallowing royalty amounting to Rs.4,83,87,010 and technical guidance fee amounting to Rs.l,53,20,390 paid to Honda Motor Company, Japan as per the agreement as capital expenditure incurred for acquisition of intangible asset.
73.1 That the assessing officer erred on facts and in law in holding that in terms of the agreement, intellectual property right developed by Honda, Japan has been transferred to the assessee.
3.2 That assessing officer erred on facts and in law in misinterpreting the agreement between the appellant and Honda, Japan and holding that in the event of the expiration of the contract, the assessee may continue to use the know-how and the Industrial Property Rights, without appreciating that appellant would still be required to pay royalty for use of such know how and Industrial Property Rights.
3.3 That the assessing officer erred on facts and in law in holding that the terms of agreement are quite comprehensive and the whole technical know-how to set up the business of the assessee are provided by Honda, Japan.
3.4 That the assessing officer erred on facts and in law in holding the payment of royalty and technical guidance fee to be capital expenditure on the ground that the assessee can grant indivisible and non-transferable sublicenses to use the know-how to Indian persons, companies or other legal entities exclusive privilege of manufacturing and selling the products.
3.5 Without prejudice, the assessing officer erred on facts and in law in ignoring the fact that, since the payment of royalty to the extent of Rs 4,73,09,110 has already been disallowed in the transfer pricing order, any further disallowance to that extent would result 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 Rs.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 Rs.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.
85.1 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 commission to Honda does not result in an income accruing or arising in India in terms of section 9(1) of the Act and hence is not liable to tax in India.
5.3 That the assessing officer erred on facts and in law in not appreciating that payment of export commission was not for right to use any copyright, literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark, design and, therefore, was not in the nature of royalty.
5.4 That the assessing officer erred on facts and in law in not appreciating that services / assistance provided by Honda were incidental to the right for exploiting the foreign territory and were not in the nature of fee for technical services.
5.5 That the assessing officer erred on facts and in law in not appreciating that the payment of export commission was not consideration for use of trade mark or provision of technical assistance, for which separate royalty payment was being made on which tax is duly deducted under section 195 of the Act.
5.6. That the assessing officer erred on facts and in law in not appreciating That payment of export commission being for earning income from source outside India, cannot be characterized as royalty or fee for technical service as per section 9(1 )(vi)(b) of the Act respectively.
5.7 That the assessing officer erred on facts and in law in alternatively holding payment of export commission to be in the nature of capital expenditure not allowable under section 37(1) of the Act on the ground that the same was incurred for acquiring permission/license for making export.
9The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal."
4. Mr. Ajay Vohra, Advocate represented the assessee and Mr. Peeyush Jain, CIT, DR along with Mr. Yogesh K Varma, Sr. D.R. represented the Revenue. Both the parties argued at length. Numerous paper books were filed. Reliance was placed by both the parties on a number of decisions, which we would be adverting to wherever required and necessary during the course of this order. Suffice to say, all the case laws are studied by us and those case laws, which are relevant are discussed in our order. For the sake of brevity the arguments of both the parties are recorded and considered in the order issue wise.
5. Rival contentions heard. On a 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 10 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 emphasized that the products were termed as variants on account of minor variation in the use of petrol, kerosene/LPG, recoil - electric starter and at times due to use of different types of crank shaft. It is further argued that the royalty was paid as per Govt. approval and that it is not the case that the assessee paying royalty without approval from the concerned authorities. Reliance was placed on the following case laws.
- Sona Okegawa Precision Forgings Ltd. (ITA 4781/Del/10)
- SGS India P.Ltd. vs. ACIT (ITA 2406/Mum/2006)
- Rebok India Co. vs. ACIT (ITA 5130/Del/2010)
- Hero Moto Corp Ltd. vs ACIT (ITA 5857/Del/12) 6.2. He further submits that no method has been applied by the TPO and hence the determination of ALP by the TPO is bad in law. It was further submitted that similar payments of royalty have been made in the past and that revenue has been consistently accepting payments as being at arm's length and that in the subsequent AYs also the TPO has not made similar adjustment on account of payment of royalty. The principle of consistency was relied upon.
116.3. The Ld. DR Mr. Peeyush Jain on the other hand submits that the agreement does not speak about the payment of royalty on variants of products. He relied on the findings of the TPO and DRP. On the issue whether Govt. approval can form a basis for coming to a conclusion that the payment is at arm's length price, he submitted that the argument is fallacious and not in accordance with the transfer pricing provisions. He relied on the following case laws:
- ACIT vs. M/s Genom Biotech P.Ltd. 2012-T II-ITAT-Mum-TP
- Coca Cola India Inc. vs. ACIT, Gurgeon : 2008-TIOL-658-HC-P&H-IT
- CIT vs. M/s Nestle India Ltd. : 2011-T II-18-HC-Del-Intl.
- M/s Festo Controls P.Ltd. vs. DCIT, Bangalore : 2013- T II-14-ITAT- Bang.-TP
- Deloitte Consulting India P.Ltd. vs. DCIT :2012-T II-ITAT-Mum-TP
- SKOL Breweries Ltd. vs. ACT, Mumbai 'K' Bench (ITA 6175/Mum/11)
- ITAT Mumbai 'L' Bench in ITA 2469/Mum/2006 Serdia Pharmaceuticals (India) P.Ltd.
- Perot Systems TSI (India) Ltd. vs. DCIT -2010-TIOL-51-ITAT-Del.
6.4. He laid emphasis on the findings of the DRP and submitted that royalties have been paid by the assessee 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.12
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 completely built up and finished products) designed and developed by Honda and specified in Annexure 1 hereto and includes variations thereof resulting from design changes or minor model changes made by Honda during the term of this contract."
