GKN Driveline (India) Ltd., Faridabad V. ACIT, New Delhi

ITA 5669/DEL/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7085 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 21-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 16-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: MANOJ PARDASANI; JATIN BUDHIRAJA CAS
• Keywords: Transfer pricing; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.5669/DEL/2011 ASSESSMENT YEAR : 2007-08 GKN DRIVELINE (INDIA) LTD., PLOT 270, SECTOR-24, FARIDABAD. PAN: AAACG4276B VS. ACIT, CIRCLE-12(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANOJ PARDASANI AND SHRI JATIN BUDHIRAJA, CAS DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 27.06.2016 DATE OF PRONOUNCEMENT : 30 .06.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE EMANATES FROM THE FINA L ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) U/S 143( 3) READ WITH SECTION ITA NO.5669/DEL/2011 2 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) ON 24.10.2011 IN RELATION TO THE ASSESSMENT YEAR 2007- 08. 2. GROUND NOS. 1 TO 6 WERE WITHDRAWN BY THE LD. AR BECAUSE OF THE SETTLEMENT OF DISPUTE UNDER MUTUAL AGREEMENT PROCED URE (MAP) PROCEEDINGS. THESE GROUNDS, THEREFORE, STAND DISMI SSED AS WITHDRAWN. 3. THE ONLY EFFECTIVE GROUND IS AGAINST THE CONFIR MATION OF DISALLOWANCE OF RS.2,94,77,926/- ON ACCOUNT OF PAYM ENT FOR TECHNICAL KNOW-HOW AND TRADEMARK/LOGO. 4. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT THE A SSESSEE, AN INDIAN COMPANY, IS A PART OF GKN GROUP. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF CONSTANT VELOCITY JOINTS (C VJ). THE ASSESSEE ENTERED INTO AN AGREEMENT WITH GKN AUTOMOTIVE GMBH, A GERMAN GROUP COMPANY FOR USE OF KNOW-HOW TO MANUFACTURE TH E CVJ IN ITS PLANT. THE ASSESSEE ALSO ENTERED INTO AN AGREEMENT WITH ITS ANOTHER ASSOCIATED ENTERPRISE, NAMELY GKN HOLDINGS PLC., UK , FOR USE OF TRADEMARKS IN RESPECT OF THE PRODUCTS MANUFACTURED . THE ASSESSEE PAID A TOTAL SUM OF RS.2,94,77,926/- TO THESE TWO COMPANIE S TOWARDS KNOW-HOW ITA NO.5669/DEL/2011 3 FEES AND TRADEMARK/BRAND ROYALTY. THE AO PERUSED T HE TECHNICAL COLLABORATION AGREEMENT DATED 11.1.2003 ENTERED INT O BETWEEN THE ASSESSEE AND GKN AUTOMOTIVE, GERMANY, WHICH WAS AME NDED FROM TIME TO TIME. HE OBSERVED THAT THE ASSESSEE, UNDER THESE AGREEMENTS, RECEIVED TECHNICAL KNOW-HOW AND TECHNICAL ASSISTANC E IN RELATION TO DESIGN, MANUFACTURE AND SALE OF CVJ. ON BEING CALL ED UPON TO EXPLAIN AS TO WHY SUCH PAYMENT BE NOT TREATED AS A CAPITAL EXPENDITURE, AS AGAINST THE REVENUE CLAIMED BY THE ASSESSEE, IT WAS SUBMITTED THAT THE EXPENDITURE DID NOT RESULT INTO AN ENDURING BENEFIT AND FELL IN THE REVENUE FIELD. THE ASSESSEE RELIED ON CERTAIN DECIS IONS TO FORTIFY ITS VIEW. AFTER TAKING INTO CONSIDERATION CERTAIN DECISIONS, THE AO CAME TO HOLD THAT TOTAL AMOUNT OF RS.2.94 CRORE PAID BY THE ASSE SSEE TO BOTH ITS AES WAS A CAPITAL EXPENDITURE. HE, THEREFORE, PROPOSED THE DISALLOWANCE OF RS.2.94 CRORE IN THE DRAFT ORDER. THE ASSESSEE REM AINED SUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP) WHICH OBS ERVED THAT THIS ISSUE HAS BEEN IN DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE FOR THE IMMEDIATELY TWO PRECEDING ASSESSMENT YEARS AND, STI LL, THERE WAS NO ITA NO.5669/DEL/2011 4 FINALITY. THE AO MADE THE ADDITION IN THE IMPUGNED ORDER. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE AO AS W ELL AS THE DRP HAVE PROCEEDED BY TREATING TOTAL PAYMENT OF RS.2.94 CROR E AS ROYALTY WITHOUT MAKING A DISTINCTION BETWEEN THE PAYMENT MADE FOR K NOW-HOW AND FOR TRADEMARKS/LOGO. OUT OF TOTAL PAYMENT OF RS.2.94 CR ORE, THE ASSESSEE PAID RS.71 LAC AS TECHNICAL KNOW-HOW FEES TO GKN AU TOMOTIVE GMBH, GERMANY AND THE REMAINING AMOUNT OF RS.2.23 CRORE T O GKN HOLDINGS, UK FOR USE OF BRAND NAME. SINCE THERE IS A DISTINC TION BETWEEN THE NATURE OF THESE TWO PAYMENTS AND DIFFERENT CONSEQUE NCES CAN FOLLOW AS REGARDS THEIR TREATMENT FOR TAX PURPOSE, WE PROCEED TO DISCUSS THEM SEPARATELY. 6. FIRSTLY, WE ARE TAKING UP THE PAYMENT OF RS.71 L AC MADE BY THE ASSESSEE TO GKN AUTOMOTIVE GMBH, GERMANY, TOWARDS T ECHNICAL KNOW-HOW. THE ASSESSEE ENTERED INTO AN AGREEMENT W ITH GKN AUTOMOTIVE GMBH, GERMANY, ON 11.1.2003, A COPY OF W HICH IS ITA NO.5669/DEL/2011 5 AVAILABLE ON PAGES C-1 ONWARDS OF THE PAPER BOOK. T HIS AGREEMENT PROVIDES THAT GKN AUTOMOTIVE GMBH, GERMANY, IS A LI CENSOR WHICH IS ENGAGED IN THE MANUFACTURE OF CVJ IN AUTOMOTIVE DRI VE SHAFTS AND IS IN A POSITION TO PROVIDE KNOW-HOW IN RESPECT OF THE DESI GN, MANUFACTURE AND SALE OF SUCH CVJ. THE ASSESSEE-LICENSEE IS ENGAGED IN MANUFACTURE AND SALE OF CERTAIN TYPES OF CVJ BY USING TECHNICAL KNO W-HOW RECEIVED UNDER AN EARLIER AGREEMENT DATED 30 TH JUNE, 1987, WHICH WAS SUBSEQUENTLY AMENDED FROM TIME TO TIME. CLAUSE 3 O F THE AGREEMENT DATED 11 TH JANUARY, 2003 PROVIDES THAT THE LICENSOR GRANTS TO LICENSEE: 3.1.1. THE EXCLUSIVE RIGHT (SUBJECT TO SUB-CLAUSE 3.2) TO USE THE KNOW-HOW TO MANUFACTURE THE JOINTS IN THE LICENSEE S PLANTS FROM COMPONENTS (OTHER THAN THE BOUGHT OUT COMPONENTS L ISTED IN SCHEDULE 2) MANUFACTURED BY LICENSEE OR PURCHASED B Y LICENSEE FROM LICENSOR OR FROM A SOURCE APPROVED BY LICENSOR ; 3.1.2 THE NON-EXCLUSIVE RIGHT TO SELL THE JOINTS IN THE TERRITORY; 3.1.3 THE NON-EXCLUSIVE RIGHT TO EXPORT THE JOINTS TO ALL COUNTRIES EXCEPT (OTHERWISE THAN T\WITH THE CONSENT OF LICENSOR) WHERE THE LICENSOR OR ANY COMPANY IN THE GKN GROUP MANUFACTURES OR HAS EXISTING LICENSING ARRANGEMENTS FOR JOINTS, NAMELY:- 7. THE TERM KNOW-HOW HAS BEEN DEFINED IN THIS AGR EEMENT TO MEAN: ITA NO.5669/DEL/2011 6 1. THE INFORMATION AND SKILLS AVAILABLE TO THE LI CENSOR AT THE SIGNATURE DATE ALL AS DEFINED IN CLAUSE 4 HEREOF CO NCERNING THE MANUFACTURE OF JOINT COMPONENTS AND THE ASSEMBLY OF JOINTS (BUT EXCLUDING ANY INFORMATION ON FORGING, FORMING OR EX TRUSION USED IN THE MANUFACTURE OF COMPONENTS FOR JOINTS); AND 2. ANY FURTHER INFORMATION PASSED FROM LICENSOR TO LICENSEE DURING THE TERM OF THIS AGREEMENT. 8. A PERUSAL OF THE ABOVE CLAUSES OF THE AGREEMENT REVEALS THAT THE ASSESSEE WAS GIVEN AN EXCLUSIVE RIGHT ` TO USE THE KNOW-HOW TO MANUFACTURE THE JOINTS IN ITS PLANTS AND NON-EXCLUS IVE RIGHT TO SELL THE PRODUCTS IN THE DEFINED TERRITORY. WHAT FOLLOWS FRO M THIS CLAUSE IS THAT THE ASSESSEE WAS GRANTED A SIMPLE USER OF THE KNOW- HOW DURING THE CURRENCY OF THE AGREEMENT WHICH, AS PER CLAUSE 2.3, IS TEN YEARS FROM THE EFFECTIVE DATE OR SEVEN YEARS FROM THE DATE OF COMM ENCEMENT OF THE COMMERCIAL PRODUCTION. CLAUSE 3.3 OF THE AGREEMENT PROVIDES AS UNDER:- LICENSEE ACKNOWLEDGES THAT LICENSOR IS THE OWNER OF THE COPYRIGHT AND ALL OTHER PROPRIETARY RIGHTS IN KNOW-HOW SUPPLI ED BY LICENSOR TO LICENSEE HEREUNDER. 