TaxTMI 
TaxTMI 
2018 (7) TMI 2094
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....issing the contention of the Appellant that the Appellant was not liable to deduct tax under Section 195 of the Income Tax. Act, 1961, from the payment made to M/s. Bellsonica Corporation Japan towards reimbursement of expenses as the same was not an income chargeable to tax in India. 2.1 That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in observing in complete disregard of the supporting details and written submissions that the Appellant has failed both in the assessment proceedings as well as in the appellate proceedings to demonstrate the nature of reimbursements. 2.2 That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in not appreciating that, similar claim of reimbursement of expenses of the Appellant has been allowed by the department in the previous assessment year i.e. Assessment Year 2010-11. 3. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in not deleting the disallowance of expenditure the Appellant towards expenditure on account of royalty. 3.1 That on the facts and in the....
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....ded to the income of the assessee. In appeal before the ld. CIT(A), who after considering the submissions of the assessee sustained the addition made u/s. 40(a)(ia) and in respect of payment of royalty, the ld.CIT(A) treated 25% of total payment as capital in nature and the balance 75% was treated as revenue expenditure after relying on case laws. Aggrieved by the order of the ld. CIT(A), the assessee as well as the Revenue have come up in appeal before the ITAT. 4. The learned AR reiterated the submissions made before the ld. CIT(A) and submitted that these payments made by the assessee are in nature of reimbursement, therefore, the TDS provision is not applicable on it. He has also referred to the agreement clause 3.05 and submitted that all payments have been made according to the agreement. 5. On the other hand, the ld. DR relied on the orders of the lower authorities and submitted that the assessee had not demonstrated the exact nature of payments made to its group company or payments made to the employees of Bellsonica Corpn. Japan. Therefore, the ld. CIT(A) has rightly dismissed the appeal of the assessee on this issue. 6. We have heard the submissions of both the p....
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....to decide here is whether the payment made for technical knowhow was capital in nature or revenue. The ownership of the technical knowhow remained with the foreign company. The assessee has made license agreement with the foreign company as on 01.10.2006, which is continuously in force till date. The terms of agreement read as under : " ARTICLE 2 LICENSE AND BELLSONIC'S OWNERSHIP 2.01: Scope of License (a) Bellsonica agrees to provide, during the term of this Agreement, technical collaboration and license necessary to the manufacture, testing and quality control of Products, in accordance with the terms and conditions in this Agreement. (b) Bellsonica hereby grants to Licensee during the term of this Agreement, in strict accordance with the terms and subjects to the conditions set forth, the nonexclusive right to use the Licensed Information for the manufacture, testing and quality control of Products within the Territory. 2.02 Bellsonica's Ownership Licensee recognizes and acknowledges Bellsonica's ownership and validity of the Licensed Information and shall not raise or cause to be raised and question concerning or any objecti....
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....y Bellsonica in any such law suits shall be decided by mutual agreement between Bellsonica and Licenee if and when such a need arises. (d) Bellsonica gives no other warranty express or implied, as to description, quality, merchantability, fitness for a particular purpose, performance, productiveness, or any other matter, of any Products, Licensed Information, or any other matter of thing that may be provided by Bellsonica to Licensee at any time under this Agreement or any related agreement, unless the same is in written and signed by Bellsonica. Bellsonica will use its best efforts to verify the accuracy of the Licensed Information furnished it to Licensee, but shall not be liable to Licensee for damages arising out of, or resulting from, any of the Licensed Information made available hereunder or thereof by Licensee. (e) Bellsonica further disclaims any responsibility whatsoever with respect to any representations or warranties, whether express or implied, which Licensee may make with respect to Products manufactured and/or sold by Licensee and, in any event, Licensee agrees to hold and save harmless Bellsonica from any claims, demands or actions which may resul....
