M/S HERO HONDA MOTORS LTD,,NEW DELHI vs. DCIT, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “C”: NEW DELHI BEFORE SH C.M.GARG, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.2148/Del/2009 (Assessment Year: 2004-05) Hero Honda Motors Ltd, DCIT, 34, Basant Lok, Vasant Vihar, Circle-12(1), Vs. New Delhi New Delhi PAN:AAACG0812J (Appellant) (Respondent)

Assessee by : Sh. Ajay Vohra, Sr. Adv Sh. Gaurav Jain, Adv Ms. Bhavita Kumar, Adv Revenue by: Sh. AK Saroha, CIT DR Date of Hearing 03/11/2016 Date of pronouncement 02/02/2017 O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the assessee against the order of LD CIT, New Delhi passed u/s 263 of the Income Tax Act, 1961 dated 26.03.2009 for the Assessment Year 2004-05. 2. The assessee has raised the following grounds of appeal:- “1. That on the facts and circumstances of the case and in law the order dated 26.3.2009 passed by the Commissioner of Income Tax, Delhi-IV ("CIT") under section 263 of the Income-tax Act, 1961 ('the Act') is beyond jurisdiction, bad in law and void ab initio. 1.1 That the CIT erred on facts and in law in setting aside the assessment completed under section 143(3) of the Act, vide order dated 28.12.2006, on the limited issues, holding that the same was erroneous and prejudicial to the interest of Revenue, on the ground that the assessment was completed without proper enquiries on such issues. 1.2 That the CIT erred on facts and in law in exercising revisionary powers under section 263 of the Act without appreciating that the twin conditions in that section, viz, assessment order being (i) erroneous as well as (ii) prejudicial to the interest of Revenue, were not satisfied, in respect of each issue. 1.3 That the CIT erred on facts and in law in exceeding revisionary jurisdiction under section 263 by substituting his opinion with that of the assessing officer, formed after detailed examination / inquiries and

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 2 of 34 proper application of mind at the time of passing assessment order under section 143(3) of the Act, which is not permissible in law. 1.4 That the CIT erred on facts and in law in exceeding revisionary jurisdiction under section 263 of the Act with respect to issues that are (i) debatable and, (ii) a possible view was formed by the assessing officer in respect of the same. 2 That the CTT erred on facts and in law in observing that total expenses on account of royalty and technical know-how fees paid to Honda Motor Co., Japan, are not revenue in nature and restoring the matter back to the file of the assessing officer to re-examine/re-determine the percentage of total expense being capital in nature, as against 25% of the total expense regarded as capital expenditure in the assessment order. 3 That the CIT erred on facts and in law in directing the assessing officer to re-examine the allowability of model fees paid to Honda Motor Co.. Japan, as revenue or capital expenditure. 4 That the CIT erred on facts and in law in observing that 'export commission' paid to Honda Motor Co., Japan was disallowable under section 40(a)(ia). since the appellant had failed to deduct tax at source therefrom in accordance with section 195 of the Act. 4.1 That the CIT erred on facts and in law in holding that the payment of export commission was towards royalty/fee for technical services chargeable to tax in India, as the same was in consideration for (i) right to use trademark, (ii) permission to export and (iii) in lieu of managerial and technical services provided by Honda, and accordingly, the appellant was under the obligation to deduct at source therefrom as per section 195 of the Act. 4.2 That the CIT erred on facts and in law in not appreciating that the payment of export commission was made to Honda in consideration of ceding overseas territory to which export of motorcycles and spares could be made by the appellant, in lieu of such payment. 4.3 That the CIT erred on facts and in law in not appreciating that 'License and Technical Assistance Agreement' and/or 'Export Services Agreement" did not provide right or payment for use of trademark of Honda. 4.4 Without prejudice that the CIT erred on facts and in law in not appreciating that the payment of export commission being for earning income from source outside India, could not be characterized as royalty or fee for technical services as per section 9(l)(vi)(b) or 9(l)(vii)(b) of the Act respectively. 4.5 That the CIT has erred on facts and in law in alternatively holding payment of export commission to be in the nature of capital expenditure not allowable under section 37(1) of the Act on the ground that the same was incurred for acquiring permission/license for making export. 5. That the CIT erred on facts and in law in directing the assessing officer to revisit/re-examine the deductibility of depreciation, claimed under Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 3 of 34 section 32. and deferred revenue expenses, claimed under section 35 of the Act, aggregating to Rs. 2,52,56,9447- on the ground that same are not allowable as deduction, without offering any reasons for such observation. 5.1 That the CIT erred on facts and in law in directing the assessing officer to re-examine whether computers, on which additional depreciation was claimed under section 32 of the Act, was covered under the head 'plant and machinery' or 'office appliances'.” 3. Thought he assessee has raised in all five grounds however, they are raising an issue that the ld CIT erred in assuming jurisdiction u/s 263 of the Act with respect to five issues raised therein. 4. The brief facts of the case is that the assessee is a company engaged in manufacture and sale of motorcycle and spare filed its return of income on 28.10.2004 declaring income of Rs.9800849030/-. Subsequently, the assessment u/s 143(3) of the Act was passed on 28.12.2006 at a total income of Rs. 10192782174/-. On examination of the records of the assessee the ld CIT issued notice u/s 263 of the Act holding as under:- 1. payment on account of royalty and technical guidance fee have been debited to P&L A/c. These payments appear to be disallowable. The AO has made additions amounting to Rs. 225093563/- instead of Rs. 670187127/-. 2. Model Fee (know-how) of Rs. 231880363/- has been wrongly claimed and allowed. This expenditure is of capital nature needs t be disallowed after allowing deprecation @25%. 3. The assessee has debited Rs. 57237951/- to the P&L A/c as export commission without deducting tax at source. 4. The assessee had debited Rs. 25256944/- to the P&L A/c under the head ‘depreciation and deferred revenue expenses written off’. As per the 3CD report, this amount was not admissible. 5. The assessee claimed an additional depreciation of Rs. 6664989/- on computers. As the computers does not include under the head ‘plant and machinery’ the additional depreciation should have been disallowed. 5. Before us, ld AR submitted a detailed chart that all the above issues raised were duly examined during the course of original assessment and thereafter ld Assessing Officer has taken a particular view. With respect to disallowance of royalty and technical fees he submitted that Assessing Officer has raised query during assessment proceedings that was replied on 23.11.2006 and thereafter the ld Assessing Officer has disallowed 25% of the expenditure holding it to be capital in nature applying the decision of Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 4 of 34 Honourable High court and supreme court. He submitted that this issue is now squarely covered in favor of the assessee by the decision of the Hon'ble Delhi High Court reported at 372 ITR 481 in its own case. On the issue of disallowance of model fees he submitted that the issue was raised by the Assessing Officer during the course of assessment proceedings which was replied by the assessee vide letter dated 23.11.2006 and after discussion the ld Assessing Officer disallowed 25% of the above expenditure holding it to be capital in nature. He further submitted that on the identical question in earlier year the issue was decided by the Tribunal in favour of the assessee and the appeal of the revenue filed before the Hon'ble High Court and Hon'ble Supreme Court has been dismissed. On the issue of disallowance of export commission it was submitted that the query was raised vide Sl No. 8, which was replied by letter dated 23.11.2006 and the ld Assessing Officer has allowed the claim. The issue is further decided in favour of the assessee for AY 2006-07 and 2007-08 by ITAT. With respect to the double disallowance of depreciation, he submitted that the AO himself has allowed this relief to the assessee vide order dated 26.10.2009 passed u/s 143(3) read with Section 263 of the Act. With respect to additional depreciation on computers he submitted that the query was raised vide Sl. No. 9 of the query letter by AO to whom reply was supplied on 01.12.2006 and identical issue has been decided by ld DRP in AY 2006-07 in favour of the assessee. Therefore, his main contention was that issue has been examined during the course of assessment proceedings and thereafter, the ld Assessing Officer has decided the issue. Therefore, in all the issues there is no error in order of the ld Assessing Officer and it is also not prejudicial to the interest of the revenue. He further stated that in all the cases the ld Assessing Officer has made detailed enquiry and therefore, it cannot be said that there is no application of mind by making an enquiry or it is also the case of that the issues have not at all examined by the Assessing Officer. He therefore submitted that the ld CIT has erred in assuming the jurisdiction u/s 263 of the Act. 6. Ld Departmental Representative vehemently contested the stand of the assessee and supported that the ld CIT has correctly assumed the jurisdiction. His main contention as under:- Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 5 of 34 i. That Assessing Officer has not raised any question about the disallowance of royalty @25% but he has merely followed the order of Southern Switchgear Ltd 148 ITR 272 ( Mad). He therefore stated that it is question of fact which can be decided only after making an enquiry. He further submitted that when there is no application of mind then the assessment can be termed to erroneous and prejudicial to the interest of the revenue. He relied upon the decision of Hon'ble Supreme Court in case of Malabar Industrial Co. Ltd Vs. CIT 243 ITR 83. He further relied upon the decision of the coordinate bench in case NIIT Vs. CIT 60 Taxmann. Com 313 (Delhi). ii. He further referred to point No. 7 and 10 of the letter dated 19.09.2006 of the Assessing Officer and submitted that these queries are general and in no case pointed towards the question as to how much percentage of royalty, technical fees and model fee is in nature of capital expenditure. He therefore, stated that there is no enquiry on the specific issue by the AO. iii. He further submitted that the for AY 2000-01, order u/s 263 has been upheld by the ITAT vide order dated 15.02.2007 which was also challenged before the Hon'ble High Court and subsequently not pressed. iv. On the issue of export commission, he submitted that the ld CIT has analysed export agreement and it shows that the ld Assessing Officer has not applied his mind and there is a lack of enquiry. With respect to point No. 8 of the query letter dated 19.09.2006 by AO he stated that these are general in nature. v. He submitted that ld Assessing Officer has made on all these issues pretence of enquiry by calling routine details on the issue of claim of depreciation and additional depreciation. vi. He further referred to the amendment made by Finance Act 2015 w.e.f. 01.06.2015 wherein explanation 2 to section 263 was introduced. He submitted that it is declaratory and clarificatory in nature and therefore applies to the impugned order. Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 6 of 34 vii. He further relied upon the decision of the Hon'ble Supreme Court in case of Transmission Corporation of AP Ltd Vs. CIT 239 ITR 587 and Toyota Motor Corporation Vs. CIT 306 ITR 52.

