Honda Siel Power Products Ltd., Uttar Pradesh V. DCIT, New Delhi

ITA 5713/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77823 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 14-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SHAILY GUPTA C AS
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Permanent establishment; Advance ruling; Revised return; Revenue expenditure; Capital expenditure
• Section: 92C; 37(1); 10B

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I NEW DELHI BEFORE SHRI U.B.S.BEDI, JM AND SHRI J.SUDHAKAR REDDY, AM ITA NO: 5713/DEL/2011 ASSESSMENT YEAR : - 2007-08 HONDA SIEL POWER PRODUCTS LTD. VS. DCIT, CIRCLE 1 2(1) PLOT NO.5, SECTOR 41 (KASNA) NEW DELHI GREATER NOIDA INDUSTRIAL DEVELOPMENT AREA DT. GAUTAM BUDH NAGAR, U.P. PAN: AAACH 8464 L (APPELLANT) (RESPONDENT) APPELLANT BY : SH RI AJAY VOHRA, SH.NK JAIN, ADVS SH. ABHISHEK AG ARWAL AND MS.SHAILY GUPTA, C.AS RESPONDENT BY: SH. PEEYUSH JAIN, CIT, D.R. SH. YOGESH K.VERMA, CIT, D.R. O R D E R PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER DT. 31 ST MARCH, 2007 OF LD.ACIT, T.P.O. I (2), NEW DELHI PERTAINING TO THE ASSESSMENT YEAR 2007-08. 2 2. FACTS IN BRIEF :- THE ASSESSEE COMPANY FILED ITS RETURN OF INCOM E DECLARING TOTAL INCOME OF RS. NIL ON 27.10.2007. SUBSEQUENTLY IT FILED A REVISED RETURN OF INCOME ON 29.10.2007 DECLARING TO TAL INCOME OF RS.31,49,18,923/-. DURING THE COURSE OF ASSESSMEN T PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE IS PAYING ROYALTY OF R S.4,83,87,010/- AND A TECHNICAL GUIDANCE FEE OF RS.1,53,20,390/-. THE AO ALSO NOTICED THAT THE ASEESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIO NS. REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER. THE TRANSFER PRICING OFFICER AT PARA 1.1 OF HIS REPORT DATED 10.08.2010 LISTED OUT THE INTERNATIONAL TRANSACTIONS ENTERED IN TO BY THE ASSESSEE WHICH IS EXTRACTED FOR READY REFERENCE. NATURE OF TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) PURCHASE OF RAW MATERIAL AND COMPONENTS TNMM 197,145,128 PURCHASE OF SPARES TNMM 15,666,313 PURCHASE OF FINISHED GOODS TNMM 31,952,529 SALE OF SPARE PARTS TNMM 1,714,373 SALE OF FINISHED GOODS CUP/ TNMM 164,197,230 SALE OF SOFTWARE CD TNMM 283,516 ROYALTY CUP/ TNMM 48,387,010 TECHNICAL ASSISTANCE FEE TNMM 15,320,390 COMMISSION EXPORTS TNMM 37,840,919 REIMBURSEMENT OF TICKET COST CUP/TNMM 2,908,871 MODEL FEE TNMM 4,373,000 2.1. OUT OF THE TOTAL ROYALTY PAYMENT OF RS.4,83,8 7,010/-, THE AO TREATED ROYALTY PAYMENT OF RS.10,77,900/- AS PAYMEN T AT ARMS LENGTH 3 PRICE, BEING ROYALTY PAID IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT AND ON THE PRODUCTS SPECIFICALLY MENTIONED IN THE A GREEMENT. THE CASE OF THE TRANSFER PRICING OFFICER IS THAT, THE BALANCE OF THE ROYALTY HAS BEEN PAID ON PRODUCTS WHICH ARE NOT SPECIFICALLY MENTION ED IN THE TECHNICAL COLLABORATION AGREEMENT ENTERED BETWEEN THE PARTIE S HONDA MOTORS, JAPAN AND SHRI RAM POWER EQUIPMENT LTD., NOW CALLED AS HONDA SIEL POWER PRODUCTS LTD., DATED 18.10.1985, WHICH IS RENEWED FROM TIME TO TIME AND THE LATEST AMENDMENT, WHICH IS THE 7 TH AMENDMENT TO THE TECHNICAL COLLABORATION CONTRACT WAS ENTERED O N 13.09.2009. THE MOST APPROPRIATE METHOD CHOSEN BY THE ASESESSEE FOR ITS TRANSFER PRICING STUDY AND THE CLAIM MADE BY THE ASSESSEE I N ITS TRANSFER PRICING REPORT, THAT THE RATE AT WHICH ROYALTY IS PAID IS A T ARMS LENGTH. THE CASE OF THE TRANSFER PRICING OFFICER IS THAT THE T ECHNICAL COLLABORATION AGREEMENT IN QUESTION DOES NOT AUTHORIZE PAYMENT OF ROYALTY ON THE VARIANTS OF THE PRODUCTS, WHICH ARE NOT LISTED IN THE TECHNICAL COLLABORATION AGREEMENT (TCA) AND HENCE NO ROYALTY NEED TO HAVE BEEN PAID ON THE PRODUCTS AND HENCE THE PAYMENTS ARE NO T AT ARMS LENGTH PRICE (ALP). AT PARA 9 AND 10 OF HIS ORDER THE TPO HELD AS FOLLOWS. 9. BY THE APPLICATION OF CUP, THE ARMS LENGTH PRIC E IN RESPECT OF PAYMENT IS DETERMINED AT NIL AS AGAINST RS.37,840 ,919 DETERMINED BY THE ASSESSEE. SIMILARLY, IN THE CASE OF PAYMENT OF ROYALTY THE ARMS LENGTH PRICE OF THIS TRANSACTION IS DETERMINED AT RS.10,77 ,900 AS AGAINST RS.4,83,87,010 DETERMINED BY THE ASSESSEE. THE ASS ESSING OFFICER SHALL ENHANCE THE RETURNED INCOME BY RS.47,309,110 ON ACC OUNT OF THE TRANSACTION OF PAYMENT OF ROYALTY AND BY RS.37,840, 919 ON ACCOUNT OF THE 4 TRANSACTION RELATED TO PAYMENT OF EXPORT COMMISSION . THE CUMULATIVE ENHANCEMENT OF THE RETURNED INCOME THUS STANDS AT R S.85,150,029/-. 10. THE TRANSFER PRICING APPROACH IN THIS ORDER M AY BE SUMMARIZED AS BELOW: (I) THE ISSUES DEALT WITH IN THIS ORDER ARE THE P AYMENT OF ROYALTY AND PAYMENT OF EXPORT COMMISSION BY THE ASSESSEE TO ITS AE. (II) A SHOW CAUSE WAS ISSUED TO THE ASSESSEE WHEREI N IT WAS ARGUED THAT THE ASSESSEE NEED NOT MAKE THIS PAYMENT UNDER THE A RMS LENGTH PRINCIPLE. THE SHOW CAUSE NOTICE IS REPRODUCED AT PARA 3 OF THIS ORDER. (III) THE ASSESSEES REPLY AND THE ARGUMENTS OF THI S OFFICE ON THAT REPLY ARE AT PARA 4 ONWARDS. (IV) THE ARMS LENGTH PRICE ON ACCOUNT OF THE TRANSA CTION OF PAYMENT OF ROYALTY AMOUNTING TO RS.47,309,110 HAS BEEN REDUCED TO NIL. THE ARMS LENGTH PRICE ON ACCOUNT OF THE TRANSACTION RELATED TO PAYMENT OF EXPORT COMMISSION AMOUNTING TO RS.37,840,919 HAS BEEN REDU CED TO NIL. THE CUMULATIVE ENHANCEMENT OF THE RETURNED INCOME THUS STANDS AT RS.85,150,029. (V) THE ASSESSEE WAS ALLOWED REASONABLE OPPORTUNITY OF BEING HEARD WHICH INCLUDED PERSONAL HEARING ON VARIOUS DATES ME NTIONED IN COL.7 OF PAGE 1 OF THIS ORDER. (VI) IN RESPECT OF OTHER TRANSACTION NO ADVERSE INF ERENCE IS DRAWN. 