TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 601
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.... 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 that, the balance of the royalty has been paid on products which are not specifically mentioned in the Technical Collaboration Ag....
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....bsp; (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 invoki....
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....ional 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 adjus....
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....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 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 fa....
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....ates 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 authorities. Reliance was placed on the following case laws. - Sona Okegawa Precision Forgings Ltd. (ITA 4781/Del/10) &nb....
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....e 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:- "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 ....
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....he 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.....
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.... 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 by Petrol 2. EB 2200 Generator Variant of EBK 2000 EBK 2000 operates by Kerosene EB 2200 operates by Petrol 3. EB 3000 Generator Included in the list - 4. EB 3000S Generator Variant of EB 3000 EB 3000 is a electric start Generator whereas EB 3000 recoil start 5. EB 650 GP Generator Included in the list 6. EBK 1000 Generator Included in the list 7. EBK 2000 Generator Included in the list 8. EBK 2800 Generator Included in the list 9. EBK ....
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....ariant 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 GK 300 operates by Kerosene G 300 QPD operates by Petrol and differ due to different type of crank shaft used 30 G 300 VPY 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 31 G 300 QPID 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 32 GK 200 Engine Included in the list 33 GK 200 VA Engine Variant of GK 200 GK 200 VA differ due to different type of crank shaft used. 34 GK 200 SA Engine Variant of GK 200 GK 200 SA differ due to different type of crank shaft used. 35 GK 200 WA Engine Variant of GK 200 GK 200 WA differ due to different type of crank shaft used. 36 GK 300 Engine Included in the list 37 GK 300 QP Engine Variant of GK 300 ....
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....ssessee that the payment of royalty in question is governed by the agreement. It is nobodies case that illegal or unauthorized payments of royalty and 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 genui....
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....o.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 Ltd. Facts of Hero Moto Corp Ltd. 1. 2.1 HONDA hereby grants LICENSEE, subject to the payment by LICENSEE of the consideration set forth in Article 21 hereof, an indivisible, nontransferable and exclusive license (without the right to grant sublicenses except as provided in Article 2.2 below) to manufacture and assemble the products and the Parts in the Territory, and to sell and distribute in the Territory the Products" and the Parts so. manufactured or assembled or (in the case of the Parts) procured by LICENSEE, during the term of this Contract (but subject to the provisions of Article 32.1 hereof) in accordance with the provisions of this Contract. 2.2 LICENSEE may grant indivisible and nontransferable sublicenses to use the know-how to Indian persons, companies or the legal entities to the extent deemed necessary and appropriate by HONDA and LICENSEE by mutual agreement; provided, that the terms of such sublicense arrangements shall be f....
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....all be held in trust and confidence for LICENSOR by LICENSEE, inter alia, in accordance with this Article 17. 17.2 LICENSEE agrees that it shall not, either during the term of this Agreement or thereafter, make know, divulge or communicate any information in any way or manner whatsoever to any person, legal person or any other entity except otherwise provided herein. 17.3 . LICENSEE further agrees 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....
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....ents which relate to the Products, the Parts, the Knowhow 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 clai....
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....deration 25.1. In consideration of the right and license granted to LICENSEE under Article 2 hereof and of the furnishing of the technical information hereof, LICENSEE shall pay to Licensor the following model fee and running royalty: (a) Model fee.... (2) Running royalty LICENSEE shall pay the running royalty to LICENSOR during the royalty period 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 running royalty shall be (a) the amount specified in Exhibit 1 attached hereto or (b) the amount calculated by multiplying by the rate specified in Exhibit 1 attached hereto (including any revision thereto) with 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 purchaser, renters or tier transferees of such products, less, in case of (b) herein: (i)The landed cost including ocean freight, insurance premiums, customs duties and other inland expenses) or the supply parts irrespective of source of import; (ii) The cost to L....
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....f Expiry and termination) 33.1. In the event of any termination pursuant to Article 32.1 on account of material breach by LICENSOR of its obligations under this agreement, and subject to the due performance by of its material obligations, LICENSEE may continue to manufacture, assemble, sell, deliver and service the products and the aprts until the due expiration date of this agreement as specified in Article 31 33.2. In the event of any termination pursuant to Article 32.1 on account of material breach by LICENSEE its material obligations under this agreement, LICENSEE shall discontinue (i) the manufacture, sale and toher disposition of the products and the parts, and (ii) the use of the intellectual property right and the technical information licensed or furnished by LICENSOR under this agreement without incurring any obligation of LICENSOR's continuation of the grant of the right and license provided hereunder. 33.3. Notwithstanding anything to contrary contained in this agreement, in the event this Agreement expires on its own terms LICENSOR and LICENSEE agree as follows: 33.3.1. Subject to the provision of Article 33.3.2 herein below, the LICENSEE shall continu....
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....anufacture 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 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 n....
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....ion of Article 4 (Exports of the TIC Contract shall mutatis mutandis be applicable to the export by SHPEL hereunder with the deletion of the wordings, "but nly 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. Article 2 Subject to the terms and conditions contained herein, LICENSOR hereby gives consent to the export to the Designated Country by LICENSEE without a right to re-export; (i) of the products for the sale thereof within the designated country only. (ii) of the component parts for the assembly of the products therein and for the sale thereof within the specific Designated country only, and (iii) of the service aprts only for the purpose of repair or replacement of the products exported to and sold in the designated country by LICENSEE hereunder. In this connection, it is....
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....provals in India. 6. Article 6 HONDA and SHPEL mutually confirm that it is most preferable to utilize for the purpose of distribution of the products exported by SHPEL hereunder the existing distribution and service net work if any. Article 4.2. LICENSOR agrees that LICENSEE will utilize the distribution and service net work established by distributors of LICENSOR goods, and LICENSEE hereby agrees to 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 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 Mo....
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....vides 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 h....
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....dictional 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 fo....
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....ment of export commission. Therefore, the contention of the Revenue that cumulative effect 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 distribu....
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....en 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 i....
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....refore, 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 ru....