TaxTMI 
TaxTMI 
2021 (8) TMI 73
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....stt. year Amount 2009-10 Rs. 7,67,40,014/- 2010-11 Rs. 9,31,03,660/- 2011-12 Rs. 13,91,35,242/- 2012-13 Rs. 16,90,72,648/- 2013-14 Rs. 19,40,11,412/- 2014-15 Rs. 2,37,68,129/- 2015-16 Rs. 20,49,31,705/- 2. Since identical issue is involved in all the appeals arising out of similar set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order. 3. Brief facts are that the assessee company is engaged in the business of manufacturing and selling of clutch assemblies for two wheelers and four wheelers and supplying to original equipment manufacturers since 1997. During the course of assessment proceedings, AO noted that the assessee has entered into a license agreement dated 01.04.1999 with F.C.C. Co. Ltd., Japan ('FCC Japan'). After the expiry of the first agreement it had entered into another license agreement dated 01.10.2007 with FCC Japan so as to ensure continuity in manufacture, development, production and sale. Vide this agreement, the assessee was granted non-exclusive and non-transferable right and license to use the Industrial Property Rights ('IPRs') and technical informati....
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.... the Technical Information on a non-exclusive and non-transferable basis. The ownership of the technical information and IPRs remained with the Licensor i.e. FCC Japan. It is further submitted that the appellant has not acquired any tangible or intangible assets by paying royalty. The appellant has relied upon various case laws which are quoted in the submission above. The AR has further submitted that the disallowance on similar ground made by the AO has been allowed in favour of the appellant by the Ld. CIT(A) in AY 2005-06 vide order dated 14.05.2013. After going through this order of the CIT (A), I find that this issue has already been decided in favour of the appellant, in which the Ld. CIT(A) has held as under: 'The facts of the appellant's case are identical with the facts of the above stated judicial pronouncements; therefore, the ratio of the said judgments is squarely applicable to the appellant's case. Hence, the royalty paid for using non-exclusive, non-transferable technical knowhow from FCC, Japan and Foreign Personal Deputation expenses for dissemination of technical knowhow in the production process is in the nature of recurring expenditure and ....
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....eement. The CIT(A) thus relied on the grounds of royalty payment being non-exclusive in nature and the right to use the Industrial Property Rights and Technical Information only for the period the agreement was in force and not after the termination of the agreement. 3. In view of the above and the submission made by the AR of the assessee during the proceedings before the Hon'ble Bench following submission is made for consideration of the Hon'ble Bench in light of the facts and circumstances of the case. 3.1 The assessee came into existence as an outcome of the Joint Venture Agreement (JV) dated 10-12-2006 made between FCC Co. Ltd. (a corporation organized and existing under the laws of Japan) and Rico Auto Industries Ltd. (a corporation organized and existing under the laws of India). The object of creating the JV was to manufacture clutch for automobiles and other parts and provide high quality products at competitive prices in India. This was to be achieved by utilizing the technical expertise, know-how and experience of the FCC Co. Ltd in the field of clutch assemblies and other parts. 3.2 In order to execute the same, an agreement was to be signed b....
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....he assessee is the key factor which gives the products of the assesse an edge over the other products. In this background, the license even though as per the License Agreement is non-exclusive in nature thereby implying that the licensor has the right to share it with other parties also but considering the peculiar situation, the financial interests at stake of the parties to the agreement and the close nexus of the licensor with the profits of the assessee, it is not difficult to assume that the licensor would prefer to have the technical information and know-how with assesse only rather than sharing it with other parties as this would adversely affect the business interests of the assesses which in turn would also mean the financial interest of the licensor on account of being 50% stakeholder in the assessee. In view of the above facts, it can be said that the rights granted to the assesse by the agreement are infact exclusive in nature. This can also be seen from the fact that the license agreement executed in FY 1999-2000 was in operation till FY 2014-15 which happens to be one of the years of appeal, the information about existence of business in subsequent years is not known ....