2.2. THE AO FURTHER CAME TO A CONCLUSION THAT THE R OYALTY AND TECHNICAL GUIDANCE FEES WERE TO BE CAPITALISED. HE ALLOWED 2 5% DEPRECIATION ON THESE AMOUNTS AFTER CAPITALISING THE SAME. ON EXPO RT COMMISSION THE AO CONSIDERED THE TERMS AND CONDITIONS OF THE AGREE MENT, FOUND THAT THE EXPORT COMMISSION IN QUESTION IS CLEARLY IN THE NAT URE OF ROYALTY/FEES FOR TECHNICAL SERVICES. AS NO TAX WAS DEDUCTED AT SOUR CE, THE PAYMENT OF RS.3,78,41,000/- WAS NOT ALLOWED AS A DEDUCTION BY INVOKING S.40(A)(I) OF THE INCOME TAX ACT, 1961. ALTERNATIVELY THE AO HEL D THAT THE EXPENDITURE IN QUESTION IS PURELY FOR THE USE OF LI CENSE ACQUIRED BY THE ASSESSEE, WHICH WAS FOR A LONG PERIOD AND THUS WOUL D CONSTITUTE A CAPITAL ASSET. ACCORDINGLY THE PAYMENT OF EXPORT COMMISSION WAS DISALLOWED. 5 2.3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFO RE THE D.R.P. THE D.R.P.-I, NEW DELHI IN ITS ORDER AT PAGE 6, DIRECTE D THE T.P.O. TO DELETE THE ADDITION OF RS.3,78,40,919/- BEING PAYMENT OF EXPOR T COMMISSION ON THE FOLLOWING GROUND. THE ASSESSEE FELT THAT THE ASSESSING OFFICER MADE THE DISALLOWANCE NOT APPRECIATING THAT PAYMENT OF EXPORT COMMISSION WAS NOT IN THE NATURE OF ROYALTY AND FEE FOR TECHNICAL SERVICES, AND THE SAM E DID NOT CONSTITUTE INCOME WHICH ACCRUES OR ARISES TO HONDA IN INDIA. THE ASSESSING OFFICER ALSO DID NOT APPRECIATE THAT PAYMENT OF EXPORT COMM ISSION WAS FOR ACQUIRING ANY CAPITAL ASSET AND DID NOT RESULT IN A NY ENDURING BENEFIT TO THE ASSESSEE. WITHOUT PREJUDICE, IT IS ALSO STATED THAT PAYMENT TO THE EXTENT OF RS.3,78,40,919/- HAS ALREADY BEEN DISALLO WED IN THE TRANSFER PRICING ORDER AND THEREFORE TO DISALLOW IT AGAIN WO ULD TANTAMOUNT TO DOUBLE DISALLOWANCE. IT IS FOUND THAT IN THE TRANSFER PRICING PORTION OF THE ORDER, EXPORT COMMISSION HAS BEEN DISALLOWED AND THEREFORE ITS DI SALLOWANCE AGAIN WOULD BE DOUBLE DISALLOWANCE. AS THE DRP HAS ALREA DY UPHELD THE DISALLOWANCE IN THE TRANSFER PRICING PORTION, DISAL LOWANCE AGAIN WOULD LEAD TO DOUBLE DISALLOWANCE. HENCE ASSESSING OFFI CER IS DIRECTED NOT TO DISALLOW EXPORT COMMISSION ON GROUNDS OF CAPITAL EX PENDITURE OR BY TREATING IT AS ROYALTY/FEE FOR TECHNICAL SERVICE. 2.4. ON THE ISSUE OF DETERMINATION OF ARMS LENGTH PRICE ON INTERNATIONAL TRANSACTION ON PAYMENT OF ROYALTY OF RS.4,73,09,110/- THE D.R.P. UPHELD THE TRANSFER PRICING ADJUSTMENT. 3. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS. 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME- TAX ACT, 1961 ('THE 6 ACT') AT AN INCOME OF RS.44,78,49,600 AS AGAINST TH E INCOME OF RS.31,49,18,923 RETURNED BY THE APPELLANT. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADJUSTMENT OF RS4,73,09,110/- TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY BY THE ASSESSEE DURING THE PREVIOUS YEAR. 2.1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT NO ROYALTY WAS REQUIRED TO BE PAID IN RESPECT OF PRODU CTS NOT SPECIFICALLY MENTIONED IN THE TECHNICAL COLLABORATION AGREEMENT ('THE AGREEMENT') BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE . 2.2. THAT THE ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN NOT APPRECIATING THAT THE PAYMENT OF ROYALTY WAS MADE E ITHER IN RESPECT OF THE PRODUCTS SPECIFICALLY MENTIONED IN THE AGREEMENT OR ANY OF ITS VARIANTS AS PER PROVISIONS OF THE AGREEMENT. 2.3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT PAYMENT OF ROYALTY IS A NECESSARY COST, INCURRED FOR OBTAINING THE KNOW-HOW FOR MANUFACTURING THE FINAL PRODUCTS. 2.4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPUTING THE ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY WITHOUT APPLYING ANY OF THE METHODS PRESCRIBED UNDE R SECTION 92C OF THE ACT READ WITH RULE 10B OF THE RULES. 2.5 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER / TPO ERRED ON FACTS AND IN LAW IN NOT PROVIDING ANY BASIS FOR COMPUTATION O F ADJUSTMENT FOR THE DIFFERENCE IN ARM'S LENGTH PRICE IN RESPECT OF INTE RNATIONAL TRANSACTION OF PAYMENT OF ROYALTY. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING ROYALTY AMOUNTING TO RS.4,83,87,010 AND TECHNICAL GUIDANCE FEE AMOUNTING TO RS.L,53,20,390 PAID TO HONDA MOTOR COM PANY, JAPAN AS PER THE AGREEMENT AS CAPITAL EXPENDITURE INCURRED FOR ACQUISITION OF INTANGIBLE ASSET. 7 3.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT IN TERMS OF THE AGREEMENT, INTELLECTUAL PROPERTY R IGHT DEVELOPED BY HONDA, JAPAN HAS BEEN TRANSFERRED TO THE ASSESSEE. 3.2 THAT ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MISINTERPRETING THE AGREEMENT BETWEEN THE APPELLANT AND HONDA, JAP AN AND HOLDING THAT IN THE EVENT OF THE EXPIRATION OF THE CONTRACT, THE ASSESSEE MAY CONTINUE TO USE THE KNOW-HOW AND THE INDUSTRIAL PROPERTY RIGHTS , WITHOUT APPRECIATING THAT APPELLANT WOULD STILL BE REQUIRED TO PAY ROYALTY FOR USE OF SUCH KNOW HOW AND INDUSTRIAL PROPERTY RIGHTS. 3.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THAT THE TERMS OF AGREEMENT ARE QUITE COMPREHENSIVE AND THE WHOLE TECHNICAL KNOW-HOW TO SET UP THE BUSINESS OF THE ASSESSEE AR E PROVIDED BY HONDA, JAPAN. 