AI Drafter 
TaxTMI 
TaxTMI 
2019 (11) TMI 1024
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....f royalty and model fees As per the terms and conditions provided in the Technical Collaboration Agreement, the assessee claimed the royalty 5% / 8%, (net) of the sales made during the year under consideration in respect of technical know-how in view of the new TCA made between the parties subject to taxes. The details thereof is summarized hereunder. The Royalty expenses and allowability thereof is discussed in detail in subsequent Paras. On perusal of the profit and loss a/c, it is seen that the assessee has paid royalty of Rs. 156,32,14,000/-. A further breakup of the royalty is given in the 3CEB report. As per the report, payment of royalty of Rs. 101,45,19,188/- and payment of model fees of Rs. 54,86,95,000/- was made to Honda Motor Japan during the year. As per details furnished by the assessee, royalty has been calculated on domestic sales and on export sales and model fee has been paid on a lumpsum basis. In the earlier years, the payment on account of royalty/ model fee has been treated as capital expenditure in view of the facts mentioned in detail in the orders for earlier assessment years. Accordingly, assessee was asked vide questionnaire and order sh....
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....payment of Royalty is capital expenditure in the case of Ram Kumar Pharmaceutical Works Vs. CIT (1979) 119HR 33 (Allahabad) and CIT Vs. Warner Hindustan Limited (1998) 9 sec 533, 534. The Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) Limited. Vs. Commissioner of Income- Tax 224 ITR 342 {Supreme Court} also held that the Royalty payment, which was in terms of the collaboration agreement between the assessee & foreign company, was a composite payment for supply of technical know-how and services for setting up plant and manufacture of products as it was the composite agreement. Further held that the sum disallowed and treated as capital expenditure and not allowable as a revenue expenditure on the ground that the benefit derived is of enduring nature and for longterm. Merely the payment of Lump-sum fee in installments and Royalty at a certain percentage of the gross turnover, it cannot be held as revenue expenditure. The same view has also been held by Hon'ble Kerala High Court in the case of CIT Vs Polyformalin Pvt. Ltd: (1986) 161 ITR 36 in which it was held that royalty paid by the assessee under Technical know-how agreement for right to use Trade Ma....
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....stablishment of industry is the capital expenditure." (B.1) Vide appellate order dated 31.03.2014 of Learned Commissioner of Income Tax (Appeals) ["Ld. CIT(A)", for short), deleted this addition vide paragraphs 4.2 to 4.7 of the said order, being reproduced below for ease of reference: (C) Revenue's appeal against aforesaid impugned order dated 31.03.2014 was decided by Co-ordinate Bench of ITAT, Delhi, vide order dated 29.06.2016 wherein the order of the Ld. CIT(A) on this issue was sustained, holding that there is no infirmity in the order of the Ld. CIT(A). The relevant portion of the aforesaid order dated 29.06.2016 of Co-ordinate Bench of ITAT, Delhi is reproduced as under: "24. Dissatisfied with the orders of AO, the assessee carried the matter to Ld. CIT(A). Ld. CIT (A) by following the order of Tribunal in assessee's own case in earlier assessment years, deleted the additions made by the AO. We now dispose of the issue item wise. a) Royalty & lump sum fee The AO had made the additions on the basis that the payment made by assessee had resulted into a benefit of enduring nature and that the expenditure was capital in nature. The Ld. CIT(A....
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....revenue and at the same time in the later part of its judgment, upheld the reasoning of this Court for some other part of the payments made. The assessee furthermore contends that for A.Y. 2010-2011 similar payments were held to be revenue in nature. The discussion of the lower appellate authority i.e. the CIT(A) and the ITAT would disclose that they went by the previous assessment year's decisions for A.Y. 2003- 2004. The assessee entered into a new agreement in 2005. In these given circumstances, the omission by the lower appellate authorities is erroneous. The issue is therefore remitted for reconsideration by the ITAT which shall proceed to decide the question whether the payments made towards model fee/running royalty - characterised - lump sum payment, by the ITAT in the impugned order fall in the revenue or capital stream. The appeal is partly allowed in the above terms." (C.2) It is in this background that the present appeal came up for fresh hearing before us. Although there are several grounds of appeal, only relevant ground of appeal for present purposes is ground no. 1 which is as under: "1. On the facts and circumstances of the ca....
