TaxTMI 
TaxTMI 
2020 (9) TMI 1180
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.... 2. Addition on account of royalty on sales to its AEs 3. Disallowance of expenditure being incurred under corporate social responsibility 4. Disallowance of expenditure on signages 5. Disallowance of sales tools expenses 6. Capitalisation of Royalty 7. Disallowance of claim of deduction of expenses in respect of Technical know-how 8. Claim of TDS 5. Representatives of both the sides were heard at length. Case record carefully perused and with the assistance of the counsel we have considered the relevant documentary evidences brought on record in the form of paper book in the light of Rule 18 (6) of the ITAT Rules. 6. On the agreement of both the representatives we have considered the facts of A.Y.2013-14 since facts of A.Y. 2014-15 are identical. 7. Appellant is a subsidiary of Honda Motor Company Ltd,. Japan, Group and is engaged in the business of manufacture and sale of motor cycles and scooters. The details of the international transactions and specified domestic transactions entered by the assessee with its AE during the year under consideration which are as under :- S. No. Nature of transactions Tot....
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....y of expenditure incurred by the assessee under the head CSR-expenditure. The assessee claimed that the expenditure has been incurred towards maintenance charges of GSS, Gurgaon for the benefit of the children of the employees of the assessee company. The assessee has placed on record the list of the expenditure before us. The perusal of the same reflects the expenditure on certain renovation work at Mohindergarh including providing chairs and tables by the assessee. Further expenses are debited on account of Tools for Honda Training Center Lab- Mohindergarh. All the said expenses are incurred for efficiently carrying out the business of the assessee and thus fulfill the condition of wholly and exclusively for the purpose of business. Further, the donation to Brahma Kumaris merits to be disallowed in the hands of the assessee, as it is case of charity. The same may be looked into as per the provision of section BOG of the Act. Further, expenditure incurred towards display of name/logo of the assessee on various items is undoubtedly for the promotion of the business of the assessee as it promotes goodwill. Hence, the expenditure is to be allowed as revenue expenditure. 14. ....
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....en the assessee and the third party manufacturers, 50% of the price of the sales tools is directly paid by the assessee as advance to the third party manufacturer at the time of placement of order and balance 50% is paid by the authorized dealers, post inspection and approval of the ordered items by the Inspecting Officer of the assessee before delivery at dealer's outlet. Such sales tools/ fixtures inter-alia includes the following:- * Reception Counter; * Customer Lounge Partition with Monitor Stand; * Shelf Partition for Parts and Accessories; * Frost Glass Partition; * Digital Graphic Panel; * Specifications Panel; * Two-Wheeler Display Base (Window); * Two-wheeler Display Base (Corner); * Sing Ring; * Catalogue Stand. 31. The question which arises is whether the assessee is incurring expenditure to maintain standard format of displaying its products all over India in order to induce prospective customers to clearly identify the exclusive dealers of assessee's products in India and expenditure incurred was wholly and exclusively for the purpose of his business. 32. The Ld....
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....f setting up of manufacturing facility and was not for running of the business. The Tribunal in assessee's own case for Assessment Year 2011-12 while deciding the issue in appeal filed against the order passed u / s 263 of the Act had distinguished the said decision and allowed the claim of the assessee. Hence, Ground of appeal No.7 raised by the assessee is allowed." 4.1 Respectfully following the decision of the coordinate bench, we hold accordingly. 5. Capitalisation of royalty - A similar issue was decided by the Tribunal in A.Y. 2012-13 in ITA No. 7714/Del/2017. The relevant findings read as under :- "37. Now coming to Ground of appeal No.8 raised by the assessee under which the assessee is aggrieved by the orders of the authorities below in disallowing 25% of Royalty expenses. The Ld.AR for the assessee pointed out that Ground of appeal No.9(a) which is the additional ground of appeal raised by the assessee may be taken up alongwith this ground of appeal. 38. Briefly in the facts of the case relating to the issue, the assessee has claimed expenses on technical knowhow fees and royalty during the year amounting to Rs. 488.65 crores (approx.)....
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....ich the assessee filed elaborate submissions before the Assessing Officer, the Assessing Officer noted that the arguments of the assessee that this was running Royalty, therefore, it was treated as revenue expenditure. The Assessing Officer on perusal of the technical know-how and Royalty Agreement came to a finding that the Royalty Agreement was extension of payment towards technical know-how. He thus observed that. "Any payment which has been made on account of technical know-how and royalty should be read, into one and cannot be bifurcated as the assesses has done. It is further noted that the royalty without technical knowhow do not have any existence per se. Therefore the same is inextricable from the technical know-how. The assessee claimed that the royalty paid was a running royalty therefore, the same would he allowable expenditure however it failed to acknowledge the. fact that the royalty was conjoint with the technical knowhow and without which the same did not have any existence therefore, the same should be treated, as capital in nature." 40. The Assessing Officer did not accept the plea of the assessee that the same Royalty being paid for more than 15 years a....