9. THROUGH THE ABOVE CLAUSE OF THE AGREEMENT, THE A SSESSEE ADMITS THAT THE LICENSOR IS THE OWNER OF THE COPYRIGHT AND INTELLECTUAL PROPERTY ITA NO.5669/DEL/2011 7 RIGHTS OF THE KNOW-HOW SUPPLIED, WHO HOLDS ALL THE PROPRIETARY RIGHTS IN IT. CLAUSE 7 OF THE AGREEMENT HAS BEEN CAPTIONED A S CONFIDENTIALITY WHICH READS AS UNDER:- LICENSEE SHALL KEEP SECRET AND CONFIDENTIAL AND USE ITS BEST ENDEAVOURS TO PREVENT DISCLOSURE OF THE KNOW-HOW AND TO LIMIT ACCESS THERETO SUCH OF ITS EMPLOYEES OR SUCH OTHERS (INCLUDING PERMITTED SUB-LICENSEES UNDER CLAUSE 13) AS REASONA BLY REQUIRE THE SAME FOR THE PURPOSE FOR WHICH THE KNOW-HOW IS STA TED IN CLAUSE 3 TO BE SUPPLIED AND WITHOUT PREJUDICE TO THE EXTEN T OF THE FOREGOING OBLIGATION SHALL IN PARTICULAR TAKE ALL MEASURES BY CONTRACT AND OTHERWISE WHICH A PRUDENT, DETERMINED AND REASONABL E OWNER OF THE RIGHTS IN THE KNOW-HOW ACTING IN HIS OWN INTERESTS AND DESIRING TO PROTECT SUCH RIGHTS, WOULD TAKE TO ENSURE THAT THE KNOW-HOW IS NOT DISCLOSED BY THOSE TO WHOM DISCLOSURE IS MADE IN AC CORDANCE WITH THE PROVISIONS OF THIS CLAUSE. 10. A PERUSAL OF THIS CLAUSE OF THE AGREEMENT DIVUL GES THAT THE ASSESSEE SHALL KEEP SECRET AND CONFIDENTIAL THE KNO W-HOW RECEIVED FROM THE LICENSOR AND SHALL ENSURE THAT IT IS NOT DISCLO SED TO OTHERS. CLAUSE 11 OF THE AGREEMENT DEALS WITH ASSIGNMENT AND SUB-LIC ENCE. CLAUSE 11.2 PROVIDES THAT THE : LICENSEE SHALL NOT BE ENTITLED TO ASSIGN ITS RIGHTS OR OBLIGATIONS UNDER THIS AGREEMENT WITHOUT THE PRI OR CONSENT IN WRITING OF LICENSOR. CLAUSES 13 AND 14 DEAL WITH TERMINATI ON AND EFFECTS OF EXPIRATION/TERMINATION. CLAUSE 14.2 OF THIS AGREEME NT PROVIDES THAT IN ITA NO.5669/DEL/2011 8 THE EVENT OF THIS AGREEMENT BEING LAWFULLY TERMINAT ED BY THE LICENSOR, THE LICENSEE SHALL CEASE TO MANUFACTURE ALL THE JOI NTS AND SHALL NOT USE ANY PART OF THE KNOW-HOW AND SHALL RETURN TO LICENS OR ALL TANGIBLE KNOW- HOW MATERIAL AND ALL COPIES THEREOF. CLAUSE 9 OF T HE AGREEMENT DEALS WITH CONSIDERATION WHICH REFERS TO LUMPSUM PAYME NT AND ROYALTY. CLAUSE 9.1 OF THE AGREEMENT DEALS WITH LUMPSUM PAYM ENT WHICH IS 13337 EUR. WITHIN 30 DAYS OF THE EFFECTIVE DATE, TH EN EQUAL AMOUNT WITHIN 30 DAYS OF THE COMPLETION OF THE DELIVERY TO LICENSEE OF THE TECHNICAL DOCUMENTATION AND, AGAIN, AN EQUAL AMOUNT ON COMMENCEMENT OF COMMERCIAL PRODUCTION OR THREE YEARS FROM THE EF FECTIVE DATE, WHICHEVER IS EARLIER. SINCE THIS AGREEMENT WAS ENT ERED INTO ON 11.1.2003, THESE LUMPSUM PAYMENTS WERE MADE IN EARL IER YEARS. NO LUMPSUM PAYMENT WAS STATED TO HAVE BEEN MADE BY THE ASSESSEE DURING THE YEAR, WHICH CONTENTION HAS REMAINED UNCONTROVER ED BY THE LD. DR. THEN, THERE IS CLAUSE 9.2 OF THE AGREEMENT WHICH PR OVIDES FOR PAYMENT OF ROYALTY AT THE RATE OF 3% OF THE SELLING PRICE O F ALL JOINTS SOLD BY THE LICENSEE. IT IS THIS 3% OF THE SELLING PRICE WHICH HAS BEEN PAID BY THE ASSESSEE DURING THE YEAR AMOUNTING TO RS.71 LAC. A CAREFUL PERUSAL OF ITA NO.5669/DEL/2011 9 THE ABOVE DISCUSSED CLAUSES OF THE AGREEMENT MANIFE STS THAT THE ASSESSEE WAS GRANTED THE USE OF KNOW-HOW BY GKN AUTOMOTIVE G MBH, GERMANY; THE ASSESSEE ADMITTED THE LICENSOR AS THE OWNER OF PROPRIETARY RIGHTS IN THE KNOW-HOW; THE ASSESSEE WA S PREVENTED FROM DISCLOSING SUCH KNOW-HOW TO OTHERS; THE ASSESSEE CO ULD NOT ASSIGN IT TO OTHERS; AND AT THE TERMINATION OF THE AGREEMENT, TH E ASSESSEE COULD NOT USE THE KNOW-HOW PROVIDED TO IT. WHEN WE CONSIDER T HE NATURE OF PAYMENT FOR USE OF TECHNICAL KNOW-HOW MADE DURING T HE YEAR, WHICH IS @ 3% OF THE SELLING PRICE FOR THE USE OF TECHNICAL KNOW-HOW, THERE REMAINS NO DOUBT THAT THIS PAYMENT IS IN THE NATURE OF A REVENUE EXPENDITURE. 