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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’: NEW DELHI
Before: SHRI H.S. SIDHU & SHRI ANADEE NATH MISSHRA
(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)
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. 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 ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. 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 know- how 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 ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. secrecy of the know-how and any other non-public technical or business information from the licensor as it will be the sale property of the licensor. In respect of the Technical Guidance and Technical assistance through technician deputed by the licensor separate fee will be paid to the technician offer considering their period of visit from time to time including the round trip, airfare of technical experts between Japan and place of work in the Territory shall be borne by the licensee. This Memorandum of Exchange of Technician also prove that the assessee company has to pay separately the charges as technical fee and other expenses who advise and give the technical service to the licensee company for 'which the technical guidance fee has been claimed. It is also again pertinent to mention that the M/s Honda Motor Company Limited, Japan has entered into agreement with the assessee company and agreed that all technical know-how in the shape of design and drawing in documentation, from time to time including providing the technical guidance will be provided to the assessee company. It was also agreed that that Lump sum fee (model fee} and royalty ’with certain terms and condition mentioned therein was agreed upon to be paid in the manners laid down therein. If the assessee company had not agreed upon on the terms and conditions, there was no possibility of the manufacturing of car and its parts by the assessee company. Therefore, the Royalty as well as know-how fee based on establishment 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:
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. ITA No.-3229/Del/2014 M/s Honda Cars India Ltd.
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. (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) following the order of the Tribunal for assessment year 2003-04 in wherein the identical issue was involved and deleted the addition holding as under:-
"I have carefully considered the submissions of the appellant and perused the order of the AO and have also considered the facts and the evidences placed on record which show that an identical issue was involved in assessment year 2003- 04 wherein Hon'ble Tribunal, vide their order dated 16.05.2008 in have decided this issue in favour of the appellant.
Since the issue involved in the year under consideration is identical to the one decided by the Hon'ble ITAT in the Assessment Year 2003-04, which is being followed by the CIT(A) & ITAT in the subsequent Assessment Years on identical facts, hence, in view of the same, the payment of lumpsum fees of Rs54,86,95,000/- and royalty of Rs.101,45,19,188/- is held as allowable revenue expenditure. The addition made by the AO on this ground is therefore deleted. Ground No.2 is therefore, decided in favour of the appellant." We find no infirmity in this order of the Ld.CIT(A). The finding of the Co- Ordinate Bench of the Tribunal are binding on him. Hence we uphold his order on this issue and dismiss this ground of Revenue.
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. (C.1) Revenue took the matter to Hon’ble Delhi High Court in appeal U/s 260A of I.T.
Act. Vide order dated 09.05.2018, the Hon’ble Delhi High Court remitted the issue back to the ITAT for reconsideration. The relevant portion of the aforesaid order dated 09.05.2018 of Hon’ble High Court is reproduced as under:
“The Revenue’s grievance is that ITAT without an appropriate analysis of the agreement in question concluded that the payment of royalty and lump sum fee (which the assessee says is running royalty and model fee) falls into capital stream. The assessee after accepting notice relied upon a previous judgment of the Supreme Court for Assessment Year (A.Y.) 1999- 2000, 2001-2002, 2003-2004 and 2005-2006 (reported as Honda Siel Cars India Limited Vs. Commissioner of Income Tax, Ghaziabad (2017) 395 ITR 713). It is submitted that although in respect of the past agreement, the amount paid (towards royalty and technical fee) in that case amounted to capital or revenue expenditure, the Court rejected the assessee’s contention that the expenditure was 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 case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 1,56,32,14,000/- made by AO treating the amount of ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. royalty and lump sum fee paid by assessee as capital instead of revenue claimed by assessee.”
(D) At the time of hearing before us, the Ld. Counsel for assessee contended that the aforesaid new Agreement of 2005, referred by Hon’ble Delhi High Court in the aforesaid order dated 13.05.2019 has already been considered by ITAT in assessee’s own case for Assessment Year 2010-11; and that, on identical facts and circumstances, the issue has been decided in favour of the assessee. In particular, he drew our attention to following portion of the aforesaid order dated 18.08.2017:
“ITA No. 5483/Del/2014.
Now, we take up the appeal of the Revenue in ITA No. 5483/Del/2014.
In ground No. 1, the Revenue has challenged deletion of the addition of Rs.159,74,53,889/-made towards royalty and lump sum fee as capital expenditure instead of revenue expenditure claimed by the assessee. The Assessing Officer made additions on the basis that payment made by the assessee had resulted into a benefit of enduring nature and thus the expenditure was capital in nature. The Ld. CIT-(A), following the order of the Tribunal for assessment year 2003-04 in deleted the addition holding as under: “4.7 I have carefully considered the submissions of the appellant and perused the order of the AO and have also considered the facts and the evidences placed on record which show that an identical issue was involved in assessment on record which show that an identical issue was involved in assessment year 2003-04 wherein Hon’ble Tribunal, vide their order dated 16.05.2008 in IT A No. 3173/Del/2007, have decided this issue in favour of the appellant.’’
