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05-11-2019, Honda Cars India , Section 144C, 260A, Tribunal Delhi

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6 months 3 weeks ago #11338 by amit
Section - 144C, 260A
Order Date - 05-11-2019
Favouring - Assessee
Court - Tribunal Delhi
Appellant - DCIT
Respondent - Honda Cars India Ltd.
Citation - 1119Taxpundit74
Appeal No. - ITA No:- 3229/Del/2014
Asstt. Year - 2009-10


PER : Anadee Nath Misshra, AM

(A) This appeal by Revenue is filed against the order of Learned Commissioner of Income Tax (Appeals)-LTU, New Delhi, [“Ld. CIT(A)”, for short], dated 31.03.2014 for Assessment Year 2009-10.

(B) Assessment Order dated 22.03.2013 was passed by the Assessing Officer (“AO”, for short) under Section 143(3) r.w.s. 144C of the I.T. Act, 1961 (“I.T. Act”, for short) wherein, the total income was assessed Rs. 1665,09,05,642/- as against returned income of Nil. The additions made by the AO included, inter alia, royalty and lump sum fee amounting to Rs. 1,56,32,14,000/-. The relevant portion of the Assessment Order is reproduced below for ease of reference:

“2. Disallowance of 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 sheet entry dated 07.03.2013 to explain as to why the expenditure claimed under the head be not treated as capital expenditure. In response to the specific query regarding treatment of royalty and lump sum Fee(model fee) to Honda Motor Company Limited, Japan as capital expenditure, the authorized representative submitted vide letter dated 14.03.2013 that the assessee merely acquired a right to use the technical information provided by HMCL during the currency of agreement. The ownership / proprietary rights in the technical know-how continue to vest in HMCL and the assessee is not authorized to transfer, assign or convey the knowhow / technical information to any third party and therefore the assessee acquired a limited right to use and exploit the know-how. The assessee has also cited various clauses of the new TCA together with case laws.

With due regard to the finding of Hon'bie High Court of Delhi, the department has filed an SLP before the Hon'bie Supreme Court for the treatment of Royalty expenses and lump-sum fee (model fee) as revenue in nature. Considering the facts as mentioned in the earlier orders in the case of assessee and the nature of payment towards royalty made to HMCL under the new TCA which is similar to the payments made under the old TCA, the expense is treated as capital in nature. The reasons given in earlier orders are again narrated herein below.

a. That contrary to the facts in the case law quoted by the assessee, the acquisition of technical know-how, license etc mentioned in article 2 and 4 of the agreement was crucial for manufacturing cars in India. M/s Honda Motor Company is also a majority stock holder in the assessee company. Thus it is clear that without this agreement, the assessee company could not carry on its business of manufacturing cars.

b. Thus assessee has obtained an advantage of enduring benefit by payment of this lump sum (model fee) as well royalty on turnover basis at a prefixed percentage. This has now been held to be the benchmark for deciding the nature of any expenditure related to foreign technical collaboration etc. in the light of Supreme Court decision in the case of CIT Vs. Ciba of India Limited (1968) 69 ITR 692. Further, on similar facts as are in the assessee's case, the Hon'ble Allahabad High Court has upheld the transfer of technical know-how and 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 Mark and Technical knowhow exclusively is not allowable revenue expenditure.

c. During the course of examination of the Agreement, it is also seen that as per Article-4 regarding furnishing of technical Information, the licensor (Honda Motor Company Limited, Japan) shall furnish Licensee (the assessee) with the Technical Information required by the licensee based on mutual consultation by disclosing it in documentary form Furnishing of Technical Information shall be written in English language, with regards to technical information existing as of the effective date hereof and shall be effected from time to time when the licensor deems it necessary to do so. All expenses for preparation and delivery of technical material shall be borne by Licensor. Any incidence of taxation or Custom Duty shall be borne by licensee. It has also been mentioned that the licensee will maintain the

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