Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Honda Siel Power Products Pvt. ... on 28 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-1', NEW DELHI
Before Sh. N. K. Saini, AM and Smt. Beena A. Pillai, JM
ITA No. 962/Del/2015 : Asstt. Year : 2010-11
Deputy Commissioner of Vs M/s Honda Siel Power Products Pvt.
Income Tax, Circle-10(1), Ltd., 5, Sector-41, Kasna Greater
New Delhi Noida Industrial Development Area,
Distt. Guatam Budhha Nagar-201306
(APPELLANT) (RESPONDENT)
PAN No. AAACH8464L
Assessee by : Sh. Neeraj Jain, Adv.
Sh. Pratham Aggarwal, CA
Revenue by : Sh. Sanjay I. Bara, CIT DR
Date of Hearing : 22.03.2018 Date of Pronouncement : 28.03.2018
ORDER
Per N. K. Saini, AM:
This is an appeal by the department against the order dated 16.12.2014 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
"1. Whether on the facts & Circumstances of the case and in law, the Hon'ble DRP was right in deleting the addition of Rs. 6,89,28,750/- made by the AO/TPO by treating the royalty inclusive of technical now feel as revenue expenditure by completely ignoring the facts that this addition was rightly made by treating this expenditure as capital expenditure?
2. Whether on the facts & Circumstances of the case and in law, the Hon'ble DRP was right in deleting the addition of Rs. 50,21,750/- made by the AO/TPO on account of technical guidance fees paid to its holding 2 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
company as revenue expenditure by completely ignoring the facts that this addition was rightly made by treating this expenditure as capital expenditure?
3. The appellant craves leave/ to add, alter or amend any ground of appeal raised above at the time of the hearing."
3. From the above grounds, it is gathered that the grievance of the department relates to the deletion of addition of Rs.6,89,28,750/- made b y the AO by treating the royalt y inclusive of technical know-how fee as revenue expenditure and the addition of Rs.50,21,750/- made by the AO on account of technical guidance fees.
4. Facts related to this issue in brief are that the assessee filed the return of income on 29.09.2010 declaring an income of Rs.31,80,76,601/-. Later on, the case was selected for scrutin y. The AO made the reference u/s 92CA(3) of the Act to the TPO in respect of international transactions entered into by the assessee. The TPO also noticed that the assessee entered into technical collaboration contract with M/s Honda Motor Company Ltd. (Honda Japan). Under this agreement Honda Japan agreed to give technical assistance in relation to assembly, manufacture, distribution and sale of products to the assessee. The TPO proposed an adjustment of Rs.11,36,67,464/-.
5. In the present case, the AO noticed that the assessee had paid royalty of Rs.9,19,05,000/- and the expenses incurred on 3 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
account of ro yalty were not capitalized. He asked the assessee to explain the nature of royalt y paid to the holding compan y and as to wh y the same ma y not be treated as capital in nature. The AO also noticed that the similar royalt y was disallowed in the preceding year and similar submissions were furnished by the assessee as were in the earlier year. He, therefore, proposed the disallowance. As regards to the addition on account of technical guidance fees, the AO noticed that the assessee had paid Rs.2,00,87,000/- to its holding company on account of technical guidance fees. He further observed that technical assistance contemplated in the agreement covers the establishment of the factory and the operation thereof for manufacture of various products. He considered the technical guidance fees as capital expenditure.
6. The assessee raised the objection before the ld. DRP and submitted that the issue relating to the royalty and technical guidance fees were covered in favour of the assessee vide decision dated 25.07.2014 of the ITAT in assessee's own case for the assessment year 2007-08 in ITA No. 5713/Del/2011. The ld. DRP after considering the submissions of the assessee deleted the additions made b y the AO b y following the aforesaid decision of the ITAT.
7. Now the department is in appeal. The ld. CIT DR supported the order of the AO. In his rival submissions, the ld. Counsel for 4 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
the assessee submitted that these issues have been decided in favour of the assessee by the ITAT Delhi Bench 'I', New Delhi in ITA No. 5713/Del/2011 for the assessment year 2007-08 vide order dated 25.07.2014 in assessee's own case wherein the relevant findings have been given in paras 7.4 to 7.8. It was further submitted that the said order passed b y the ITAT had been followed in the subsequent years i.e. assessment years 2008-09, 2009-10 and 2010-11 in ITA Nos. 6023/Del/2012, 551/Del/2014 and 636/Del/2015 vide order dated 12.12.2014, 13.04.2016 and 13.04.2016 respectively. It was also stated that the order of the Tribunal for the assessment year 2008-09 had been affirmed b y the Hon'ble Jurisdictional High Court vide order dated 14.01.2016 in ITA No. 538 of 2015.
8. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the ld. CIT(A) followed the earlier order dated 25.07.2014 of the ITAT for the assessment year 2007-08 in assessee's own case. The said order has been followed for the assessment years 2008-09 to 2010-11 vide order dated 12.12.2014 and 13.04.2016. The relevant findings for the assessment year 2007-08 vide order dated 25.07.2014 had been given in paras 7.4 to 7.8 which read as under:
"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 5 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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.
7.5. 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 Facts of Hero Moto
Products Ltd. Corp Ltd.
1. 2.1 HONDA hereby grants Subject to the
LICENSEE, subject to the terms and
payment by LICENSEE of conditions herein
the consideration set forth contained, in Article 21 hereof, an LICENSOR hereby 6 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
indivisible, non-
grants to
transferable and exclusive LICENSEE an
license (without the right indivisible, non-
to grant sublicenses excepttransferable and
as provided in Article 2.2 exclusive right and below) to manufacture and license, without the assemble the products and right to grant the Parts in the Territory,sublicenses, to and to sell and distribute manufacture, in the Territory the assemble, sell and Products" and the Parts distribute the so. manufactured or products and the assembled or (in the case parts during the of the Parts) procured by term of this LICENSEE, during the Agreement within term of this Contract (but the Territory under subject to the provisions the Intellectual I of Article 32.1 hereof) in Property Rights accordance with the and by using the provisions of this Technical Contract. Information.
2.2 LICENSEE may grant Provided,it is indivisible and non-
ackno wledged by'"
transferable sublicenses toLICENSEE, (i) the use the know-how to exclusivity granted Indian persons, companies herein is against or the legal entities to the the third parties extent deemed necessary but not HMSI, and and appropriate by
(ii) the -
HONDA and LICENSEE exclusivity against by mutual agreement;HMSI is only with provided, that the terms ofrespect to the such sublicense exterior of the arrangements shall be firstproducts. It is approved by HONDA in agreed between the writing and shall be parties that subject subject to the approval of to the terms hereof, the Government of India. the LICENSOR shall make 2.3 LICENSEE may export necessary the products and the Parts endeavors so that 7 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
to countries outside the New Model(s) for Territory in compliance the LICENSEE are with, and within the limits introduced in a stipulated by, the phased and timely provisions of this manner in order to Contract. meet the request from the LICENSEE and such introduction would be on reasonable riteria.
2. Article 27 - Maintenance Article 17of Secrecy (Maintenance of Secrecy) 27.1 LICENSEE shall use or cause to be used the 17.1 The Know- Kno w-Ho w furnished by how, technical HONDA under this Information and Contract only for the any other non- purposes of this Contract. public technical or Whether during the term of business this Contract or after the information of expiration or termination LICENSOR (such of this Contract, information being LICENSEE shall neither collectively use any of the Kno w-Ho w hereinafter for any purpose other than referred to as the those specifically "Information") authorized under this shall remain the Contract nor make kno wn, sole and exclusive divulge or communicate property of any of the Know-Ho w in LICENSOR and any way or manner shall be held in whatsoever to any person, trust and company or other legal confidence for entity to whom disclosure LICENSOR by is not authorized by this LICENSEE, inter Contract. alia, in accordance 27.2 LICENSEE shall take with this Article all necessary precautions 17. to. keep the Kno w-Ho w 17.2 LICENSEE 8 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
secret and confidential agrees that it shall and to restrict its use as not, either during provided in Article 27.1 the term of this above. For this purpose Agreement or LlCENSEE agrees to thereafter, make establish and maintain know, divulge or such procedures for communicate any protection of the Kno w- information in any Ho w as recommended by way or manner HONDA. whatsoever to 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 9 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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, ho wever,
that LICENSEE
shall obtain from
each of such
approved
subcontractors a
written promise to
10 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
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
written promise to
LICENSOR.