11. THE LD. DR VEHEMENTLY ARGUED THAT CLAUSE 14 OF THE AGREEMENT EMPOWERS THE LICENSEE TO TERMINATE THE AGREEMENT AN D, THEREAFTER, USE THE KNOW-HOW FREE OF CHARGE. IT WAS SUBMITTED THAT THE FREE USER OF THE TECHNICAL KNOW-HOW MEANT THAT THE PAYMENT MADE FOR USE OF TECHNICAL KNOW-HOW WAS A CAPITAL EXPENDITURE ENTITLING THE AS SESSEE TO USE SUCH KNOW-HOW IN PERPETUITY. ITA NO.5669/DEL/2011 10 12. THIS ARGUMENT OF THE LD. DR, THOUGH APPEARS ATT RACTIVE AT FIRST FLUSH, BUT, LOSES ITS SHINE ON AN IN-DEPTH ANALYSIS . IN ORDER TO APPRECIATE THE CONTENTION OF THE LD. DR IN CORRECT PERSPECTIVE , IT WOULD BE RELEVANT TO NOTE CLAUSE 13 AND RELEVANT PARTS OF CLAUSE 14 O F THE AGREEMENT, WHICH ARE AS UNDER :- 13. TERMINATION 13.1 EACH PARTY SHALL HAVE THE RIGHT TO TERMINATE T HIS AGREEMENT, BY NOTICE IN WRITING TO OPERATE ON THE DATE SPECIFIED IN THE NOTICE, IF; 13.1.1 THE OTHER PARTY FAILS TO OBSERVE ANY OF TH E TERMS HEREOF TO A MATERIAL AND SIGNIFICANT EXTENT AND TO REMEDY SUCH FAILURE (WHERE IT IS CAPABLE OF BEING REMEDIED) WIT HIN THE PERIOD SPECIFIED IN A NOTICE GIVEN TO IT BY THE AGGRIEVED PARTY CALLING FOR REMEDY, BEING A PERIOD NOT LESS THAN THIRTY (30) DAYS; 13.1.2 THE OTHER PARTY IS FOR ANY CAUSE PREVENTED F ROM PERFORMING ITS DUTIES HEREUNDER FOR A TOTAL PERIOD OF SIX (6) MONTHS IN ANY PERIOD OF TWELVE (12) CALENDAR MONTHS; 13.1.3 THE OTHER PARTY BECOMES INSOLVENT, MAKES ANY ARRANGEMENT OR COMPOSITION WITH ITS CREDITORS, OR H AS A RECEIVER APPOINTED OVER THE WHOLE OR ANY PART OF IT S ASSETS OR EXECUTION OR DISTRESS LEVIED UPON ITS ASS ETS PROVIDED THAT IN THE CASE OF EXECUTION OR DISTRESS IT IS SUCH AS WOULD MATERIALLY AFFECT THE ABILITY OF THAT PARTY TO DISCHARGE ITS OBLIGATIONS UNDER THIS AGREEMENT; 13.1.4 AN ORDER IS MADE OR A RESOLUTION IS PASSED F OR WINDING- UP OR LIQUIDATION OF THE OTHER PARTY (EXCEPT THAT W HERE ANY SUCH EVENT IS ONLY FOR THE PURPOSE OF AMALGAMAT ION WITH ANOTHER OR RECONSTRUCTION AND THE RESULTANT ITA NO.5669/DEL/2011 11 COMPANY EMERGING IS OR AGREES TO BE BOUND BY THE TERMS HEREOF AND IS A COMPANY WHOSE SHARES ARE OWNE D BY PERSONS NOT IN COMPETITION WITH THE OTHER PARTY EXCEPT TO AN AMOUNT NOT EXCEEDING FIVE PERCENT, THI S PROVISION SHALL NOT APPLY); 13.1.5 BY REASON OF ANY ORDER OF A GOVERNMENT OR OT HER AUTHORITY THE CONTINUED OPERATION OF THIS AGREEMENT IN ALL ITS PROVISIONS IS PREVENTED OR DELAYED FOR AN UNSPECIFIED AND INDETERMINATE PERIOD. 13.2 LICENSOR SHALL HAVE THE RIGHT TO TERMINATE THI S AGREEMENT BY NOTICE IN WRITING TO OPERATE ON THE DATE SPECIFIED IN THE NOTICE IF LICENSEE SHALL COME UNDER THE DIRECT OR I NDIRECT CONTROL WHETHER JOINTLY OR OTHERWISE OR SHALL ENTER INTO ANY PARTNERSHIP OR JOINT VENTURE WITH ANY CONCERN OR CO NCERNS INTERESTED IN OR CONNECTED WITH THE MANUFACTURE, SA LE OR SUPPLY OF GOODS WHICH MAY COMPETE WITH ANY OF THE J OINTS MANUFACTURED, SOLD OR SUPPLIED BY LICENSOR OR ANY G OODS IN RELATION TO WHICH LICENSORS KNOW-HOW OR OTHER MANUFACTURING INFORMATION IS OR MAY BE USED. 13.3 A PARTY HAVING SUCH RIGHT MAY TERMINATE THIS A GREEMENT BY NOTICE IN WRITING TO OPERATE ON THE DATE SPECIFIED IN THE NOTICE, WHICH DATE MAY BE A DATE EARLIER THAN THE D ATE OF THE NOTICE SO AS TO DEFEAT ANY TITLE WHICH A TRUSTEE IN BANKRUPTCY OR A RECEIVER OR LIQUIDATOR OR OTHER SUCH PERSON MI GHT OTHERWISE ACQUIRE TO THE RIGHTS CONFERRED HEREBY. 13.4 NO WAIVER OF ANY ANTECEDENT BREACH AND NO GRAN T OF TIME OR INDULGENCE SHALL PREJUDICE ANY SUBSEQUENT RIGHT TO TERMINATE THIS AGREEMENT. 14. EFFECT OF EXPIRATION/TERMINATION . 