3.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN HOLDING THE PAYMENT OF ROYALTY AND TECHNICAL GUIDANCE FEE TO BE CAPITAL EXPENDITURE ON THE GROUND THAT THE ASSESSEE CAN GRANT INDIVISIBLE AND NON-TRANSFERABLE SUBLICENSES TO USE THE KNOW-HOW TO INDIAN PERSONS, COMPANIES OR OTHER LEGAL ENTITIES EXCLUSIVE PRIVILEGE OF MANUFACTURING AND SELLING THE PRODUCTS. 3.5 WITHOUT PREJUDICE, THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN IGNORING THE FACT THAT, SINCE THE PAYMENT OF ROYALT Y TO THE EXTENT OF RS 4,73,09,110 HAS ALREADY BEEN DISALLOWED IN THE TRAN SFER PRICING ORDER, ANY FURTHER DISALLOWANCE TO THAT EXTENT WOULD RESULT IN DOUBLE DISALLOWANCE OF THE SAME AMOUNT. 4. WITHOUT PREJUDICE THAT THE ASSESSING OFFICER/TP O ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION IN RESPECT OF PAYM ENT OF ROYALTY AND TECHNICAL GUIDANCE FEE OF RS.134,87,786/- DISALLOWE D AS CAPITAL EXPENDITURE IN THE PRECEDING PREVIOUS YEAR. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING EXPORT COMMISSION PAID TO M/S HONDA MOTOR CO.LTD. O F JAPAN OF RS.3,78,41,000 INVOKING SECTION 40 (A) (I) OF THE A CT HOLDING THE SAME TO BE ROYALTY/FEE FOR TECHNICAL SERVICES ON WHICH ALLEGE DLY THE ASSESSEE HAD FAILED TO DEDUCT TAX AT SOURCE AS PER SECTION 195 OF THE ACT. 8 5.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN HOLDING THAT THE PAYMENTS OF EXPORT COMMISSION WAS TOWARDS ROYAL TY/FEE FOR TECHNICAL SERVICES AS THE SAME WAS IN CONSIDERATION FOR (I) R IGHT TO USE TRADEMARK, (II) PERMISSION TO EXPORT AND (III) IN LIEU OF MANAGERIA L AND TECHNICAL SERVICES PROVIDED BY HONDA, AND ACCORDINGLY THE ASSESSEE WAS UNDER OBLIGATION TO DEDUCT TAX AT SOURCE THERE FROM AS PER SECTION 195 OF THE ACT. 5.2. THAT THE ASSESSING OFFICER ERRED ON FACTS AN D IN LAW IN NOT APPRECIATING THAT PAYMENT OF EXPORT COMMISSION TO HONDA DOES NOT RESULT IN AN INCOME ACCRUING OR ARISING IN INDIA IN TERMS OF SECTION 9(1) OF THE ACT AND HENCE IS NOT LIABLE TO TAX IN INDIA. 5.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT PAYMENT OF EXPORT COMMISSION WAS NOT FOR RIGHT TO USE ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CIN EMATOGRAPH FILMS AND FILMS OR TAPES FOR RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADEMARK, DESIGN AND, THEREFORE, WAS NOT IN THE NATURE OF ROY ALTY. 5.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SERVICES / ASSISTANCE PROVIDED BY HONDA WERE INCIDENTAL TO THE RIGHT FOR EXPLOITING THE FOREIGN TERRITORY A ND WERE NOT IN THE NATURE OF FEE FOR TECHNICAL SERVICES. 5.5 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE PAYMENT OF EXPORT COMMISSION WAS NOT CONSIDERATION FOR USE OF TRADE MARK OR PROVISION OF TECHNICAL ASS ISTANCE, FOR WHICH SEPARATE ROYALTY PAYMENT WAS BEING MADE ON WHICH T AX IS DULY DEDUCTED UNDER SECTION 195 OF THE ACT. 5.6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT PAYMENT OF EXPORT COMMISSION BEIN G FOR EARNING INCOME FROM SOURCE OUTSIDE INDIA, CANNOT BE CHARACTERIZED AS ROYALTY OR FEE FOR TECHNICAL SERVICE AS PER SECTION 9(1 )(VI)(B) OF T HE ACT RESPECTIVELY. 5.7 THAT THE ASSESSING OFFICER 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 T HE ACT ON THE GROUND THAT THE SAME WAS INCURRED FOR ACQUIRING PER MISSION/LICENSE FOR MAKING EXPORT. 9 THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR VARY, ANY OF THE AFORESAID GROUNDS OF APPEAL. 4. MR. AJAY VOHRA, ADVOCATE REPRESENTED THE ASSESS EE AND MR. PEEYUSH JAIN, CIT, DR ALONG WITH MR. YOGESH K VARMA , SR. D.R. REPRESENTED THE REVENUE. BOTH THE PARTIES ARGUED A T LENGTH. NUMEROUS PAPER BOOKS WERE FILED. RELIANCE WAS PLACED BY BOT H THE PARTIES ON A NUMBER OF DECISIONS, WHICH WE WOULD BE ADVERTING TO WHEREVER REQUIRED AND NECESSARY DURING THE COURSE OF THIS ORDER. SUF FICE TO SAY, ALL THE CASE LAWS ARE STUDIED BY US AND THOSE CASE LAWS, WHICH ARE RELEVANT ARE DISCUSSED IN OUR ORDER. FOR THE SAKE OF BREVITY TH E ARGUMENTS OF BOTH THE PARTIES ARE RECORDED AND CONSIDERED IN THE ORDER IS SUE WISE. 5. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW, WE HOLD AS FOL LOWS. 6.1. GROUND NO.1 IS GENERAL IN NATURE. GROUND NO.2 TO 2.3 ARE ON THE ISSUE OF T.P. ADJUSTMENTS MADE ON ACCOUNT OF PAYMEN T OF ROYALTY, ON THE GROUND THAT THE ROYALTY IN QUESTION WAS PAID ON PRO DUCTS THAT ARE NOT SPECIFICALLY MENTIONED IN THE TECHNICAL CONSULTANCY AGREEMENT BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES. MR. V OHRA, THE LD.COUNSEL SUBMITS THAT THE AGREEMENT IN QUESTION CLEARLY STIP ULATES PAYMENTS FOR NOT ONLY PRODUCTS MENTIONED SPECIFICALLY IN THE TEC HNICAL COLLABORATION CONTRACT BUT ALSO FOR VARIANTS OF THOSE PRODUCTS. H E RELIES ON THE DEFINITION OF THE TERM PRODUCTS GIVEN IN THE AGRE EMENT. FURTHER RELIANCE 10 IS PLACED BY MR. VOHRA ON ARTICLE 21.3 OF THE AGREE MENT WHICH MANDATES THE PAYMENT OF ROYALTY ON ANY OR ALL PRODUCTS CARRI ED OUT AT THE MANUFACTURING FACILITY OF LICENSEE. IT WAS SUBMITTE D THAT EVERY ITEM OF FINISHED PRODUCT IS MANUFACTURED BY THE ASSESSEE US ING THE TECHNICAL KNOW HOW AND TECHNICAL INFORMATION, ASSISTANCE, E TC. PROVIDED BY THE ASSOCIATED ENTERPRISES. IT WAS FURTHER EMPHASIZED THAT THE PRODUCTS WERE TERMED AS VARIANTS ON ACCOUNT OF MINOR VARIATI ON IN THE USE OF PETROL, KEROSENE/LPG, RECOIL ELECTRIC STARTER AND AT TIMES DUE TO USE OF DIFFERENT TYPES OF CRANK SHAFT. IT IS FURTHER ARGUE D THAT THE ROYALTY WAS PAID AS PER GOVT. APPROVAL AND THAT IT IS NOT THE C ASE THAT THE ASSESSEE PAYING ROYALTY WITHOUT APPROVAL FROM THE CONCERNED AUTHORITIES. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS. - SONA OKEGAWA PRECISION FORGINGS LTD. (ITA 4781/DE L/10) - SGS INDIA P.LTD. VS. ACIT (ITA 2406/MUM/2006) - REBOK INDIA CO. VS. ACIT (ITA 5130/DEL/2010) - HERO MOTO CORP LTD. VS ACIT (ITA 5857/DEL/12) 6.2. HE FURTHER SUBMITS THAT NO METHOD HAS BEEN APP LIED BY THE TPO AND HENCE THE DETERMINATION OF ALP BY THE TPO IS BA D IN LAW. IT WAS FURTHER SUBMITTED THAT SIMILAR PAYMENTS OF ROYALTY HAVE BEEN MADE IN THE PAST AND THAT REVENUE HAS BEEN CONSISTENTLY ACC EPTING PAYMENTS AS BEING AT ARMS LENGTH AND THAT IN THE SUBSEQUENT AY S ALSO THE TPO HAS NOT MADE SIMILAR ADJUSTMENT ON ACCOUNT OF PAYMENT OF ROYALTY. THE PRINCIPLE OF CONSISTENCY WAS RELIED UPON. 11 6.3. THE LD. DR MR. PEEYUSH JAIN ON THE OTHER HAND SUBMITS THAT THE AGREEMENT DOES NOT SPEAK ABOUT THE PAYMENT OF ROYAL TY ON VARIANTS OF PRODUCTS. HE RELIED ON THE FINDINGS OF THE TPO AND DRP. ON THE ISSUE WHETHER GOVT. APPROVAL CAN FORM A BASIS FOR COMING TO A CONCLUSION THAT THE PAYMENT IS AT ARMS LENGTH PRICE, HE SUBMITTED THAT THE ARGUMENT IS FALLACIOUS AND NOT IN ACCORDANCE WITH THE TRANSFER PRICING PROVISIONS. HE RELIED ON THE FOLLOWING CASE LAWS: - ACIT VS. M/S GENOM BIOTECH P.LTD. 2012-T II-ITAT -MUM-TP - COCA COLA INDIA INC. VS. ACIT, GURGEON : 2008-TIO L-658-HC-P&H-IT - CIT VS. M/S NESTLE INDIA LTD. : 2011-T II-18-HC-D EL-INTL. - M/S FESTO CONTROLS P.LTD. VS. DCIT, BANGALORE : 2 013- T II-14-ITAT- BANG.-TP - DELOITTE CONSULTING INDIA P.LTD. VS. DCIT :2012-T II-ITAT-MUM-TP - SKOL BREWERIES LTD. VS. ACT, MUMBAI K BENCH (IT A 6175/MUM/11) - ITAT MUMBAI L BENCH IN ITA 2469/MUM/2006 SERDIA PHARMACEUTICALS (INDIA) P.LTD. - PEROT SYSTEMS TSI (INDIA) LTD. VS. DCIT -2010-TIO L-51-ITAT-DEL. 6.4. HE LAID EMPHASIS ON THE FINDINGS OF THE DRP AND SUBMITTED THAT ROYALTIES HAVE BEEN PAID BY THE ASSESSEE TO ITS AE, EVEN THOUGH THERE IS NO EXPLICIT AGREEMENT BETWEEN THE AE AND THE ASSESS EE ON THE PAYMENT OF ROYALTY ON THESE PRODUCTS. ON RES JUDICATA, HE SUBMITTED THAT FOR THE AY 2008-09, ROYALTY HAS BEEN DISALLOWED THOUGH ON A DIFFERENT GROUND AND THAT RES JUDICATA IS NOT APPLICABLE TO INCOME TAX PROCEEDINGS AND THE AO AND THE TPO HAVE NOT VIEWED THE ISSUE FROM THIS PERSPECTIVE IN THE EARLIER AY`S. 12 6.5. JOINING THE ISSUE MR. AJAY VOHRA, THE LD.COUNS EL FOR THE ASSESSEE ARGUED THAT FOR THE AY 2008-09 THE DISALLOWANCE OF ROYALTY WAS ON DIFFERENT GROUNDS, BUT SUBMITTED THAT IT IS NOT BA SED ON THE INTERPRETATION OF AGREEMENT AS THIS YEAR, WHICH MEA NS THAT THE A.O. HAS ACCEPTED THE CLAIM OF THE ASSESSEE ON THIS LIMB OF ARGUMENT. 7. AFTER HEARING RIVAL CONTENTIONS AND CONSIDERING THE PAPERS ON RECORD, WE HOLD AS FOLLOWS. WE FIND THAT THE TERM PRODUCT HAS BEEN DEFINED IN THE TECHNICAL CONSULTANCY COLLABORATION AGREEMENT AS FOLLOWS:- UNLESS OTHERWISE CLEARLY REQUIRED BY THE CONTEXT, THE FOLLOWING TERMS AS USED IN THIS CONTRACT SHALL HAVE THE MEANINGS AS DE FINED BELOW: THE TERM PRODUCTS MEANS SUCH MODELS OF PORTABLE GENERATORS AND GENERAL PURPOSE ENGINES (AS COMPLETELY BUILT UP AND FINISHED PRODUCTS) DESIGNED AND DEVELOPED BY HONDA AND SPECIFIED IN AN NEXURE 1 HERETO AND INCLUDES VARIATIONS THEREOF RESULTING FROM DESIGN C HANGES OR MINOR MODEL CHANGES MADE BY HONDA DURING THE TERM OF THIS CONTR ACT. CLAUSE 21.3 OF THE TECHNICAL CONSULTANCY COLLABORAT ION AGREEMENT READS AS FOLLOWS: 21.3. LICENSEE SHALL PAY A ROYALTY ON ANY AND AL L PRODUCTS CARRIED OUT OF THE MANUFACTURING FACILITY OF LICENSEE FOR DELIV ERY TO ANY AND ALL PURCHASERS, RENTERS OR OTHER TRANSFEREES WHETHER I N THE TERRITORY OR NOT. SUCH ROYALTY SHALL BE IN THE AMOUNT EQUIVALENT TO F OUR PERCENT (4%) OF THE EX-FACTORY SALES PRICE (OR EX-WAREHOUSE SALES PRICE IN CASE OF THE PRODUCTS KEPT IN A WAREHOUSE IMMEDIATELY BEFORE SUCH DELIVER Y) OF SUCH PRODUCTS INVOICED BY LICENSEE TO THE PURCHASERS, RENTERS OR OTHER TRANSFEREES OF SUCH PRODUCTS, LESS: (I) THE LANDED COST (INCLUDING OCEAN FREIGHTS, INSURANC E PREMIUMS, CUSTOMS DUTIES AND INLAND TRANSPORTATION COSTS) OF THE PARTS IMPORTED IRRESPECTIVE OF SOURCE OF PROCUREMENT; (II) THE COST TO LICENSEE OF THE STANDARD BOUGHT-OUT COM PONENT PARTS LISTED IN ANNEX 3 ATTACHED HERETO; 13 (III) THE COST OF PACKAGING MATERIALS FOR THE PRODUCTS AN D (IV) EXCISE DUTIES IMPOSED ON LICENSEE BY THE GOVERNMENT OF INDIA AND INCLUDED IN SAID EX-FACTORY SALES PRICE OR EX-WAREH OUSE SALES PRICE. THE ROYALTY SHALL BE PAID ON THE PRODUCTS CARRIED O UT OF THE MANUFACTURING FACILITY OF LICENSEE DURING THE PERIO D OF FIVE (5) YEARS (THE ROYALTY PERIOD), WITHIN THE TERM OF THIS CON TRACT, FROM THE DAY TO BE DESIGNATED BY HONDA IN WRITING, WHICH DAY SHALL FAL L WITHIN THE PERIOD COMMENCING ON THE DAY ON WHICH THE MANUFACTURE OF A NY ONE MODEL OF THE PRODUCTS BY LICENSEE ON A COMMERCIAL BASIS STAR TS AND ENDING ON THE THIRD ANNIVERSARY OF THE EFFECTIVE DATE. LICEN SEE HEREBY AGREES TO USE ITS BEST EFFORTS TO START THE MANUFACTURE OF TH E PRODUCTS ON A COMMERCIAL