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....accruing to the assessee from the license agreement will not be available after the termination of the agreement itself is a fallacy as in such a condition even the assesse will cease to exist. Hence, to arrive at the conclusion that the agreement is only for a limited period and not enduring in nature is not true rather on the basis of the above discussion it can be said that the benefit is available to the assessee as long as it is in existence and the benefit is therefore enduring in nature. 3.8 The assessee has been availing the benefits of the license agreement for the 15 years since it was executed and will continue to do sb till the date of termination of the said agreement thus rendering the benefit to be enduring in nature. The condition of the benefits not being available post termination of the agreement does not hold any relevance in the given case as the very existence of the assesse is concurrent with the license agreement. 3.9 The grounds of the license agreement being non-exclusive, non-transferrable and the benefits of the agreement not being available post termination would have been relevant had the assesse been an independent entity without the....
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.... treated as revenue expenditure. This case thus gives an indication that if such a technical know-how is for the purpose of setting up a new business, the position may be different. 4.2 The Court further held that the conclusion drawn by the High Court that expenditure incurred was capital in nature appears to be unblemished. Admittedly there was no existing business and thus question of improvising the technical knowledge by borrowing the technical know-how of HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of the joint venture of HMCL, Japan and M/s HSCIL, India. The very purpose of agreement between the two companies was to set up a JV compan y :h the aim and objective to establish a unit for manufacture of automobiles and parts thereof 5. The case is also covered by another decision of the Hon'ble Supreme court in CIT v Southern Switchgears Ltd. (148ITR 272) wherein the Court disallowed one fourth of the royalty paid on the ground that the same was for acquisition of an exclusive privilege of manufacturing and selling the products. In the case before the Hon'ble Bench also the benefit available to the aseessee is exclu....
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....d parts in India is revenue expenditure of capital. The relevant clauses of licence agreement have been reproduced in detail in the appellate order. However, relevant article 2 and 12 are reproduced hereunder:- Article 2- License 1. The Licensor hereby grants and Licensee a non-exclusive and nontransferable right and license to use the Industrial Property Rights and Technical Information in order to manufacture and sell the Products and Parts in the Territory in accordance with the provisions of this Agreement. 2. In the event the Licensee wishes to subcontract to manufacture all or any part of the Products to a third party, the Licensee shall inform the Licensor in advance. Article 12- Consideration In consideration of the right to manufacture and sell the products under the Industrial Property Rights and the Technical Information provided by the Licensor pursuant to this Agreement, the Licensee shall pay to the Licensor the following royalties: Five percent (5%) of the difference between the net sales price actually charged by the Licensee to purchasers of the products sold by the Licensee and the gross sales price actually charged by ....
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....nt of royalty is, whether any right has been given which is for use of technology or it has been given for acquiring the knowhow or transfer of technology; whether any exclusive right has accrued to the licensee or it is purely for use of technology for production and sale. In case where it is purely for use of technology without giving any exclusive right to acquire the knowhow or transfer of technology then it is revenue expenditure. In this case the right has been given as nonexclusive and non transferable right to the assessee. Hon'ble Delhi High Court in the case of Climate Systems India Ltd. v. CIT (supra) held that royalty paid by the assessee to the foreign collaborator at specified percentage of its domestic and export sales for using the technology and availing of technical services provided by the licensee under the technical collaboration agreement is allowable as revenue expenditure. Similar view was taken in the case of CIT v. Sharda Motor Industrial Ltd. In this decision, Hon'ble High Court has also considered the judgment of Southern Switchgears Ltd. and held that the proposition laid down in the said judgment and the principle will not apply where the payment of ro....
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.... payment on the facts of the case needs to be held as capital in nature. Thus, there was an exclusive right the same was treated as non-exclusive in the licence Agreement. He has also referred to para 2 of the termination clause of license agreement wherein in the event of termination licensee shall promptly return to the licensor all the documents and other tangible property supplied by the licensor in connection with the agreement and shall keep confidential all technical information received from the licensor and shall cease using and shall remove all marks used on the products. The relevant termination clause has already been incorporated in the written submissions of Ld. DR. Thus, he had submitted that very existence of assessee is based on the agreement with the licensor and in case of termination of the agreement assessee will be deprived with the technical knowhow and IPR on which its business activities are based. 13. On perusal of the entire submissions and the contention put forth by the Ld. DR, no way can be inferred that the license agreement gave any exclusive right to the licensee or any technical know-how is being transferred or it will lead to creation of any ca....