14.1 IN THE EVENT THAT THIS AGREEMENT EXPIRES BY EF FLUXION OF TIME, OR IS LAWFULLY TERMINATED BY LICENSEE, LICENSEE MAY CONTINUE TO USE THE KNOW-HOW FREE OF CHARGE . ITA NO.5669/DEL/2011 12 14.2 IN THE EVENT THAT THIS AGREEMENT IS LAWFULLY T ERMINATED BY LICENSOR:- 14.2.1 LICENSEE SHALL CEASE MANUFACTURE OF THE JOIN TS AND SHALL NOT USE ANY PART OF THE KNOW-HOW AND SHALL RETURN TO LICENSOR ALL TANGIBLE KNOW-HOW MATERIAL AND ALL COPIES MADE THEREOF; 14.2.2 LICENSEE SHALL HAVE A PERIOD OF NINE (9) MON THS TO DISPOSE OF STOCKS OF THE JOINTS IN HAND AND TO FULF IL ORDERS IN HAND SUBJECT TO PAYMENT OF ROYALTY IN ACCORDANCE WITH SUB-CLAUSE 9.2. 14.3. ON TERMINATION OF THIS AGREEMENT WHETHER TERM INATED BY LICENSOR OR BY LICENSEE OR BY EFFLUXION OF TIME:- 14.3.1 THE RIGHTS OF EITHER PARTY AGAINST THE OTHER WHICH MAY HAVE ACCRUED UP TO THE DATE OF TERMINATION OR EXPIRATION SHALL NOT BE PREJUDICED BY TERMINATION OR EXPIRATION; 14.3.2 LICENSEE SHALL HAVE NO RIGHTS WHATSOEVER UND ER OR IN CONNECTION WITH THIS AGREEMENT EXCEPT AS PROVIDED UNDER THE PROVISIONS OF THIS AGREEMENT. 13. ON GOING THROUGH CLAUSE 14 OF THE AGREEMENT, IT BECOMES EVIDENT THAT THE SAME CAN BE TERMINATED IN THREE WAYS, NAME LY, BY LICENSEE, BY LICENSOR AND BY EFFLUXION OF TIME. IN CASE THE AGR EEMENT IS LAWFULLY TERMINATED BY THE LICENSOR, THEN, AS PER CLAUSE 14. 2, 14.2.1 AND 14.2.2, THE LICENSEE SHALL CEASE TO MANUFACTURE THE JOINTS AND SHALL NOT USE ANY PART OF THE KNOW-HOW AND SHALL RETURN TO THE LICENS OR ALL TANGIBLE KNOW-HOW MATERIAL AND ALL COPIES MADE THEREOF. IN O THER WORDS, THE ITA NO.5669/DEL/2011 13 LICENSEE WILL BE DEBARRED FROM USING THE KNOW-HOW A FTER THE TERMINATION OF THE AGREEMENT BY THE LICENSOR. IF T HE AGREEMENT IS TERMINATED BY EFFLUXION OF TIME, THEN CLAUSE 14.3 R EAD WITH CLAUSE 14.3.1 AND 14.3.2. COME INTO PLAY. ALBEIT THERE IS SOME DI CHOTOMY IN THESE CLAUSES, BUT THE ESSENCE IS THAT THE LICENSEE SHAL L HAVE NO RIGHT WHATSOEVER UNDER THE AGREEMENT, EXCEPT AS PROVIDED UNDER THE PROVISIONS OF THIS AGREEMENT, WHICH AS PER CLAUSE 1 4.3 MAY BE TO ALLOW THE CONTINUATION OF USE OF KNOW-HOW FREE OF CHARGE. BUT THE FACT OF THE MATTER IS THAT BY THE TIME THE TERMINATION OF THE A GREEMENT APPROACHES BY EFFLUXION OF TIME, THE TECHNOLOGY BECOMES OBSOLE TE AND REMAINS HARDLY OF ANY SIGNIFICANCE. THE THIRD SITUATION, WH ICH HAS BEEN ACCENTUATED BY THE LD. DR TO BRING HOME HIS ARGUMEN T, IS THE TERMINATION BY THE LICENSEE. CLAUSE 14.1 PROVIDES THAT THE AGR EEMENT CAN BE LAWFULLY TERMINATED BY THE LICENSEE IN WHICH CASE T HE LICENSEE MAY CONTINUE TO USE THE KNOW-HOW FREE OF CHARGE. IT IS THIS CLAUSE 14.1 OF THE AGREEMENT WHICH HAS BEEN GREATLY EMPHASIZED BY THE LD. DR TO BOLSTER HIS ARGUMENT THAT IF THE ASSESSEE-LICENSEE TERMINAT ES THE AGREEMENT AT HIS VOLITION, SAY WITHIN A SHORT SPAN AFTER SIGNING , HE MAY CONTINUE TO USE ITA NO.5669/DEL/2011 14 THE KNOW-HOW FREE OF CHARGE FOR AN UNLIMITED PERIOD , WHICH SHOWS THAT THE PAYMENT MADE BY IT IS FOR ACQUISITION OF KNOW-H OW AND NOT ITS MERE USE AND HENCE LIES IN THE CAPITAL FIELD. IT IS, NO DOUBT, TRUE THAT IF THE LICENSEE LAWFULLY TERMINATES THE AGREEMENT, IT MAY CONTINUE TO USE THE KNOW-HOW FREE OF CHARGE, BUT, THE IMPORTANT THING I S THAT A LICENSEE CAN LAWFULLY TERMINATE THE AGREEMENT ONLY IN THE SITUAT IONS AS HAVE BEEN DISCUSSED IN CLAUSE 13 OF THE AGREEMENT. WHEN WE P ERUSE CLAUSE 13, IT EMERGES THAT THE LICENSEE (EACH PARTY) SHALL HAVE A RIGHT TO TERMINATE THE AGREEMENT IF THE LICENSOR (THE OTHER PARTY) F AILS TO