viii. The ld DR further referred to the various paragraphs of the order of ld CIT to defend that order. 7. The ld AR in rejoinder submitted as under:- i. In the subsequent years the issue has been decided in favour of the assessee by the various stages of appellate authorities therefore it cannot be said that the treatment given by the Assessing Officer to various issues is erroneous. He relied on the decision of the Hon'ble Supreme Court in case of CIT Vs. Max India 295 ITR 282. He further referred to page No. 129 of the decision of the Hon’ble Punjab and Haryana High Court in case of CIT Vs. Max India wherein it was argued by the revenue that on the basis of subsequent decision of the tribunal it could not be said that the view taken by the Assessing Officer was a possible view. ii. He further referred to the decision of Hon’ble Bombay High Court in CIT Vs. Gabriel India Ltd. 203 ITR 108 (Bombay) to contend that when the AO has made disallowance on the estimate basis the ld CIT does not have power to enhance the estimate so made by the Assessing Officer. iii. With respect to the export commission he submitted that there is no error in the order of AO and stated that when the income of the recipient is not chargeable to tax in India , there is no requirement of tax deduction at source and he placed reliance on the decision of the Hon'ble Supreme Court in case of GE India Technology Centre Pvt. Ltd Vs. CIT 327 ITR 456. iv. He further submitted that the ld Transfer Pricing Officer in case of the assessee has held that payment of royalty, model fees, technical guidance fees, have been held to be at Arm’s

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 7 of 34 Length for this year. He therefore submitted that as the payment is at ALP there is no question of disallowance. v. With respect of the argument of the ld DR regarding applicability of explanation 2 to section 263 enacted w.e.f. 01.06.2015, he submitted that same is not retrospective in nature. He stated that it cannot validate jurisdiction which was lacking originally. He further relied on the decision of the Hon'ble Supreme Court in case of Sedco Forex 279 ITR 310. He further stated that jurisdiction applied to the order u/s 263, therefore, if that order is passed prior to the amendment it cannot be made applicable. vi. He further submitted that on the merits of the case ld CIT has not given any finding and therefore, he referred para No. 14 of the order of the ld CIT. He therefore submitted that when revising authority feeling enquiry inadequate then it must be made by the revising authority to demonstrate that order was erroneous and it does not have any authority to remand and direct the Assessing Officer to conduct the enquiry, for this he relied upon the decision Hon'ble Delhi High Court in DIT Vs. Jyoti Foundation 357 ITR 388 which followed the decision of Hon'ble Delhi High Court in ITO Vs. DG Housing Project Ltd 343 ITR 329. In the end he submitted that the order passed by the ld CIT in revising the order of the ld Assessing Officer u/s 263 is not sustainable as there is no error in the order of ld Assessing Officer and it is not prejudicial to the interest of revenue. 8. We have carefully considered the rival contentions. We would be examining each of the issue raised in the order of the ld CIT to hold that whether the order is erroneous and prejudicial to the interest of the revenue or not. 9. With respect to royalty, technical guidance fees when the Learned assessing officer is disallowed 25% of the expenditure as capital expenditure, the issue is examined as under:- a) the ld Assessing Officer has raised the query on 19.09.2006 by item No. 7 asking details of royalty, technical know-how, technical Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 8 of 34 guidance fees, initial fees for new model paid to Honda Motor Co. LTD with the copy of agreement and related computation. It was further asked to explain how these are accounted for while determining the income and if these are claimed as revenue expenses why these are to be allowed. In response to this the assessee submitted letter dated 23.11.2006 wherein, vide Sl No. 2 the assessee has replied to this query as under:-

Model Jap¥ In Rs. P70(KRY A) model 400,000,000 157.386,262 CDNIOO(KSTA)model 150,000,000 63.492.016 Total 550,000,000 220,878,278

Further, the assessee has incurred royalty aggregating to Rs.89.64,39,331/-on different models at ex factory sale price of the product in pursuance of Article 25.1(2) of the Technical Assistance. Agreement ("Agreement") dated 2nd June, 1995 read with Fourth and Fifth Supplementary Amendment to the said Agreement entered into with Honda. Copies of all the three agreement;; are attached herewith at Annexure IV. No part of the model fee and royally paid to Honda, it is respectfully submitted, can he disallowed or held as capital both, on facts and in law for reasons elaborated hereinunder: The assessee, pursuant to the agreement with Honda has been paying running royalty, "on any and all products carried out of the manufacturing facility of the assessee for delivery to any purchasers, renters or other transferees for the right to use technology licensed by Honda to the assessee". Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 9 of 34 It is respectfully submitted that the agreement between the assessee and Honda provides for the latter to grant the assessee an indivisible and non- transferable exclusive right and license to manufacture, assemble, sell and distribute the products and parts during the terms of the agreement within the specified territory. The assessee during the currency of the agreement only had a limited right to use the technology of Honda. The ownership/proprietary rights in Mie technical know-how continued to vest in Honda and the assessee was not authorized to transfer, assign or convey the know- how/technical information to any third party and. therefore, the assessee acquired a limited right to use exploit the know-how. The expenditure on model fee and royalty, it is respectfully submitted, did not result in acquisition of any capital asset or a benefit of enduring nature. The same would be clear on perusal of the rights obtained by the assessee under the aforesaid agreement. Your honour's kind attention is invited to the following clauses of the agreement in support of the aforesaid :  Article 2 provides for the grant of an indivisible, non transferable and exclusive right and license by Honda to the assessee to manufacture, assemble, sell and distribute the products and the pails within,-the territory under the Intellectual Property Rights and by using the Technical information provided by Honda.  Article 20 provides that the assessee shall, in accordance with the specification and standards set by Honda, keep proper control of the quality of the Products and the Parts and maintain the high standard of quality thereof.  Article 17 provides that the know-bow, technical information and any other non-public technical or business information of Honda shall remain the sole exclusive property of Hondai and shall be held in trust and confidence with the assessee.  Article 17 further provides for the maintenance of secrecy by the assessee. Accordingly, the assessee agreed not to divulge or communicate any know-how, technical information and any oilier non- public technical or business information in any way or manner whatsoever, to any person to whom disclosure is no! authorized by this agreement.  Article IS provides that assessee shall not use or cause or permit to be used by any third party the Intellectual Property rights and the Technical Information licensed in the agreement, in the manufacture, assembly, servicing, sale or other disposition of any goods other than the Products, or for any purpose other than as expressly provided in this Agreement.  This Article also provides that the assesses shall not claim any title or property right in the Intellectual Property Rights, know-how. Technical Information or other information received under the agreement from Honda.  Article 21 provides that the assessee shall notify Honda of any infringement, or i gal use in the Territory of the Intellectual Property Rights, or any imitation of the Products immediately after it comes to the knowledge of the assessee. Articles 21.3 further provides that the assessee shall, upon the request and at the expense of Honda take all such action as may be deemed necessary to ensure such protection.  Article 25 provides that the assessee% in consideration of the rights and license granted under Article 2 and of the furnishing of the Technical Information and technical assistance provided to the assessee under Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 10 of 34 Article 4. shall pay to Honda the model fee and running royalty as mentioned in said Article.  Article 30 provides that the assessee shall not without the prior permission of Honda manufacture, assemble or deal in any two/three wheelers(other than the products)(Non-Competition clause.  Article 32 provides that the agreement can be terminated after giving notice to the other party in case there is any default.  Article 33.3 provides that in the event of termination of this agreement the assessee shall promptly discontinue (i) use of the Trademarks licensed by Honda (ii) return all documents and tangible property supplied by Honda under the agreement and keep all information received by Licensee hereunder secret and confidential. Having regard to the various clauses of the agreement as indicated in the preceding paras, it would be appreciated that the model fee and royalty payable to Honda is only for the purpose of use of technical assistance in the manufacture and sale of products and the assessee has not acquired any capital asset resulting in an enduring benefit so as to consider any part of the said expenditure to be as capita! expenditure. It will be appreciated that in the case of acquisition of the technical, know-how, etc., the acquirer is free to use the rights acquired in the manner he likes and has the right to dispose of such rights. There are no restrictions or obligations on the acquirer as to secrecy, disposal, inspection of facilities, returning the technical know how. etc. It is reiterated, at the cost of repetition, that the assessee did not have absolute ownership of the know-how / information and merely had a licence to use such technical information regarding the -manufacturing process and. therefore, there was no acquisition of asset and no enduring benefit in-capital field has accrued lo the assessee in order to treat the aforesaid expenditure as capital expenditure. On the facts as aforesaid, the Courts including the Supreme Court, have held that he payment made for licence to use know-how as revenue expenditure. The first and the leading decision on the issue was rendered by the Supreme Court in the case of CIT v. Ciba India Ltd.; 69 ITR 692. hi that cave' (heir Lordships while allowing the claim of appellant held that the appellant did no! wider the agreement become entitled exclusively even far the period of the agreement, (a the patents and trade marks of the Swixs company, i, had merely access to the technical knowledge and experience, in (he pharmaceutical field which the Swiss company commanded. The appellant was on that account a mere licensee for a limited period of (he technical knowledge of the Swiss company with the right to use the patents and trade marks of that company. The appellant acquired under the agreement merely V right -to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period, by making that technical knowledge available (he Swiss company did no! pan with tiny asset of its business, nor did the appellant acquire any asset or advantage of an enduring nature for the benefit of its business. In the case of Empire Jute Co. Ltd Vs. CIT : 124 ITR 1. in which the Supreme Court laid down the teat for determining as to who! constitutes capital expenditure in the following terms:

it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 11 of 34 consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital filed that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though i.e. advantage may endure of an indefinite future. In CIT vs. British India Corp. Ltd. 1987 165 ITR 51, the Supreme Court held that a lump sum payment made to a distributor nominated by the foreign collaborator of the assesses as a condition of an agreement which entitled the assessee to the benefit of using the trade marks and special processes of the collaborator to be revenue expenditure. The Supreme Court reiterated the same view in the case of Alembic Chemical Works Co. Ltd. v. CIT: 177 ITR 377. The Court in that case observed that the limitation placed in the agreement on the rights of the appellant in dealing with the know-how and the condition as to the non-partibility, confidentiality and secrecy of the know-how pertained more to (he use of the know-how than to its exclusive acquisition. The Court further observed that "it would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know how at any particular sit tge in (his fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capita/ asset. The rapid strides in science and technology in the fief d should make us a little slow and circumspect in too readily pigeon-holding on outlay, such as this, as capital. " The Supreme Court in the case of CIT Vs. Indian Oxygen Ltd: 218 ITR 337, affirming the decision of the Calcutta High Court in the case of the appellant, reported in 1 12 ITR 1025, on the facts identical to the assessee, held that where the foreign company did not sell any ^formation, processes and inventions to the Indian company, the Indian company wax not en/., ted to use them after termination of the agreement, the Indian company was prohibited from disclosing (he information, processes and inventions (hiring the currency and also after determination of the agreement, the expenditure incurred was revenue in nature and was not for purposes of bringing into existence any asset or benefit of enduring nature. The Supreme Court in the case of CIT v. Wavin (India) Ltd. 236 ITR 314 affirmed the decision of the Madras High Court holding that where (here was no sale of technical know-how, but the appellant was merely given right to use the technical information the payment made for the use of such know how were allowable as revenue deduction. The jurisdictional High Court, too, has consistently taken the view that where the assessee merely obtained the right to use the know-how for a limited period in lieu of the lump sum payment, the same was of revenue nature deductible in the computation of business income. In the case of Shriram Refrigeration Industries Ltd. v, CIT: 127 ITR 746, the Delhi High Court while holding that the lump sum payment on the facts of that case was deductible revenue expenditure, their Lordships of the Delhi High Court laid down the proposition of taw that if the collaboration agreement results in the absolute transfer of technical knowledge to the assessee the appellant could be said to have acquired an asset or enduring advantage but where the payment is mode only for obtaining access to information which does not become its own the payment cannot be elevated to the nature of payment (if capital nature. Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 12 of 34 The same view has been reiterated by the Delhi High Court in the following cases: > Triveni Engineering Works Ltd. v. CIT 136 ITR 340 (Del) > Acted.CIT v. Sharma Engine Valves Ltd. 138 ITR 216 (Del) > CIT v. Bhai Sunder Dass & Sons Ltd. 158 ITR 195 (Del) In the case of CIT vs. Ohlum Electrical Industries (P.) Ltd. [127 ITR 409f before the AP High Court the assessee paid a certain royalty on net .vales effected by the exploitation of a technical know how patent for which a license wax granted for 14 years on a non- exclusive basis without the right of granting any sub licence. It wax held that the royalty payment wax deductible revenue expenditure as it was linked with turnover. In (he cave of CIT w. Gujarat Carbon ltd 1254 ITR 294} before the Gujarat High Court, royalty paid by the assessee to the collaborator wax based on sales, in return for service rendered by collaborator, and on factory price for supply of information of clay today development in range' of products. Tin- same was held allowable revenue expenditure.

The Madras High Court in the of S.R. P Tools ltd. v. CIT; 237 ITR 684, after analyzing the terms of the agreement between the assessee find the foreign collaboration held that the technical know-how fee paid was deductible ax revenue expenditure. The court observed that the assessee had an existing business and from the mere fact that certain new product were sought to be manufactures, it could not be concluded that it has set up a new plant with a new technology and further the cumulative effect of the various terms of the agreement clearly showed that the expenditure could not be regarded as having been incurred for acquiring a capital asset by the assessee. In that case though the assessee had a right to use the technical know how after the expiry of the agreement still the course the court held the amount paid to be allowable revenue deduction since the assessee was given only a license and had access to the information for the running of the business of the assessee. The court further observed that the question whether the expenditure the effect the expenditure and the impact of the expenditure in the business carried on by the assessee and for that purpose, it was necessary to bear in mind the business exigencies on the basis of which the agreement had been entered into. In a subsequent decision in the case of CIT vs. Southern Pressings (P) Ltd.; 242 ITR 67 flu. Court held that where the assessee had no proprietary interest over the know- how obtained in the collaboration agreement and tin- purpose of outlay wax the use of the technical know how during the period of the agreement, the payment made nuclei- the collaboration agreement had in he allowed as revenue deduction. The court observed that when the business realities and rapid technological changes in the automobile field were taken into account, the payment made by the assesses could not he regarded as capital expenditure. In CITvs. BN Elias & Co. (F) Ltd 1198?! 168 ITR 190, it was emphasized at pages 204-205 by the Calcutta High Court that if under the agreement there was no out and out of out transfer of the foreign know-how to the assessee and the know-how supplied by the foreign company remains the property of the foreign company for all times to come and the assessee assessee had only a right In use the know-how during the currency of the agreement, the payment made under the agreement could be deductible as revenue expenditure The other High Courts in the country, loo. have taken a similar view in the under noted cases;

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 13 of 34  CIT v. Tata Engg. & Locomotive Co. Pvl. Ltd. 123 ITR 538 (Bom,)  CIT v. Avery India Ltd. 207 ITR 813 (Cat)  Bajaj Tempo Ltd. v. C/T 207 ITR 1017 (Bom)  CIT v. Madras Rubber Factory ltd. 212 ITR 443 (Mad). The Delhi Bench of the Tribunal (TM) in the case of Goodyear India Ltd. vs. /TO : 73 ITD 189 (Del) (TM) observed as under: "In the present case, the assessee obtained right to use the technical know-how for manufacturing of Radial Tyres, which was meant for improvisation in the process and technology far manufacture of tyres. It was on part of the existing line of business. The Agreement provided the conditions as to non transferability to others without the permission of the foreign company. it also contained clauses' relating to confidentiality and secrecy of the know-how, it contained prohibition for user of the know-how upon termination of the Agreement. It only provided a licence to the assessee to me such technical know-how for a limited period as provided in the Agreement. The reading of the Agreement at a whole in the light of the. aforesaid judgments of the Hon'ble Apex Court, Hon'ble. Jurisdictional High Court and other judgments referred above would make it crystal clear that the expenditure incurred by the assessee by way of lump xi/m consideration payable for obtaining technical know-how etc, for manufacture of Radial Tyres is clearly allowable as Revenue expenditure". The Ahmedabad Bench of Tribunal in the case of Indian Petrochemicals Corporation Ltd. vs. DCIT: 81 ITD 263 held the lump sum payment made by the assessee for acquiring technical know-how for improving its existing products and for extending the range of its existing business and/or for expanding the said business was clearly allowable as revenue expenditure. The emphasis in all the aforesaid decisions was that if the payment is made for exclusive acquisition of the technical know how or information the expenditure would be capital, but if the payment was made only to secure the use of the technical know how or knowledge, it would be allowable as revenue expenditure. In the assessee's own case in appeal for A.Y.1996-97 the Tribunal was pleased to allow model fee paid to Honda under section 37(1) of the Act pursuant to the agreement under dispute. The Bench held that since there was only rifiht to use the Technical know-how and there was no ownership of any property, expenses are alowable under section 37(1) of the Act. ( Hero Honda Motors Ltd. v. ^ CIT: 95 TTJ (Del) 782). Further, the Hon'ble Delhi High Court has rejected departmental appeal for admission of questions of law on model / know how fee. The status of various questions referred to the High court by the department is as under: Question referred Status of deptt appeal 1 Warranty provision Rejected 2 Deferred revenue expenses admitted 3 Technical know how fee Rejected 4 Ded. u/s80HHCon Custom duty benefit under advance admitted a. license Excise Dty/Sales tax excluded from Rejected b. turnover

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 14 of 34 5 Deduction u/s 80HH Rejected

Copy of Grounds of the department and order are attached at Annexure- V. In view of the aforesaid, it is respectfully submitted that no part of the royalty and mode fee paid to Honda can be considered as capital expenditure and the same is allowable in full. Without prejudice to the above, it is submitted that, in view of model fee being held as capital expenditure eligible to deduction u/s 32 in some of the past years , the assessee should be allowed deduction of depreciation in rcspcd ofbroujilit forward written down value of model fee. For this purpose, we are attaching herewith calculation of deduction of depreciation on know how fee like in last year. The amount of deduction so allowable comes to Rs. 4,58,38,627. The detail is attached at Annexure- VI

b) The ld Assessing Officer has dealt with this issue vide para No. 2 of his order as under:- “2. Royalty 2.1 During the relevant year, the assessee company M/s Hero Honda Motors Ltd. ("HHML'3 had paid Rs. 896439331/- as royalty and Rs. S934922/- as technical guidance fee totaling Rs. 900374253/- to its Joint Venture partner M/s. Honda Motors Co. Ltd., Japan ("Honda"). An amount of Rs. 220878278/- was also paid as Model Fees in pursuance to the License and Technical Assistance Agreement. The assessee was asked to explain why part of the Royalty (and Technical fees) paid to M/s Honda Motors Co., Japan should not be disallowed in view of the decision of the Apex Court in the case of M/s Southern Switch Gears Ltd. Vs. CTT 232 ITR 359 as in the past. The Supreme Court had affirmed the decision of the Madras High Court in the said case (" .,SL"), wherein part of the royalty and technical know paid to its foreign collaborator , as per Collaboration Agreement, to the extend of 25% was treated as Capital Expenditure. 2.2 At this juncture, it may be mentioned that the Hero Group entered in to a License and Technical Collaboration Agreement on 24.01.1984 with the world's largest two wheeler manufacturer M/s Honda of Japan to set up M/s Hero Honda Motors Ltd (HHML). This agreement, taken on record by Government of India on 21/06/1^ entitled, amongst others, the right and license to manufacture, assemble, sell, distribute repair and service certain two/ three wheeler parts thereof designed and developed by Honda. HHML has since renewed the agreement with HONDA on 02-06-95 (effective date was 21/06/1994 as per Article 2(12)) for a period of 10 years again 011 the same terms and conditions of the former agreement. The model changes were incorporated vide separate Model Agreements supplementary to the main agreement 'License and Technical Assistance Agreement/ The earlier such Agreements were dated 10.6.1997, 3.4.2000, 25.09.2001, 11.11.2002 and now the fifth dated 13/11/2003. Besides these, die other Agreements are for Exchange of Technicians; Exports; etc. 2.3 From a reading of the 'License and Technical Assistant Agreement', it is clear that the Intellectual Property Rights developed by Honda has been transferred to the assessee. The Agreement states that Honda has acquired and possesses certain Intellectual Property Rights, manufacturing information and know-how, quality standards and marketing methods relating to such 2/3 wheelers. Thus, an asset of enduring benefit which was the exclusive property of Honda has been transferred for use by the assessee company. The above agreement has been discussed in detail in

