TaxTMI 
TaxTMI 
2014 (9) TMI 601
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....ansactions. 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 and components TNMM 197,145,128 Purchase of spares TNMM 15,666,313 Purchase of Finished Goods TNMM 31,952,529 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 cost CUP/TNMM 2,908,871 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 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....
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....nbsp; (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....
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....pellant. 2. That the assessing officer erred on facts and in law in making adjustment of Rs. 4,73,09,110/- 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 ....
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....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. 5.1 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 cinema....
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....ts 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 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 a....
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.....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. 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:- &nb....
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.... 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: &....
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.... 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 S No. 5. EB 650 GP No 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 QPD No 16. G 200 QA No 17. G 200 PAM No 18. G 200 SA No 19. G 200 VAM No 20. G 200 QA 3 No 21. G 200 QAM No 22. G 200 QB 3 No 23. G 200 SAM No 24. G 200 WBI No 25. G 300 LPY No 7.2. The chart of products with variations is given below. Sl. No. Model Product Variant of Product Difference 1. EB 1000 Generator Variant of EBK 1000 EBK 1000 operates by Kerosene EB 1000 operates ....
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.... Engine Variant of GK 200 GK 200 operates by Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used 23 G 200 SAM Engine Variant of GK 200 GK 200 operates by Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used 24 G 200 WBI Engine Variant of GK 200 GK 200 operates by Kerosene G 200 SA 31 operates by Petrol and differ due to different type of crank shaft used 25 G 300 LPY Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 26 G 300 QCS Engine Variant of GK 300 GK 200 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 27 G300 QP II Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 28 G 300 QPY Engine Variant of GK 300 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 29 G 300 VCS Engine Variant of GK 300....
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....sed 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....
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....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 fur....
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.... Know-How furnished by HONDA under this Contract only for the purposes of this Contract. Whether during the term of this Contract or after the expiration or termination of this Contract, LICENSEE shall neither use any of the Know-How for any purpose other than those specifically authorized under this Contract nor make known, divulge or communicate any of the Know-How in any way or manner whatsoever to any person, company or other legal entity to whom disclosure is not authorized by this Contract. 27.2 LICENSEE shall take all necessary precautions to. keep the Know-How secret and confidential and to restrict its use as provided in Article 27.1 above. For this purpose LlCENSEE agrees to establish and maintain such procedures for protection of the Know- How as recommended by HONDA. Article 17 (Maintenance of Secrecy) 17.1 The Know-how, technical Information and any other nonpublic technical or business information of LICENSOR (such information being collectively hereinafter referred to as the "Information") shall remain the sole and exclusive property of LICENSOR and shall be held in trust and confidence for LICENSOR by LICENSEE, inter alia, in accordance w....
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....ntellectual property rights and the technical information licensed or provided hereunder, and the licensed parts manufactured by LICENSEE and/or its sub contractors hereunder and the supply parts supplied to LICENSEE and/or its purchasing agencies designated by 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 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 and improvements which relate to the Products, the Parts, the Knowhow or the Inte....
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....anded 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; (ii) the cost to LICENSEE of the standard bought-out Component Parts listed in Annex 3 attached hereto; (iii) 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 terms 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 anyone 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 the manufacturer of the products on a commercial basis within one (1) year after the Effective Date. Article 25 Consideration 25.1. In consideration of....
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....pulated herein or agreed upon by the parties hereto, LICENSEE shall immediately cease to use, and cause its distributors, dealers and Subcontractors to cease to use, the Industrial Property Rights and the Know-How authorized by HONDNA to be used in accordance with this Contract; (iii) LICENSEE shall immediately pay to HONDA all sums owing to HONDA; (iv) Except as otherwise specifically required hereunder, LICENSEE shall forthwith discontinue, and cause its distributors, dealers and Sub- contractors to discontinue, all activities under this Contract; (v) HONDA may at its option Repurchase or cause to be repurchased at a fair and reasonable price all or any portion of the products and the parts then held by LICENSEE or any- of its distributors, dealers or Subcontractors, which remain unsold and un used at the time of the termination of this Contract; (vi) HONDA may at its option sell, directly or indirectly, the products and the parts repurchased under Paragraph (v) above in the Territory or any other country, without any liability on the part of HONDA to account to LICENSEE for any part of the proceeds of such sale or any other subs whatsoever. Article 33 (Effec....
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....tly 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 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 c....
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....hree wheelers including scooters specifically listed in Exhibit 1. 2. Article 1.2 defines The term "Permitted Countries" shall mean a country or countries, other than USA, Canada, Islamic republic of Iran, Republic of Iraq, Socialist People's Libyan, Arab Jamahiriya, Korea, Angola, Myanmar, Kingdome of Lesotho, Kingdom of Swaziland, Republic of Botswana & Republic of Namibia. Article 1(4) defines the "designated countries" and Article 1(5) defines "nominated countries" as those listed in Exhibit 11(1) and 11(2). 3. Article 3.1. (Consent to export) 3.1 Subject to the terms and conditions herein contained, HONDA hereby gives consent to the export and sale by SHPEL of the products to the distributors in the permitted countries. In this connection, it is agreed to by SHPEL that HONDA may also Export the products and the spare parts to and sell them in the permitted countries. 3.2 SHPEL shall ensure that each distributors shall sell and distribute only in such distributor's country all the products supplied by SHPEL to it, and shall neither permit nor cause each distributor to sell such products outside such distributor's cou....
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....ly referred to as "Trade mark"................. 3.2. The country of origin shall be clearly indicated on all products and service parts to be exported by LICENSEE hereunder and/or on all packages of such products and service parts. 5. Article 5.1 (Consideration) In consideration of the consent for export and use of trade marks and cooperation and assistance granted or provided by HONDA hereunder, SHPEL shall pay to HONDA a consideration in the amount equal to 8% of the export price, F.O.B. port of India of the products shipped by or on behalf of SHPEL for export hereunder. This consideration shall be payable only if relevant distributor is any of the Honda's distributors and SHPEL's distributors appointed with Honda's reference or assistance. Xxxx xxxxxx xxxx Article 5.1. In consideration of the consent and the assistance given by LICENSOR hereunder, LICENSEE shall pay to LICENSOR a commission in an amount equivalent to five (5) per cent of the export price, F.O.B. port of the territory, of each of the products shipped by or on behalf of LICENSEE for export hereunder; provided that such consideration becomes payable only when the r....
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....l 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 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 inf....
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.... 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 derive....
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....o 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 ....
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.... 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 . (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." ....
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.... 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 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....