THYSSENKRUPP ELECTRICAL STEEL INDIA PVT.LTD,,NASHIK vs. DEPUTY COMMISSIONER OF INCOME TAX,, NASHIK

This appeal by the assessee against the order dated 02-11-2016 passed by the Commissioner of Income Tax (Appeals)-1, Nashik [„CIT(A)‟] for assessment year 2011-12.

The assessee raised as many as 8 grounds amongst which the only effective ground remains for our consideration is ground No. 2 challenging the action of CIT(A) in upholding the addition made in respect of adjustment involving international transaction of Corporate Mark Fee to its associated Enterprise.

The brief facts of the case are that the assessee is a company incorporated on 19-07-2000, took over the Steel Division of Raymond Limited effective from 01-09-2000. The assessee is engaged in producing and offering the entire range of non-ageing, energy conserving Power Core Electrical Steel Products namely Cold Rolled Non Grain Oriented (in short “CRNGO”) in fully processed varieties. The assessee also produces special quality carbon steel products of Automotive, White Goods and Engineering applications and its primary objective is to cater to the demand of electrical steel in India, where almost 70% of electrical steel is imported. The assessee filed its return declaring income of Rs.70,20,05,617/-. The assessment was made u/s. 143(3)/144C(3) of the Act assessing the income at Rs.79,61,20,488/-, which includes the addition pertaining to Transfer pricing adjustment on account of Arm‟s Length Price determination of Corporate Mark Fees amounting to Rs.9,01,78,426/-.

During the year under consideration, it was observed by the AO/TPO that the assessee had made a payment of Rs.90,17,84,260/-, to its AE, ThyssenKrupp AG (TKAG) towards Corporate Mark Fees. It was explained by the assessee that during the year under consideration it has entered into an agreement with its ultimate holding company, TKAG for the use of licensed rights which are the Central Signs for license fee @ 0.5 of its sale.

The AO concluded that no such benefits have accrued to the assessee and the assessee has failed to substantiate the need for making said payments for a period pertaining to earlier two financial years. The ALP of the Corporate Mark Fees is taken as NIL and an adjustment of Rs.9,01,78,426/- was made.

Having not satisfied with the upward adjustment on corporate mark fee, the assessee challenged the final order passed by the AO before CIT(A). The assessee filed its written submissions before the CIT(A) vide dated 14-09-2016 and 20-09-2016 of which, the CIT(A) reproduced the same in the impugned order from pages 11 to 27. The assessee canvassed in detail supporting the payment of corporate mark fee on various aspects like jurisdiction of TPO, determination of ALP, commercial expediency, recognition of receipt as income of TKAG and payment of taxes before the CIT(A).

In brief that the Corporate Mark belong to TKAG which is the owner of the Trade mark. The corporate mark, signs ThyssenKrupp and logo play a significant role in the marketing efforts made by the assessee, since the brand name aids in ensuring quality and performance, and signifies the assessee‟s affiliation to the multinational group which is among the top global steel manufactures. As such, the assessee is able to make penetration to large customers conveniently. The Corporate Mark is prominently used in all products/goods, company letterheads, websites, etc. and as such ipso facto reap the benefits to the assessee, which are available only to a global manufacturer, which otherwise would not have been available to the assessee but for the Corporate Mark.

That the payment made by the assessee on corporate mark fees is taxable in the hands of the parent company i.e. TKAG and TKAG has discharged its statutory obligation by filing return of income in India and payment of due taxes. Filing of return of income by TKAG for A.Y. 2011-12 and A.Y. 2012-13, the years in which the payment made by the assessee was considered by TKAG as income, on cash basis of accounting of income. TKAG has offered receipts of Corporate Mark fees from the assessee as royalty taxable as per section 9(1)(vi) of the Act with DTAA between India and Germany.

Considering the submission of assessee, the CIT(A) upheld the upward adjustment for F.Y. 2008-09 (A.Y. 2009-10) and F.Y. 2009-10 (A.Y. 2010-11) and directed the AO to delete the adjustment for F.Y. 2010-11 (A.Y. 2011-12) treating the same as double disallowance.

Aggrieved by the order of ld. CIT(A), the assessee is before us by raising the grounds of appeal annexed to Form No.36.