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 15 of 34 the assessment order for AY 2003-04. From the above agreement, the following points emerge : 1. The licensor has developed model nos. CD-100 STD, CD100 OX, CD- 100 Splendor, C-100 to cite some examples after sustained research and development at their end. 2. The model developed by licensor has been patented. The dictionary meaning of Patent is a grant made by a designated regulated authority that confers upon the creator of an invention the sole right to make, use and sell that invention for a set period of time. 3. The licensor has the Intellectual Property Right over the said developed model. For clarification, the meaning of Intellectual Property is a product of the intellect that has commercial value, including copyrighted property such as literary or artistic works, and ideational property, such as patents, appellations of origin, business methods, and industrial processes. 4. The licensor has transferred this Intellectual Property Right to licensee (assessee company) 5. The patent over the now developed project has also been transferred to licensee. 6. Over and above the transfer of the right of Intellectual Property right and Patent, the licensor has also agreed to set up manufacturing facilities for the licensee. 7. Other rights, exclusively handed over to the licensee inter alia are (a) know-how and technical information and any other non-pul-lic technical or business information being the sole and exclusive property i licensor to be held hi trust and confidence by licensee (b) use of trademark (c) the know-how is not limited to drawings, specifications, process manu etc. 8. The agreement to manufacture and sell, within the territory of India and assigned countries of export, is exclusive, which has to be enjoyed by licensee. 9. Consideration in the form of model fee and royalty is paid to licensor by the licensee. 10. The License and Technical Assistance Agreement is renewable, the brutial term being for ten years, since extended to another ten years, as on date. 2.4 From the above discussion, it is crystal clear that a capital asset in terms of Intellectual Property Rights and patents have been transferred in whole by the licensor to the assessee company. The Licensor has parted with its assets pursuance to- the Agreement. For acquiring this capital asset for which payment made, would also have to fall within the four walls of capital expenditure. 2.5 In view of the above and keeping into consideration the findings given in the order for AY 2003-04, the assessee was accordingly asked to justify why its claim of royalty payments (and model fee) should not be disallowed as capital expenditure. 2.6 The assessee has filed its submission vide letter dated 23/11/2006. In this submission the assessee has submitted that it has been paying 'running royalty" for the right to use technology licensed by Honda to the assessee. The agreement granted the assessee an indivisible and non-transferable exclusive right and license to manufacture, assemble, sell and distribute the products and parts during the terms of agreement within the specified territory. It does not have the ownership/proprietary rights on the technical know-how and the incurring of the royalty expenditure did not result in acquisition of any capital assets or a benefit of enduring nature. The assessee Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 16 of 34 has also relied upon some case laws in support of its case and submitted mat royalty expenses are revenue in nature and should be allowed. 2.7 The submissions made by the assessee are the same as made by it during the assessment proceedings of AY 2003-04. For the reasons given in detail in the AY 2003- 04, the submission of the assessee are not acceptable and hereby rejected. Moreover, it was seen in the assessment order for AY 2003-04 that the facts of the case are similar to the case of M/s Southern Switch Gears Ltd. Vs. CIT 232 ITR 359. In that case, the Supreme Court had affirmed the decision of the Madras High Court in the said case ("SSL"), wherein part of the royalty and technical know paid to its foreign collaborator as per Collaboration Agreement, to the extend of 25% was treated as Capital Expenditure. In this backdrop, the facts of the case of the assessee are discussed as under: 1) HHML was set up on 19th January 1984 as a joint venture between the Hero Group and Honda, Japan. The Technical collaboration Agreement (License & Technical Assistance Agreement) is dt. 24/01/1984, formalized just 5 days after inception. Thus the technical assistance contemplated in that agreement covered the setting of the factory / and the operation thereof for the manufacture of products as in the case of SSL. The entire apparatus set up for manufacture of 'models' has been provided by Honda exclusively to the assessee, HHML. 2) On expiring of the former agreement dt. 24/01/84 (effective dt 21/06/1984), it was mutually agreed to enter the agreement for an additional period vide renewal dt. 02/06/95, effective from 21/06/94. Thus, the assessee was entitled to continue to use the know-how from inception to date. Agreements may be for a particular time period but if the same clauses are again & again renewed then, as in this case already for 20 odd years, it tantamount to "virtual ownership". The expression advantage of an enduring nature was evolved to emphasis die element of a sufficient degree of durability appropriate to the context. The time over which the things 'endures' is a matter of degree. Thus assessee, as in case of SSL, used and continues to use the know-how for a reasonable period of time as long as die 'agreements' are renewed again & again. 3) The Intellectual Properly Right/patent has been given for use by assessee within the territory specified/ assigned countries of exports. As an aside, in the case of SSL too, a running royalty was also paid. 4) The assessee has been granted an indivisible and non-transferable exclusive right over the intellectual Property Right and Patent which has been developed by Honda after sustained research and development activities. In so far as ownership of model, within the specified territory of India and, in fact, assigned countries as per export agreement, the assessee has agreed upon and maintained an unequivocal right of using the property acquired by the agreement. 5) It is relevant to mention here that in case of expiry of the agreement the assessee may continue to manufacture, assemble, sell, delivery and service the products and the parts. Therefore, The assessee may continue to use the technical know how provided to it by HONDA even after expiry of the agreement for which royalty has been paid by it. 2.8 It is clear from the above, that the technical know-how, technical assistance and training and use of technical information and patents, as well as the exclusive and independent right to manufacture and sell; with Honda refraining from operations within the specified territories, have been bestowed solely on the assessee company. For these rights, royalty and technical know-how fees are paid by the assessee to He ida. Even on expiry of die agreement the assessee may continue to manufacture the products for which technical know-how is provided to it by Honda. Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 17 of 34 Though, it is correct that the services provided by the Honda also have a component of revenue nature as it is providing day to day technical services to the assessee also. However, as discussed above, the rights and benefits received by the assesses like setting up the manufacturing facility and getting further technical information on the models developed by the Honda, for which royalty is paid are enduring in nature and therefore, this capital component of royalty is not allowable as revenue expenditure. Therefore, for the acquisition f such rights as discussed above, royalty paid by die assessee may be treated partly to card capital and partly towards the revenue. The Hon'ble Supreme Court in die case of Southern Switch Gear Ltd. vs. CIT reported in 232 ITR 359 (SC) and Hon'ble Madras High-Court in same case reported in 148 ITR 272 held that 25$. of such royalty expenses constitutes capital expenditure as it gives to the assessee a benefit which is of enduring nature and thereby constituting a capital asset. Following the same judgment, 25% of total royalty and technical guidance fee totaling Rs. 900374253/- which come to Rs. 225093565/- are treated as being spent towards acquisition of capital asset and therefore, is disallowed and added to the 'declared income of the assessee. Since the assessee has filed incorrect particulars of its income, penalty proceedings under section 271(l)(c) have been/initiated separately.” c) The ld Assessing Officer has held that specifically in para No. 2.8 that the royalty paid by the assessee may be treated partly towards capital and partly towards revenue and therefore, relying on the decision of the Hon'ble Supreme Court in case of Southern Switchgear Ltd reported in 232 ITR 359 and the decision of the Hon’ble Madras High Court in case of that assessee reported in 148 ITR 272 held that 25% of such royalty expenses constitutes capital expenditure as it gives rise to the assessee a benefit which is of enduring nature and thereby constituting a capital asset. He, therefore, disallowed 25% of total royalty and technical guidance fees. d) The ld CIT has held that the ld Assessing Officer has erred in reading the ratio of the decision of Hon'ble Supreme Court and without any enquiry on nature of services offered and nature of activities had simply applied 25% as disallowable expenditure. He further stated that there is apparent lack of enquiry and finding of fact that balance 75% of revenue expenditure is allowable. Therefore, he held that full enquiries cannot be carried at this level and therefore, matter is to be restored to Assessing Officer for carrying out necessary enquiry and application of proper ratio of Hon'ble Supreme Court. e) On analysis of the identical issue in the earlier years and subsequent years it was submitted that this issue was decided in Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 18 of 34 favour of the assessee for AY 2001-02 and 2002-03 in 372 ITR 481 by the Hon'ble Delhi High Court wherein the revenue challenged the order of the coordinate bench and it was held that as the total expenditure on account of technical and royalty fees is revenue in nature as under:-

