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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI R.S. SYAL & SHRI SUDHANSHU SRIVASTAVA
ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: This appeal by the assessee arises out of the final assessment order passed by the AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) r.w.s. 144C in relation to assessment year 2009-10.
The facts of the case are that the assessee, an Indian Company is a part of GKN Group. It is engaged in the Page 1 of 17 business of manufacture and sale of Constant Velocity Joints (CVJ). The assessee made a payment of Rs. 16,931,247/- as royalty which was treated as capital in nature by the AO and a sum of Rs. 12,698,435/- was disallowed and depreciation @ 25% was allowed. Also a disallowance of Rs. 1,444,726/- u/s 14A read with Rule 8D was made. The assessee has approached the ITAT and has raised the following grounds of appeal:
1. “Transfer Pricing-Management Consultancy and Business Auxiliary Services 1.1 On the facts and in law, the Addl. Commissioner of Income Tax, Ld. Transfer Pricing Officer-1(2), New Delhi and Deputy Commissioner of Income Tax, The Ld. Assessing Officer erred in determining and the Hon’ble Dispute Resolution Panel erred in confirming the arm’s length price of the international transaction pertaining to payment of management consultancy and business auxiliary services by the assessee to its Associated Enterprises for AY 2009-10 as Nil against INR 210,653,579 as determined by the assessee. 1.2 On the facts and in law, the Ld.TPO, the Ld. AO and the Hon’ble DRP erred in disregarding the ITA No. 1651/D/14 Page 2 of 17 correct interpretation and adaptation of Global Service Agreement, Cost Allocation Audit Certificate, various documentary evidences, factual details and submissions filed by the assessee from time to time to substantiate the receipt of services, benefits derived there from and cost incurred by AE for rendering the management consultancy and business auxiliary services. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon’ble DRP erred in disregarding the benchmarking analysis conducted by the assessee using the Transactional Net Margin Method (TNMM) to demonstrate the arm’s length nature of the pricing of the international transaction and erroneously applied the Comparable Uncontrolled Price (CUP) Method to determine the arm’s length price as Nil without providing any comparable transaction and without any cogent reasoning, thereby disregarding Rule 10B and Rule 10C of the Income Tax Rules, 1962 (“the Rule”).
2. Transfer Pricing Trademark Sub-License fee 2.1 On the facts and in law, the ld. TPO and the ld. AO erred in determining and the Hon’ble DRP erred in confirming the arm’s length price of the international transaction pertaining to payment of license fee by the Assessee to its AEs for AY 2009- ITA No. 1651/D/14 Page 3 of 17 10 as INR 20,698,069 instead of INR 62,094,207 as paid by the assessee and thereby disallowing payments to the extent of INR 41,396,138. 2.2 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon’ble DRP erred in disregarding the benchmarking analysis conducted by the assessee using TNMM to demonstrate the arm’s length nature of the pricing of the international transaction and instead erroneously applying CUP Method to determine the arm’s length price without providing any comparable transaction thereby disregarding Rule 10B and Rule 10C of the Rules. 2.3 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon’ble DRP erred in not giving cognizance to the benchmarking analysis conducted by Appellant for comparable royalty rates using CUP Method.
3. Corporate Tax Royalty & Trademark Sub-License fee 3.1 On the facts and in law, the Ld. AO and the Hon’ble DRP erred in treating the revenue expenditure of Royalty of Rs. 16,931,247 as capital in nature and thereby disallowing Rs. 12,698,435 after allowing depreciation of 25% 3.2 On the facts and in law, the Ld. AO and the Hon’ble DRP erred in treating the revenue ITA No. 1651/D/14 Page 4 of 17 expenditure of Rs. 62,094,207 on License fee as capital in nature. 3.3 On the facts and in law, the Ld. AO and the Hon’ble DRP erred in observing that the license granted to the assessee under the Technical Collaboration Agreement/Trademark agreement tantamount to acquisition of intangible asset. 3.4 On the facts and in law, the Ld. AO and the Hon’ble DRP erred in observing that the usage and terms under the agreements have almost attained perpetuity in reality as against temporariness exhibited in term of agreement. 3.5 On the facts and in law, the Ld. AO and the Hon’ble DRP erred in disregarding the order of the Hon’ble High Court in the assessee’s own case for AY 2004-05 wherein this ground has been decided in favour of the assessee.