BASIS WITHIN ONE(1) YEAR AFTER THE EFFEC TIVE DATE. HONDA HEREBY ACKNOWLEDGES THAT THE PAYMENT OF ROYA LTY AT THE RATE OF FOUR PERCENT (4%) PROVIDED ABOVE IS RESTRIC TED TO LICENSED/REGISTERED CAPACITY (100,000 UNITS OF THE PRODUCTS PER YEAR AT THE DATE OF EXECUTION OF THIS CONTRACT) PLUS SUCH A DDITION AS THE GOVERNMENT OF INDIA MAY FROM TIME TO TIME SPECIFY ( BEING AT THE DATE OF EXECUTION OF THIS CONTRACT TWENTY FIVE PERCENT (25% ) OF THE LICENSED/REGISTERED CAPACITY). LICENSEE AGREES TO PAY ROYALTY IN RESPECT OF THE PRODUCTS MANUFACTURED IN EXCESS OF T HE SAID QUANTITY (I.E. LICENSED/REGISTERED CAPACITY PLUS THE AFORESAID ADD ITION) SUBJECT TO THE PRIOR APPROVAL OF THE GOVERNMENT OF INDIA REGARDING THE TERMS OF PAYMENT OF ROYALTY. WITHIN TWO (2) CALENDAR MONTHS FOLLOWING THE LAST D AY OF FEBRUARY AND AUGUST OF EACH YEAR AND THE EXPIRATION OR TERMINATI ON OF THIS CONTRACT FOR ANY REASON WHATSOEVER, LICENSEE SHALL PAY HONDA THE TOTAL AMOUNT OF ROYALTY DUE TO HONDA WHICH HAS ACCRUED DU RING THE SIX MONTHS PERIOD ENDING ON SUCH LAST DAY OF FEBRUARY O R AUGUST OR THE OTHER PERIOD ENDING ON THE DATE OF THE EXPIRATION O R TERMINATION OF THIS CONTRACT OR THE EXPIRATION DATE OF THE ROYALTY PERI OD. 7.1. THE T.P.O. AT PARA 2.1 LISTED OUT THE PRODUCT S. HE OBSERVED AS FOLLOWS: SUBSEQUENTLY THE ROYALTY HAS BEEN CONTINUED TO BE PAID BY VARIOUS AMENDMENTS TO THE TECHNICAL COLLABORATION CONTRACT. EACH OF THESE AMENDMENTS PROVIDED A RATE OF ROYALTY FOR EXISTING PRODUCTS AND NEW PRODUCTS. THESE CLASSES OF PRODUCTS ARE LISTED BY AN ANNEXURE TO THE AMENDMENT. THE LATEST AMENDMENT THAT CONTAINS SUCH AN ANNEXURE, IS THE 14 SEVENTH AMENDMENT TO THE TECHNICAL COLLABORATION ;C ONTRACT DT. 13.9.2009. PARA 3 DEALING WITH RATE OF ROYALTY STATES, RATE OF ROYALTY: IT IS ACKNOWLEDGED THAT THE PROVI SION TWO PER CENT (2%) ON EXISTING MODELS AND FOUR PERCENT (4%) ON NEW MOD ELS AS SET FORTH IN ;SECTION 3 OF THE SIXTH AMENDMENT SHALL ALSO BE APP LICABLE TO THIS SEVENTH AMENDMENT. SUCH EXISTING MODELS AND NEW MODELS SHA LL MEAN MODELS AS DESCRIBED IN ANNEX-1 (13 TH SEPTEMBER,2004) TO THIS SEVENTH AMENDMENT, RESPECTIVELY. THE ANNEXURE I THAT LISTS OUT PRODUCTS TO WHICH SUC H ROYALTY RATE SHALL APPLY ARE REPRODUCED BELOW. DEFINITION OF THE PRODUCTS UNDER 1(1) OF EXISTING C ONTRACT AS AMENDED UNDER THE SEVENTH AMENDMENT EXISTING MODELS PORTABLE GENERATORS: 1. E 650K AND MINOR VARIATIONS THEREOF. 2. EM 650 AND MINOR VARIATIONS THEREOF 3. E 1000K AND MINOR VARIATIONS THEREOF 4. EBK 1200 AND MINOR VARIATIONS THEREOF 5. EBK 2000 AND MINOR VARIATIONS THEREOF 6. EBK 2800 AND MINOR VARIATIONS THEREOF 7. EB 3000 AND MINOR VARIATIONS THEREOF GENERAL PURPOSE ENGINES: 1. GK 100 AND MINOR VARIATIONS THEREOF 2. GK 200 AND MINOR VARIATIONS THEREOF 3. GK 300 AND MINOR VARIATIONS THEREOF NEW MODELS PORTABLE GENERATORS: 1. EBK 1200S AND MINOR VARIATIONS THEREOF 2. EBK 2000S AND MINOR VARIATIONS THEREOF 3. EBK 3600 AND MINOR VARIATIONS THEREOF 4. EXK 1200 AND MINOR VARIATIONS THEREOF 5. EXK 2000 AND MINOR VARIATIONS THEREOF 6. EXK 2800 AND MINOR VARIATIONS THEREOF 7. E 400 AND MINOR VARIATIONS THEREOF 8. EBK 650 AND MINOR VARIATIONS THEREOF 9. EBK 1000 AND MINOR VARIATIONS THEREOF 10. EP 900H AND MINOR VARIATIONS THEREOF 15 GENERAL PURPOSE ENGINES: 1. G/GK 400 AND MINOR VARIATIONS THEREOF. 2.1. VIDE YOUR SUBMISSION DT. 12.2.2010 YOU HAVE PROVID ED A LIST OF MODELS THAT YOU HAVE EXPORTED TO VARIOUS PARTIES, ( AES AND NON-AES), AS PART OF YOUR SUPPORT OF THE CUP METHODOLOGY. THIS DATA WAS ANALYSED FROM THE STAND POINT OF CHECKING WHETHER ALL MODELS EXPORTED WERE COVERED BY THE DEFINITION OF THE TERM PRODUCTS IN THE TEC HNICAL COLLABORATION AGREEMENT. THE RESULTS OF THIS ANALYSIS ARE TABULA TED BELOW. SL.NO. MODEL WHETHER APPEARING IN TECHNICAL CONTRACT AGREEMENT (YES/NO) 1. EB 1000 NO 2. EB 220 NO 3. EB 3000 YES 4. EB 3000 S NO. 5. EB 650 GP NO 6. EBK 1000 NO 7. EBK 2000 YES 8. EBK 2800 YES 9. EBK 650 YES 10. EM 650 Z NO 11. EP 650 NO 12. EXK 2000 YES 13. G 200 NO 14. G 300 NO 15. G 300 QPD NO 16. G 200 QA NO 17. G 200 PAM NO 18. G 200 SA 31 NO 19. G 200 VAM NO 20. G 200 QA 3 NO 21. G 200 QAM NO 22. G 200 QB NO 16 3 23. G 200 SAM NO 24. G 200 WBI NO 25. G 300 LPY NO 7.2. THE CHART OF PRODUCTS WITH VARIATIONS IS GIVEN BELOW. SL.NO. MODEL PRODUCT VARIANT OF PRODUCT DIFFERENCE 1. EB 1000 GENERATOR VARIANT OF EBK 1000 EBK 1000 OPERATES BY KEROSENE EB 1000 OPERATES BY PETROL 2. EB 2200 GENERATOR VARIANT OF EBK 2000 EBK 2000 OPERATES BY KEROSENE EB 2200 OPERATES BY PETROL 3. EB 3000 GENERATOR INCLUDED IN THE LIST - 4. EB 3000S GENERATOR VARIANT OF EB 3000 EB 3000 IS A ELECTRIC START GENERATOR WHEREAS EB 3000 RECOIL START 5. EB 650 GP GENERATOR INCLUDED IN THE LIST 6. EBK 1000 GENERATOR INCLUDED IN THE LIST 7. EBK 2000 GENERATOR INCLUDED IN THE LIST 8. EBK 2800 GENERATOR INCLUDED IN THE LIST 9. EBK 650 GENERATOR INCLUDED IN THE LIST 10. EM 650 Z GENERATOR VARIANT OF EM 650 MINOR MODEL CHANGE LIKE MARK AND STICKER PASTED IN GENSET IS DIFFERENT. 