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....ance to Licensee in converting Japanese technical standards in the Documentation whatever required to Indian standards to enable them to be used by Licensee in India. 3.2 Improvement by Licensee If, at any time during the term of this Agreement, Licensee discovers or acquires any improvement with respect to Products, it shall give to Bellsonica full information, instructions, know-how and particulars as to the mode of working and using the same. Such improvement shall be treated as Licensed Information for the purpose of this Agreement. If such information contains improvements of significant commercial value for Bellsonica, Bellsonica will pay reasonable compensation to Licensee for the use thereof. The amount of such compensation will be mutually agreed upon. 3.03 Observance of Standards and Specifications (a) In order to establish a Licensee production standard of quality comparable to the standards of Bellsonica, Licensee shall use its best efforts to provide and maintain adequate manufacturing and testing facilities, with the assistance and cooperation of Bellsonica in accordance with this Agreement. Bellsonica may also, in consultation with....
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....f personnel to be dispatched, their period of stay at the factory and/or factories of Licensee, the date of departure and all other terms and conditions not set forth hereunder in this Article 3.05 shall be, mutually agreed upon between Bellsonica and Licensee, on a case by case basis and subject to approval by the Government of India. (b) Licensee shall bear, or upon the receipt of Bellsonica's statement reimburse to Bellsonica, the following expense and fees for each Bellsonica's despatched personnel: (1) round-trip air fare between Japan and India, in business class for official general manager and above positions whereas in economy class for all others. (2) twenty five thousand Japanese yen (¥ 25,000.-) per person for the inland transportation expense within Japan (3) travel and transportation expenses (including business class air fare and driver's expenses if applicable) within India, and (4) daily technical advisory fee for despatched personnel in the amount of forty thousand (40,000.-) for managers or greater while twenty thousand (20,000) for all other, both in Japanese yen and uniformity applied which rate is subject to inc....
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....s hereto. Such royalty payment shall be made by Licensee within 30 (thirty) days upon closing Licensee's accounting book at every six (6) months within each fiscal year and by means of wire transfer to Bellsonica Licensee further agrees to submit Bellsonica such statement of account for royalty along with profit and loss statement in equivalent period as an evidencing document. (c) All royalty payment by Licensee shall be done in Japanese Yen. Licensee may make payment of royalty to Bellsonica net of taxes, on an understanding that Licensee shall furnish such documents, details and information in regard to the deduction of tax on daily technical advisory fee which may be required by Bellsonica. All other expenses incurred in connection with making such payments including expenses of currency conversion shall be borne by Licensee and no deduction shall be made by Licensee from such payment. (d) Notwithstanding of the provisions in Article 3.06 (a) and (b) royalty payment by Licensee may forbear, subject to Licensee's prior written notice and consent to the same by Bellsonica, further provided that the Licensee's gross profit is so long as and substantially negative....
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....ll require their officers, directors and employees not to, at any time, directly or indirectly, during the life of this Agreement or after its termination, divulge to any person, firm or corporation any information furnished by either party which may, in any way, be prejudicial to the best interest of the other party hereto. 3.10: Special Work by Bellsonica In the event Licensee requests Bellsonica to render any advice or assistance relating to Product or any manufacturing and operating preparations including, but not limited to, machineries, facilities and tooling or alike which requires special or unusual work or analysis and is not covered by this Agreement and in the event Bellsonica agrees to render such advice and assistance, Licensee agrees to pay Bellsonica a reasonable fee to be mutually agreed upon therefore. This fee shall be paid in Japanese Yen. ARTICLE 4: PURCHASE OF PRODUCTION MACHINERY 4.01: Purchase of Production Machinery With regard to the production machinery to be purchased by Licensee for the manufacture of Products by Licensee, Bellsonica shall render advice and assistance to Licensee in the selection and purchase ....
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.... party in such connection shall be for the account of such party. (b) It is also agreed that unless and until all such validations, approvals and/or registrations which may be required and are capable of being obtained initially upon execution of this Agreement, under the laws of Japan or India, as the case may be, have been received from the Government of Japan and India, respectively, which responsibility Bellsonica and Licensee respectively assume, no party shall be under any obligation to undertake performance of any of its obligations contained herein. (c) Bellsonica shall obtain or complete, if required, such approvals, validations, registrations and filings in Japan with respect to this Agreement as set forth in paragraph (b) above by the end of October, 2006, and Licensee shall obtain or complete such approvals, validations, registrations and filings in India with respect to this Agreement as set forth in paragraph (b) above by the end of October 2006. Upon failure of either party to obtain or complete such approvals, validation, registrations and filings within the specific period stated herein from or with their respective Governments or regulatory autho....