4. Corporate Tax Disallowance u/s 14A of the Act
4.1 On the facts and in law, the Ld. AO erred in proposing and the Hon’ble DRP erred in confirming disallowance relating to expenditure incurred for earning tax exempt income from investments by invoking the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 without appreciating that no such income has been ITA No. 1651/D/14 Page 5 of 17 earned by the assessee company during the year under consideration.
5. On the facts and in the circumstances of the case, the Ld. AO erred in initiating penalty proceedings u/s 271(1)(c ) of the Act.
6. That on the facts and in the circumstances of the case and in law, the ld. AO has erred in levying interest u/s 234B of the Act.
That on the facts and in the circumstances of the case and in law, the Ld. AO has grossly erred holding that interest u/s 234C be charged on the assessed income of the appellant.
That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in not granting full credit of tax deducted at source on the income of the appellant.
The above ‘Grounds of Appeal’ are all independent and without prejudice to one and another.
The Appellant craves leave to supplement, to cancel, amend, add and/or otherwise alter or modify, any or all, grounds of the appeal stated hereinabove.”
At the outset, the Ld. AR submitted that ground nos. 1 and 2 were being withdrawn and ground nos. 5, 6, 7 and 8 Page 6 of 17 were either consequential or premature. On ground no. 2, the Ld. AR submitted that out of the logo fees of Rs. 62,094,207/-, Rs. 4,13,96,138/- was disallowed by the TPO. In MAP proceedings, the ALP was determined at Rs. 52,318,386/- and the disallowance was reduced to Rs. 9,775,821/- only and in view of the MAP proceedings, this ground was not being pressed. The Ld. AR submitted that he would be in effect pressing only ground nos. 3.1 and 4.
3.1 On ground no. 3.1 the Ld. AR submitted that the assessee had entered into an agreement with GKN Driveline International GmbH, Germany dated 11/01/2003, wherein a royalty @ 3% on total sales was to be paid by the assessee for the use of know-how to manufacture, sell and export CVJ/Axle. He drew our attention to clause 9.2 of the agreement in this regard. He further submitted that the assessee had also entered into another agreement dated 16/02/2008 with GKN Holdings Plc., UK, wherein a logo fee @ 1.5% of the total sales was to be paid by the assessee for the use of trademark/logo. The Ld. AR submitted that the AO had Page 7 of 17 concluded that the payments made were capital in nature and accordingly, placing reliance on the decision of the Hon’ble Apex Court in Southern Switchgear Ltd. vs. CIT 232 ITR 359 and Jonas Woodhead & Sons (India) Ltd. 224 ITR 342, the AO made a net addition of Rs. 12,698,435/- towards royalty. The Ld. AR submitted that by way of the agreements, the assessee had obtained a right to use technical know-how for manufacturing CVJ’s in the assessee’s plant as well as the use of brand name “GKN” to sell its products. It was submitted that the technical know-how was required for usage in manufacturing process in the ordinary course of running of business of the assessee and that the same did not relate to the acquisition of technology during the course of setting up of business. It was submitted that the issue had earlier been settled by the decision of the ITAT till assessment year 2004- 05 in favour of the assessee, vide ITAT’s order dated 08/05/2009 and thereafter, the dismissal of the Department’s appeal by the Hon’ble Delhi High Court on 31/05/2010. Page 8 of 17 3.2 On the issue of 14A disallowance, the Ld. AR submitted that the disallowance had been incorrectly calculated at Rs. 1,444,726/-. As per the AR, the correct amount of disallowance was Rs. 2,677/- and a chart was submitted in support of the assessee’s claim. The chart is being reproduced as under:
Particulars As per Draft As per Final Correct Calculation Assessment Assessment (INR) Order Order (INR) (INR) Interest expenditure incurred during 6,978,032,000 6,978,032,000 817,233 the year (A) (Refer Schedule N Of the Financial Statements) Investment as on March 31, 2009 501,650 501,650 501,650 Investment as on March 31, 2008 501,650 501,650 501,650 (Refer Schedule E of the Financial Statements) Average Value of Investment during 501,650 501,650 501,650 the year (B) Total assets as on March 31, 2009 2,527,145,587 2,527,145,587 2,527,145,587 Total assets as on March 31, 2008 2,327,225,742 2,327,225,742 2,327,225,742 (Refer balance sheet) Average Value of Assets during the 2,427,185,665 2,427,185,665 2,427,185,665 year (C ) Disallowance under clause (ii) of 169 1,442,218 169 Section 14A of the Act_____________ (A*B/C)
Disallowance under clause (iii) of 2,508 2,508 2,508 Section 14A of the Act_____________ (0.5% of Average Investment)
Total Disallowance 2,677 1,444,726 2,677 The Ld. AR submitted that in view of the incorrect calculation of disallowance, the matter needs to be restored to the file of Page 9 of 17 the AO for re-computing the disallowance after taking the correct figures into account.