The Ld. CIT-(DR) in support of the ground, placed reliance on the recent decision of the Hon’ble Supreme Court in assessee’s own case bearing serial Appeal No. 4918 of 2017 dated 09/06/2017 for assessment year 1999-2000 to 2005-06, wherein it is held that payment of royalty and lump sum fee under the agreement in question was for manufacturing of vehicles would be in the nature of capital expenditure and not revenue expenditure. Accordingly, submitted that given the decision of the Apex Court, the issue was settled in favour of Revenue.
On the contrary, the Ld. counsel for the assessee submitted that said case is distinguishable on facts since the assessment years before the ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. 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.
The Ld. Counsel for the assessee drew our attention to the para of the Apex Courts judgment where the court had confined itself only to answering the question raised regarding the lump sum payment of US Dollars 30.5 million and not on running royalty- The dispute which has arisen is as to whether the said technical fee of 30.5 million US Dollar payable in five equal installments on yearly basis is to be treated as revenue expenditure or capital expenditure.
He then referred to the relevant clauses of the TCA dated 21.5.1996 (as also noted by the Apex Court in its decision dated 9.6.2017) which read as under- "14.1 In consideration of the right and licence granted to licensee under Article 2 hereof and of the furnishing of the Technical Information under Article 4.2 hereof licensee shall pay to LICENSOR the following fees:
Lumpsum fee:
The amount of lump-sum fee payable by the licensee to the LICENSOR shall be USS 30.5 million. This fee shall be payable in 5 continuous equal annual installments, the amount of each of which instalments shall be six million one hundred thousand US dollars (USS 6,100,000), beginning from the 3rd year after the commencement of Commercial Production. The lump sum fees shall be payable by licensee in currency of US dollars by bank transfer remittance to the bank account designated by LICENSOR, based on final government approval.
Royalty:
The rate of royalty payable by the licensee to the LICENSOR shall be Four (4) Page 15 of 27 ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. percent; both on internal sales and exports, subject to taxes. The royalty shall calculated on the basis of the ex-factory sale price of the product exclusive of excise duties, minus the cost of standard bought out components and the landed cost of imported components irrespective of the source of procurement, including ocean-freight, insurance, custom duties, and other similar charges. The royalty shall be payable fora period of seven (7) years from the date of commencement of Commercial Production.
Thus, he submitted that the issue of allowability and nature of expenditure on running royalty on sales was not a subject matter of consideration before the Apex Court. He further submitted that the Hon’ble Supreme Court in the said case took note of the order of Delhi High Court in the case of group company in CIT vs. Hero Honda Motors [(2015) 327 ITR 481 (Delhi)] wherein it has been held that payment of technical know-how fee 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 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. ”
He further submitted that it was evident and apparent that even the Hon’ble Apex Court was of view that where unit was already in existence and the technical know-how was obtained merely to improvise the existing product line, then payment for such technical know-how fall in the realm of revenue expenditure and not capital.
He submitted that for the assessment year under consideration, which was the 11th year of production of the assessee, a brief perusal of revised Technical Collaboration Agreement between Honda Motor Co. Ltd. and Honda Siel Cars India Pvt. Ltd. dated 01.04.2005 (Page 684 of the Assessee’s Paper book -Vol - II) will show that in the instant case the technical know-how was obtained for improving the existing product line being manufactured by the assessee. Article 13 (Page 700 of the ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. Assessee’s Paper book -Vol - II) of the said agreement shows that the lump-sum fee paid is a Model Fee and is payable for each New or FMC Model and the running royalty was paid on sales. The said clauses of the TCA dated 1.4.2005 are as under-
“Article 13. CONSIDERATION 13.1.1 MODEL FEE
In consideration of the furnishing of the Technical Information under Article 4 hereof, LICENSEE shall pay to LICENSOR, a Lumpsum Fee, hereinafter referred to as "Model Fee" as hereunder: (a) For each New or FMC Model
The amount of Model fee payable for each New or FMC model of the Products, as detailed under Exhibit I, by the LICENSEE to the LICENSOR shall be JP¥ 800 Million {Japanese Yen Eight Hundred Million). This fee shall be payable in three instalments as detailed under: i) The first instalment of JP¥ 250 Million (Japanese Yen Two Hundred and Fifty Million) shall be payable within 60 days after the signing of Model Agreement by the LICENSOR and LICENSEE ii) The second instalment of JP¥ 250 Million (Japanese Yen Two Hundred and Fifty Million) shall be payable within 60 days after receipt of the Technical Information necessary for mass production of the Model by the LICENSEE as per Article 4, and iii) The final instalment of JP¥ 300 Million (Japanese Yen Three Hundred Million) shall be payable within 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.