Clause 21.3 of the technical consultancy collaboration agreement reads as follows:
"21.3. LICENSEE shall pay a royalty 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;13
(iii) The cost of packaging materials for the products and
(iv) 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 'royalty period'), within the term of this contract, from the day to be designated by HONDA in writing, which day shall fall within the period commencing on the day on which the manufacture of any one model of the products by LICENSEE on a commercial basis starts and ending on the third anniversary of the effective date. LICENSEE hereby agrees to use its best efforts to start the manufacture of the products on a commercial basis within one(1) year after the effective date. HONDA hereby acknowledges that the payment of royalty at the rate of four percent (4%) provided above is restricted to licensed/registered capacity (100,000 units of the products per year at the date of execution of this contract) plus such addition as the Government of India may from time to time specify (being at the date of execution of this contract twenty five percent (25%) of the licensed/registered capacity). 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 14 seventh amendment to the technical collaboration ;contract dt. 13.9.2009. Para 3 dealing with rate of royalty states, Rate of royalty: It is acknowledged that the provision "Two per cent (2%) on existing models and four percent (4%) on new models as set forth in ;section 3 of the Sixth amendment shall also be applicable to this seventh amendment. Such existing models and new models shall mean models as described in Annex-1 (13th September,2004) to this seventh amendment, respectively.
The Annexure I that lists out products to which such royalty rate shall apply are reproduced below.
Definition of the products under 1(1) of existing contract as amended under the Seventh Amendment Existing Models Portable Generators:
1. E 650K and minor variations thereof.
2. EM 650 and minor variations thereof
3. E 1000k and minor variations thereof
4. EBK 1200 and minor variations thereof
5. Ebk 2000 and minor variations thereof
6. EBK 2800 and minor variations thereof
7. EB 3000 and minor variations thereof General Purpose Engines:
1. GK 100 and minor variations thereof
2. GK 200 and minor variations thereof
3. Gk 300 and minor variations thereof New Models Portable Generators:
1. EBK 1200S and minor variations thereof
2. EBK 2000S and minor variations thereof
3. EBK 3600 and minor variations thereof
4. EXK 1200 and minor variations thereof
5. EXK 2000 and minor variations thereof
6. EXK 2800 and minor variations thereof
7. E 400 and minor variations thereof
8. EBK 650 and minor variations thereof
9. EBK 1000 and minor variations thereof
10. EP 900H and minor variations thereof 15 General Purpose Engines:
1. G/GK 400 and minor variations thereof.
2.1. Vide your submission dt. 12.2.2010 you have provided a list of models that you have exported to various parties, (AEs and Non-AEs), as part of your support of the CUP methodology. This data was analysed from the stand point of checking whether all models exported were covered by the definition of the term 'products' in the technical collaboration agreement. The results of this analysis are tabulated below.
Sl.No. Model Whether appearing in
technical contract
agreement (Yes/No)
1. EB 1000 No
2. EB 220 No
3. EB 3000 Yes
4. EB 3000 No.
S
5. EB 650 No
GP
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 No
QPD
16. G 200 QA No
17. G 200 No
PAM
18. G 200 SA No
31
19. G 200 No
VAM
20. G 200 QA No
3
21. G 200 No
QAM
22. G 200 QB No
16
3
23. G 200 No
SAM
24. G 200 No
WBI
25. G 300 LPY No
7.2. The chart of products with variations is given below.
Sl.No. Model Product Variant of Difference Product
1. EB Generator Variant of EBK 1000 operates by 1000 EBK 1000 Kerosene EB 1000 operates by Petrol
2. EB Generator Variant of EBK 2000 operates by 2200 EBK 2000 Kerosene EB 2200 operates by Petrol
3. EB Generator Included in -
3000 the list
4. EB Generator Variant of EB EB 3000 is a electric
3000S 3000 start Generator whereas
EB 3000 recoil start
5. EB 650 Generator Included in
GP the list
6. EBK Generator Included in
1000 the list
7. EBK Generator Included in
2000 the list
8. EBK Generator Included in
2800 the list
9. EBK Generator Included in
650 the list
10. EM 650 Generator Variant of EM Minor model change like
Z 650 mark and sticker pasted
in Genset is different.
11. EP 650 Generator Variant of EBK 650 operates by
EBK 650 Kerosene EP 650
operates by Petrol
12. EXK Generator Included in
2000 the list
13. G 200 Engine Variant of GK GK 200 operates by
200 Kerosene G 200 operates
by Petrol
14. G 300 Engine Variant of GK GK 300 operates by
17
300 Kerosene G 300 operates
by Petrol
15. G 300 Engine Variant of GK GK 300 operates by QPD 300 Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used
16. G 200 Engine Variant of GK GK 200 operates by QA 200 Kerosene G 200 QA operates by Petrol and differ due to different type of crank shaft used
17. G 200 Engine Variant of GK GK 200 operates by PAM 200 Kerosene G 200 PAM operates by Petrol and differ due to different type of crank shaft used
18. G 200 Engine Variant of GK GK 200 operates by SA 31 200 Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used
19. G 200 Engine Variant of GK GK 200 operates by VAM 200 Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used
20. G 200 Engine Variant of GK GK 200 operates by QA 3 200 Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used
21. G 200 Engine Variant of GK GK 200 operates by QAM 200 Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used
22. G 200 Engine Variant of GK GK 200 operates by QB 3 200 Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used
23. G 200 Engine Variant of GK GK 200 operates by SAM 200 Kerosene G 200 SA 31 operates by Petrol and 18 differ due to different type of crank shaft used
24. G 200 Engine Variant of GK GK 200 operates by WBI 200 Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used
25. G 300 Engine Variant of GK GK 300 operates by LPY 300 Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used
26. G 300 Engine Variant of GK GK 200 operates by QCS 300 Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used
27. G300 Engine Variant of GK GK 300 operates by QP II 300 Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used
28. G 300 Engine Variant of GK GK 300 operates by QPY 300 Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used
29. G 300 Engine Variant of GK GK 300 operates by VCS 300 Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used
30. G 300 Engine Variant of GK GK 300 operates by VPY 300 Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used
31. G 300 Engine Variant of GK GK 300 operates by QPID 300 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. GK 200 Engine Variant of GK GK 200 VA differ due to 19 VA 200 different type of crank shaft used.
