AI Drafter 
TaxTMI 
TaxTMI 
2017 (9) TMI 1157
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....cause of the settlement of dispute under Mutual Agreement Procedure (MAP). These grounds are, therefore, dismissed as withdrawn. 3. Ground of appeal no.3 by the assessee and ground of appeal no. - 1 by the revenue which are co-related to each other are as under : a) Ground of appeal no. 3 by the assessee "3. Corporate Tax - Royalty and Logo fee 3.1 On the facts and in law, the Ld. AO erred on facts and in law in treating the revenue expenditure of Royalty of INR 23,444,658 paid to its Associate Enterprise - GKN Driveline International GMBH, Germany as capital in nature and thereby disallowing Rs. 17,583,494/- after allowing depreciation of 25%. The Ld. AO further erred in disallowing an amount of Rs. 46,954,801 on account of logo fee paid to another Associated Enterprise - GKN Holding Plc. 3.2 On the facts and in law, the Ld. AO erred in disregarding the order of Hon'ble High Court in the Appellant's own case for AY 2004-05 wherein the issue if Royalty paid to the Associated Enterprise - GKN Driveline International GMBH is revenue in nature has been decided in favour of the Appellant. 3.3 On the facts and in law, the Ld. AO gravely er....
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.....05.2010 for assessment years 2002-03 and 2004-05 respectively in assessee's own case. The relevant observation of DRP at para 9.4 reads as under :- "9.4 It is seen by us that this issue has come up earlier before the DRP in assessee's case for A.Y. 2007-08. Vide its directions dated 8/8/11 the DRP has upheld the proposed disallowance with the following observations : "It is seen from the assessment order that the AO has proposed this disallowance giving his reasoning and placing reliance on the Supreme Court's decisions of Southern Switchgear Ltd. Vs. CIT 232 ITR 359 and Jonas Woodhead and Sons (India) Ltd. 224 ITR 342. The taxpayer on the other hand has distinguished these two case laws from its case. According to it, it obtained a right to use technical know-how for its existing plant and machinery during the setting up of the business. It is seen that this issue has been a matter of dispute between the taxpayer and the department in A.Ys. 2005-06 and 2006-07. The matter has not reached a final legal conclusion." The DRP for A.Y. 08-09 and A.Y. 2009-10 also rejected the claim of the assessee. Thus, there is a dichotomous position wherein the High Court....
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....penditure. The relevant observations of the Tribunal from para 7 to 23 read as under :- "7. We have heard the rival submissions and perused the relevant material on record. It is noticed that the AO as well as the DRP have proceeded by treating total payment of Rs. 6.39 crore as royalty without making a distinction between the payment made for know-how and for trademarks/logo. Out of total payment of Rs. 6.39 crore, the assessee paid Rs. 1.19 crore as technical know-how fees to GKN Automotive GmbH, Germany and the remaining amount of Rs. 5.19 crore to GKN Holdings, UK for use of brand name. Since there is a marked distinction between the nature of these two payments and different consequences can follow as regards their treatment for tax purpose, we proceed to discuss them separately. 8. Firstly, we are taking up the payment of Rs. 1.19 crore made by the assessee to GKN Automotive GmbH, Germany, towards technical know-how. The assessee entered into an agreement with GKN Automotive GmbH, Germany, on 11.1.2003, a copy of which is available in the paper book. This Agreement provides that GKN Automotive GmbH, Germany, is a Licensor which is engaged in the manufacture ....
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....t, the assessee admits that the Licensor is the owner of the copyright and intellectual property rights of the knowhow supplied, who holds all the proprietary rights in it. Clause 7 of the Agreement has been captioned as 'Confidentiality' which reads as under:- "Licensee shall keep secret and confidential and use its best endeavours to prevent disclosure of the Know-How and to limit access thereto such of its employees or such others (including permitted sub-licensees under Clause 13) as reasonably require the same for the purpose for which the Know-How is stated in Clause 3 to be supplied and without prejudice to the extent of the foregoing obligation shall in particular take all measures by contract and otherwise which a prudent, determined and reasonable owner of the rights in the Know-How acting in his own interests and desiring to protect such rights, would take to ensure that the Know-How is not disclosed by those to whom disclosure is made in accordance with the provisions of this clause." 12. A perusal of this clause of the Agreement divulges that the assessee shall keep secret and confidential the know-how received from the Licensor and shall ensu....
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....at Clause 14 of the Agreement empowers the Licensee to terminate the Agreement and, thereafter, use the know-how free of charge. It was submitted that the free user of the technical know-how meant that the payment made for use of technical know-how was a capital expenditure entitling the assessee to use such know-how in perpetuity. 14. This argument of the ld. DR, though appears attractive at first flush, but, loses its shine on an in-depth analysis. In order to appreciate the contention of the ld. DR in correct perspective, it would be relevant to note Clause 13 and relevant parts of Clause 14 of the Agreement, which are as under :- "13. Termination 13.1 Each party shall have the right to terminate this Agreement, by notice in writing to operate on the date specified in the notice, if; 13.1.1 the other party fails to observe any of the terms hereof to a material and significant extent and to remedy such failure (where it is capable of being remedied) within the period specified in a notice given to it by the aggrieved party calling for remedy, being a period not less than thirty (30) days; 13.1.2 the other party is for any cause prevent....