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....contrary, the Ld. counsel for the assessee submitted that said case is distinguishable on facts since the assessment years before the Apex court were the formative years and this fact played on the court to hold that lump sum fee for acquisition of know-how was for the purpose of setting up the manufacturing facility. He submitted that the Hon'ble Supreme Court had not given any opinion on the issue of allowability of the running royalty as was the payment in the present assessment year. In the said case the assessment year involved were initial assessment years and in those facts it was held that payments are made for setting up of the plant project for manufacturing of cars and thus the expenditure was in the nature of capital expenditure and not revenue expenditure. In the present case the payment of royalty and lump sum model fee was paid in terms of Technical Collaboration Agreement (TCA) dated 01/04/2005, whereas the payments in the relied upon Supreme Court judgment were made under TCA dated 21/05/1996 entered at the time of setting up/commencement of business of the assessee. 22. The Ld. Counsel for the assessee drew our attention to the para of the Apex Courts jud....
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....and royalty was in the nature of revenue expenditure and opined as under- "Coming to the judgment of the Delhi High Court in the case of this very assessee, it would be noticed that in that case, technical knowhow was obtained for improvising scooter segment, which unit was already in existence. On the contrary, in present case, the TCA was for setting up of new plant for the first time to manufacture cars. The Delhi High Court specifically noted this fact in para 14 of the judgment. While analysing the agreement in that case which was for providing technical know-how in relation to the product i.e. two wheelers and three wheelers and the purpose was to introduce 'new models' of the said product developed by the Japanese Company, the High Court noted that the agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It referred to the earlier collaboration agreement dated January 24, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufac....
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....ithin 60 days after commencement of Commercial Production of the specific New or FMC model of the Products. b) For each MMC Model The amount of Model fee payable for each MMC of the Products, as detailed under Exhibit I, by the LICENSEE to the LICENSOR shall be JP¥ 400 Million (Japanese Yen Four Hundred Million). This fee shall be payable in two equal instalments as under: The first of such instalments of JP¥ 200 Million (Japanese Yen 200 Million) shall be payable within 60 days after signing of Model Agreement and receipt of the Technical Information necessary for mass production of the Model by the LICENSEE, as per Article 4, and ii)The second and final instalment of JP¥ 200 Million (Japanese Yen Two Hundred Million) shall be payable within 60 days after commencement of Commercial Production of the specific MMC of the products. Provided that not more than one Model Fee for Minor Model Change (MMC) in respect of any Existing Model or FMC Model or New Model shall be payable a during the term of this Agreement. The model fee shall be payable by LICENSEE in currency of Japanese Yen by bank transfer remittance to the ba....
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....diture has held as under: "16. Reading the aforesaid terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical knowhow and information. The ownership and the intellectual property rights in the knowhow or technical information were never transferred or became an asset of the respondent assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the respondent assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. In fact, the business was not exactly new. Manufacture and sates had already commenced under the agreement dated 24th January, 1984. After expiry of the first agreement, the second agreement dated 2nd June, 1995, ensured continuity in manufacture, development, production and sale. The period of agreeme....
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.... establishment of plant, machinery etc. so as to bring in existence manufacturing unit for the products. Thus, a new business was set up with the technical know-how provided by HMCL, Japan and lump-sum royalty, though in five installments, was paid therefor made under the issue are that payments. ........Since, it is found that the Agreement in question was crucial for setting up of the plant project in question for manufacturing of the goods, the expenditure in the form of royalty paid would be in the nature of capital expenditure and not revenue expenditure.... " 32, He submitted that it becomes clear that the judgment of the Hon'ble Supreme Court is distinguishable on facts and is applicable for the payments made at the time of setting up of plant and is not applicable in the present case. In the present case, there is no dispute that the payments were made pursuant to the agreement dated 01.04.2005. At the time the agreement was executed, the assessee was in existence and in operation for more than 10 years. Thus, in line with the Hon'ble Supreme Court judgement the said agreement dated 01.04.2005 has been entered into by the assessee to improvise the existing....