“2 . The respondent-assessee Hero Motocorp Ltd. earlier known as Hero Honda Motors Ltd. was a joint venture between the Hero group and Honda Motorcycle Co. Ltd., Japan ("Honda", for short) for manufacture and sale of motorcycle using technology licenced by Honda. The respondent-assessee and Honda had entered into a technical collaboration contract dated January 24, 1984, which was revised by the second and the third supplementary agreements. These agreements were valid for a period of ten years. The respondent-assessee and Honda thereupon entered into another agreement dated June 2, 1995, called "licence and technical assistance agreement" and we are concerned in the present appeals with the payments made under the said agreement and the question raised is whether royalty paid under the said agreement to Honda is wholly or partly capital expenditure. Another contention raised by the Revenue is that the model fee, which was separately payable under the agreement dated June 2, 1995, was capital expenditure. The third contention raised by the Revenue relates to the payment of technical guidance fee and whether the same was capital expenditure. The last two items arise for consideration in the assessment year 2000-01 but these aspects have not been raised in the appeals preferred for the assessment years 2001-02 and 2002-03. 3. Before we critically examine the relevant clauses of the "licence and technical assistance agreement" dated June 2, 1995, it would be punctilious to elucidate the difference between capital and revenue expenditure with reference to acquisition of technical information and know-how. A frequent and primary test adopted to differentiate between capital and revenue expenditure is the enduring nature test. When an assessee incurs expenditure which gives enduring benefit in the capital field, as distinct from expenditure of concurrent and reoccurring nature in revenue field, it is treated and regarded as capital expenditure. Albeit, the said test is applied on the basis of commercial principles and not as a straitjacket formula. Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) exemplified that even if the expenditure is incurred for obtaining an advantage of enduring benefit, the said test would break down when the nature of advantage considered in a commercial sense merely facilitates the assessee's trading operations or enables the management to conduct the assessee's business more efficiently or more profitability, while leaving the fixed capital untouched. Such expenditure would be on revenue account though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not unconditional or conclusive test ; it cannot be applied impetuously and mechanically without regard to the particular and realistic terra firma. The conclusion must be practical, common sensical and down to earth and not prosaic, academic and theoretical. 4. In the facts of the present case, we have to consider whether the expenditure incurred on acquisition or right to technical information and know-how would satisfy the enduring benefit test in the capital field or the right acquired had enabled the assessee's trading and business apparatus, in practical and commercial sense. 5. Technical information and know-how are intangible and have unique characteristics as distinct from tangible assets. These are acquired by a person over a period of time or acquired from a third person, who may transfer ownership or grant a licence in the form of right to use, i.e., grant limited rights, while retaining ownership rights. In the latter case, technical information or know-how even when parted with, the proprietorship is retained by the original holder and in that sense what is granted to the user would be a mere right to use and not transfer of absolute or complete ownership. Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 19 of 34 6. The aforesaid aspect and its relevance in determining whether the expenditure was to acquire technical information and know-how in capital or revenue field was elucidated by the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC). This judgment pronounced on December 15, 1967, is incessantly cited and applied to decide this question/issue. In the said case, the assessee-company had procured know- how in the form of processes, formulae, scientific data, working, prescription and other intellectual property rights developed by a Swiss company, to produce licensed preparations and to promote their sale in India. In spite of the fact that the Swiss company had granted to the Indian assessee "full and sole right and licence" in the territory of India under the patents listed in schedule I, to make use, exercise and vend the inventions referred to therein and to use the trade marks set out in schedule II in the territory of India, the Supreme Court held that what was conferred was a mere right to use. The Indian assessee, it was observed, was not entitled to exclusive rights to patents, trade marks, etc. As per the agreement, proprietary information was not to be divulged to third parties without consent. The rights granted enabled access to the technical knowledge and experience with right to use patents and trade marks for a limited period. The Swiss company did not part with any asset of its business, nor did the Indian assessee acquire any asset or advantage of enduring nature. The right empowered the Indian assessee to draw for the purpose of carrying on its business as a manufacturer and rely upon the technical knowledge of the Swiss company. There was no attempt to part with the technical knowledge absolutely in favour of the Indian assessee. It was not a case of transfer of intellectual rights once for all. Thus, the expenditure incurred was revenue in nature.

Absence of stipulation as to duration of time for use of know-how, etc., and whether it would be determinative and crucial, when we answer whether it is a case of outright transfer or mere access or right to use, was considered by the Delhi High Court in Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746 (Delhi). In the said case, the Indian assessee had been granted non-divisible, non-transferable and non- assignable licence in respect of technical knowledge and secret process for manufacture of sealed compressors, without right to sub-licence except with the consent of the grantor. The agreement, it was observed, contemplated that it would continue unless otherwise terminated at the end of 10 years and at the end of succeeding five-year period. This period of 5/10 years was considered to be not unduly long as to warrant an inference that some lasting advantage was obtained. Significantly, the Division Bench held that once the conclusion was reached on the difference in principle between a payment made for acquisition of assets and a payment made for only use of intellectual property rights, the period of use pales into insignificance. Payment made for use of an asset for, however long a period, it will be only payment of revenue nature. Similarly, whether the payment was lump sum or periodical cannot by itself in the absence of other facts, help decide whether the agreement was for acquisition of a capital asset or an enduring advantage. But the nature and character of the asset acquired, whether it is permanent or everlasting or merely enables an assessee to run its business more efficiently, is determinative. In the said case, technical knowledge was made available without absolute acquisition of any knowledge or asset and, therefore, the payment, it was held, was revenue in nature.

In Triveni Engineering Works Ltd. v. CIT [1982] 136 ITR 340 (Delhi), the Indian assessee was a public limited company manufacturing turbines and other machinery. It had made payments in connection with obtaining the technical know-how, services for manufacture of turbines and sugar mill machinery for 10 years, which were partly treated as revenue expenditure in one year and partly carried forward for two years, and then written off in three years. The Revenue contested the said claim on the ground Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 20 of 34 that the expenditure was of capital nature. The High Court observed that the test to be applied was whether there was absolute sale of know-how or the payment was for mere right to use. On elucidation of the relevant clauses of the agreement, the High Court observed that the use of the words like "sold", "absolute property" and "deemed to be the property of" was made in the agreement but on careful and closer scrutiny and reading the agreement as a whole, it emerged that the agreement was for a period of 10 years but it could be terminated "forthwith". The agreement was limited to India. Though the data, drawings, documents and dyes, etc., were to be treated as absolute property of the Indian assessee, yet the copyright continued and remained vested with the foreign party, meaning thereby that it was a case of grant of licence for use. The Indian assessee was to observe complete confidentiality with regard to the know-how and could not assign the agreement, without the written consent. The aforesaid clauses, manifested that the right was only a limited licence for use and not a case of absolute transfer of property. Importantly, in this age of fast technological developments and scientific research, it was held that technical know-how and information become obsolete and useless unless updated.

The aforesaid ratio and reasoning has been followed by the Delhi High Court in Addl. CIT v. Shama Engine Valves Ltd. [1982] 138 ITR 216 (Delhi), In the said case, the agreement was initially for 10 years, with right of automatic renewal and right to continue manufacture without payment on termination. The agreement had granted an exclusive right to manufacture in India and other specified countries. However, there was restriction in the form of a confidentiality clause on communication or disclosure of information to third parties. It was observed that the information and know- how granted was in respect of fast changing technological developments which become obsolete in a short span of time. The payment had a direct nexus with carrying on or conduct of the business and considered commercially, it would be an integral part of the profit-making process. The court, therefore, held that the expenditure must be treated as revenue. Similar reasoning is to be found in the case of CIT v. Bhai Sunder Dass and Sons P. Ltd. [1986] 158 ITR 195 (Delhi). Reference can also be made to the recent decision in CIT v. Lumax Industries Ltd. [2008] 173 Taxman 390 (Delhi) wherein referring to a circular, it was observed that if a licence was acquired for use of technical know-how for a limited period, the payment would not bring into existence an asset of enduring nature. In this decision, reference was made to the decision of the Supreme Court in Jonas Woodhead and Sons (India) Ltd. v. CIT [1997] 224 ITR 342 (SC), wherein it has been held that the answer to the question whether a particular payment was wholly or partly capital or revenue expenditure, would depend upon several factors like, whether the assessee had obtained a completely new plant with completely new process and technology ; whether the expenditure was for acquiring technical know-how for betterment of the product which were already being produced ; is it a case of improvisation and part and parcel of the existing business or a new business ; whether the assessee after the expiry of a specified period was required to return plans and designs but could continue to manufacture the product in the factories which had been set up. The cumulative effect on a construction of various terms and conditions of the agreement must be considered. Similar reasoning can be found in Shriram Pistons and Rings Ltd. v. CIT [2008] 307 ITR 363 (Delhi) ; [2008] 171 Taxman 81 (Delhi) which made specific reference to the fact that when the intellectual property rights remain with the foreign party, it indicates that what was granted was a mere licence, as the assessee was obliged to observe complete confidentiality as to know-how and could not have disclosed information or assigned the agreement without prior consent. In this case, there was no provision for returning the drawings or documents. The said factum, it was observed would not be relevant in the rapidly evolving world of science and technology. The decision in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC) was distinguished, as in the said case the issue was whether the drawings and designs could be treated as "books" or "plant" under section 43(3) of the Act and, hence, depreciable. Thus, Scientific Engg. House (P.) Ltd. (supra) dealt with the issue, whether depreciation should be allowed on intangible property like know-how, etc. The Supreme Court in Scientific Engg. (supra) had not answered the question whether the expenditure was capital or revenue in nature. A detailed discussion on the said aspect is to be found in the decision of this court in CIT v. J. K. Synthetics Ltd. [2009] 309 ITR 371 (Delhi) ; [2009] 176 Taxman 355 (Delhi), wherein the principles to distinguish the capital and revenue expenditure Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 21 of 34 stand set out in paragraph 38. We would only like to refer to clauses 5 and 6 thereof, which reads as under (page 412 of 309 ITR) :

"(v) expenditure incurred for grant of licence which accords 'access' to technical knowledge, as against, 'absolute' transfer of tech nical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as :

(a) the tenure of the licence.

(b) the right, if any, in the licensee to create further rights in favour of third parties,

(c) the prohibition, if any, in parting with a confidential informa tion received under the license to third parties without the consent of the licensor,

(d) whether the licence transfers the 'fruits of research' of the licensor, 'once for all',

(e) whether on expiry of the licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained dur ing the subsistence of the licence.