OBSERVE ANY OF THE TERMS OR FAILS TO PERFORM ITS DUTIES OR BECOMES INSOLVENT OR GOES INTO WINDING UP OR LIQUIDATION ETC. IN TERMS OF SUB-CLA USES 13.1.1 TO 13.1.4. THUS IT IS DISCERNIBLE THAT THE LICENSEE CAN TERMIN ATE THE AGREEMENT ONLY WHEN THERE IS SOME DEFAULT OR INSOLVENCY, ETC., OF THE LICENSOR AND NOT OTHERWISE AT HIS OWN SWEET WILL. CLAUSE 13.1.5 PR OVIDES THAT THE ASSESSEE CAN TERMINATE THE AGREEMENT IF THE CONTIN UED OPERATION OF THIS AGREEMENT IS PREVENTED BY REASON OF ANY ORDER OF GO VERNMENT OR ANY OTHER AUTHORITIES. CLAUSES 13.2 TO 13.4 EITHER DEA L WITH THE RIGHT OF THE LICENSOR TO TERMINATE THE AGREEMENT OR THE PROCEDUR AL ASPECTS OF THE ITA NO.5669/DEL/2011 15 TERMINATION. THUS, IT IS APPARENT THAT THE ASSESSE E-LICENSEE CAN TERMINATE THE AGREEMENT, UNDER ALL THE SUB-CLAUSES OF CLAUSE 13.1 OF THE AGREEMENT, EITHER DUE TO SOME DEFAULT OR INCAPACITY OF THE LICENSOR OR GOVERNMENT ORDER. ALL THESE SITUATIONS MAKE IT CRY STAL CLEAR THAT THE LICENSEE CANNOT, AT HIS OWN SWEET WILL, TERMINATE T HE AGREEMENT AND, THEREAFTER, CONTINUE TO USE THE KNOW-HOW RECEIVED F ROM LICENSOR FREE OF CHARGE. SUCH A RIGHT TO TERMINATE THE AGREEMENT VE STS IN THE LICENSEE ONLY IF THE DEFAULT IS COMMITTED BY THE LICENSOR. T HE LICENSEE, UNDER NO CIRCUMSTANCE, CAN SUO MOTU TERMINATE THE AGREEMENT WITHOUT ANY DEFAULT BY THE LICENSOR AND ALSO REAP THE BENEFITS OF FREE USER OF TECHNICAL KNOW-HOW. ERGO, CLAUSE 14.1 OF THE AGREE MENT, WHICH HAS BEEN GREATLY HARPED ON BY THE LD. DR, DOES NOT DEF END THE CASE OF THE REVENUE BECAUSE THE ASSESSEE CANNOT, AT ITS PLEASUR E, TERMINATE THE AGREEMENT AND USE THE TECHNICAL KNOW-HOW WITHOUT AN Y CONSIDERATION. WHEN WE CONSIDER THE EFFECT OF TERMINATION OF THE A GREEMENT IN TOTALITY, WHAT EMERGES IS THAT THE LICENSEE, ON SUCH TERMINAT ION, SHALL BE BOUND TO RETURN THE KNOW-HOW ACQUIRED FROM THE LICENSOR, WHICH REMAINS HIS EXCLUSIVE PROPERTY. ITA NO.5669/DEL/2011 16 14. THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. HERO HONDA MOTORS LTD. (2015) 372 ITR 481 (DEL) HAS HELD THAT WHERE THE OWNERSHIP AND THE INTELLECTUAL PROPERTY RIGHTS IN THE KNOWHOW OR TECHNICAL INFORMATION WERE NEVER TRANSFERRED OR BECAME AN ASS ET OF THE RESPONDENT ASSESSEE; THE OWNERSHIP RIGHTS WERE PROTECTED BY TH E LICENSEE AND THE PROPRIETORSHIP IN THE INTELLECTUAL PROPERTY WAS NOT CONVEYED TO THE ASSESSEE BUT ONLY A LIMITED AND RESTRICTED RIGHT TO USE ON STRICT AND STRINGENT TERMS WAS GRANTED, THE PAYMENT WAS DEDUCT IBLE. THE FACTS OF THE EXTANT CASE ARE QUITE CLOSE TO THOSE CONSIDERED AND DECIDED BY THE HONBLE HIGH COURT. ALL THE SALIENT FEATURES OF TRA NSFER OF TECHNICAL KNOW-HOW, AS DISCUSSED ABOVE, GO TO SHOW THAT THE ASSESSEE PAID 3% OF SELLING PRICE OF THE JOINTS SOLD BY IT FOR THE USE OF TECHNICAL KNOW-HOW PROVIDED BY THE LICENSOR, WHICH IS NOT A CONSIDERAT ION FOR ACQUIRING ANY KNOW-HOW. IT IS A CASE OF PARTING BY THE LICENSOR, FOR CONSIDERATION, WITH THE PARTIAL OWNERSHIP OF TECHNICAL KNOW-HOW, THAT IS, FOR ALLOWING ONLY A RIGHT TO USE TO THE ASSESSEE; AND NOT A CASE OF PARTING WITH FULL OWNERSHIP OF TECHNICAL KNOW-HOW, THAT IS, FOR TRANS FERRING THE OWNERSHIP TO THE ASSESSEE. HENCE, THE AMOUNT SO PAID IS ELIGI BLE FOR DEDUCTION AS A ITA NO.5669/DEL/2011 17 REVENUE EXPENDITURE. WE, THEREFORE, OVERTURN THE A SSESSMENT ORDER ON THIS POINT AND ALLOW DEDUCTION OF THE AMOUNT PAID F OR THE USE OF TECHNICAL KNOW-HOW. 15. NOW, WE TAKE UP PAYMENT OF RS.2.23 CRORE MAD E BY THE ASSESSEE TO GKN