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....anted to the respondent assessee a right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. The aforesaid distinction between the two Agreements has made all the difference in the results. As a consequence, we find no merit in these appeals which are dismissed with coast. " 35. The Hon'ble Supreme Court has carved out the distinction between the payments at the time of setting up of the manufacturing facility and the payments made once the manufacturing process has already begun. We observe from the facts available on record that the assessee had commenced manufacturing activity in the year 1998 itself and by virtue of the new TCA dated 01/04/2005 the technical information provided to the assessee was in respect of addition of the existing product profile already been manufactured by the assessee. The Hon'ble Delhi High Court in the case of CIT Vs. Hero Honda Motors (supra) in para - 16 of the order (reproduced in para -29 of this order) has held the royalty for carrying on the day-to-day business as revenue expenditure. 36. The Hon'ble Supreme Court in the decision in the case of assessee (supra) has further observed as....
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.... High Court is reproduced as under: "5. The only question, urged by the Revenue in the present case which remains to be considered reads as under: '"2.1 Whether the ITAT/C1T(A) erred in deleting the addition of Rs. 1,59,74,53,889/- made by the Assessing officer treating the amount of royalty and lump sum fee paid by the assessee as capital expenditure instead of revenue expenditure as claimed by the Assessee?" 6. The Court has heard the counsel for the parties. 7. It is pointed out, at the outset, by Mr. Ruchir Bhatia, learned senior standing counsel for the Revenue, that for AY 2009-10, the above issue stands remanded by this Court to the ITAT by the order dated 9lh May 2018 in ITA 480/2017. This is not disputed by Mr. Deepak Chopra, learned counsel for the Assessee. Mr, Bhatia, therefore, submits that for the present AY 2010-11 also, the issue be remanded to the ITAT for a fresh decision, particularly, since, according to him, the ITAT has not given sufficient reasons in arriving at its conclusion. Further although for AY 2008-09, the issue of treatment of the expenditure towards royalty as revenue expenditure has been confirmed by the ITAT and....
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....the judgment of the Hon'ble Supreme Court in assessee's own case for assessment year 1999-2000 to 2005-06 would not be applicable in the assessment year under consideration, since the assessee was already engaged in the manufacturing of cars and spare parts and the payments towards royalty/technical knowhow paid in pursuant to agreement dated 01/04/2005 were not toward setting up of manufacturing facility, hence we hold that royalty/technical knowhow payment made by the assessee during the year under consideration were revenue in nature and the Ld. CIT-A has correctly allowed the said expenditure as revenue. Accordingly, we dismiss the ground of appeal of the Revenue." 11. Mr. Bhatia then urged that the ITAT has not discussed the clauses of the agreement dated lsl April 2005. The Court in fact finds that in paragraph 26 of the impugned order while setting out the submissions of learned counsel for the Assessee, the clauses of the said agreement have been set out. What appears to have weighed with the ITAT is the distinction between the royalty payments made during the initial phase of the Assessee's operations, which formed subject matter of the judgment of the Supreme....
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....nch of ITAT, Delhi by Ld. CIT(A), in aforesaid impugned order dated 18.08.2017. It is also not in dispute that the aforesaid Agreement of 2005 has been considered already by in the aforesaid order dated 13.05.2019 Hon'ble Delhi High Court for Assessment Year 2010-11 in which Revenue's appeal was distinguishable. Neither side has brought any distinguishing facts and circumstances, legal points or decided precedents for our consideration to persuade us to take a view different from view already taken on the issue by Co-ordinate Bench of ITAT, Delhi and by Hon'ble Delhi High Court in aforesaid orders dated 18.08.2017 and 13.05.2019 respectively. Respectfully following the aforesaid orders dated 13.05.2019 of Hon'ble Delhi High Court and the aforesaid order dated 18.08.2017 of Co-ordinate Bench of ITAT, Delhi, we also decide the disputed issue regarding royalty and lump sum fee in favour of the assessee. Accordingly, we decline to interfere with the aforesaid impugned order of the Ld. CIT on this issue and dismiss the first ground of appeal in the appeal filed by Revenue. As we are not adjudicating any other ground in the present appeal, for statistical purposes the appeal is dismissed....