3. Article 12 (Restrictions on Article 18
use of parts) (Limitation of use,
Without the prior written and other
consent of HONDA or prohibition)
except as other wise 18.1. LICENSEE specifically authorized in shall not use or this contract, LICENSEE cause or permit to shall not sell, distribute, be used by any use or other wise dispose third party the of, directly or indirectly, intellectual the parts for any purpose property rights and other than the manufacture the technical or assembly of the information products at LICENSEE's licensed or plant in the territory or provided the service of the products hereunder, and the in accordance with this licensed parts contract, regardless of manufactured by whether such aprts are LICENSEE and/or purchased from HONDA, its sub contractors manufactured by hereunder and the LICENSEE, manufactured supply parts by the subcontractors or supplied to otherwise procured by LICENSEE and/or LICENSEE and its purchasing 11 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
subcontractors comply agencies with the provisions of this designated by Article 12. LICENSEE hereunder, in the 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 Kno w-ho w 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, 12 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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 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 13 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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
14 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
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
whatsoever at all
times after the life
of this agreement
as regards the
intellectual
property rights,
know-ho w,
technical
information or
other information
received under this
agreement."
(emphasissupplied)
4. Article 21 Consideration Article 25
Consideration
21.1. In consideration of the license and technical 25.1. In assistance to be granted or consideration of 15 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
provided by HONDA the right and hereunder, LICENSEE license granted to shall pay to HONDA an LICENSEE under initial fee and a royalty in Article 2 hereof the amount and in the and of the manner set forth in this furnishing of the Article 21. technical ...... information hereof, LICENSEE shall 21.3. LICENSEE shall pay pay to Licensor the a royalty on any and all following model fee products carried out of the and running manufacturing facility of royalty:
LICENSEE for delivery to (a) Model fee.... any and all purchasers, (2) Running royalty renters or other LICENSEE shall transferees whether in the pay the running territory or not. Such royalty to royalty shall be in the LICENSOR during amount equivalent to four the royalty period percent (4%) of the ex on any and all factory sales price (or ex products carried warehouse sales price in out of the case of the products kept manufacturing in a warehouse facility of immediately before such LICENSEE for delivery) of such products delivery to any and invoiced by LICENSEE to all purchasers, the purchasers, renters or renters or other other transferees of such transferees whether products, less: in the territory or
(i) the landed cost not. Such running (including ocean freights, royalty shall be (a) insurance premiums, the amount customs duties and inland specified in Exhibit transportation costs) of 1 attached hereto the parts imported or (b) the amount irrespective of source of calculated by procurement; multiplying by the
(ii) the cost to LICENSEE rate specified in of the standard bought out Exhibit 1 attached 16 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
component parts listed in hereto (including Annex 3 attached hereto; any revision
(ii) the cost to thereto) with the ex LICENSEE of the standard factory sales price bought-out Component (or ex warehouse Parts listed in Annex 3 sales price in case attached hereto; of the products
(iii) excise duties kept in a imposed on LICENSEE by warehouse the Government of India immediately before and included in said ex- such delivery) of factory sales price or ex- such products warehouse sales price. The invoiced by royalty shall be paid on LICENSEE to the Products carried out of purchaser, renters the manufacturing facility or tier transferees of LICENSEE during the of such products, period of five (5) years less, in case of (b) (the Royalty Period"), herein:
within the terms of this (i)The landed cost Contract, from the day to including ocean be designated by HONDA freight, insurance in writing, which day shall premiums, customs fall within the period duties and other commencing on the day on inland expenses) or which the manufacture of the supply parts anyone model of the irrespective of products by LICENSEE on source of import; a commercial basis starts (ii) The cost to and ending on the third LICENSEE of the anniversary of the standard bought Effective Date. LICENSEE out component hereby agrees to use its parts listed in best efforts the Exhibit IV attached manufacturer of the hereto; and products on a commercial (iii) Excise duties basis within one (1) year imposed on after the Effective Date. LICENSEE by the government of India and included in said ex factory 17 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
sales price or ex
warehouse sales
price.