34. GK 200 Engine Variant of GK GK 200 SA differ due to SA 200 different type of crank shaft used.
35. GK 200 Engine Variant of GK GK 200 WA differ due to WA 200 different type of crank shaft used.
36. GK 300 Engine Included in the list
37. GK 300 engine Variant of GK GK 200 VA differ due to QP 300 different type of crank shaft used.
38. WB 30 Water Variant of G Pump set is attached to Pump 200 variant G 200.
39. WB 15 Water Variant of G Pump set is attached to pump 100 variant G 100
40. WBK 30 Water Variant of GK Pump set is attached to pump 200 variant G 200
41. WBK 30 Water Variant of GK Different Mark & Stocker D Pump 200 variant
42. WP 20 Water Variant of G Pump set is attached to Pump 200 variant G 200
43. WPK 20 Water Variant of GK Pump set different from Pump 200 variant WBK 30 is attached to GK 200.
In our view the contract as amended under the seventh amendment authorize payment of royalty for certain products as well as minor variations thereof. The wording "and includes variations thereof from design changes or minor model changes" in our view puts the issue beyond debate. The TPO bases his decision on a finding that the variations in question cannot be considered as minor and that the products, which the assessee claims as variants, are in fact separate 20 products having different features, different prices and different set of target customers.
Even if 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 length price, we are of the opinion that these approvals in a way would support the contentions of the assessee that the payment of royalty in question is governed by the agreement. It is nobodies case that illegal or unauthorized payments of royalty and 21 consequent remittances of foreign exchange has been made by the assessee company. The conclusions drawn by the TPO as endorsed by the DRP, that the assessee is not required to pay any royalty on the products in question is against the terms of the agreement in question and the facts of the case. Such a conclusion is not supported by the facts and circumstances of the case. The broader question that arises here is whether the TPO can sit in judgement over the rights, duties and liabilities that arise between the parties to a particular agreement, when in fact there is no such conflict in the interpretation of the terms and conditions of the agreement between the parties. It is well settled that 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. In this context 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. Though res judicata is not applicable to tax laws, when the fundamental facts remain the same in different years, rule of consistency applies.
7.3. For all these reasons we agree with the contentions raised by Mr. Ajay Vohra, the Ld.Counsel for the assessee and allow this ground of assessee. As already stated, we once again repeat that there is no dispute as to what is the "the most appropriate method" or that the rate of 22 royalty at 2% or 4% as the case may be is at arm's length. 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 to the tune of Rs. 10,77,900/- 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. In the result ground no. 2 to 2.5 are allowed.
7.4. Ground nos. 3 to 3.5 and ground no.4 are on the issue whether the royalty paid 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.
237.5. 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 Motor Corp Ltd. for the A.Y. 2006-07; and (ii) Technical Collaboration Contract, dt. 18.10.1985, between Honda Motor Co.Ltd. Japan and Shriram Honda Power Equipment Ltd. (presently known as Honda Siel Power Products Ltd.).
The comparative clauses as furnished by the assessee are extracted below.
Sl.No. Facts of Honda Siel Power Products Facts of Hero Moto Corp
Ltd. Ltd.
1. 2.1 HONDA hereby grants Subject to the terms and
LICENSEE, subject to the payment by conditions herein contained,
LICENSEE of the consideration set forth in LICENSOR hereby grants to
Article 21 hereof, an indivisible, non- LICENSEE an indivisible, non-
transferable and exclusive license (without the transferable and exclusive right right to grant sublicenses except as provided and license, without the right to in Article 2.2 below) to manufacture and grant sublicenses, to manufacture, assemble the products and the Parts in the assemble, sell and distribute the Territory, and to sell and distribute in the products and the parts during the Territory the Products" and the Parts so. term of this Agreement within the manufactured or assembled or (in the case of Territory under the Intellectual I the Parts) procured by LICENSEE, during the Property Rights and by using the term of this Contract (but subject to the Technical Information. Provided,it provisions of Article 32.1 hereof) in is acknowledged by'" LICENSEE, 24 accordance with the provisions of this (i) the exclusivity granted herein Contract. is against the third parties but not 2.2 LICENSEE may grant indivisible and non- HMSI, and (ii) the - exclusivity transferable sublicenses to use the know-how against HMSI is only with respect to Indian persons, companies or the legal to the exterior of the products. It is entities to the extent deemed necessary and agreed between the parties that appropriate by HONDA and LICENSEE by subject to the terms hereof, the mutual agreement; provided, that the terms of LICENSOR shall make necessary such sublicense arrangements shall be first endeavors so that New Model(s) approved by HONDA in writing and shall be for the LICENSEE are introduced subject to the approval of the Government of in a phased and timely manner in India. order to meet the request from the LICENSEE and such introduction 2.3 LICENSEE may export the products and would be on reasonable criteria.
the Parts to countries outside the Territory in compliance with, and within the limits stipulated by, the provisions of this Contract.