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....CIL. Further, HCIL is expressly prohibited from divulging confidential information to any person or entity inside or outside India, without the consent of HMJ. HCIL is also prohibited to permit any third party to use the Intellectual Property Rights and the technical information licensed etc. for any purpose other than expressly provided in the TCA. It is respectfully submitted that the supply of technical know-how for manufacture of products is an ongoing and continuous exercise. The drawings and designs relating to the products have to be made available much before the actual production starts since the same need to be studied and understood by HCIL's personnel in advance. It will be appreciated that Document 3 • . HCIL cannot start production immediately on receipt of technical designs relating to the products to be manufactured as these are complex and comprehensive documents which require detailed study and analysis, before the actual manufacturing at the floor level. In view of the above, it is respectfully submitted, if the royalty is towards the use of know-how and technical information, which directly relates to th....
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....the case of Empire Jute Co. Ltd. v CIT [124 ITR 1] is relevant in this regard, where it has been held that: "there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowed on an application of this test. If the advantage consists merely in facilitating the assessee's trading operation or enabling the management and conduct of the assessee's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future....." In the case of Hero Honda Motors Ltd.(95 TTJ (Del) 782), in appeal for A. Y. 1996-97 the Delhi Bench of the Tribunal was pleased to allow model ....
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....r 2003-04 and the nature of payment was similar to that in the earlier years. The AO acknowledged the aforesaid but has not followed the Tribunal's order on the ground that the department is in appeal before the High Court against the above decision of the Tribunal. In the Assessment Year 2003-04, the appellant paid a sum of Rs.29,40,64,000/- towards lump sum fee for technical know-how to HMJ and royalty of Rs.18,55,24,000/- which was claimed as revenue expenditure. The AO, Document 6 however, disallowed the aforesaid payment of lump sum fee for technical know- how and royalty holding the same to be capital expenditure. The disallowance was upheld by the CIT(A). 4.5 It has been submitted by the appellant that no part of the lump sum fee/royalty paid to HMJ can be considered as capital expenditure as the same is allowable in full, because the Tribunal in their own case for the assessment year 2003-04, in identical circumstance, vide their order dated 16.08.2008 in ITA No. 3173/Del./2007 has held that payment of lump sum fee for technical know-how and royalty made by the appellant to be revenue expenditure. The Tribunal, after examini....
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....of Royalty & lumpsum fee for technical know-how as capital in nature. CIT(A) order upheld the disallowance Disallowance deleted by ITAT vide order dated 16.05.2008 in ITA No. 3173 & 4. 2004-05 Disallowed, held payment of Royalty & lumpsum fee for technical know-how as capital in nature. 5. 2005-06 Disallowed, held payment of Royalty & lumpsum fee for Disallowance deleted by CIT(A) vide order dated 17.09.2009 in Appeal No. 122/2006- 07. Disallowance deleted by CIT(A) vide order dated 23.04.2009 in 3408/Del/2007. CIT (A) order upheld vide order dated 18.02.2010 in ITA No. 4701/Del/2009. CIT (A) order upheld vide order dated 23.10.2009 in ITA No. technical know-how as Appeal No. 149/2008- 3030/Del/2009. capital in nature. 6. 2006-07 Disallowed, held payment of Royalty & lumpsum fee for 09/GZB-Noida. Disallowance deleted CIT (A) order upheld by CIT(A), LTU vide vide order dated order dated 28.02.2011 22.07.2011 in ITA No. Document 8 10. technical know-how as in Appeal No. 81/2009- 2372/Del/2011. capital in nature. 7. ....