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. The model fee shall be payable by LICENSEE in currency of Japanese Yen by bank transfer remittance to the bank account designated by LICENSOR.
ROYALTY In consideration of the right and license granted to the LICENSEE under Article 2 hereof, the LICENSEE shall pay to LICENSOR a Royalty on all Products, while this Agreement is effective.
The rate of royalty payable by the LICENSEE to the LICENSOR shall be as a. On Domestic Sales: 5% (Five Percent) net remittable to LICENSOR, after deduction from the Gross rate, the applicable withholding taxes, which shall be additionally borne and deposited by the LICENSEE on behalf of the LICENSOR b. On Export Sales: (Eight Percent) net remittable to LICENSOR, after deduction from the Gross rate, the applicable withholding taxes, which shall be additionally borne and deposited by the LICENSEE on behalf of the LICENSOR 27. The term technical information has been defined in Article 1(6) of the said TCS as under- “The term Technical Information shall mean any and all secret knowhow and technical information (except for the Intellectual Property Rights), whether in writing or not, including but not limited to drawings, standards, specifications, materials lists, process manuals, direction maps, service materials, test reports and analysis on homologation of products and the domestic parts etc,, which directly relates to the Products or the Licensed Parts themselves or is necessary for the manufacture and sale of the Products or the Licensed Parts and which LICENSOR owns at the time of execution of the Agreement or……….
He submitted that the running royalty was payable on the basis of sales effected. He reiterated the fact that the year under consideration was the 11th year of production and it was clear from the reading of the Supreme Court’s judgment that the only consideration for holding the lump sum payment was that those assessment years were the initial years and the know how was utilized for setting up the manufacturing facility of the assessee. Thus, the judgment of the Supreme Court was not applicable on the facts of the present case.
The Ld. Counsel submitted that the facts before Hon’ble Delhi High Court in the case of Hero Honda Motors (supra) were identical to the facts and circumstances of the present case. The jurisdictional High Court while holding the payment for technical know-how and royalty to be in the nature of revenue expenditure has held as under:
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. “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 agreement, 10 years in the present case, would be inconsequential for the agreement merely permitted and allowed use of technology subject to payment of royalty and compliances and the proprietorship and ownership right was never granted or transferred. The factum that after 10 years and after returning the tangible properties, the respondent assessee could still have continued to use technical knowhow and information would be a trivial and inconsequential factum as in the automobile industry, technology up- gradation is constant and rapid. Gone are the days when one or two manufacturers enjoyed monopoly rights and there was a long and indeterminate wait and queue for purchase of out-of-date models. Technical up- gradation and state-of-the-art know-how is injected every year in the automobile industry. Failure to keep up and upgrade would result in product rejection and fall in sales. Persistent up- gradation and cutting edge technology is mandate and business requirement in the competitive market of two/three wheelers. ”
It is further submitted, that the Hon’ble Delhi High Court in the case of the assessee itself for assessment year 2008-09 has dismissed the appeal of the Revenue on this issue. He also submitted that the Revenue has not preferred an appeal against the said order before the Supreme Court. It was also submitted that coordinate bench of this Tribunal in Assessee’s case for AY 09-10 has dismissed the appeal of the Revenue on this ground.
He further submitted that above position becomes quite clear from the following observations made by the Hon’ble Supreme Court:-
“Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information,
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. but, complete assistance, actual, factual and on the spot, for 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 business and the said expenditure has to be held as revenue expenditure.”
We have considered the rival submission and perused the relevant material on record. In the present case, payments are made pursuant to the agreement dated 01/04/2005. At the time of the agreement was executed, the assessee was in existence in operation for more than 10 years. Thus, it cannot be said that the technical knowhow given under the agreement was for setting up of the business of the assessee. It was also brought to our attention that a coordinate Bench of this Tribunal in assessee’s own case for assessment year 2008-09 & 2009-10 has held that the said expenditure of paymnt of royalty and lump sum model fee to be in the nature of revenue expenditure. The said order for assessment year 2008-09 has also been confirmed by the Hon’ble Jurisdictional Delhi High Court in of 2016 dated 18.01.2016.
Hon’ble Supreme Court while deciding the case of royalty/technical knowhow expenditure in the nature of capital held that the expenditure was for the purpose of setting up of manufacturing facility of the assessee and hence the payment was treated as capital in nature. The Hon’ble Supreme Court distinguished the judgment of the Delhi High Court in the case of Hero Honda Motors (supra) and observed as under:
“25) 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 know-how 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 ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. para 14 of the judgment. While analyzing 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 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. ”
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.
The Hon’ble Supreme Court in the decision in the case of assessee (supra) has further observed as under:
“22) When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for 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.