2. Article 27 - Maintenance of Secrecy Article 17 (Maintenance of Secrecy) 27.1 LICENSEE shall use or cause to be used the Know-How furnished by HONDA under 17.1 The Know-how, technical this Contract only for the purposes of this Information and any other non- Contract. public technical or business Whether during the term of this Contract or information of LICENSOR (such after the expiration or termination of this information being collectively Contract, LICENSEE shall neither use any of hereinafter referred to as the the Know-How for any purpose other than "Information") shall remain the those specifically authorized under this sole and exclusive property of Contract nor make known, divulge or LICENSOR and shall be held in communicate any of the Know-How in any trust and confidence for way or manner whatsoever to any person, LICENSOR by LICENSEE, inter company or other legal entity to whom alia, in accordance with this disclosure is not authorized by this Contract. Article 17. 27.2 LICENSEE shall take all necessary 17.2 LICENSEE agrees that it precautions to. keep the Know-How secret and shall not, either during the term of confidential and to restrict its use as provided this Agreement or thereafter, in Article 27.1 above. For this purpose make know, divulge or LlCENSEE agrees to establish and maintain communicate any information in 25 such procedures for protection of the Know- any way or manner whatsoever to How as recommended by HONDA. any person, legal person or any other entity except otherwise provided herein.
17.3 . LICENSEE further agr-ees that it shall take all necessary precautions to keep the Information secret and confidential, and to restrict its use as provided for in the Former Agreement or in Article 18 hereof, as the case may be, and, for that purpose, shall establish and maintain internal regulations and procedures for protection of the secrecy, as approved by LICENSOR, recognizing that LICENSEE shall use at least the same degree of precautions as it takes to protect its own confidential information, and all reproduced copies shall be numbered in numerical sequence and such reproduced copies shall also remain in the property of LICENSOR.
17.4. LICENSEE may disclose the information to its directors, employees and/or approved subcontractors referred to in Article 6 hereof, to whom disclosure is reasonably necessary for the purpose of manufacture, assembly, repair and servicing of the products and/or the licensed parts pursuant to this agreement;
provided, however, that LICENSEE shall obtain from each of such approved subcontractors a written promise to treat all the information as secret and confidential and to restrict the use thereof, in the manner and fashion provided for in this Article 17 and shall, if so requested by LICENSOR, submit a copy of the 26 written promise to LICENSOR.
3. Article 12 (Restrictions on use of parts) Article 18 (Limitation of use, and Without the prior written consent of HONDA other prohibition) or except as otherwise specifically authorized 18.1. LICENSEE shall not use or in this contract, LICENSEE shall not sell, cause or permit to be used by any distribute, use or otherwise dispose of, directly third party the intellectual or indirectly, the parts for any purpose other property rights and the technical than the manufacture or assembly of the information licensed or provided products at LICENSEE's plant in the territory hereunder, and the licensed parts or the service of the products in accordance manufactured by LICENSEE with this contract, regardless of whether such and/or its sub contractors aprts are purchased from HONDA, hereunder and the supply parts manufactured by LICENSEE, manufactured supplied to LICENSEE and/or its by the subcontractors or otherwise procured purchasing agencies designated by by LICENSEE and subcontractors comply LICENSEE hereunder, in the with the provisions of this Article 12. 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 disclosed to LICENSEE hereunder. If application for any patent or other intellectual property rights in the country, it shall be deemed a breach of this Agreement, and further, the right to such application and any intellectual property rights resulting from such application shall be automatically gratuitously assigned and transferred by LICENSEE TO LICENSOR.
18.3 In the event any inventions 27 and improvements which relate to the Products, the Parts, the Know-
how or the Intellectual Property Rights was made by LICENSEE or its directors, officers, employees and Subcontractors in the course of or as the result of the change as set forth in Article 19.3 hereof, LICENSEE shall promptly disclose in writing to LICENSOR all such inventions and improvements, and LICENSEE, insofar as lawfully may, hereby grants or causes to be granted to LICENSOR a transferable right and license to use such Inventions and improvements in any country with right to sublicense. The terms of any sublicense with respect to patented inventions or improvements shall be approved by LICENSEE prior to the granting of such sublicense.
Upon request by LICENSOR, LICENSOR and LICENSEE shall jointly file applications for appropriate patent or other statutory intellectual property rights with-respect to such inventions or improvements in any country. The right and license granted to LICENSOR hereunder shall be royalty- free during the terms of this Agreement and shall, after any termination or expiration of this Agreement, continue for such period and on such terms as may be mutually agreed upon.
18.4. LINCENSEE shall claim no title or property right whatsoever during the existence of this agreement and if this agreement is terminated as a result of the default of LICENSEE, then LICENSEE shall claim no right, title, property, interest or use 28 whatsoever at all times after the life of this agreement as regards the intellectual property rights, know-how, technical information or other information received under this agreement."
(emphasis supplied).