11. EP 650 GENERATOR VARIANT OF EBK 650 EBK 650 OPERATES BY KEROSENE EP 650 OPERATES BY PETROL 12. EXK 2000 GENERATOR INCLUDED IN THE LIST 13. G 200 ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 OPERATES BY PETROL 14. G 300 ENGINE VARIANT OF GK GK 300 OPERATES BY 17 300 KEROSENE G 300 OPERATES BY PETROL 15. G 300 QPD ENGINE VARIANT OF GK 300 GK 300 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 16. G 200 QA ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 QA OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 17. G 200 PAM ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 PAM OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 18. G 200 SA 31 ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 SA 31 OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 19. G 200 VAM ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 SA 31 OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 20. G 200 QA 3 ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 SA 31 OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 21. G 200 QAM ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 SA 31 OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 22. G 200 QB 3 ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 SA 31 OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 23. G 200 SAM ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 SA 31 OPERATES BY PETROL AND 18 DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 24. G 200 WBI ENGINE VARIANT OF GK 200 GK 200 OPERATES BY KEROSENE G 200 SA 31 OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 25. G 300 LPY ENGINE VARIANT OF GK 300 GK 300 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 26. G 300 QCS ENGINE VARIANT OF GK 300 GK 200 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 27. G300 QP II ENGINE VARIANT OF GK 300 GK 300 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 28. G 300 QPY ENGINE V ARIANT OF GK 300 GK 300 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 29. G 300 VCS ENGINE VARIANT OF GK 300 GK 300 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 30. G 300 VPY ENGINE VARIANT OF GK 300 GK 300 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 31. G 300 QPID ENGINE VARIANT OF GK 300 GK 300 OPERATES BY KEROSENE G 300 QPD OPERATES BY PETROL AND DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED 32. GK 200 ENGINE INCLUDED IN THE LIST 33. GK 200 ENGINE VARIANT OF GK GK 200 VA DIFFER DUE TO 19 VA 200 DIFFERENT TYPE OF CRANK SHAFT USED. 34. GK 200 SA ENGINE VARIANT OF GK 200 GK 200 SA DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED. 35. GK 200 WA ENGINE VARIANT OF GK 200 GK 200 WA DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED. 36. GK 300 ENGINE INCLUDED IN THE LIST 37. GK 300 QP ENGINE VARIANT OF GK 300 GK 200 VA DIFFER DUE TO DIFFERENT TYPE OF CRANK SHAFT USED. 38. WB 30 WATER PUMP VARIANT OF G 200 VARIANT PUMP SET IS ATTACHED TO G 200. 39. WB 15 WATER PUMP VARIANT OF G 100 VARIANT PUMP SET IS ATTACHED TO G 100 40. WBK 30 WATER PUMP VARIANT OF GK 200 VARIANT PUMP SET IS ATTACHED TO G 200 41. WBK 30 D WATER PUMP VARIANT OF GK 200 VARIANT DIFFERENT MARK & STOCKER 42. WP 20 WATER PUMP VARIANT OF G 200 VARIANT PUMP SET IS ATTACHED TO G 200 43. WPK 20 WATER PUMP VARIANT OF GK 200 VARIANT PUMP SET DIFFERENT FROM WBK 30 IS ATTACHED TO GK 200. IN OUR VIEW THE CONTRACT AS AMENDED UNDER THE SEVEN TH AMENDMENT AUTHORIZE PAYMENT OF ROYALTY FOR CERTAIN PRODUCTS A S WELL AS MINOR VARIATIONS THEREOF. THE WORDING AND INCLUDES VARIA TIONS THEREOF FROM DESIGN CHANGES OR MINOR MODEL CHANGES IN OUR VIEW PUTS THE ISSUE BEYOND DEBATE. THE TPO BASES HIS DECISION ON A FI NDING THAT THE VARIATIONS IN QUESTION CANNOT BE CONSIDERED AS MINO R AND THAT THE PRODUCTS, WHICH THE ASSESSEE CLAIMS AS VARIANTS, AR E IN FACT SEPARATE 20 PRODUCTS HAVING DIFFERENT FEATURES, DIFFERENT PRICE S AND DIFFERENT SET OF TARGET CUSTOMERS. EVEN IF IT IS TO BE ACCEPTED THAT THESE PRODUCTS AR E HAVING DIFFERENT FEATURES THEN ALSO, AS PER THE WORDING, THESE ARE NOTHING BUT VARIANTS OF THE PRODUCT. IN OUR OPINION THE TPO HAS ERRED IN C OMING TO SUCH A CONCLUSION ON FACTS. CHANGE IN TYPE OF FUEL USED OR CHANGING THE START MECHANISM, OR CHANGE IN THE CRANK SHAFT, ETC. W OULD BE VERSIONS OF VARIANTS OF THE SAME PRODUCTS. THESE ARE NOT NEW PR ODUCTS. EVEN IF THE PRODUCT IS A RESULT OF DESIGN CHANGE THEN ALSO THE CLAUSE AUTHORIZED PAYMENT OF ROYALTY. IN ANY EVENT, IN THE DEFINIT ION GIVEN IN THE COLLABORATION AGREEMENT, PRODUCT MEANS A MODEL OF PORTABLE GENERATOR AND INCLUDES VARIATION THEREOF FROM DESIGN CHANGES AND MINOR MODEL CHANGES MADE BY HONDA. CLAUSE 21.3 MAN DATES THAT THE LICENSEE SHALL HAVE TO PAY ROYALTY ON ANY AND ALL P RODUCTS CARRIED OUT OF THE MANUFACTURING FACILITY OF THE LICENSEE AT SUCH PERCENTAGE OF THE EX FACTORY SALE PRICE OF SUCH PRODUCTS INVOICED BY THE LICENSEE. IN OUR VIEW A PLAIN READING OF THESE TWO CLAUSES SUPPORT THE ARGU MENT OF THE ASSESSEE. THOUGH APPROVALS FROM THE GOVT. OF THE TECHNICAL CO LLABORATION AGREEMENT CANNOT FORM THE SOLE BASIS FOR COMING TO A CONCLUSION OR FOR DETERMINATION OF ARMS LENGTH PRICE, WE ARE OF THE OPINION THAT THESE APPROVALS IN A WAY WOULD SUPPORT THE CONTENTIONS OF THE ASSESSEE THAT THE PAYMENT OF ROYALTY IN QUESTION IS GOVERNED BY T HE AGREEMENT. IT IS NOBODIES CASE THAT ILLEGAL OR UNAUTHORIZED PAYMENTS OF ROYALTY AND 21 CONSEQUENT REMITTANCES OF FOREIGN EXCHANGE HAS BE EN MADE BY THE ASSESSEE COMPANY. THE CONCLUSIONS DRAWN BY THE