It being understood
by the parties 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 termination) expiration of this 33.1. In the event Contract, but subject to of any termination the due performance by pursuant to Article LICENSEE of its 32.1 on account of obligations (including the material breach by payments of royalties) LICENSOR of its hereunder in full, obligations under LICENSEE may continue this agreement, and to use the Know-Ho w and subject to the due the Industrial Property performance by of Rights for the purposes of its material manufacture, assembly, obligations, procurement, sale, LICENSEE may delivery and service of the continue to products and the parts. manufacture, assemble, sell, 32.2 In the event of the deliver and service termination of this the products and Contract: the aprts until the
(i) LICENSEE shall at its due expiration date expense promptly return to of this agreement 18 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
HONDA all documents and as specified in materials embodying the Article 31 Kno w-Ho w or any part thereof supplied by 33.2. In the event HONDA under or in of any termination connection with this pursuant to Article Contract together with any 32.1 on account of and all reproduced copies material breach by of such documents and LICENSEE its materials; material
(ii) Except as other wise obligations under expressly stipulated herein this agreement, or agreed upon by the LICENSEE shall parties hereto, LICENSEE discontinue (i) the shall immediately cease to manufacture, sale use, and cause its and toher distributors, dealers and disposition of the Subcontractors to cease to products and the use, the Industrial parts, and (ii) the Property Rights and the use of the Kno w-Ho w authorized by intellectual HONDNA to be used in property right and accordance with this the technical Contract; information
(iii) LICENSEE shall licensed or immediately pay to furnished by HONDA all sums o wing to LICENSOR under HONDA; (iv) Except as this agreement otherwise without incurring specifically required any obligation of hereunder, LICENSEE LICENSOR's shall forthwith continuation of the discontinue, and grant of the right cause its and license distributors, dealers and provided Sub- contractors to hereunder. discontinue, all activities under this Contract; 33.3.
(v) HONDA may at its Notwithstanding option Repurchase or anything to cause to be repurchased contrary contained 19 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
at a fair and reasonable in this agreement,
price all or any portion of in the event this
the products and the parts Agreement expires
then held by LICENSEE or on its own terms
any- of its LICENSOR and
distributors, dealers LICENSEE agree
or Subcontractors, as follows:
which remain unsold and
un used at the time of the 33.3.1. Subject to termination of this the provision of Contract; Article 33.3.2
(vi) HONDA may at its herein below, the option sell, directly or LICENSEE shall indirectly, the products continue and the parts repurchased manufacture, sale, under Paragraph (v) above distribution and in the Territory or any service and the other country, without any products and the liability on the part of aprts and the right HONDA to account to to use the technical LICENSEE for any part of information in the proceeds of such sale respect of the or any other subs manufacture, sale, whatsoever. distribution and service of products and the parts.
33.3.2. The continued right of use by LICENSEE as envisaged under Article 33.3.1 above is sinter alia upon the follo wing mutual understanding:
(i) LICENSEE shall pay the LICENSOR
(a) any outstanding amount under the applicable model 20 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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
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
21 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
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
22 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
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
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
23 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
commitment made in connection with the manufacture of the Products and the Parts, or on account of the establishment, development or maintenance of thing good will 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 24 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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
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
25 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
include, without
limitations
"AMBITION",
"AMBITION 135",
"da wn",
"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 1. Article 1.1 defines The term defines The term "Products" shall mean "Products" to mean all of Portable two/three wheelers Generators, General including scooters Purpose Engines, specifically listed in Water Pumps and Exhibit 1.
parts thereof, which have been manufactured or assembled by SHPEL in the Union of India under the TIC contract, and shall also include such other models of Portable Generators 26 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
and other products
such as general
purpose engines and
water pumps as may
be decided from time
to time by 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 term "Permitted the "designated
Countries" shall countries" and
mean a country or Article 1(5) defines
countries, other "nominated
than USA, Canada, countries" as those
Islamic republic of listed in Exhibit
Iran, Republic of Iraq, 11(1) and 11(2).
Socialist People's
Libyan, Arab
Jamahiriya, Korea,
Angola, Myanmar,
Kingdome of Lesotho,
Kingdom of
Swaziland, Republic
of Botswana &
Republic of Namibia.