4. Article 21 Consideration Article 25 Consideration 21.1. In consideration of the license and 25.1. In consideration of the right technical assistance to be granted or provided and license granted to LICENSEE by HONDA hereunder, LICENSEE shall pay under Article 2 hereof and of the to HONDA an initial fee and a royalty in the furnishing of the technical amount and in the manner set forth in this information hereof, LICENSEE Article 21. shall pay to Licensor the ...... following model fee and running royalty:
21.3. LICENSEE shall pay a royalty on any (a) Model fee....
and all products carried out of the (2) Running royalty manufacturing facility of LICENSEE for LICENSEE shall pay the running delivery to any and all purchasers, renters or royalty to LICENSOR during the other transferees whether in the territory or royalty period on any and all not. Such royalty shall be in the amount products carried out of the equivalent to four percent (4%) of the ex manufacturing facility of factory sales price (or ex warehouse sales LICENSEE for delivery to any price in case of the products kept in a and all purchasers, renters or other warehouse immediately before such delivery) transferees whether in the territory of such products invoiced by LICENSEE to or not. Such running royalty shall the purchasers, renters or other transferees of be (a) the amount specified in such products, less: Exhibit 1 attached hereto or (b)
(i) the landed cost (including ocean freights, the amount calculated by insurance premiums, customs duties and multiplying by the rate specified inland transportation costs) of the parts in Exhibit 1 attached hereto imported irrespective of source of (including any revision thereto) procurement; with the ex factory sales price (or
(ii) the cost to LICENSEE of the standard ex warehouse sales price in case bought out component parts listed in Annex 3 of the products kept in a attached hereto; warehouse immediately before
(ii) the cost to LICENSEE of the standard such delivery) of such products bought-out Component Parts listed in Annex 3 invoiced by LICENSEE to attached hereto; purchaser, renters or tier 29
(iii) excise duties imposed on LICENSEE transferees of such products, less, by the Government of India and included in in case of (b) herein:
said ex-factory sales price or ex-warehouse (i)The landed cost including ocean sales price. The royalty shall be paid on the freight, insurance premiums, Products carried out of the manufacturing customs duties and other inland facility of LICENSEE during the period of expenses) or the supply parts five (5) years (the Royalty Period"), within irrespective of source of import; the terms of this Contract, from the day to be (ii) The cost to LICENSEE of the designated by HONDA in writing, which day standard bought out component shall fall within the period commencing on the parts listed in Exhibit IV attached day on which the manufacture of anyone hereto; and model of the products by LICENSEE on a (iii) Excise duties imposed on commercial basis starts and ending on the LICENSEE by the government of third anniversary of the Effective Date. India and included in said ex LICENSEE hereby agrees to use its best factory sales price or ex efforts the manufacturer of the products on a warehouse sales price. commercial basis within one (1) year after the It being understood by the parties Effective Date. that the aforesaid deduction in respect of calculation of running royalties shall be in accordance with the prevailing policy of the government of India.
5. Article 32(Effect of expiration or termination) Article 33 (Effect of Expiry and 32.1. In the event of expiration of this termination) Contract, but subject to the due performance 33.1. In the event of any by LICENSEE of its obligations (including termination pursuant to Article the payments of royalties) hereunder in full, 32.1 on account of material breach LICENSEE may continue to use the Know- by LICENSOR of its obligations How and the Industrial Property Rights for theunder this agreement, and subject purposes of manufacture, assembly, to the due performance by of its procurement, sale, delivery and service of thematerial obligations, LICENSEE products and the parts. may continue to manufacture, assemble, sell, deliver and service 32.2 In the event of the termination of this the products and the aprts until the Contract: due expiration date of this
(i) LICENSEE shall at its expense promptly agreement as specified in Article return to HONDA all documents and materials 31 embodying the Know-How or any part thereof supplied by HONDA under or in connection 33.2. In the event of any with this Contract together with any and all termination pursuant to Article reproduced copies of such documents and 32.1 on account of material breach materials; by LICENSEE its material
(ii) Except as otherwise expressly stipulated obligations under this agreement, herein or agreed upon by the parties hereto, LICENSEE shall discontinue (i) LICENSEE shall immediately cease to use, the manufacture, sale and toher 30 and cause its distributors, dealers and disposition of the products and the Subcontractors to cease to use, the Industrial parts, and (ii) the use of the Property Rights and the Know-How intellectual property right and the authorized by HONDNA to be used in technical information licensed or accordance with this Contract; furnished by LICENSOR under
(iii) LICENSEE shall immediately pay to this agreement without incurring HONDA all sums owing to HONDA; (iv) any obligation of LICENSOR's Except as otherwise specifically required continuation of the grant of the hereunder, LICENSEE shall forthwith right and license provided discontinue, and cause its distributors, hereunder.
dealers and Sub- contractors to discontinue, all activities under this Contract; 33.3. Notwithstanding anything to
(v) HONDA may at its option Repurchase or contrary contained in this cause to be repurchased at a fair and agreement, in the event this reasonable price all or any portion of the Agreement expires on its own products and the parts then held by terms LICENSOR and LICENSEE or any- of its LICENSEE agree as follows:
distributors, dealers or Subcontractors, which remain unsold and un 33.3.1. Subject to the provision of used at the time of the termination of this Article 33.3.2 herein below, the Contract; LICENSEE shall continue
(vi) HONDA may at its option sell, directly manufacture, sale, distribution and or indirectly, the products and the parts service and the products and the repurchased under Paragraph (v) above in the aprts and the right to use the Territory or any other country, without any technical information in respect of liability on the part of HONDA to account to the manufacture, sale, distribution LICENSEE for any part of the proceeds of and service of products and the such sale or any other subs whatsoever. parts.
33.3.2. The continued right of use by LICENSEE as envisaged under Article 33.3.1 above is sinter alia upon the following mutual understanding:
(i) LICENSEE shall pay the LICENSOR
(a) any outstnaidng amount under the applicable model agreement to LICENSOR as on the date of expiry or termination of this 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 31 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 connection with this Agreement and belonging to LICENSOR and ail copies and translations thereof except in the event of termination in accordance with Article 33.1, and shall keep all information received by LICENSEE hereunder secret and confidential in accordance with Article 32 17 hereof.