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....es was incurred for the purpose of business. He fairly pointed out that the lumpsum fee paid of Rs. 110 crores was capitalized in the books of accounts as well as for income tax purpose and the assessee was claiming depreciation on the same. But by way of Additional Ground of appeal No.9(a), the same is being claimed as revenue expenditure. The Ld.AR for the assessee stressed that where the assessee had acquired only limited rights in the Agreement, then same reasons are applicable for running Royalty, and lumpsum Royalty payment should also be allowed as expenses. In this regard, reliance was placed on the following decisions:- [ij CIT v. Hero Honda Motors Ltd. 372 ITR 481 (Del.HC) [lij CIT V. Munjal Showa Ltd. 329 ITR 449 (Del.HC) (in) Maruti Suzuki India Ltd. vs Addl. CIT (ITA No.6021/Del/2012) (Assessment Year 2008-09] 42. The Ld.AR for the assessee further pointed out that this was a legal issue raised by the assessee where the facts were already on record and in the light of the decision of Hon'ble Supreme Court in National Thermal. Power Co.Ltd. vs CIT (1998] 229 ITR 383 (SC), the additional ground to be admitted and claim to ....
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.... (supra) was with regard to the expenditure in first year wherein Hon'ble Apex Court held that since the information was passed for establishing the manufacturing facilities, the same was capital in nature. The Ld.AR for the assessee stressed that under Ground of appeal No.8, the claim was made in respect of recurring Royalty which is always been allowed as revenue expenditure in the hands of the assessee. Ground No.9a was against allowance of technical know-how paid for new models, which come into the market and this lumpsum Royalty which in turn is model fee has been, allowed as an expenditure in the case of the CIT vs Hero Honda Motors Ltd. (supra), The SLP against the order of Hon'ble Delhi High Court has been dismissed. The Ld.AR for the assessee also pointed out that the amount has been paid in respect of the new models introduced during the year. 46. We have heard the rival contentions and perused the record. The assessee had entered into a technical know-how agreement with Honda Motors Company, Japan under which it was paying lumpsum fee which was the amount in connection with the new models introduced in a year. The total amount paid during the year was Rs. 110.45....
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....ting up of the manufacturing facility and the payments made once the manufacturing process has already began. In the former case, royalty expenditure for setting up the manufacturing facility is capital in nature while in the latter case, the royalty expense is revenue in nature. " 48. The SLP filed against the said decision has been dismissed by the Hon'ble Supreme Court. Applying the said ratio, we are of the view that the assessee was entitled to claim the aforesaid expenditure as revenue expenditure in the hands of the assessee. 49. Coming to the stand of the Revenue that where the assessee itself had not claimed as deductible in its hands, then the same cannot be allowed by the additional ground of appeal. We find no merit in the stand of the Ld. DR for the Revenue as there is no estoppel in law; especially where the issue has been decided by the Jurisdictional High Court on similar facts. Accordingly, we allow the additional ground of appeal raised by the assessee. 6.1 Respectfully following the findings of the coordinate bench we decide accordingly. 7. Now, we will address to the grievance relating to addition on account of payment of expo....
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....AE. 7.9 Further we find from the comparative profitability statement, the profitability derived by the assessee from export of goods at 8.91 % is significantly higher than the profitability derived by the assessee from sale of goods in the domestic market @ 5.50%. The comparative profitability statement is as under :- 7.10 For the sake of repetition, the entire edifice of the TPO/DRP's finding is based upon the assumption that the assessee is operating as a contract manufacturer with respect to export of good. 7.11 In our understanding of the facts of the case in hand, we are of the considered view that the TPO/ DRP have grossly failed in distinguishing between the function of the license manufacturers and contract manufacturers. 7.12 A perusal of the business profile of the assessee viz-a-viz agreement with the parent, we find that the assessee is a licensed manufacturer such as the assessee, the seller is entitled to compensation which includes returns attributable to exploitation of intangibles such technical know-how etc i.e. market determined prices. On the other hand, in the case of a contact manufacturer, the manufacturer acts in accordanc....
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....erable exclusive right and license, without the right to grant sublicenses, to manufacture, use and sell the Products and the Licensed Parts within the Territory under the Intellectual Property Rights and by using the Technical Information and Technical Material provided by the LICENSOR to the LICENSEE hereunder. 2.2 Notwithstanding the provision of Article 2.1 above, the LICENSOR reserves the right to sell or otherwise supply even within the Territory to any third party the Parts for repair or replacement of the Products or other products of the LÄ°CENSOR. ARTICLE 3 INFORMATION 3.1 FURNISHING OF TECHNICAL During the term of this Agreement, the LICENSOR shall furnish the LICENSEE with the Technical Information and Technical Material to the extent deemed necessary by the LICENSOR, by disclosing it in a documentary form , and advising them as to the application of the Technical Information and/or otherwise, in the manner mentioned in this Article 3. 3.2 111 Technical Information Furnishing of the documentary form, that is the Technical Materials, the items ....