TPO AS ENDORSED BY THE DRP, THAT THE ASSESSEE IS NOT REQUIRED TO PAY ANY ROYALTY ON THE PRODUCTS IN QUESTION IS AGAINST THE TERMS OF THE A GREEMENT IN QUESTION AND THE FACTS OF THE CASE. SUCH A CONCLUSION IS NO T SUPPORTED BY THE FACTS AND CIRCUMSTANCES OF THE CASE. THE BROADER QUESTION THAT ARISES HERE IS WHETHER THE TPO CAN SIT IN JUDGEMENT OVER T HE RIGHTS, DUTIES AND LIABILITIES THAT ARISE BETWEEN THE PARTIES TO A PAR TICULAR AGREEMENT, WHEN IN FACT THERE IS NO SUCH CONFLICT IN THE INTERPRETA TION OF THE TERMS AND CONDITIONS OF THE AGREEMENT BETWEEN THE PARTIES. I T IS WELL SETTLED THAT THE AO CANNOT SIT IN THE ARM CHAIR OF THE BUSINESSM AN AND DETERMINE AS TO WHAT EXPENDITURE IS NECESSARY TO BE INCURRED BY THE BUSINESSMAN FOR THE PURPOSE OF HIS BUSINESS. IN THIS CONTEXT THE AR GUMENTS OF THE ASSESSEE THAT SIMILAR PAYMENTS WERE MADE BY THE ASSESSEE FOR THE LAST FEW YEARS AND THAT THE TPO AS WELL AS THE AO HAVE A CCEPTED THE GENUINENESS OF THE PAYMENTS AND HAVE APPROVED THE C LAIM THAT THE PAYMENTS WERE AT ARMS LENGTH ASSUME SIGNIFICANCE. THOUGH RES JUDICATA IS NOT APPLICABLE TO TAX LAWS, WHEN THE FUNDAMENTAL FACTS REMAIN THE SAME IN DIFFERENT YEARS, RULE OF CONSISTENCY APPLIE S. 7.3. FOR ALL THESE REASONS WE AGREE WITH THE CONTE NTIONS RAISED BY MR. AJAY VOHRA, THE LD.COUNSEL FOR THE ASSESSEE AN D ALLOW THIS GROUND OF ASSESSEE. AS ALREADY STATED, WE ONCE AGAIN REPEAT T HAT THERE IS NO DISPUTE AS TO WHAT IS THE THE MOST APPROPRIATE METHOD OR THAT THE RATE OF 22 ROYALTY AT 2% OR 4% AS THE CASE MAY BE IS AT ARM S LENGTH. AS THE TPO HAS ACCEPTED THAT MAM FOLLOWED BY THE ASSESSEE A ND APPROVED THE ARMS LENGTH PRICE OF ROYALTY RATE DETERMINED BY T HE ASSEESEE, WITH RESPECT TO ROYALTY PAID ON THE PRODUCTS TO THE TUNE OF RS. 10,77,900/- THE CLAIM OF THE ASSESSEE ON THE PAYMENTS OF ROYALTY ON THE VARIANTS OF THE PRODUCTS IS TO BE ALLOWED AS PER THE ASPECTS ARE CO NCERNED. IN THE RESULT GROUND NO. 2 TO 2.5 ARE ALLOWED. 7.4. GROUND NOS. 3 TO 3.5 AND GROUND NO.4 ARE ON TH E ISSUE WHETHER THE ROYALTY PAID AND THE TECHNICAL GUIDANCE FEE PAID IN TERMS OF THE TECHNICAL COLLABORATION AGREEMENT ARE IN THE CAPITAL FIELD OR IN THE REVENUE FIELD. BOTH PARTIES ARGUED AT LENGTH. THE SUM AND SUBSTAN CE OF THE ARGUMENT OF THE LD.COUNSEL FOR THE ASSESSEE IS THAT THE ISSU E IS COVERED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S HERO MO TOR CORP. LTD. VS. ACIT IN ITA 5130/DEL/10, DELHI C BENCH OF THE TRI BUNAL FOR THE ASSESSMENT YEAR 2006-07 VIDE ORDER DT. 23.11.2012. MR.AJAY VOHRA, THE LD.COUNSEL FOR THE ASSESSEE SUBMITS THAT THE TERMS AND CONDITIONS IN THE AGREEMENTS ARE PARA MATERIA. MR.PEEYUSH JAIN, THE LD.D.R. OPPOSES THESE CONTENTIONS AND SUBMITS THAT THE TERMS AND CO NDITIONS IN THE TECHNICAL COLLABORATION AGREEMENT CONSIDERED IN HE RO MOTOR CORP. LTD. AND ARE DIFFERENT AND HENCE THE REASONING GIVEN THE REIN CANNOT BE ACCEPTED. HE SUPPORTS THE ORDER OF THE ASSESSING O FFICER AS UPHELD BY THE DRP. 23 7.5. WE HAVE CONSIDERED THE COVENANTS OF (I) LICENS E AND TECHNICAL ASSISTANCE AGREEMENT DT. 2.6.2004 BETWEEN HONDA MOT OR CO.LTD., JAPAN AND HERO HONDA MOTORS LTD. BASED ON WHICH THE D ELHI C BENCH OF THE TRIBUNAL IN ITA NO.5130/DEL/2010 ADJUDICATED THE C ASE OF M/S HERO MOTOR CORP LTD. FOR THE A.Y. 2006-07; AND (II) TEC HNICAL COLLABORATION CONTRACT, DT. 18.10.1985, BETWEEN HONDA MOTOR CO.LT D. JAPAN AND SHRIRAM HONDA POWER EQUIPMENT LTD. (PRESENTLY KNOW N AS HONDA SIEL POWER PRODUCTS LTD.). THE COMPARATIVE CLAUSES AS FURNISHED BY THE ASSESSE E ARE EXTRACTED BELOW. SL.NO. FACTS OF HONDA SIE L POWER PRODUCTS LTD. FACTS OF HERO MOTO CORP LTD. 1. 2.1 HONDA HEREBY GRANTS LICENSEE, SUBJECT TO THE PAYMENT BY LICENSEE OF THE CONSIDERATION SET FORTH IN ARTICLE 21 HEREOF, AN INDIVISIBLE, NON- TRANSFERABLE AND EXCLUSIVE LICENSE (WITHOUT THE RIGHT TO GRANT SUBLICENSES EXCEPT AS PROVIDED IN ARTICLE 2.2 BELOW) TO MANUFACTURE AND ASSEMBLE THE PRODUCTS AND THE PARTS IN THE TERRITORY, AND TO SELL AND DISTRIBUTE IN THE TERRITORY THE PRODUCTS AND THE PARTS SO. MANUFACTURED OR ASSEMBLED OR (IN THE CASE OF THE PARTS) PROCURED BY LICENSEE, DURING THE TERM OF THIS CONTRACT (BUT SUBJECT TO THE PROVISIONS OF ARTICLE 32.1 HEREOF) IN SUBJECT TO THE TERMS AND CONDITIONS HEREIN CONTAINED, LICENSOR HEREBY GRANTS TO LICENSEE AN INDIVISIBLE, NON- TRANSFERABLE AND EXCLUSIVE RIGHT AND LICENSE, WITHOUT THE RIGHT TO GRANT SUBLICENSES, TO MANUFACTURE, ASSEMBLE, SELL AND DISTRIBUTE THE PRODUCTS AND THE PARTS DURING THE TERM OF THIS AGREEMENT WITHIN THE TERRITORY UNDER THE INTELLECTUAL I PROPERTY RIGHTS AND BY USING THE TECHNICAL INFORMATION. PROVIDED,IT IS ACKNOWLEDGED BY'' LICENSEE, 24 ACCORDANCE WITH THE PROVISIONS OF THIS CONTRACT. 2.2 LICENSEE MAY GRANT INDIVISIBLE AND NON- TRANSFERABLE SUBLICENSES TO USE THE KNOW-HOW TO INDIAN PERSONS, COMPANIES OR THE LEGAL ENTITIES TO THE EXTENT DEEMED NECESSARY AND APPROPRIATE BY HONDA AND LICENSEE BY MUTUAL AGREEMENT; PROVIDED, THAT THE TERMS OF SUCH SUBLICENSE ARRANGEMENTS SHALL BE FIRST APPROVED BY HONDA IN WRITING AND SHALL BE SUBJECT TO THE APPROVAL OF THE GOVERNMENT OF INDIA. 