33.7 LICENSEE shall not be entitled to demand from LICENSOR, for the expiration or termination of this Agreement of the failure to renew or extend it, any damages, reimbursements or other payments on account of the current or prospective profits on LICENSEE's sale or anticipated sale of the Products and the parts, or on account of LICENSEE's expenditures, investments or commitment made in connection with the manufacture of the Products and the Parts, or on account of the establishment, development or maintenance of thing goodwill or other business of LICENSEE, or on account of any other cause or thing whatsoever, except in case where this Agreement is terminated for any reason directly imputable to LICENSOR.
33.8 The LICENSEE shall promptly discontinue the use of;
(i) the Trademarks licensed by LICENSOR hereunder shall not claim any right, title and interest whatsoever in the said trademarks.
Further, LICENSEE agrees to terminate the utilization of the product identifications used for the Products under this Agreement and 1995 LTAA which being;
(i) introduced by LICENSOR, (ii) or originated from any of other LICENSOR's Products names, code or identifications and, regardless of their registration status or ownership of such names, code or identifications. For the avoidance of doubt, the names 33 of the Products introduced by LICENSOR or originated from LICENSOR's products names, code or identifications shall include, without limitations;
"CB", "CBZ", "CD" and "CD 100". For the purposes of this Article 33.8, LICENSEE's obligations to discontinue under para (i) and (ii) above shall not include, without limitations "AMBITION", "AMBITION 135", "dawn", "splendor", "splendor +" "PASSION", "PASSION PLUS", "JOY", "SLEEK", "STREET SMART", AND "KARIZMA".
Comparative chart of covenants of (i) Export agreement, dated 21.6.2004, between Honda Motor Co.Ltd. Japan and Hero Honda Motors Ltd. and (ii) Export agreement dt. 1.4.1998, between Honda Motor Co.Ltd. Japan and Shriram Honda Power Equipment Ltd. (now known as Honda Siel Power Products Ltd.) Sl.No. Facts of Honda Siel Facts of Hero Moto Power Products Ltd. Corp Ltd.
1. 1. Article 1.1 defines 1. Article 1.1 defines The term "Products" shall The term "Products" to mean all of Portable Generators, General Purpose mean two/three wheelers Engines, Water Pumps and including scooters parts thereof, which have been specifically listed in Exhibit manufactured or assembled by 1.
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 34 mutual written consent between HONDA and SHPEL, which shall constitute an integral part of this agreement.
2. Article 1.2 defines Article 1(4) defines the The term "Permitted "designated countries" and Countries" shall mean a country or countries, other Article 1(5) defines than USA, Canada, Islamic "nominated countries" as republic of Iran, Republic of those listed in Exhibit 11(1) Iraq, Socialist People's Libyan, and 11(2). Arab Jamahiriya, Korea, Angola, Myanmar, Kingdome of Lesotho, Kingdom of Swaziland, Republic of Botswana & Republic of Namibia.
3. Article 3.1. (Consent to Article 2 export) Subject to the terms and 3.1 Subject to the terms and conditions contained herein, conditions herein contained, LICENSOR hereby gives HONDA hereby gives consent to the export and sale by consent to the export to the SHPEL of Designated Country by the products to the distributors LICENSEE without a right in the permitted countries. In to re-export; this connection, it is agreed to (i)of the products for the by SHPEL that HONDA may sale thereof within the also Export the products and designated country only. the spare parts to and sell (ii) of the component parts them in the permitted for the assembly of the countries. products therein and for the 3.2 SHPEL shall ensure that sale thereof within the each distributors shall sell and distribute only specific Designated country in such distributor's only, and country all the products (iii) of the service aprts only supplied by SHPEL to it, and for the purpose of repair or shall neither permit nor replacement of the products cause each distributor to sell exported to and sold in the such products outside such designated country by distributor's country. LICENSEE hereunder. In this connection, it is agreed 3.3 It is specifically to by LICENSEE that understood and agreed to by 35 both parties that the entire LICENSOR and third provision of Article 4 (Exports parties may also export the of the TIC Contract shall products and the service mutatis mutandis be applicable parts to and sell them in the to the export by SHPEL designated country. hereunder with the deletion of the wordings, "but only through HONDA" appearing in (i), (ii) and (iii) of Article 4.2 thereof to the extent that there is no provision to the contrary herein or provided that such application does not contradict the intention of this Agreement.
Notwithstanding the foregoing, no provisions of Article 4.4 of the TIC Contract shall be applicable and HONDA shall be exempted from performing its obligations thereunder with regard to the export by SHPEL hereunder.
4. Article 4 (Trademarks and Article 3 (Trade marks and Country of Origin) country of origin) 4.1 Subject to the terms and 3.1.The products, and conditions hereinafter wherever designated by contained, HONDA hereby LICENSOR, the service gives consent that the parts to be exported by trademarks to be used for or LICENSEE hereunder shall In connection with the bear the trade mark "HERO products exported by HONDA" or trade marks as SHPEL hereunder shall be may be designated by "HONDA and "SHRIRAM LICENSOR (the trade mark HONDA", and the "HERO HONDA" and such provisions of Articles 24.2 designated trade marks through 24.4 of the T/C being hereinafter contract shall mutatis collectively referred to as mutandis apply to such "Trade mark"................. trade marks "HONDA" and 3.2. The country of origin "SHRIRAM HODNA". shall be clearly indicated on all products and service 4.2. The country of origin parts to be exported by shall be clearly indicated on 36 all products to be export by LICENSEE hereunder SHPEL hereunder, if so and/or on all packages of requested by the distributor. such products and service parts.