3. Article 3.1. (Consent Article 2
to export) Subject to the terms
3.1 Subject to the and conditions
terms and conditions contained herein,
herein contained, LICENSOR hereby
HONDA hereby gives gives consent to the
consent to the export export to the
and sale by SHPEL of Designated Country
the products to the by LICENSEE
distributors in the without a right to
permitted countries. re-export;
In this connection, it (i)of the products
27 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
is agreed to by SHPEL for the sale thereof that HONDA may also within the Export the products designated country and the spare parts only.
to and sell them in the (ii) of the permitted countries. component parts for 3.2 SHPEL shall the assembly of the ensure that each products therein distributors shall and for the sale sell and distribute thereof within the only in such specific Designated distributor's country country only, and all the products (iii) of the service supplied by SHPEL to aprts only for the it, and shall neither purpose of repair or permit nor cause each replacement of the distributor to sell products exported such products outside to and sold in the such distributor's designated country country. by LICENSEE hereunder. In this 3.3 It is specifically connection, it is understood and agreed to by agreed to by both LICENSEE that parties that the entire LICENSOR and provision of Article 4 third parties may (Exports of the TIC also export the Contract shall mutatis products and the mutandis be service parts to and applicable to the sell them in 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 28 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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 hereunder
with regard to the
export by SHPEL
hereunder.
4. Article 4 (Trademarks Article 3 (Trade
and Country of marks and country
Origin) of origin)
4.1 Subject to the 3.1.The products,
terms and and wherever
conditions hereinafter designated by
contained, HONDA LICENSOR, the
hereby gives consent service parts to be
that the trademarks to exported by
be used for or In LICENSEE ereunder
connection with the shall bear the trade
products exported by mark "HERO
SHPEL hereunder HONDA" or trade
shall be "HONDA and marks as may be
"SHRIRAM HONDA", designated by
and the provisions of LICENSOR (the
Articles 24.2 through trade mark "HERO
24.4 of the T/C HONDA" and such
contract shall mutatis designated trade
mutandis apply to marks being
such trade marks hereinafter
"HONDA" and collectively referred
"SHRIRAM HODNA". to as "Trade
29 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
mark"................. 4.2. The country of 3.2. The country of origin shall be clearly origin shall be indicated on all clearly indicated on products to be export all products and by SHPEL hereunder, service parts to be if so requested by the exported by distributor. LICENSEE hereunder and/or on all packages of such products and service parts.
(Consideration) In consideration of
In consideration of the consent and the
the consent for export assistance given by
and use of trade LICENSOR
marks and hereunder,
cooperation and LICENSEE shall
assistance granted or pay to LICENSOR a
provided by HONDA commission in an
hereunder, SHPEL amount equivalent
shall pay to HONDA a to five (5) per cent
consideration in the of the export price,
amount equal to 8% of F.O.B. port of the
the export price, territory, of each of
F.O.B. port of India of the products
the products shipped shipped by or on
by or on behalf of behalf of LICENSEE
SHPEL for export for export
hereunder. This hereunder; provided
consideration shall be that such
payable only if consideration
relevant distributor is becomes payable
any of the Honda's only when the
distributors and relevant distributor
SHPEL's distributors is a distributor of
appointed with the LICENSOR.
Honda's reference or Commission against
assistance. export to Nepal and
Bhutan shall be
30 ITA No. 962/Del/2015
Honda Siel Power Products Pvt. Ltd.
Xxxx xxxxxx xxxx paid subject to the local regulations/approva ls in India.
HONDA and SHPEL LICENSOR agrees mutually confirm that that LICENSEE will it is most preferable utilize the to utilize for the distribution and purpose of service net work distribution of the established by products exported by distributors of SHPEL hereunder the LICENSOR goods, existing distribution and LICENSEE and service net work hereby agrees to if any. ship and make all its exports of the products and the service parts for the designated country to (if the distributor in the designated country is the exclusive istributor or, even if a non exclusive istributor, the only distributor in the designated country) the distributor for the LICENSOR goods or (if there are more than one distributor)the istributor that LICENSOR will designated after mutual consultation with LICENSEE, in the designated country).
31 ITA No. 962/Del/2015Honda Siel Power Products Pvt. Ltd.
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 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 32 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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 33 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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 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 34 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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 35 ITA No. 962/Del/2015 Honda Siel Power Products Pvt. Ltd.
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 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)."
9. So, respectfully following the aforesaid order in ITA No. 5713/Del/2011 for the assessment year 2007-08 in assessee's own case. We do not see any merit in this appeal of the department.
36 ITA No. 962/Del/2015Honda Siel Power Products Pvt. Ltd.
10. In the result, the appeal of the department is dismissed. (Order Pronounced in the Open Court on 28/03/2018) Sd/- Sd/-
(Beena A. Pillai) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28/03/2018 *Subodh* Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT ASSISTANT REGISTRAR