2016 (7) TMI 393 - AT - Income Tax

Tribunal Partially Allows Appeal, Overturns Corporate Disallowance, Upholds MAP Disallowance

The tribunal partially allowed the appeal, deleting the corporate disallowance of Rs. 18.09 crore and the disallowance of Rs. 4.79 crore for technical ... Addition towards payment for Management Consultancy and Business Auxiliary Services - tpa - Held that:- The material produced before the TPO in support of the claim for deduction of expenses, which was found by the AO to be unsatisfactory, was found satisfactory in the MAP proceedings which accepted the genuineness of availing such Management Consultancy and Business Auxiliary Services. In that view of the matter, the AO’s case that the assessee was not entitled to corporate deduction of ₹ 18.09 crore, automatically fails. It is further relevant to mention that similar claim was made by the assessee for payment of Managerial Services and Business Auxiliary Services in its accounts for the immediately succeeding assessment year 2009-10, which was accepted by the AO as such. A copy of the final assessment order passed by the AO for the AY 2009-10 has been placed on record from which it is palpable that no corporate disallowance was made in respect of payment of Managerial Services and Business Auxiliary Services. In view of the foregoing discussions, we are satisfied that the AO was not justified in making the corporate disallowance of ₹ 18.09 crore which is hereby deleted. At the same time, it is made clear that the disallowance of ₹ 71 lac and odd sustained in MAP proceedings will continue and the AO will make addition for this sum. In other words, the corporate disallowance of ₹ 18.09 crore will stand deleted and the addition on account of transfer pricing adjustment would be reduced to ₹ 71 lac. - Decided in favour of assessee Disallowance on account of payment for technical know-how and trademark/logo - Held that:- All the salient features of transfer of technical know-how, show that the assessee paid 3% of selling price of the Joints sold by it for the ‘use of’ technical know-how provided by the Licensor, which is not a consideration for acquiring any know-how. It is a case of parting by the Licensor, for consideration, with the partial ownership of technical know-how, that is, for allowing only a right to use to the assessee; and not a case of parting with full ownership of technical know-how, that is, for transferring the ownership to the assessee. Hence, the amount so paid is eligible for deduction as a revenue expenditure. Payment made by the assessee to GKN Holding, UK, towards royalty for trademark/ brand - When we consider all the relevant clauses of the trademark royalty Agreement, it becomes manifest that the assessee did not acquire any ownership right in trademarks by paying the consideration as set out therein. Such payment was made simply for the use of the trademarks, and that too, by means of a non-exclusive License. It has been made clear in the Agreement that the ownership in the trademarks shall remain the intellectual property of the Licensor and the assessee shall have a mere right to use them. Further, upon the termination, the Licensee shall cease to make any use of such trademarks. Thus, it is patent that the payment has been made by the assessee for ‘use of ’ trademarks and not for acquiring trademarks as an owner. It goes without saying that any payment made for a mere use of an asset falls in the realm of a revenue expenditure and cannot be treated as a capital expenditure. We, therefore, hold that whole of the payment of ₹ 5.19 crore made by the assessee for use of trade mark is a revenue expenditure. - Decided in favour of assessee As we have held hereinabove that the payment for use of knowhow and trademarks is a revenue expenditure, the disallowance made by the AO to the tune of ₹ 4.79 crore, after allowing depreciation at the rate of 25%, shall be deleted. Consequently, the unwritten off portion of this amount carried forward to subsequent years, should also be removed for the purposes of granting depreciation in later years, so that no double allowance is made, once in the year under consideration by allowing the deduction in entirety by treating it as a revenue expenditure and then again as depreciation in the later years by treating it as a capital expenditure. However, the amount of transfer pricing adjustment retained in the MAP proceedings for the year under consideration shall stand as disallowance. The AO is directed to make addition on this score only to the extent of the transfer pricing adjustment retained in the MAP proceedings. Issues Involved:1. Corporate addition towards payment for Management Consultancy and Business Auxiliary Services.2. Disallowance on account of payment for technical know-how and trademark/logo.3. Disallowance under section 14A of the Income-tax Act, 1961.Detailed Analysis:1. Corporate Addition towards Payment for Management Consultancy and Business Auxiliary Services:The assessee, an Indian company part of the GKN Group, engaged in the manufacture and sale of Constant Velocity Joints (CVJ), made a payment of Rs. 18.09 crore to its Associated Enterprise in the UK for Management Consultancy and Business Auxiliary Services. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO), who determined the Arm's Length Price (ALP) of this transaction as 'Nil'. Consequently, the AO made a double disallowance of Rs. 18.09 crore, both as a corporate disallowance and as a transfer pricing adjustment.The assessee appealed to the tribunal, and during the appeal, the transfer pricing adjustment was resolved through Mutual Agreement Procedure (MAP) proceedings. The MAP proceedings allowed a deduction of Rs. 17.38 crore, retaining a disallowance of Rs. 71 lakh. The tribunal noted that the MAP proceedings validated the assessee's methodology, allocation key, and 5% markup on costs. The tribunal found that the AO's reasons for corporate disallowance were invalidated by the MAP proceedings, which confirmed the genuineness of the services availed. Consequently, the tribunal deleted the corporate disallowance of Rs. 18.09 crore but sustained the disallowance of Rs. 71 lakh as per the MAP proceedings.2. Disallowance on Account of Payment for Technical Know-How and Trademark/Logo:The assessee entered into agreements with GKN Automotive GmbH, Germany, and GKN Holdings plc., UK, for technical know-how and trademark/logo usage, paying a total of Rs. 6.39 crore. The AO treated this payment as a capital expenditure, allowing depreciation at 25%, leading to a disallowance of Rs. 4.79 crore. The AO also referred the matter to the TPO, who proposed a transfer pricing adjustment of Rs. 3.46 crore. The AO did not make a separate addition for transfer pricing adjustment as it was less than the disallowance.The tribunal examined the agreements and found that the payments were for the 'use' of technical know-how and trademarks, not for acquiring ownership rights. The agreements specified that the licensor retained ownership and proprietary rights, and the assessee was granted a non-exclusive right to use the know-how and trademarks. The tribunal concluded that the payments were revenue expenditures and not capital expenditures. Consequently, the tribunal allowed the deduction of the full amount paid for technical know-how and trademarks and deleted the disallowance of Rs. 4.79 crore. However, the tribunal noted that the transfer pricing adjustment retained in the MAP proceedings would stand as a disallowance.3. Disallowance under Section 14A of the Income-tax Act, 1961:The AO made a disallowance of Rs. 3,546 under section 14A of the Income-tax Act, 1961. The assessee's representative did not press this disallowance due to the smallness of the amount but reserved the right to argue in later years when the quantum might be higher. The tribunal, therefore, did not allow this ground.Conclusion:The appeal was partly allowed. The tribunal deleted the corporate disallowance of Rs. 18.09 crore and the disallowance of Rs. 4.79 crore for technical know-how and trademarks but sustained the disallowance of Rs. 71 lakh as per MAP proceedings and the small disallowance under section 14A.