5. Article 5.1 (Consideration) Article 5.1.
In consideration of the In consideration of the consent for export and use consent and the assistance of trade marks and given by LICENSOR cooperation and assistance granted or provided by hereunder, LICENSEE shall HONDA hereunder, pay to LICENSOR a SHPEL shall pay to commission in an amount HONDA a consideration in equivalent to five (5) per the amount equal to 8% of cent of the export price, the export price, F.O.B. port F.O.B. port of the territory, of India of the products of each of the products shipped by or on behalf of SHPEL for export shipped by or on behalf of hereunder. This LICENSEE for export consideration shall be hereunder; provided that payable only if relevant such consideration becomes distributor is any of the payable only when the Honda's distributors and relevant distributor is a SHPEL's distributors distributor of the appointed with Honda's reference or assistance. LICENSOR. Commission against export to Nepal and Xxxx xxxxxx xxxx Bhutan shall be paid subject to the local regulations/approvals in India.
HONDA and SHPEL LICENSOR agrees that
mutually confirm that it is LICENSEE will utilize the
most preferable to utilize
distribution and service net
for the purpose of
distribution of the products work established by
exported by SHPEL distributors of LICENSOR
hereunder the existing goods, and LICENSEE
distribution and service net hereby agrees to ship and
work if any. make all its exports of the
products and the service
parts for the designated
country to (if the distributor
37
in the designated country is
the exclusive distributor or,
even if a non exclusive
distributor, the only
distributor in the designated
country) the distributor for
the LICENSOR goods or (if
there are more than one
distributor)the distributor
that LICENSOR will
designated after mutual
consultation with
LICENSEE, in the
designated country).
7.6. The Ld.D.R. could not specifically point out substantive
difference/variation in the Clauses between both the agreements. In our view the clauses in these agreement are para materia. Hence we are of the considered opinion that the issue stands covered by the decision of the Tribunal in the case of 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 38 18 of the agreement provides that the licensee (i.e. the assessee) shall not permit any third party to use the intellectual property right or the technical information provided under this license. Paragraph 18.3 of the agreement provides that even in respect of any inventions and improvements made by the licensee i.e. the assessee, the licensee is required to disclose it to the licensor i.e. HMSI and it is the HMSI who will have a transferable right to use such inventions and improvements with right to sub-license. Therefore, not only the original information and know-how provided by the licensor is the property of the licensor and not the assessee but even any inventions and improvements made by the assessee would be transferred to the licensor by the licensee. Paragraph 18.4 clearly provides that the assessee shall not claim any title or property right in respect of any intellectual property rights, know-how, technical information etc. provided under this agreement. Article 25 provides the consideration to be paid by the assessee for the use of technical information provided to the assessee under this license. The consideration is in the form of model fee as well as the running royalty. Paragraph 33.6 of the agreement provides that the licensee i.e. the assessee shall return to the licensor all documents and tangible property supplied by licensor in connection with this agreement. This proves beyond doubt that the intangible property continues to be owned of the licensor and the assessee has not acquired any know- how or license by virtue of this agreement which can be said to be intangible asset of the assessee.
26. In the light of these facts let us examine the various decisions discussed above so as to arrive at the finding which of the decisions is applicable in the case of the assessee.
27. In our opinion, the facts of the assessee's case are identical to the facts in the case of Climate Systems India Ltd. (supra). In the case of Climate Systems India Ltd. (supra), the assessee company made the lump sum payment and also the running royalty. The running royalty was calculated as a percentage of sales. The lump sum payment was treated as capital expenditure by the assessee company and the running royalty was treated as revenue expenditure. The Assessing Officer disallowed the running royalty holding it to be capital expenditure which was confirmed by the learned CIT(A) as well as the ITAT. The Hon'ble Jurisdictional High 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 39 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 capital expenditure and running royalty was claimed as revenue expenditure. The Assessing Officer treated the royalty as capital expenditure and the Hon'ble Jurisdictional High Court affirmed the views of the Tribunal that the payment of running royalty was revenue expenditure. In this case, the Hon'ble Jurisdictional High Court has considered the decision of Hon'ble Apex Court in the case of Southern Switchgears Ltd. (supra) relied upon by the Revenue.
29. In the case of Lumax Industries Ltd. (supra) the assessee was paying license fee on year to year basis for acquisition of technical knowledge. The L1L claimed the said payment as revenue expenditure which was disallowed by the Assessing Officer holding that by virtue of the agreement, the L1L had derived an asset of enduring nature. On appeal, the CIT(A) allowed the assessee's claim and the Tribunal upheld the order of the CIT(A). On further appeal, the Hon'ble Jurisdictional High court upheld the order of the ITAT and has also observed that even if the assessee had obtained the long term advantage of enduring benefit, that by itself would not convert any expenditure incurred by the assessee into capital expenditure. This decision of Hon'ble Jurisdictional High Court is after considering the decision of Hon'ble Apex Court in the case of Jonas Woodhead and Sons (India) Ltd. (supra) relied upon by the Revenue. The decisions of Hon'ble Apex Court in the case of Southern Switch Gear Ltd. (supra) and Jonas Woodhead And Sons (India) Ltd. (supra) have slightly different facts because in both the cases, there was a collaboration agreement by which technical assistance was provided for setting up of the factory and also manufacture and sale of product. The payment of royalty was lump- sum payment and, therefore, the Hon'ble Apex Court upheld the view of the Revenue that 25% of the payment is capital in nature. In the case of the assessee also, the collaboration 'agreement was for grant of technical assistance for setting up of the factory and also for the manufacture and sale of the product. But the assessee made separate payment for the technical assistance for setting up of the factory which was $5,00,000. This sum was treated as capital expenditure by the assessee itself. The annual payment for the royalty was based upon the percentage of sale of the motorcycles.