The Ld. CIT DR vehemently supported the directions of the Hon’ble DRP as well as the orders of the TPO/AO.
Having heard the rival submissions and perused the material on record, it is seen that ground no. 3.1 of the assessee’s appeal is covered in favour of the assessee in assessee’s own case for A.Y. 2008-09 in wherein the issue has been discussed at length in Para 17 to 22 of the said order and wherein an addition on identical ground was deleted by the ITAT ‘I-1’ Bench. The relevant Paragraphs are being reproduced herein under:
“17. Now, we take up payment of Rs. 5.19 crore made by the assessee to GKN Holding, UK, towards royalty for trademark/brand. The assessee entered into an Agreement dated 16.2.2008, with its group company, a copy of which is available on record. Such Agreement has been made effective from 1.1.2007. Recitals of this Agreement provide that the Licensor (GKN Holding, UK) is the proprietor of the Page 10 of 17 trademarks and the Licensor wishes to permit the Licensee (the assessee) to use the trademarks in respect of the products and the services. Clause 2 of the Agreement reads as under:
2. GRANT The Licensor grants to the Licensee, on the terms set out in this Agreement, a non-exclusive License: 2.1 under the registrations; and 2.2 to use the Trade Marks in those countries in the Territory where they are not registered.
It emerges from a simple reading of the above clause that GKN Holdings, UK granted a non- exclusive License to the assessee ‘to use’ the trademarks. Clause 6.1 of the Agreement provides that: “All use of any Trade marks by the Licensee shall be for the benefit of the Licensor and the goodwill accrued to Licensee arising from its use of the Trade Marks (but no greater or other goodwill) shall accrue to and be held in trust by the Licensee for the Licensor which goodwill the Licensee agrees to assign free of charge to the Licensor at its request at any time whether during or after the term of this Agreement.” On going through the above clause of the Agreement, it becomes crystal clear that the assessee has been allowed user of trademarks held Page 11 of 17
by the Licensor, which shall remain the exclusive property of the Licensor alone. Clause 7 of the Agreement, which is relevant for our purpose, runs as under: “7. OWNERSHIP 7.1 The Licensor warrants that it is the proprietor of the Trade Marks and that it is not aware (but does not warrant or represent) that the use of the Trade Marks on or in relation to the provision of the Products and Services in the Territory infringes the rights of any third party. The Licensor gives no warranty as to the validity or enforceability of the Registration. 7.2 The Licensee undertakes not to do or permit to be done any act which would or might jeopardizes or invalidate any registration of the registered Trade Marks or application thereof nor to do any act which might assist or give rise to an application to remove any of the registered Trademarks from the Register or which might prejudice the right or title of the Licensor to any of the Trade Marks. 7.3 The Licensee will on request give to the Licensor or its authorized representatives any information as to its use of the Trade Marks which the Licensor may require and will ITA No. 1651/D/14 Page 12 of 17 (subject to the provisions of clause 8) render any assistance reasonably required by the Licensor in maintaining the Registrations and/or prosecuting any application there for. 7.4 The Licensee will not make any representation or do any act which may be taken to indicate that it has any right, title or interest in or to the ownership or use of any of the Trade Marks except under the terms of this Agreement and acknowledge that nothing contained in this agreement shall give the Licensee any right, title, or interest in or to the Trade Marks save as granted by this Agreement.”