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....parties hereto. (b) The second installment in the amount of six hundred sixty six thousand six hundred sixty seven (US$666,667) shall be paid within one hundred twenty days (120) days after the day on which the manufacture of the Products on a commercial basis has started. (c) The third installment in the amount of six hundred sixty six thousand six hundred sixty seven (US$666,667) shall be paid within one hundred eighty days (180) days after the day on which the manufacture of the Products on a commercial basis has started. 11.3 Payments and remittances by the LICENSEE hereunder shall be free and clear of any deductions for taxes or other charges in the Territory, except for the taxes and other governmental charges set forth in Article 12 hereof. Receipt by the LICENSOR of any payment tendered hereunder shall not constitute the LICENSOR's acceptance of any account, schedule or figure on which such payment is based. All payments made or to be made by the LICENSEE to the LICENSOR hereunder shall not be refundable to the LICENSEE, even if any of the Intellectual Property Rights licensed to the LICENSE....
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....the payment of royalty and the export commission are for two different purposes. The assessee is paying royalty as per technical know-how agreement dated 02.06.2004 with HMCL. As per this agreement, the assessee is entitled to use technical know-how provided by HMCL for manufacture and sale of two wheelers and parts. Royalty is to be paid for the goods manufactured by the assessee, whether sold within India or outside India. It is not in dispute that the 92 ITA- 5130/Del/2010 motorcycles which were exported by the assessee, were manufactured by using the technical know- how provided by HMCL under the technical know-how agreement dated 02.06.2004. Therefore, royalty is payable on such manufacturing of goods. The contention of the learned TPO that the goods are exported to subsidiaries of the Associate Enterprise i.e. AE of Honda Japan and the assessee also paid export commission, would be no ground for disallowance of the royalty or determining arm's length price of the royalty at nil. The assessee is exporting goods to AE of Honda on principal to principal basis and the price at which export is made is higher than the domesti....
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....41,140 31,044 10,096 Lid Motoriders Pvy Ltd Dio Honda Del Peru S.A 844.00 55.15 2,327.33 Vistar Wheels 41.05% 46,547 44.219 31,351 12,868 Honda Del Peru S.A. 54.20 Hem Agencias 2,783.17 14.80% Unicom 1,027.00 55.663 $2,880 (Mumbai) 46.063 6.817 Pilot 2 Wheelers Pvt Honda Del Peru S.A. 52.25 Unicom 2,818.89 16.27% 1,079.00 56 378 $3,550 Ltd 46063 7.496 Unicorn- Honda Motor De 48.60 3,052,09 20.69% STD Chile SA 1.256,00 61,042 $7.990 V.D. Autowheels 48,050 9.940 Unicorn Honda Motor De 55.00 2,956,25 16.90% STD Chile SA. 1,075,00 59,125 56,169 Jas Motors 48,050 8.119 Unicom- Honda Selva Del Dugar Automotive 48.60 3,052.03 20.08% STD Peni A 1.256.00 61,047 57,990 Private Limited 48 291 0,600 Unicorn- Honda Del Peru S.A. $5.15 3,184.91 Vinayak (Sales) 25.31% STD 1.155.00 63.698 60,513 Corporation 48.291 12.222 Unicorn- Honda Del Peru S.A. 55.15 2,964.31 16.63% STD 1,075.00 59.286 56.322 Halder Auto 48.291 8.031 U....
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....el Export Price FORU Name Exchange FOB/Unit Export (net of export Price Difference Difference USD or 2. ÐÐ½Ð¸Ñ Rate INR Commission commission) B (A)-(B) EUR DUGAR CBR 250 Honda Del Peru S.A. 55.15 7,326.68 AUTOMOTIVE 9.80% 2,657.00 146,534 139,207 126,787 12,420 ABS PRIVATE LIMITED CBR 250 Honda Del Peru S.A 55.15 7,365.28 10.07% ABS 2.671.00 147.306 139.940 HDA Motors (P) Ltd. 127,143 12.797 Average Profit from exports to AEX (met of 19.77% export commission) Document 10 Particulars Within India Outside India Total Segments Total Income Income as per segmental information Total Revenue (including inter-segment revenue) 97,155 7,630 104,784 104,784 Total Segmental income 97,155 7,630 104,784 104,784 Segmental revenue/Total operating revenue 97.72% 7.281% Operating Income (as per P&L) 105.143 Income to be allocated from P&L to segmental income (Allocated on the basis of revenue ratio) 333 26 359 Total operating income 97,487 7,656 Segmental profit (Given) 10,958 1.112 ....