(f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature ;

(vi) the fact that assessee could use the technical knowledge obtained during the tenure of the licence for the purposes of its busi ness after the agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of sci ence, the knowledge may with passage of time become obsolete."

The said decision makes a reference to the decision of the Bombay High Court in CIT v. Tata Engineering and Locomotive Co. P. Ltd. [1980] 123 ITR 538 (Bom) where the payment was made to the foreign collaborator in respect of design and technical information required for manufacture of automotive products. The reasoning adopted by a Division Bench of the Bombay High Court was to the effect that technical know- how made avail able under an agreement did not stand on the same footing as protected rights of a registered patent holder, as mere right to use in limited sense was granted. It was not material whether the assessee could use the know- how even after the end of the agreement on the ground that this aspect was wholly immaterial. (we express no opinion on other grounds/reason ing recorded in the said decision.)

Recently the Delhi High Court in I. T. A. No. 1450 of 2010 titled CIT v. Modi Revlon Pvt. Ltd., decided on August 29, 2012, observed that when royalty was paid for a limited purpose, i.e., for use of know-how, it would be revenue in nature as the entire benefit of know-how was meant for manufacture of products. It was not a matter where the assessee had chosen to undertake the manufacture through a contractor. In the said case, the ownership of the brand, remained property of the foreign party and a licence to operate in a defined territory was granted. The expenditure was allowed under section 37(1) of the Act. This was in spite of the fact that the original licence was for the indefinite period and the supplementary agreement did not indicate a terminus quo. It was, however, observed that the agreement could be terminated and upon such expiration or termination, the Indian assessee would have no right to exploit or use the know-how. There was no vesting of know-how or goodwill in the Indian assessee.

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 22 of 34 Learned counsel for the assessee has also referred to the decisions in CIT v. Oblum Electrical Industries P. Ltd. [1981] 127 ITR 409 (AP), CIT v. Gujarat Carbon Ltd. [2002] 254 ITR 294 (Guj), CIT v. Jyoti Electric Motors Ltd. [2002] 255 ITR 345 (Guj), S. R. P. Tools Ltd. v. CIT [1999] 237 ITR 684 (Mad), CIT v. Southern Pressings P. Ltd. [2000] 242 ITR 67 (Mad) and CIT v. B. N. Elias and Co. P. Ltd. [1987] 168 ITR 190 (Cal). We need not specifically dilate any more on the said aspect in view of the position of law as expounded above. However, we would like to refer to the decision in CIT v. Southern Switchgear Ltd. [1984] 148 ITR 272 (Mad) relied on by the Revenue. In the said case, the assessee had entered into a collaboration agreement for providing of technical know-how for setting up of a factory and operation thereof. The foreign company had agreed not to manufacture products in India or give right to a third person to do the same. Referring to the clauses of the agreement, the High Court held that technical knowledge so secured had resulted in an enduring advantage and benefit, as the same was available even after termination of the agreement since the factory and its operation would have continued. The duration of the agreement was 5 years but the method, production, procedure, etc., would remain with the Indian assessee and, therefore, an enduring benefit/advantage was acquired. There was also conferment of exclusive right to manufacture and sell the articles, which was an independent right secured and was of an enduring nature. Accordingly, 25 per cent. of the royalty paid was disallowed as capital expenditure. Noticeably, it was observed that the entire royalty was for acquisition of the exclusive privilege to manufacture and sell the products and, therefore, it was partly capital and partly revenue in nature. The aforesaid decision was upheld by the Supreme Court by a short order observing that they were not persuaded to hold that the view of the High Court was erroneous, vide Southern Switch Gear Ltd. v. CIT [1998] 232 ITR 359 (SC). The decision in Southern Switchgear Ltd. (supra) was considered by the Delhi High Court in CIT v. Sharda Motor Industrial Ltd. [2009] 319 ITR 109 (Delhi) and was distinguished on facts.

What is placed before us is the "licence and technical assistance agreement" dated June 2, 1995, for the territory of India. The term "intellectual property right" stood defined to mean those patents, utility models, design patents and other intellectual property rights relating directly to the products or the licensed parts thereof or to manufacturing of the products and their licensed parts but excluded trade marks, patents, utility models, design patents and intellectual property rights relating to the manufacturing facilities and the manufacture thereof. The term "know-how" was defined as any or all secret, technical information except for intellectual property rights, whether in writing or not, including but not limited to drawings, standards, specifications, material list, process manuals and direction maps, etc., directly related to products or licensed parts thereof, or necessary for manufacture of the same. The term "technical information" was to mean "know-how" and any technical information not included in "know-how" which related to the product or licensed part or was necessary for manufacture of product or licensed parts which the Honda owned at the time of execution of the agreement or would own from time to time during the subsistence of the agreement. The term "products" meant two- wheelers or three- wheelers as expressly specified under clauses (a) and (b), identified by the licensor's development codes, viz., 198s, KCCA, etc., which had already been developed and was under manufacture under the earlier agreement. Under clause (c), it would include additional models or types of two/three wheelers pursuant to "model change" as specified in the model agreement. The term "new models" was to mean new models developed by Honda at the request of the respondent-assessee with the new development code and subject to the new model agreement. Similarly, the term "model change" was defined as conduct through which a new model with a new development code was made by a change in any part or entirety of the product, including but not limited to appearance, structure, characteristics or specifications and in each case was subject to a new model agreement. 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.

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 23 of 34 The other terms of the agreement were :

Rights and licences granted by the licensor to the respondent- assessee were exclusive, indivisible and non-transferable, without the right to grant sub-licenses to manufacture, assemble, sell and distribute the product or parts thereof. The rights and duties under the agreement were not assignable or delegatable, directly or indirectly.

The aforesaid licence was for the term of the agreement, i.e., 10 years from the effective date of June 21, 1994.

The agreement could be terminated by 60 days notice to the defaulting party, if it failed to cure the same within the notice period. The agreement could also be terminated forthwith by a party, if the other party had transferred the whole or an important part of business ; went into liquidation, bankruptcy or insolvency ; merged with, or was directly or indirectly transferred to third party ; or on significant change in share holding ownership.

Upon expiration of the term of the agreement, i.e., after 10 years, or termination due to default of performance of obligations, the respond ent-assessee could continue to manufacture, assemble, sell or deliver ser vices but subject to due performance of their obligations, including payment of royalty.

In the event of pre-mature termination, i.e., within 10 years, except due to default of performance of obligations, the respondent-asses see was to promptly discontinue manufacturing activities, sale and other dispositions of the products and the parts, as well as the use of intellectual property right and technical information.

Further, in the event of expiration or termination, the respondent was to promptly return all documents and tangible properties in connection with the agreement including copies and translations and all information received under the secret and confidentiality clauses.

Honda had right to access the respondent's factories and other facilities for inspections to check and confirm whether conditions/obliga tions imposed were being complied with.

Know-how, technical information and other non-public technical or business information was to remain solely and exclusively the property of Honda and was to be held in trust and in confidence for Honda by the respondent-assessee. This information was not to be divulged, communi cated or made known to third persons in any manner whatsoever, except as expressly provided. The respondent was to take all necessary precau tions to keep the said information secret and confidential and restrict its use strictly as per the first as well as the present agreement. The respond ent-assessee was to establish and maintain internal regulations and pro cedures for protection of secrecy. The information could be disclosed to employees, directors or approved sub- contractors when it was reasonably necessary for the purpose of manufacture, assembly, repair and servicing, subject to obtaining a "written promise" from the approved sub-contrac tors to treat all information as secret and confidential.

The aforesaid rights and obligations were to persist even on the expiration or termination of the agreement.

The respondent-assessee was not to use or cause or permit use by any third party, intellectual property right or technical information pro vided under the agreement.

The respondent-assessee was not to claim any title or property right whatsoever during the existence of the agreement. Upon termination as a result of default of the respondent-assessee, no such right, title, pro perty or interest whatsoever could be claimed. Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 24 of 34 There were stipulations in case the respondent-assessee became aware or had knowledge of any infringement or illegal use of intellectual property right of Honda in India by a third party.

The respondent was to submit monthly written report in the designated form to Honda regarding manufacture, sale and inventory and/ or sale of parts or products. Honda was entitled to have access to books of account, financial statements and records, to the extent they relate to trans actions as contemplated under the agreement.

The respondent could not, without Honda's prior written consent, directly or indirectly or through its subsidiary, affiliate, distributor or agent or any other party, carry on or participate in the business of manufacturing, assembling, distributing or otherwise dealing in two/three wheelers of other parties.

On the question of consideration payable, article 25 of the agree ment provided for fees under two heads, namely, (1) model fee ; and (2) running royalty.

(a) "Model fee" was payable on model change under the new model agreement. It was non-refundable and non-creditable against other pay ments. The agreement in addition stipulated the amount of model fee pay able in respect of the product, "C-100" of US$ 10,00,000 was payable in three equal instalments ; i.e., (i) within first 60 days of the agreement being taken on record by the Government authorities in India ; (ii) within 60 days of Honda delivering to the respondent the technical information necessary for manufacture and assembly ; and (iii) within 60 days after the parties confirmed in writing that the manufacture of the model had commenced on commercial basis or 4 years after the agreement, whichever was earlier.

(b) Royalty was running and periodical payment as specified in exhibit 1 or the amounts calculated by multiplying the rate specified in exhibit 1 with reference to the ex-factory/ex-warehouse sales price.

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 know-how and information. The ownership and the intellectual property rights in the know-how 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 sales had already commenced under the agreement dated January 24, 1984. After the expiry of the first agreement, the second agreement dated June 2, 1995, ensured continuity in manufacture, development, production and sale. The period of the 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 the technical know-how and information would be a trivial and inconsequential factum as in the automobile industry, technology upgradation 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 upgradation 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 upgradation and cutting edge technology is mandate and business requirement in the competitive market of two/three wheelers.