In view of above discussion, we are of the view that the judgement 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 Page 21 of 27
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. 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”
(D.1) The Ld. Counsel for assessee further submitted that Revenue’s appeal under Section 260A of I.T. Act for Assessment Year 2010-11 against the aforesaid order dated 18.08.2017 of Co-ordinate Bench of ITAT, Delhi for Assessment Year 2010-11 has already been dismissed by the Hon’ble Delhi High Court vide order dated 13.05.2019 in ITA No. 45/2019. The relevant portion of the aforesaid order dated 13.05.2019 of Hon’ble Delhi 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?”
The Court has heard the counsel for the parties.
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 ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. expenditure towards royalty as revenue expenditure has been confirmed by the ITAT and upheld by this Court by dismissing the Revenue’s appeal being ITA 34/2016 by the order dated 18lh January 2016, Mr. Bhatia points out that the above order dated 18lh January 2016 was in fact not on merits but on account of the extraordinary delay of over 790 days in the re-filing of the said appeal.
On the other hand, Mr. Deepak Chopra, learned counsel for the Assessee, points out that the ITAT has in the impugned order discussed the decision of the Supreme Court in Honda Siel Car Ltd. v. CIT (2019) 409ITR 42 which concerned treatment of royalty payment made to its principal during the initial years of the Assessee's operations whereas the royalty payment made by the Assessee to its principal during the AY in question was pursuant to the agreement dated 1st April 2005 and well over ten years after the Assessee’s operations commenced. The ITAT therefore accepted the Assessee’s contention that it had to be treated as revenue expenditure.
The ITAT has given the reasons for its conclusion in para 33 of the impugned order which reads thus:
‘33. We have considered the rival submission and perused the relevant material on record. In the present case, payments are made pursuant to the agreement dated 01/04/2005. At the time of the agreement was executed, the assessee was in existence in operation for more than 10 years. Thus, it cannot be said that the technical knowhow given under the agreement was for setting up of the business of the assessee. It was also brought to our attention that a coordinate Bench of this tribunal in. assessee's own case for assessment year 2008-09 & 2009-10 has held that the said expenditure of payment of royalty and lump sum model fee to be in the nature of revenue expenditure. The said order for assessment year 2008-09 has also been confirmed by the Hon'ble Jurisdictional Delhi High Court in 1TA No. 34 of 2016 dated 18.01.2016.
Thereafter, the decision of the Supreme Court decision is discussed and the ITAT concludes that the judgment of the Supreme Court in Honda Siel Car Ltd. v. CTT {supra) which was for AY’s 1999-2000 to 2005-06 would not be applicable in the AY under consideration, since, the Assessee was already engaged in the manufacturing of cars, spare parts and payments has given the following reasons: “In view of the above discussion, we are of the view that 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
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. 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.”
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 Court and the subsequent AYs including the AY in question more than ten years after the Assessee commenced operations.
Mr. Chopra has also drawn the attention of the Court to a clarificatory order passed by the Supreme Court on 1.4th November 2018 where as a corollary of Irealing the royalty payment as capital expenditure during the formative years, the Supreme Court permitted the Appellant to claim depreciation thereon.
The ITAT has rightly drawn a distinction between the royalty payments made by the Assessee to the principal during its formative years and those made in subsequent years when the Assessee was fully operational. While the former payments were characterised as capital expenditure, the latter could not and were rightly treated as revenue expenditure.
Consequently, notwithstanding that for the earlier AY 2008-09 this Court has remanded the matter to the ITAT for a fresh determination of the above issue, it cannot be said that for the present AY i.e. 2010-11, the OAT has not given cogent reasons for treating the expenditure as a revenue expenditure.”
(E) In view of the above, the Ld. Counsel for assessee contended that the issue in dispute stands squarely covered by aforesaid order 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. On the other side, the Learned Commissioner of Income Tax (Departmental Representative) [“Ld. CIT(DR)”, for short] relied on the order of the AO. However, the ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. Ld. CIT(DR) could not point out any distinguishing facts and circumstances for Assessment Year before us (Assessment Year 2009-10) to persuade us to take a view different from the view already taken by aforesaid order 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, for Assessment Year 2010-11, in assessee’s own case.
(F) We have heard both sides. We have perused the materials available on records.
We have also referred to the judicial precedents brought to our attention or mentioned in the records. It is not in dispute that facts and circumstances for the present year i.e. Assessment Year 2009-10 are identical with facts and circumstances of Assessment Year 2010-11. It is also not in dispute that the aforesaid Agreement of 2005 have already been considered by Co-ordinate Bench 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 Page 25 of 27
ITA No.-3229/Del/2014 M/s Honda Cars India Ltd. 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, as far Ground No. 1 of appeal is dismissed.
(G) In the result, appeal filed by Revenue is dismissed, as far as Ground No. 1 of appeal is concerned.
Order pronounced in the Open Court on 05/11/2019.