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....terial obligations or covenants contained in this Agreement and on its part to be performed or observed and (except where such default is not capable of remedy) shall not remedy such default within 90 (ninety) days after its receipt of any written notice requiring such remedy given to it by the party terminating this Agreement; or (iii) the other party hereto shall stop payment (within the meaning of any applicable bankruptcy law) or become insolvent or unable to pay its debt when due; or (iv) any proceeding shall have been initiated against the other party hereto under any applicable bankruptcy reorganization or insolvency law and such proceeding shall not have been discharged or stayed within a period of 90 (ninety) days; or (v) the other party hereto shall institute or consent to any proceeding in respect of itself under any applicable bankruptcy, reorganization or insolvency law or shall make assignment for the benefit of, or into any composition with, it creditors. (b) Notwithstanding anything to the contrary herein and in addition to and without prejudice to the right to terminate this Agreement provided elsewhere herein, either party heret....
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.... with this Agreement, or with a breach thereof, which cannot be satisfactorily settled by correspondence or mutual conference between the parties hereto, shall be determined by arbitration in accordance with the then prevailing commercial Arbitration Rules of the Japan Commercial Arbitration Association upon written request of either party hereto. The arbitration tribunal shall consist of one arbitrator appointed in accordance with such Rules. The arbitration shall be held in Tokyo, Japan in accordance with the Rules and also in accordance with the Japanese laws in respect of the procedures on which the Rules are silent, and may be held, if the Tribunal considers it appropriate, in an informal and summary manner to shorten the total time of the arbitration proceedings on the basis that it shall not be necessary to observe or carry out the usual formalities or procedures, including the delivery of pleadings, the making of discovery or the observance of the strict rules of evidence. The decision of such arbitrator shall be final and binding upon the parties hereto and judgment thereon may be entered in any court having jurisdiction thereon or application may be made to such court for....
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.... 7.06: Governing Law This Agreement shall be governed by and constructed in accordance with the laws of India. 7.07: Notice Any written notice required by any provision of this Agreement or which either party hereto shall deem necessary or desirable shall be given by delivery in person or by registered airmail, postage prepaid, in each case addressed as follows (or to such other address or person as may have been designated by written notice as herein provided): If to Bellsonica Bellsonica Corporation, 630-18 Yamaguchi, Kosai City, Shizuoka Pref. 431-0443, Japan Attention: President/CEO If to Licensee: Bellsonica Auto Component India Private Limited, Plot No, 1, Phase 3A, IMT Manesar, Distt. Gurgaon - 122 051, Haryana India Attention: Managing Director Any written notice given pursuant to this Article 7.07 will be deemed to have been served and be effective when delivered in person at the address herein specified for the addressee or, in the case of airmail, when 20 (ten) days shall have passed after the same shall have been placed in mail. ....
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....be retained by each party hereto. The two original copies, however, shall constitute one and the same Agreement. 7.12 Entire Agreement The terms and conditions herein contained constitute the entire agreement between the parties hereto in connection with the subject matter of this Agreement and shall supersede all previous negotiations, communications, agreements or arrangements, either oral or written, between the parties hereto pertaining to the subject matter of this Agreement, and no agreement or understanding varying or extending the terms and conditions of this Agreement shall be binding upon any party hereto unless it is made in writing, signed by a duly authorized officer or representative of the parties hereto and, if so required, approved by the Government of Japan and Indian respectively." 10. After going through the terms of agreement dated 01.10.2006, we find that when the agreement is terminated, the ownership of technical knowhow will not remain with the assessee company. In the decision relied on by the assessee, the royalty payment in the similar facts and circumstances, has been decided to be a revenue in nature. The observation of ITAT Delhi ....
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....refore, acquired any asset or advantage of an enduring nature for benefit of its business and that payments were, therefore, revenue in nature and were deductible." Similarly, Hon'ble Delhi High Court in the case of Hero Honda Motors(supra) after considering the terms of agreement, has also 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 ....