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 25 of 34 Model fee, the subject matter of appeal pertaining to the assessment year 2001-02 is merely Rs. 4.09 lakhs and the said issue is not raised in other years. Royalty, on the other hand, is substantive and payment made in the assessment year 2001-02 was Rs. 17.88 crores. The said royalty paid to Honda, if paid for right to use of technical know- how and intellectual property right, would possibly be taxed in India in terms of the Double Taxation Avoidance Agreement between India and Japan. But the said payment might not be taxable in India if it is held that there was absolute and complete transfer of ownership in the intellectual property right by Honda to the Indian assessee in the absence of a permanent establishment (see articles 7 and 12 of the Double Taxation Avoidance Agreement between India and Japan).

In the appeal for the assessment year 2000-01, the Revenue has also challenged the tax treatment of Rs. 33.07 lakhs paid as technical guidance fee. Copy of the agreement on the basis of which the said fee was paid has not been placed on record by the appellant-Revenue. In the absence of any document and even details as to the nature and character of the said fee, we cannot adjudicate and decide this issue in favour of the Revenue. The tax treatment given by the Tribunal is, therefore, not interfered.

The respondent-assessee during the course of hearing had drawn our attention that the question whether the model fee paid was revenue or capital in nature had arisen for the first time in the assessment year 1996- 97. The Tribunal had held that the fee was revenue expenditure and, therefore, deductible under section 37(1) of the Act in their decision reported as [2005] 95 TTJ (Delhi) 782, titled Hero Honda Motors Ltd. v. Joint CIT, decided on May 13, 2005. The Delhi High Court did not entertain and frame any question of law on the said aspect in the appeal of the Revenue on the said issue. The Revenue had preferred a special leave petition but the same was also dismissed. For the assessment years 1997-98 and 1999- 2000, similar expenditure of model fee was allowed as revenue expenditure by the Tribunal. Appeals filed by the Revenue on the said issue were not entertained by the High Court. We would not like to decide the present appeal for this ground and reason, as the High Court orders do not set out and indicate any ground or reason. We do not comment or express an opinion on whether the High Court under section 260A of the Act can at the time of hearing, frame any additional question of law.

We also reject the contention of the respondent-assessee with reference to the power of the Commissioner under section 263 of the Act relating to the assessment year 2001- 02. In the impugned order, the Tribunal on the said question held :

"Learned counsel has made clear case that in the assessment year 2001-02, section 263 appeal before hon'ble Delhi High Court was not pressed by the assessee and the hon'ble High Court passed the order to the effect that the issue will be open for consideration in other years. In our view, the view adopted by the Assessing Officer allow ing the model fee and TGF expenses being a correct view, there was no error in passing the original assessment order. Therefore, section 263 action in the assessment year 2002-03 is quashed. Since we have quashed section 263 order passed by the Commissioner of Income- tax, subsequent proceedings, i.e., the Assessing Officer's and the Commissioner of Income-tax (Appeal)'s consequential orders thereon are also quashed."

A reading of the aforesaid reasoning clearly elucidates that the Tribunal has held that the payments made by the respondent to Honda were revenue expenditure and not capital. On the said finding on the merits, the Tribunal observed that there was no error in the order passed by the Assessing Officer. Power under section 263 can be invoked by the Commissioner only when the order passed by the Assessing Officer is erroneous and not otherwise. It is in these circumstances, that no specific question of law with reference to the power under section 263 of the Act has been framed in the appeal relating to the assessment year 2001-02.

In view of the aforesaid discussion, the substantial questions of law are answered in favour of the respondent-assessee and against the appellant- Revenue.”

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 26 of 34 [ Extracted from ITronline keeping CLI true pages] f) Therefore in the present case the Hon’ble high court on the analysis of the agreement has held that these expenditure are revenue in nature. In view of this we are not inclined to uphold the view of the Ld. CIT stating that agreements various clauses, the permanency of agreement by conduct of parties etc are all indicative of expenditure being of capital in nature leading to acquisition of intangible asset. In fact the Hon’ble high court has held that the whole expenditure is revenue in nature. In view of this the order of the Ld. assessing officer of disallowing 25% of the total expenditure as capital expenditure cannot be held to be prejudicial to the interest of revenue. g) Further for the subsequent years the coordinate bench has held that royalty and technical fees is revenue expenditure. h) On the issue of allowability of royalty, technical guidance fees and model fees the revenue has cited the decision of the coordinate bench in case of NIIT versus Commissioner of income tax (2015) 60 Taxmann.com 313 (Delhi – tribunal ) wherein paragraph No. 28 has been extensively quoted by the Ld. that CIT DR which are as under:- “28. We have considered the detailed submissions of both the parties and have perused the record of the case keeping in view the various authoritative pronouncements in this regard. There cannot be any quarrel with the legal propositions, as advanced by both the parties. It has consistently been held that if the AO's conclusion is arrived at after due application of mind on a particular issue, then the order cannot be said to be erroneous. 'Due application of mind' implies that if the assessee has merely responded to the AO's query and the AO, without proper verification of replies, accepts the same, then, it cannot be said to be a case of due application of mind. 28.1 Ld. Special counsel has rightly pointed out that the expression, 'inquiry', 'lack of inquiry' and 'inadequate inquiry', have not been defined and, therefore, when the action of the AO would be suggestive of lack of inquiry or inadequate inquiry, will depend upon the facts obtaining in a particular case. What emerges as a broad principle from the various decisions is that where the AO has reached a rational conclusion, based on his inquiries and material on record, the Commissioner should not start the matter afresh in a way as to question the manner of his conducting inquiries. It is not the province of the Commissioner to enter into the merits of evidence; it has only to see whether the requirements of essential inquires and of law have been duly and properly complied with by AO or not. Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 27 of 34 28.2 It is well settled that before the Commissioner can invoke his powers u/s 263, he has to arrive at a conclusion that the assessment order is erroneous in so far as it was prejudicial to the interests of the revenue. Then only the powers u/s 263 can be invoked. Therefore, if AO accepts or rejects any claim of the assessee without due application of mind and if such failure causes prejudice to revenue, the Commissioner would be well within his powers u/s 263 to intervene in the matter. An inquiry which is just farce or mere pretence of inquiry, cannot be said to be an inquiry at all, much less an inquiry needed to reach the level of satisfaction of the AO on the given issue. The level of satisfaction would obviously mean that he has conducted the inquiry in a manner whereby he places on record the material enough to reach the satisfaction, which a rational person, being informed of the nuances of tax laws would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry. We find that ld. Commissioner, while considering this argument of assessee has observed that the representative of the assessee was assured that this issue will be considered with independent application of mind while passing the order u/s 263. Therefore, when specific issues will be considered, it will be examined whether the AO had reached the level of satisfaction by carrying out necessary inquiries qua that issue or not. Ground is disposed of accordingly.” There cannot be any other view other than expressed by coordinate bench on the issue of when Ld. CIT can assume jurisdiction under section 263 of the income tax act and when it can be said to be Lack of inquiry or inadequate inquiry. However in the present issue the assessment order is required to be held to be erroneous. We are of the opinion that when the Hon’ble high court on the same agreement has held that expenditure in question is revenue in nature we do not find fault in the order of the Ld. assessing officer when he allowed 75% of such expenditure as revenue expenditure and disallowed 25% of such expenditure holding it to be capital in nature. Therefore in our view on allowability of these expenditure the reliance placed by the revenue on the decision of the coordinate bench is not proper. i) Therefore, on this disallowance we do not agree with the order of ld CIT to hold that 75% of amount of expenditure allowed by the AO is erroneous and prejudicial to the interest of the revenue. Furthermore, the ld CIT has set aside the issue to the file of Assessing Officer to carry out the full enquiries in the matter. It is also contrary to the principal laid down by the Hon'ble Delhi High Court in CIT Vs. Jyoti Foundation and DG Housing (supra). It can

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 28 of 34 also be not said that there is lack of enquiry on the aspect of allowability of expenditure. The ld Assessing Officer himself raised the query with respect to the allowability of the above expenditure is revenue expenditure, considered the reply of the assessee, thereafter relying on the decision of the Hon'ble Supreme Court and decision of the Hon'ble High Court has reached at a conclusion that 25% of the expenditure is capital in nature. Therefore the Ld. assessing officer has examined the expenditure with reference to capital expenditure versus revenue expenditure and its allowability vis a vis quantum also. Therefore, it cannot be said that the view taken by the AO is erroneous. Furthermore, ld CIT has failed to establish what is the error committed by the Assessing Officer. He has merely stated that in the order of the ld Hon'ble High Court in Southern Switchgear (supra) there are two other decisions of Hon'ble High Court were referred where 50% and 100% of the expenditure were held to be capital in nature. Therefore, it is clearly discernible that ld CIT is just questioning the estimate made by the Assessing Officer. Therefore, we are not inclined to uphold the order of ld CIT u/s 263 of the Act on this count. 10. The next ground of dispute is with respect to model fees, which was disallowed by ld Assessing Officer to the extent of 25% holding it as capital in nature. The issue involved on this disallowance is identical to the issue relating to royalty and technical fees. The ld Assessing Officer raised query No. 10 asking for model know-how fees that why the same should not be treated as capital expenditure as in the past. The assessee replied to the same vide letter dated 23.11.2006 vide para No. 2 of that letter which has considered by us while deciding the issue on royalty and technical fees. The ld Assessing Officer has discussed this issue in para No. 3 relying on assessment order for AY 2003-04 holding as under:- “ Model Fees: 3.1 In the computation of income, the assessee has claimed model fee as deductible u/s 37(1) of Rs. 231880363/-. 3.2 In view of the facts of the case as discussed above, as well as in the assessment order for the AY 2003-04, it is clear that both royalty and "technical know-how fee" had an integral element or capital expenditure. In this case, there has been a grant of individual and non-transferable exclusive rights and licence within the specified Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 29 of 34 territory under the Intellectual Property Rights and using the technical information furnished by Honda and for this right part consideration has been paid as model fee. Accordingly, in view of the facts discussed in preceding paragraphs as well as in the assessment order for AY 2003-04, it is hereby held that 25% of the model fee of Rs. 231880363/- amounting to Rs. 57970090/- is capital in nature. Therefore, an addition of Rs. 57970090/- is made to the income of the assessee on this account. Since the assessee has filed incorrect particulars of its income, penalty proceedings under section 271(l)(c) have been initiated separately.”