The learned Authorized Representative referred to Article 2 of the agreement and drew our attention to the Page No.191 of the Paper Book. He submits that licensor TKAG granted licensee for the duration and in the scope of Article 3 under this agreement which is a global, non-exclusive right to use the Central Signs in the frame-work of the object of the company as company signs including company name, components for the purpose of highlighting its affiliation to the THYSSENKRUPP Group and to identify as well as sell and perform its goods and services utilizing the licensed rights. Further, he submits that under the said Article 2 of the agreement, the TKAG granted license to the assessee to use its Central Signs non exclusively, globally and the assessee (licensee) is required to pay license fee of 0.5% of its total sales generated from products. Further, he referred to third part of Article 2 and submitted that the license fee shall be calculated for each financial year at October 1st on the basis of the ACT sales of the previous fiscal year reported in Hyperion Financial Management (HFM). This agreement also applicable to 2009/2010 fiscal year. In this fiscal year, the license fee shall be calculated in the third quarter. He submits that thought the agreement was entered in the year 2010 and it is applicable to earlier years also. Further, in support of the grounds raised, he submits that the assessee paid consideration for using the Central Signs to its A.E. in accordance with the agreement and the Indian entity i.e., assessee liable to pay 0.5% royalty on the total sales. In many cases, the Tribunal upheld the royalty upto 2.5%.

Further, the A.E. TKAG recognized the payment received from the assessee under Corporate Mark Fees as income / royalty and paid due taxes thereon. The assessee also deducted TDS on such payments to TKAG. The Ld. A.R. referred to Page No.199 of the Paper Book about the business description. He also referred to Page No.206 of the Paper Book and submitted that all group companies as of fiscal year 2009-10 have to pay a royalty rate of 0.5% on the revenue generated through their production, processing and services to TKAG. The said license fee is to be paid by each group calculated and invoiced by TAKG. The parent company uses the planning application in Oracle‟s Hypersion to determine the license fee. In order to do this, TAKG takes respective target revenues out of the companies‟ individual financial statements. On October 1st each year, TAKG takes the annual revenues of the previous fiscal year to calculate the license fee for each company. The assessee have selected external CUP (CUT) method to determine the Arms Length Trade Mark License rates within the TAKG group by searching for finance agreements between un-related third parties and argued that the assessee paid Corporate Mark Fees in accordance with the agreement and as per RBI guidelines at 0.5% on its sales and the AO grossly erred in making the upward adjustment and the ld.CIT(A) also erred in confirming the adjustment partly and prayed to allow the ground raised by the assessee.

The ld. D.R. Shri T. Vijaya Bhaskar Reddy submits that the TP Study at Page No.189 as referred by the Ld. A.R. does not belongs to assessee but it belongs to parent company i.e., TKAG and that the assessee‟s TP Study report is at Page No.77 of the Paper Book. He submits that as per the Article 2, as referred by the learned Authorized Representative that itself suggests that the agreement can be entered during the year under consideration and the payments can be made for earlier years. The payment made by the assessee retrospectively under the support of Article 2 for F.Y. 2008-09 and 2009-10 is not permissible under the year under consideration. He argued that if this Tribunal agrees to support the agreement and submissions of Ld. A.R. regarding the payments involving the earlier years, claiming the same in the year under consideration, there is every chance of manipulating the process of accounting i.e., showing losses initially and thereon making profits and claiming payments for previous years. He supported the order of ld. CIT(A) and vehemently placed reliance on the impugned order.

Heard both the parties and perused the material available on record. We note that the TKES India, incorporated on 19-07-2000, initially a Joint Venture between TKES EBG Deutschland GmbH and Raymond Limited with a share of 76% and subsequently, TKES GmbH, Germany acquired the remaining shares from Raymond Ltd. to make it a 100% subsidiary. Under an agreement dated 09-09-2000 (?) Nashik unit was taken over by TKES India with an intention to improve the quality of products by using expertise of TKES GmbH, Germany, over a period of time. The assessee admitted the fact to the effect that it has been using trademark or corporate mark from the initial years of set up of its business and the TKAG was allowed to use the same without any payment thereon. There is no dispute with regard to this fact the assessee reiterated the same before the TPO/CIT(A) and also before us which clearly shows the assessee was using the license trademark and signs even before the signing of agreement dated 17-06-2010/05-07-2020. The only challenge before us is as to the deductibility of the payment of corporate mark fee. && It is also not disputed the said corporate mark fee payment was arising out from the above said licensing agreement which was only entered in the year 2010 between TKAG, Germany and the assessee in the year under consideration. On perusal of the said agreement which was entered on two dates. TKAG, Germany signed on 17-06-2010 and the assessee signed on 05-07-2010 but made the said agreement w.e.f. 01-10-2009 i.e. with retrospective effect. It is to be seen that the above said agreement though signed in 2010, the assessee claims to have the earlier F.Y. October, 2008- September, 2009 involving A.Y. 2009-10 and F.Y. October, 2009- September, 2010 involving A.Y. 2010-11. For ready reference Article 2 which is at Page No. 191 of the paper book is reproduced here-in-below : “Subject to a fee, LICENSOR hereby grants LICENSEE for the duration and in the scope of Art. 3 of this Agreement a global, non-exclusive right to use the CENTRAL SIGNS in the framework of the object of the company as company signs including company name components for the purpose of highlighting its affiliation to the THYSSENKRUPP GROUP and to identify as well as sell and/or perform its goods and/or services using the LICENSED RIGHTS.