This Clause makes it palpable that the Licensor is the proprietor of the trademarks and the Licensee undertakes not to do anything which might jeopardize the trade mark in any manner. Clause 9 deals with the termination of the Agreement. Para 9.2 of the Agreement provides as under: “9.2 Upon the termination of this Agreement for whatever reason the Licensee shall cease to make any use of the Trade Marks save that if the Licensee has a stock of Products existing or in the course of manufacture or unfulfilled orders on hand at the date of termination of this Agreement, ITA No. 1651/D/14 Page 13 of 17 the Licensee may, but only with the Licensor’s specific permission, sell such stock on the terms hereof or such other terms as may be agreed.”
This clause provides in unambiguous terms that upon the termination of this Agreement for whatever reason, the assessee shall cease to make any use of the trade marks. Clause 4 of the Agreement is ‘Consideration clause’. Clause 4.2 of this Agreement provides that the amount of royalty for use of trademark shall be as under: “- Where the Operating Margin for the relevant Financial Period is less than 3%, a rate of 0.5% shall be applied; - Where the Operating Margin for the relevant Financial Period is 3% or more but less than 7%, a rate of 1% shall be applied; and - Where the Operating Margin for the relevant Financial Period is 7% or more, a rate of 1.5% shall be applied.”
When we consider all the relevant clauses of the trademark royalty Agreement, it becomes manifest that the assessee did not acquire any ownership right in trademarks by paying the consideration as set out therein. Such payment was made simply for the use of the trademarks, and that too, by means of a non-exclusive License. It has been ITA No. 1651/D/14 Page 14 of 17 made clear in the Agreement that the ownership in the trade marks shall remain the intellectual property of the Licensor and the assessee shall have a mere right to use them. Further, upon the termination, the Licensee shall cease to make any use of such trademarks. Thus, it is patent that the payment has been made by the assessee for ‘use of’ trademarks and not for acquiring trademarks as an owner. It goes without saying that any payment made for a mere use of an asset falls in the realm of revenue expenditure and cannot be treated as a capital expenditure. We, therefore, hold that whole of the payment of Rs. 5.19 crore made by the assessee for use of trade mark is a revenue expenditure.
To sum up, total payment of Rs. 6.39 crore made by the assessee for use of technical know-how and trademarks is a revenue expenditure and cannot be treated as a capital expenditure. Ex consequenti, the disallowance made by the AO for a sum of Rs. 4.79 crore (after allowing depreciation @ 25%) is hereby deleted.”
5.1 In view of the detailed findings by the ITAT in assessee’s own case in AY 2008-09 on identical issue and which could not be negated by the Department in this year, we hold that Page 15 of 17 the total payment 16,931,247/- made by the assessee for the use of technical know-how and trademarks is a Revenue expenditure and cannot be treated as a capital expenditure.
Therefore, the disallowance of Rs. 12,698,435/- (after allowing depreciation @ 25%) made by the AO is hereby deleted. In the result, this ground of the assessee is allowed.
5.2 As far as the issue of disallowance of logo fee is concerned, the Ld. AR has submitted that out of the logo fees of Rs. 62,094,207/-, Rs. 4,13,96,138/- was disallowed by the TPO.
In MAP proceedings, the ALP was determined at Rs. 52,318,386/- and the disallowance was reduced to Rs. 9,775,821/- only and in view of the MAP proceedings, this disallowance was not being contested. Hence assessee’s ground on this issue is dismissed as not pressed.
5.3 As far as the issue of disallowance u/s 14A of the Act is concerned, in view of the submissions made by the Ld. AR and the calculations submitted, we restore the issue to the file of the AO with the direction that the disallowance u/s 14A be re- computed after duly considering the correct figures. The AO Page 16 of 17 shall afford a proper opportunity to the assessee of being heard in this issue. In the result, this ground is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed.
Order is pronounced in the open court on 28.09.2016