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....awfully terminated by Licensee, Licensee may continue to use the Know-How free of charge. 14.2 In the event that this Agreement is lawfully terminated by Licensor:- 14.2.1 Licensee shall cease manufacture of the Joints and shall not use any part of the Know-How and shall return to Licensor all tangible Know-How material and all copies made thereof; 14.2.2 Licensee shall have a period of nine (9) months to dispose of stocks of the Joints in hand and to fulfil orders in hand subject to payment of royalty in accordance with Sub-clause 9.2. 14.3. On termination of this Agreement whether terminated by Licensor or by Licensee or by effluxion of time:- 14.3.1 the rights of either party against the other which may have accrued up to the date of termination or expiration shall not be prejudiced by termination or expiration; 14.3.2 Licensee shall have no rights whatsoever under or in connection with this Agreement except as provided under the provisions of this Agreement." 15. On going through Clause 14 of the Agreement, it becomes evident that the same can be terminated in three ways, namely, by Licensee, by Licensor and by effl....
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....the Licensee can terminate the Agreement only when there is some default or insolvency, etc., of the Licensor and not otherwise at his own sweet will. Clause 13.1.5 provides that the assessee can terminate the Agreement if the continued operation of this Agreement is prevented by reason of any order of Government or any other authorities. Clauses 13.2 to 13.4 either deal with the right of the Licensor to terminate the Agreement or the procedural aspects of the termination. Thus, it is apparent that the assessee-Licensee can terminate the Agreement, under all the subclauses of Clause 13.1 of the Agreement, either due to some default or incapacity of the Licensor or Government order. All these situations make it crystal clear that the Licensee cannot, at his own sweet will, terminate the Agreement and, thereafter, continue to use the know-how received from Licensor free of charge. Such a right to terminate the Agreement vests in the Licensee only if the default is committed by the Licensor. The Licensee, under no circumstance, can suo motu terminate the Agreement without any default by the Licensor por una parte and also reap the benefits of free user of technical know-how por otra p....
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....icensee (the assessee) to use the trademarks in respect of the products and the services. Clause 2 of the Agreement reads as under:- "2. GRANT The Licensor grants to the Licensee, on the terms set out in this Agreement, a non-exclusive Licence:- 2.1 under the registrations; and 2.2 to use the Trade Marks in those countries in the Territory where they are not registered;" 18. It emerges from a simple reading of the above clause that GKN Holdings, UK granted a non-exclusive License to the assessee 'to use' the trademarks. Clause 6.1 of the Agreement provides that: "All use of any Trade Marks by the Licensee shall be for the benefit of the Licensor and the goodwill accrued to the Licensee arising from its use of the Trade Marks (but no greater or other goodwill) shall accrue to and be held in trust by the Licensee for the Licensor which goodwill the Licensee agrees to assign free of charge to the Licensor at its request at any time whether during or after the term of this Agreement." On going through the above clause of the Agreement, it becomes crystal clear that the assessee has been allowed user of trademarks held by the Licensor....
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....ll such stock on the terms hereof or such other terms as may be agreed." 20. This clause provides in unambiguous terms that upon the termination of this Agreement for whatever reason, the assessee shall cease to make any use of the trade marks. Clause 4 of the Agreement is 'Consideration clause'. Clause 4.2 of this Agreement provides that the amount of royalty for use of trademark shall be as under:- "- where the Operating Margin for the relevant Financial Period is less than 3%, a rate of 0.5% shall be applied; - Where the Operating Margin for the relevant Financial Period is 3% or more but less than 7%, a rate of 1% shall be applied; and - Where the Operating Margin for the relevant Financial Period is 7% or more, a rate of 1.5% shall be applied." 21. 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....
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....R. As we have held hereinabove that the payment for use of know- how and trademarks is a revenue expenditure, the disallowance made by the AO to the tune of Rs. 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." 9. Since the Assessing Officer has followed the orders for assessment year 2008-09 while treating the royalty expenditure as capital in nature and since the Tribunal has already decided the issue in favour of the assessee, therefore, respectfully following th....
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....e u/s.37 of the Income Tax Act, 1961 ('the Act')." b) Revenue "2. On the facts and in circumstances of the case and in law, the Hon'ble DRP has erred in directing to verify the method of working of the provision for warranty and if it is based on some scientific principal and ascertainable specifically, then the same should be allowed, otherwise not." 11. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, observed that the assessee has debited an amount of Rs. 85,32,109/- towards provision for warranty claims. He, therefore, asked the assessee to justify the claim as this according to him was contingent liability. It was explained by the assessee that the issue stands decided in favour of the assessee by the decision of the Tribunal in assessee's own case in the preceding year. However, the Assessing Officer held that the decision of the Tribunal was not accepted by the Revenue but no appeal was filed against the order in view of the CBDT Instruction because of low tax effect. Further, the principles of res-judicata do not apply to income-tax proceedings and every year is separate year. Rejecting the variou....
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....ver. Since this provision exceeded the actual expenditure, the assessee reversed Rs. 5,00,246/- as reversal of excess provision, and claimed deduction of the net provision of Rs. 5,18,554/-. But the Assessing Officer disallowed the claim on the ground that it was merely a contingent liability. The High Court on appeal held that no obligation was cost on the date of sale and consequently there was no accrued liability. On appeal to the Supreme Court : Held, reversing the decision of the High Court, that the value actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that value actuator being a sophisticated item no customer was prepared to buy a value actuator without a warrant. Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. Therefore, the assessee h....