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 40 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 the case of Hero Motor Corp.Ltd. (supra) at para 71 page 65 of the order held as follows "We have carefully considered the arguments of both the sides and perused the material placed before us. While considering the adjustment made by the TPO in respect of export agreement, we have discussed both these aqreernents. The technical know-how agreement was entered into between the assessee and HMCL in the year 1984 which was renewed in the year 1994 and then in 2004. Under the technical know-how agreement, the assessee was permitted to manufacture, assemble, sell and distribute the products within the territory which was defined as Republic of India. Thus, since 1984 to 2004, the assessee was not allowed to export any product. The export agreement was entered into with HMCL only on 21st June, 2004 by which HMCL gave its consent for export of the goods to the designated countries on the payment of export commission. Therefore, the contention of the Revenue that cumulative effect 41 of the agreements is to be considered cannot be accepted. Both agreements were entered into in different parts of time, one in year 1984 and, the other in the year 2004 and both the agreement operate under different fields. By the first agreement, HMCL provided technical know- how for manufacture and sale of two wheelers within the territory of India. By the export agreement, HMCL permitted the assessee to export the designated goods to the designated countries outside India. Therefore, both the agreements are to be interpreted independently. On the perusal of the export agreement, we are unable to agree with the Revenue that the export agreement is in the nature of royalty or fees for technical services. We find that the Authority for Advance Ruling has considered the issue of TDS on the export commission in the case of Spahi Project P.Ltd. (supra). In that case, the facts are that the assessee, an Indian company engaged in the manufacturing and supply of industrial pesticides, proposed transactions with Zaikog, a non-resident company incorporated in South Africa; which promoted and distributed various products. Zaikog offered its services to promote and market a product for termite control. And for this Zaikog was to receive a commission of 3% on every completed transaction. The role of Zaikog was to communicate the details of the interested parties to the applicant which 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 Avoidance Agreement between India and South Africa (DTAA). Consequently, the applicant was not liable to deduct tax at source under section 195 of the Act. Viewed from the angle of section 9(1) of the Act, Zaikog did not earn any income or account of business connection in India. Nor could Zaikog be subjected to tax in India in the absenceof a permanent establishment in India .42
(ii) That Zaikog would not be rendering services of a managerial, technical or consultancy nature and, therefore, liability to tax could not be fastened on it by invoking the provisions dealing with fees for technical services."
72. The ratio of the above decision of Authority for Advance Ruling would be squarely applicable to the case of the assessee. Even otherwise, as per the provisions of the Income-tax Act, the export commission paid by. the assessee would not fall within the ambit of either royalty or fee for technical services. The 'royalty' has been defined in Explanation-2 after Section 9(1)(vi) of the Income-tax Act, which reads as under:-
"Explanation 2. - For the purposes of this clause. "royalty" means, consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for-
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
[(iva) the use or right to use any industrial, commercial or "scientific equipment but not "including the amounts referred to in section 44BB;}
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution 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 43 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 managerial. technical or consultancy services. In view of the above, we hold that export commission was neither royalty nor fee for technical services and, therefore, the assessee was not required to deduct tax at source on the payment of export fee. Once the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia).
74. While considering the disallowance made by the TPO by way of transfer pricing adjustment, we have discussed at length and have arrived at the conclusion that the export agreement was for the benefit or the assessee and not detrimental to the assessee. Therefore, the finding of the Assessing Officer that the expenditure incurred by the assessee by way of export agreement was not incurred for the purpose of_business of the assessee cannot be upheld. We hold that the export commission paid by the assessee was for the purpose of assessee's business.
75. The Assessing Officer has alternatively held the payment of export commission to be capital expenditure. After considering the arguments of both the sides and the facts of the case, we are unable to accept this view of the Assessing Officer. By way of export agreement, HMCL has only permitted the assessee to export .the specified goods to the specified countries, that too, subject to running payment of the export commission. The assessee has not acquired any asset or even the intangible right in the nature of a capital asset. The Assessing Officer has disallowed the royalty payment paid by the assessee by way of technical know-how agreement holding the same to be capital expenditure. From paragraph NO.7 to paragraph No.29, we have discussed at length and have come to the conclusion that the payment of running royalty cannot be said to be capital expenditure. While doing so, we have also relied upon several decisions of Hon'ble Jurisdictional High Courts at pages 17 to 24. For the sake of brevity, we are not reproducing the same again but, we reiterate that the ratio of those decisions in the cases of Lumax Industries Ltd. (supra), Shriram Pistons & Rings Ltd. (supra), Sharda Motor Industrial Ltd. (supra), J.K.Synthetics Ltd. (supra), Climate Systems India Ltd. (supra) and Munjal Showa Ltd. (supra) would also be applicable so as to arrive at the conclusion that the payment of running export commission paid as a percentage of export amount every year cannot be said to be capital expenditure. In view of the above, we delete the disallowance of export commission made by way of transfer pricing adjustment and also by way of general provisions of the Income Tax Act."
448. Respectfully following the same we allow these grounds of the assessee. As the contentions of the assessee that payment of royalty, payment of technical guidance fee as well as export commission are held to be in the revenue filed, the question of adjudication of the alternate contention of the assessee, that depreciation be granted, in case the expenditure is held to be in the capital field, does not arise. In the result these grounds of the assessee are allowed.
9. In the result the appeal of the assessee is allowed.
Order pronounced in the Open Court on 25th July, 2014.
Sd/- Sd/-
(U.B.S. BEDI) (J.SUDHAKAR REDDY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: the 25th July, 2014
*manga
45
Copy of the Order forwarded to:
1. Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5.DR; 6.Guard File By Order Asst. Registrar Dt. Of hearing: 14th March,2014 Dt. Of DFA sent: 20.3.2014 Dt. Of pronouncement: 25th July,2014