HOLDING, UK, TOWARDS ROYALTY FOR TRADEMARK/ BRAND. THE ASSESSEE ENTERED INTO AN AGREEMENT DATED 1.12.2003 WITH ITS GROUP COMPANY, A COPY OF WHICH IS AVAILABLE ON RECORD. RE CITALS OF THIS AGREEMENT PROVIDE THAT THE LICENSOR (GKN HOLDING, U K) IS THE PROPRIETOR OF THE TRADEMARKS AND THE LICENSOR WISHE S TO PERMIT THE LICENSEE (THE ASSESSEE) TO USE THE TRADEMARKS IN R ESPECT OF THE PRODUCTS AND THE SERVICES. CLAUSE 2 OF THE AGREEMENT READS A S UNDER:- 2. GRANT THE LICENSOR GRANTS TO THE LICENSEE, ON THE TERMS S ET OUT IN THIS AGREEMENT, A NON-EXCLUSIVE LICENCE :- 2.1 UNDER THE REGISTRATIONS; AND 2.2 TO USE THE TRADE MARKS IN THOSE COUNTRIES IN THE TERRITORY WHERE THEY ARE NOT REGISTERED; 16. IT EMERGES FROM A SIMPLE READING OF THE ABOVE C LAUSE THAT GKN HOLDINGS, UK GRANTED A NON-EXCLUSIVE LICENSE TO THE ASSESSEE TO USE ITA NO.5669/DEL/2011 18 THE TRADEMARKS. CLAUSE 6.1 OF THE AGREEMENT PROVID ES THAT: ALL USE OF ANY TRADE MARKS BY THE LICENSEE SHALL BE FOR THE BE NEFIT OF THE LICENSOR AND THE GOODWILL ACCRUED TO THE LICENSEE ARISING FR OM ITS USE OF THE TRADE MARKS (BUT NO GREATER OR OTHER GOODWILL) SHAL L ACCRUE TO AND BE HELD IN TRUST BY THE LICENSEE FOR THE LICENSOR WHIC H GOODWILL THE LICENSEE AGREES TO ASSIGN FREE OF CHARGE TO THE LIC ENSOR AT ITS REQUEST AT ANY TIME WHETHER DURING OR AFTER THE TERM OF THIS A GREEMENT. ON GOING THROUGH THE ABOVE CLAUSE OF THE AGREEMENT, IT BECOM ES CRYSTAL CLEAR THAT THE ASSESSEE HAS BEEN ALLOWED USER OF TRADEMARKS HE LD BY THE LICENSOR, WHICH SHALL REMAIN THE EXCLUSIVE PROPERTY OF THE LI CENSOR ALONE. CLAUSE 7 OF THE AGREEMENT, WHICH IS RELEVANT FOR OUR PURPO SE, READS AS UNDER:- 7. OWNERSHIP 7.1 THE LICENSOR WARRANTS THAT IT IS THE PROPRIETOR OF THE TRADE MARKS AND THAT IT IS NOT AWARE (BUT DOES NOT WARRANT OR REPRESENT) THAT THE USE OF THE TRADE MARKS ON OR IN RELATION TO THE PROVISION OF THE PRODUCTS AND SERVICES IN THE T ERRITORY INFRINGES THE RIGHTS OF ANY THIRD PARTY. THE LICEN SOR GIVES NO WARRANTY AS TO THE VALIDITY OR ENFORCEABILITY OF TH E REGISTRATION. 7.2 THE LICENSEE UNDERTAKES NOT TO DO OR PERMIT TO BE DONE ANY ACT WHICH WOULD OR MIGHT JEOPARDIZES OR INVALIDATE ANY REGISTRATION OF THE REGISTERED TRADE MARKS OR APPLICATION THEREOF NOR TO DO ANY ACT WHICH MIGHT ASSIST OR GIV E RISE TO AN APPLICATION TO REMOVE ANY OF THE REGISTERED TRADE M ARKS FROM ITA NO.5669/DEL/2011 19 THE REGISTER OR WHICH MIGHT PREJUDICE THE RIGHT OR TITLE OF THE LICENSOR TO ANY OF THE TRADE MARKS. 7.3 THE LICENSEE WILL ON REQUEST GIVE TO THE LICENS OR OR ITS AUTHORIZED REPRESENTATIVES ANY INFORMATION AS TO IT S USE OF THE TRADE MARKS WHICH THE LICENSOR MAY REQUIRE AND WILL (SUBJECT TO THE PROVISIONS OF CLAUSE 8) RENDER ANY ASSISTANCE REASONABLY REQUIRED BY THE LICENSOR IN MAINTAINING THE REGISTRATIONS AND/OR PROSECUTING ANY APPLICATION TH EREFOR. 7.4 THE LICENSEE WILL NOT MAKE ANY REPRESENTATION OR DO ANY ACT WHICH MAY BE TAKEN TO INDICATE THAT IT HAS ANY RIGH T, TITLE OR INTEREST IN OR TO THE OWNERSHIP OR USE OF ANY OF TH E TRADE MARKS EXCEPT UNDER THE TERMS OF THIS AGREEMENT AND ACKNOWLEDGE THAT NOTHING CONTAINED IN THIS AGREEMEN T SHALL GIVE THE LICENSEE ANY RIGHT, TITLE, OR INTEREST IN OR TO THE TRADE MARKS SAVE AS GRANTED BY THIS AGREEMENT. 