As discussed above, the said agreement was entered between TKAG Germany and TKES India i.e. assessee as Licensor and Licensee respectively. The first para of the Article 2 clearly shows subject to a fee, Licensor hereby grants Licensee a non-exclusive right to use the Central Signs in the framework of the object of the company. The second para speaks that the Licensee shall pay Licensor a license fee of 0.5% of Licensee‟s sales revenue. The third para explains the license fee shall be calculated for each fiscal year on 1st October on the basis of the ACT sales of the previous fiscal year reported in HFM. Further, it explains this shall also applicable to the 2009/2010 fiscal year, in this fiscal year the license fee shall be calculated in the third quarter.

The assessee‟s claim is reproduced here-in-below: Sr. No. Period Amount in Rs. 1 October 2008-September 2009 2,90,89,994 2 October 2009-September 2010 4,10,80,792 3 October 2010-September 2011 2,00,07,640 Total 9,01,78,426

The assessee is a private limited company. It is required to maintain its books of account on accrual basis. Deduction is allowed under this method, when the liability is incurred irrespective of payment. If liability is incurred in the year one, the same is allowed as deduction in the year one only, even if the amount is actually paid in the second year. The incurring of liability coincides with its crystallization.

There is no dispute as regards the amount at serial number 3. The ld. AR fairly admitted that no deduction of tax at source was made from the same and hence the assessee suo motu disallowed the same.

As regards item at serial no. 2, we find that it pertains to the period October 2009 to September, 2010. The financial year of the assessee-payer is April, 2010 to March, 2011 and that of the payee is October 2009 to September, 2010. On splitting-up the above payment, it turns out to be relating to the periods October, 2009 to March, 2010 and April 2010 to September, 2010. The second period matches with that of the assessee. Payment for such period thus has to be allowed as deduction. Insofar as the payment for the first period is concerned, the same would also get allowed because of the crystallization of liability under the Agreement as it states that: `This shall also apply to the 2009/2010 fiscal year, in this fiscal year the license fee shall be calculated in the third (3rd) quarter.’ Thus full amount at serial number 2, pertaining to both the split-up periods, qualifies for deduction.

As regards item at serial no. 1, we find that the same relates to the period October, 2008 to September, 2009. This period neither pertains to the financial year of the assessee under consideration, nor is governed by the Agreement, which `shall also apply to the 2009/2010 fiscal year’. Thus the user of the Central Signs for any period anterior to that mentioned in the Agreement, namely, October, 2009 shall continue to be without consideration as was the position since the assessee‟s inception. The ld. AR heavily relied on CIT vs. Exxon Mobil Lubricants (P.) Ltd. (2010) 328 ITR 17 (Del), which mandates the granting of deduction even for period prior to the year that falls within the scope of the agreement on the principle of crystallization of the liability. The ratio of this decision applies to the license fee of the first period of the transaction at sr. no. 2. It cannot apply to the transaction at sr. no. 1, as the Agreement signed on 05.07.2010 stipulates that This shall also apply to the 2009/2010 fiscal year, and the same obviously excludes the 2008/09 fiscal year of the payee, which is subject matter of transaction at sr. no. 1.

It is, therefore, held that the assessee is entitled to deduction of Rs.4,10,80,792 as per transaction at sr. no. 2 and the authorities below were not justified in refusing this deduction.

In the result, the appeal of assessee is partly allowed.