Page 30 of 34 approved by the tribunal. It is further referred before us the para No. 3 of the order of the Ld. CIT wherein it has been claimed that the expenditure is revenue in nature, it is pure export agency commission and even if it is held to be fees for technical services royalty as per the provisions of section 9 of the income tax act it is exempted therefore there is no requirement of the deduction of the tax at source on the above payment. On reading of the order of the Ld. CIT it is apparent that the Ld. assessing officer has not conducted enquiry as expected by the Ld. CIT. The Ld. CIT DR placed before us that the provisions of section 263 amended w.e.f. 01/06/2015 are also applicable retrospectively and therefore on this ground the exercise of powers of Ld. CIT under section 263 are valid. On the basis of above it is apparent that the revenue is arguing here that even if there is inadequate enquiry the provisions of section 263 would be applicable in this case. The Ld. CIT has not brought to our notice judicial precedent which says that the provisions of section 263 amended w.e.f. 01/06/2005 are applicable retrospectively. However the coordinate bench in Narayanan Tatu Rane versus income tax officer (2016) 70 Taxmann.com 227 (Mum) while analysing the amended provisions has held as under:- “19. The law interpreted by the High Courts makes it clear that the Ld Pr. CIT, before holding an order to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the assessing officer is erroneous, the Ld Pr. CIT should have shown that the view taken by the AO is unsustainable in law. In the instant case, the Ld Pr. CIT has failed to do so and has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Ld Pr. CIT is not in accordance with the mandate of the provisions of sec. 263 of the Act. The Ld Pr. CIT has taken support of the newly inserted Explanation 2(a) to sec. 263 of the Act. Even though there is a doubt as to whether the said explanation, which was inserted by Finance Act 2015 w.e.f. 1.4.2015, would be applicable to the year under consideration, yet we are of the view that the said Explanation cannot be said to have over ridden the law interpreted by Hon'ble Delhi High Court, referred above. If that be the case, then the Ld Pr. CIT can find fault with each and every assessment order, without conducting any enquiry or verification in order to establish that the assessment order is not sustainable in law and order for revision. He can also force the AO to conduct the enquiries in the manner preferred by Ld Pr. CIT, thus prejudicing the independent application of mind of the AO. Definitely, that could not be the intention of the legislature in inserting Explanation 2 to sec. 263 of the Act, since it would lead to unending litigations and there would not be any point of finality in the legal Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 31 of 34 proceedings. The Hon'ble Supreme Court has held in the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 that there must be a point of finality in all legal proceedings and the stale issues should not be reactivated beyond a particular stage and the lapse of time must induce repose in and set at rest judicial and quasijudicial controversies as it must in other spheres of human activity. 20. Further clause (a) of Explanation states that an order shall be deemed to be erroneous, if it has been passed without making enquiries or verification, which should have been made. In our considered view, this provision shall apply, if the order has been passed without making enquiries or verification which a reasonable and prudent officer shall have carried out in such cases, which means that the opinion formed by Ld Pr. CIT cannot be taken as final one, without scrutinising the nature of enquiry or verification carried out by the AO vis-à-vis its reasonableness in the facts and circumstances of the case. Hence, in our considered view, what is relevant for clause (a) of Explanation 2 to sec. 263 is whether the AO has passed the order after carrying our enquiries or verification, which a reasonable and prudent officer would have carried out or not. It does not authorise or give unfettered powers to the Ld Pr. CIT to revise each and every order, if in his opinion, the same has been passed without making enquiries or verification which should have been made. In our view, it is the responsibility of the Ld Pr. CIT to show that the enquiries or verification conducted by the AO was not in accordance with the enquries or verification that would have been carried out by a prudent officer. Hence, in our view, the question as to whether the amendment brought in by way of Explanation 2(a) shall have retrospective or prospective application shall not be relevant.” 15. On this aspect we also note para No. 31 of the decision of the coordinate bench in case of ACIT versus Gitanjali exports Corporation Ltd ITA No. 7662/mum/2013 for assessment year 2008 – 09 wherein it has been held that:- 31. ….. Take for example, the amendment to Section 263 by the Finance Act, 1961. In many judicial precedents, [such as in the case of CIT Vs Sunbeam Auto Limited (332 ITR 167) wherein it was held that "Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open"], it was reiterated that it was only the lack, not the adequacy, of inquiry which could confer jurisdiction under section 263 on the Commissioner. By inserting Explanation 2 to Section 263(1), which inter alia provided that powers under section 263 could also be invoked in the cases where "the order is passed without making inquiries or verification which should have been made", all ratio of all these decisions was nullified. That, however, is done with prospective effect, i.e. with effect from 1st June 2015. As a matter of fact, it is a laudable policy of the present tax administration to stay away from making the retrospective amendments, and thus contribute to greater certainty and congenial business climate. Nothing evidences it better than this subtle, but easily discernible, paradigm shift in the underlying approach to the amendments made in Section 263 in the very first full budget of the present Government.” Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 32 of 34 16. We have also perused the memorandum explaining provision relating to direct taxes finance bill 2015- 16 wherein while explaining clause 65 it has been specifically mentioned that the amendment will take effect from 01/06/2015 as under:- “Revision of order that is erroneous in so far as it is prejudicial to the interests of revenue The existing provisions contained in sub-section (1) of section 263 of the Income- tax Act provides that if the Principal Commissioner or Commissioner considers that any order passed by the assessing officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making an enquiry pass an order modifying the assessment made by the assessing officer or cancelling the assessment and directing fresh assessment. The interpretation of expression “erroneous in so far as it is prejudicial to the interests of the revenue” has been a contentious one. In order to provide clarity on the issue it is proposed to provide that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which, should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. This amendment will take effect from 1st day of June 2015. [Clause 65] {extracted from Indiabudget.nic.in} 17. In view of above decision of the coordinate bench as well as the memorandum explaining the finance bill 2015 – 16 we are of the considered view that the amendment is applicable prospectively. In any way we would like to also say that whether the order passed by the Ld. assessing officer is without making Inquiries or verification which should have been made. In the present case vide letter dated 23/11/2006 by wild point No. 8 the assessee has explained before the assessing officer that export commission of Rs. 5 723 7951/– was paid to M/s Honda motor Co Ltd Japan at the rate of 5% of the free on-board value of export sales made under an agreement dated 20th may 2000. Along with this the assessee enclosed the copy of the agreement to the assessing officer. It was further stated that export commission is being paid to Honda motor Co Japan for services rendered in connection with export outside India. It was also submitted that since the services are rendered outside India no income accrues or arises in India on account of export commission being paid for such services and therefore no tax is deductible at source. Furthermore assessee relied upon the circular Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 33 of 34 No. 23 dated 23/07/1969 and circular No. 786 dated 7/2/2000 with respect to tax withholding on the issue of export commission for services rendered outside India. The assessee further relied on the decision of the Hon’ble Supreme Court in 125 ITR 525. Therefore it was submitted that the export commission is not chargeable to tax in India and no tax is required to be withheld from export commission paid by the assessee to Honda motor Co Ltd Japan. Further assessee explained rational for payment of export commission. On this basis Ld. assessing officer did not disallow any part of the export commission paid by the assessee. In view of above we are of the opinion that Ld. assessing officer has made due enquiry in applicability of withholding tax on export commission and when the claim of the assessee is also supported by 2 circulars we do not find any infirmity in the order of the Ld. assessing officer in allowing the export commission to a foreign party when no services have been rendered in India. It is also not the case of the Ld. CIT that income of the agent is chargeable to tax in India when the recipient is resident of Japan. 18. Therefore We are of the view that Ld. CIT has incorrectly assumed jurisdiction on this issue. Further, the issue has already been decided in favour of the assessee by the coordinate bench in assessment year 2006 – 07 and 2007 – 08 allowing the claim of the assessee of export commission; therefore it cannot be said that the view taken by the Learned assessee officer was erroneous in allowing the claim of the assessee of the export commission. The Ld. CIT has also not referred to any of the judicial precedents where the export commission has been held to be royalty or fees for technical services none has been brought to our notice by the learned CIT during the course of hearing. In view of this it is also not possible to hold that the order of the Ld. assessing officer was erroneous. Therefore we quash the order of the Ld. CIT in assuming jurisdiction under section 263 of the income tax act with respect to allowance of export commission. 19. On the issue of double disallowance of depreciation the Ld. assessing officer is allowed is related to the assessee in the consequential order dated 26/10/2009 passed under section 143 (3) read with section 263 of the income tax act therefore it is unfair for Ld. CIT to assume jurisdiction under section 263 of the income tax act. Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT

Page 34 of 34 20. With respect to the additional depreciation on the computers the query was raised during the course of the assessment proceedings which was replied on 01/12/2006 explaining the fulfillment of conditional for claim of additional depreciation with risk back to various assets. As claimed by the assessee that this issue has been decided in favour of the assessee by dispute resolution panel in its own case for assessment year 2006 – 07 therefore it cannot be said that the claim allowed by the ld. assessing officer is erroneous at all. In view of this we cannot sustain the order of Ld. CIT in assuming jurisdiction under section 263 of the income tax act, as it cannot be said that the order of the Ld. assessing officer in allowing additional depreciation on computers is erroneous as well as prejudicial to the interest of the revenue. 21. In view of this the order of Ld. CIT passed under section 263 of the income tax act on 26th of March 2009 holding that order passed by the Ld. assessing officer on 28/12/2006 under section 143 (3) of the income tax act 1961 for assessment year 2004–05 in case of the assessee is unsustainable and hence quashed. 22. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 02/02/2017. -Sd/- -Sd/- (C.M.GARG) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 02/02/2017 A K Keot Copy forwarded to

Hero Honda Motors Ltd V DCIT 2148/del/2009 A Y 2004-05 Appeal Against Order u/s 263 of The ACT