17. THIS CLAUSE MAKES IT PALPABLE THAT THE LICENSOR IS THE PROPRIETOR OF THE TRADEMARKS AND THE LICENSEE UNDERTAKES NOT TO D O ANYTHING WHICH MIGHT JEOPARDIZE THE TRADE MARK IN ANY MANNER. CLAU SE 9 DEALS WITH THE TERMINATION OF THE AGREEMENT. PARA 9.2 OF THE AGRE EMENT PROVIDES AS UNDER:- 9.2 UPON THE TERMINATION OF THIS AGREEMENT FOR WHATEVER REASON THE LICENSEE SHALL CEASE TO MAKE ANY USE OF THE TRADE M ARKS SAVE THAT IF THE LICENSEE HAS A STOCK OF PRODUCTS EXISTI NG OR IN THE COURSE OF MANUFACTURE OR UNFULFILLED ORDERS ON HAND AT THE DATE OF TERMINATION OF THIS AGREEMENT, THE LICENSEE MAY, BU T ONLY WITH THE LICENSORS SPECIFIC PERMISSION, SELL SUCH STOCK ON THE TERMS HEREOF OR SUCH OTHER TERMS AS MAY BE AGREED. ITA NO.5669/DEL/2011 20 18. THIS CLAUSE PROVIDES IN UNAMBIGUOUS TERMS THAT UPON THE TERMINATION OF THIS AGREEMENT FOR WHATEVER REASON, THE ASSESSEE SHALL CEASE TO MAKE ANY USE OF THE TRADE MARKS. CLAUSE 4 OF THE AGREEMENT IS CONSIDERATION CLAUSE, WHICH FIXES THE RATE OF ROY ALTY FOR USE OF TRADE MARK AT 0.5% OF THE ANNUAL SALES. IT IS A MATTER O F RECORD THAT THIS AGREEMENT DATED 1.12.2003 REMAINED IN FORCE TILL IT S SUCCESSION BY ANOTHER AGREEMENT DATED 16.2.2008, WHICH HAS BEEN M ADE EFFECTIVE FROM 1.1.2007. CLAUSE 4 OF THE LATER AGREEMENT, TH EREFORE, COVERS A PERIOD OF THREE MONTHS FROM 1 ST JANUARY, 2007 TO 31 ST MARCH, 2007 RELATING TO THE PREVIOUS YEAR RELEVANT TO THE ASSES SMENT YEAR UNDER CONSIDERATION. UNDER THIS LATER AGREEMENT, THE RAT E OF ROYALTY HAS BEEN VARIED. CLAUSE 4.2 OF THIS AGREEMENT PROVIDES THAT THE AMOUNT OF ROYALTY FOR USE OF TRADEMARK SHALL BE AS UNDER:- - WHERE THE OPERATING MARGIN FOR THE RELEVANT FINA NCIAL PERIOD IS LESS THAN 3%, A RATE OF 0.5% SHALL BE APPLIED; - WHERE THE OPERATING MARGIN FOR THE RELEVANT FINANCI AL PERIOD IS 3% OR MORE BUT LESS THAN 7%, A RATE OF 1% SHALL BE APPLIED; AND - WHERE THE OPERATING MARGIN FOR THE RELEVANT FINANCI AL PERIOD IS 7% OR MORE, A RATE OF 1.5% SHALL BE APPLIED. ITA NO.5669/DEL/2011 21 19. ALL OTHER RELEVANT CLAUSES OF THE LATER AGREEME NT ARE SIMILAR TO THE CLAUSES OF THE EARLIER AGREEMENT DATED 1.12.2003, U NDER WHICH THE ASSESSEE PAID ROYALTY FOR USE OF TRADEMARKS. WHEN W E CONSIDER ALL THE RELEVANT CLAUSES OF THE ROYALTY AGREEMENT, IT BECOM ES CLEAR THAT THE ASSESSEE DID NOT ACQUIRE ANY OWNERSHIP RIGHT IN TRA DEMARKS BY PAYING THE CONSIDERATION AS SET OUT THEREIN. SUCH PAYMENT WA S MADE SIMPLY FOR THE USE OF THE TRADEMARKS, AND THAT TOO, BY MEANS OF A NON-EXCLUSIVE LICENSE. IT HAS BEEN MADE CLEAR IN THE AGREEMENT T HAT THE OWNERSHIP IN THE TRADEMARKS SHALL REMAIN THE INTELLECTUAL PROPER TY OF THE LICENSOR AND THE ASSESSEE SHALL HAVE A MERE RIGHT TO USE THEM. F URTHER, UPON THE TERMINATION, THE LICENSEE SHALL CEASE TO MAKE ANY U SE OF SUCH TRADEMARKS. THUS, IT IS PATENT THAT THE PAYMENT HA S BEEN MADE BY THE ASSESSEE FOR USE OF TRADEMARKS AND NOT FOR ACQUI RING TRADEMARKS AS AN OWNER. IT GOES WITHOUT SAYING THAT ANY PAYMENT MAD E FOR A MERE USE OF AN ASSET FALLS IN THE REALM OF A REVENUE EXPENDITUR E AND CANNOT BE TREATED AS A CAPITAL EXPENDITURE. WE, THEREFORE, HOLD THAT PAYMENT OF RS.2.23 CRORE MADE BY THE ASSESSEE FOR USE OF TRADE MARK IS A REVENUE EXPENDITURE. ITA NO.5669/DEL/2011 22 20. TO SUM UP, TOTAL PAYMENT OF RS.2.94 CRORE MADE BY THE ASSESSEE FOR USE OF TECHNICAL KNOW-HOW AND TRADEMARKS IS A R EVENUE EXPENDITURE AND CANNOT BE TREATED AS A CAPITAL EXPENDITURE. EX CONSEQUENTI , A DEDUCTION IS ALLOWED FOR THIS SUM. THIS GROUND IS ALLOWED. 21. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 30.06.201 6. SD/- SD/- [SUDHANSHU SRIVASTAVA] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED,30 TH JUNE, 2016. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.