2.3 LICENSEE MAY EXPORT THE PRODUCTS AND THE PARTS TO COUNTRIES OUTSIDE THE TERRITORY IN COMPLIANCE WITH, AND WITHIN THE LIMITS STIPULATED BY, THE PROVISIONS OF THIS CONTRACT. (I) THE EXCLUSIVITY GRANTED HEREIN IS AGAINST THE THIRD PARTIES BUT NOT HMSI, AND (II) THE - EXCLUSIVITY AGAINST HMSI IS ONLY WITH RESPECT TO THE EXTERIOR OF THE PRODUCTS. IT IS AGREED BETWEEN THE PARTIES THAT SUBJECT TO THE TERMS HEREOF, THE LICENSOR SHALL MAKE NECESSARY ENDEAVORS SO THAT NEW MODEL(S) FOR THE LICENSEE ARE INTRODUCED IN A PHASED AND TIMELY MANNER IN ORDER TO MEET THE REQUEST FROM THE LICENSEE AND SUCH INTRODUCTION WOULD BE ON REASONABLE CRITERIA. 2. ARTICLE 27 MAINTENANCE OF SECRECY 27.1 LICENSEE SHALL USE OR CAUSE TO BE USED THE KNOW-HOW FURNISHED BY HONDA UNDER THIS CONTRACT ONLY FOR THE PURPOSES OF THIS CONTRACT. WHETHER DURING THE TERM OF THIS CONTRACT OR AFTER THE EXPIRATION OR TERMINATION OF THIS CONTRACT, LICENSEE SHALL NEITHER USE ANY OF THE KNOW-HOW FOR ANY PURPOSE OTHER THAN THOSE SPECIFICALLY AUTHORIZED UNDER THIS CONTRACT NOR MAKE KNOWN, DIVULGE OR COMMUNICATE ANY OF THE KNOW-HOW IN ANY WAY OR MANNER WHATSOEVER TO ANY PERSON, COMPANY OR OTHER LEGAL ENTITY TO WHOM DISCLOSURE IS NOT AUTHORIZED BY THIS CONTRACT. 27.2 LICENSEE SHALL TAKE ALL NECESSARY PRECAUTIONS TO. KEEP THE KNOW-HOW SECRET AND CONFIDENTIAL AND TO RESTRICT ITS USE AS PROVIDED IN ARTICLE 27.1 ABOVE. FOR THIS PURPOSE LLCENSEE AGREES TO ESTABLISH AND MAINTAIN ARTICLE 17 (MAINTENANCE OF SECRECY) 17.1 THE KNOW-HOW, TECHNICAL INFORMATION AND ANY OTHER NON- PUBLIC TECHNICAL OR BUSINESS INFORMATION OF LICENSOR (SUCH INFORMATION BEING COLLECTIVELY HEREINAFTER REFERRED TO AS THE 'INFORMATION') SHALL REMAIN THE SOLE AND EXCLUSIVE PROPERTY OF LICENSOR AND SHALL BE HELD IN TRUST AND CONFIDENCE FOR LICENSOR BY LICENSEE, INTER ALIA, IN ACCORDANCE WITH THIS ARTICLE 17. 17.2 LICENSEE AGREES THAT IT SHALL NOT, EITHER DURING THE TERM OF THIS AGREEMENT OR THEREAFTER, MAKE KNOW, DIVULGE OR COMMUNICATE ANY INFORMATION IN 25 SUCH PROCEDURES FOR PROTECTION OF THE KNOW- HOW AS RECOMMENDED BY HONDA. ANY WAY OR MANNER WHATSOEVER TO ANY PERSON, LEGAL PERSON OR ANY OTHER ENTITY EXCEPT OTHERWISE PROVIDED HEREIN. 17.3 . LICENSEE FURTHER AGR-EES THAT IT SHALL TAKE ALL NECESSARY PRECAUTIONS TO KEEP THE INFORMATION SECRET AND CONFIDENTIAL, AND TO RESTRICT ITS USE AS PROVIDED FOR IN THE FORMER AGREEMENT OR IN ARTICLE 18 HEREOF, AS THE CASE MAY BE, AND, FOR THAT PURPOSE, SHALL ESTABLISH AND MAINTAIN INTERNAL REGULATIONS AND PROCEDURES FOR PROTECTION OF THE SECRECY, AS APPROVED BY LICENSOR, RECOGNIZING THAT LICENSEE SHALL USE AT LEAST THE SAME DEGREE OF PRECAUTIONS AS IT TAKES TO PROTECT ITS OWN CONFIDENTIAL INFORMATION, AND ALL REPRODUCED COPIES SHALL BE NUMBERED IN NUMERICAL SEQUENCE AND SUCH REPRODUCED COPIES SHALL ALSO REMAIN IN THE PROPERTY OF LICENSOR. 17.4. LICENSEE MAY DISCLOSE THE INFORMATION TO ITS DIRECTORS, EMPLOYEES AND/OR APPROVED SUBCONTRACTORS REFERRED TO IN ARTICLE 6 HEREOF, TO WHOM DISCLOSURE IS REASONABLY NECESSARY FOR THE PURPOSE OF MANUFACTURE, ASSEMBLY, REPAIR AND SERVICING OF THE PRODUCTS AND/OR THE LICENSED PARTS PURSUANT TO THIS AGREEMENT; PROVIDED, HOWEVER, THAT LICENSEE SHALL OBTAIN FROM EACH OF SUCH APPROVED SUBCONTRACTORS A WRITTEN PROMISE TO TREAT ALL THE INFORMATION AS SECRET AND CONFIDENTIAL AND TO RESTRICT THE USE THEREOF, IN THE MANNER AND FASHION PROVIDED FOR IN THIS ARTICLE 17 AND SHALL, IF SO REQUESTED BY LICENSOR, SUBMIT A COPY OF THE 26 WRITTEN PROMISE TO LICENSOR. 3. ARTICLE 12 (RESTRICTIONS ON USE OF PARTS) WITHOUT THE PRIOR WRITTEN CONSENT OF HONDA OR EXCEPT AS OTHERWISE SPECIFICALLY AUTHORIZED IN THIS CONTRACT, LICENSEE SHALL NOT SELL, DISTRIBUTE, USE OR OTHERWISE DISPOSE OF, DIRECTLY OR INDIRECTLY, THE PARTS FOR ANY PURPOSE OTHER THAN THE MANUFACTURE OR ASSEMBLY OF THE PRODUCTS AT LICENSEES PLANT IN THE TERRITORY OR THE SERVICE OF THE PRODUCTS IN ACCORDANCE WITH THIS CONTRACT, REGARDLESS OF WHETHER SUCH APRTS ARE PURCHASED FROM HONDA, MANUFACTURED BY LICENSEE, MANUFACTURED BY THE SUBCONTRACTORS OR OTHERWISE PROCURED BY LICENSEE AND SUBCONTRACTORS COMPLY WITH THE PROVISIONS OF THIS ARTICLE 12. ARTICLE 18 (LIMITATION OF USE, AND OTHER PROHIBITION) 18.1. LICENSEE SHALL NOT USE OR CAUSE OR PERMIT TO BE USED BY ANY THIRD PARTY THE INTELLECTUAL PROPERTY RIGHTS AND THE TECHNICAL INFORMATION LICENSED OR PROVIDED HEREUNDER, AND THE LICENSED PARTS MANUFACTURED BY LICENSEE AND/OR ITS SUB CONTRACTORS HEREUNDER AND THE SUPPLY PARTS SUPPLIED TO LICENSEE AND/OR ITS PURCHASING AGENCIES DESIGNATED BY LICENSEE HEREUNDER, 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. 18.2. LICENSEE SHALL NEITHER FILE NOR CAUSE TO BE FILED IN ANY COUNTRY ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHT APPLICATION WHICH INCORPORATES OR IS DIRECTED TO THE INTELLECTUAL PROPERTY RIGHTS, THE TECHNICAL INFORMATION, THE KNOW-HOW OR THE TRADEMARKS DISCLOSED TO LICENSEE HEREUNDER. IF APPLICATION FOR ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS IN THE COUNTRY, IT SHALL BE DEEMED A BREACH OF THIS AGREEMENT, AND FURTHER, THE RIGHT TO SUCH APPLICATION AND ANY INTELLECTUAL PROPERTY RIGHTS RESULTING FROM SUCH APPLICATION SHALL BE AUTOMATICALLY GRATUITOUSLY ASSIGNED AND TRANSFERRED BY LICENSEE TO LICENSOR. 18.3 IN THE EVENT ANY INVENTIONS 27 AND IMPROVEMENTS WHICH RELATE TO THE PRODUCTS, THE PARTS, THE KNOW- HOW OR THE INTELLECTUAL PROPERTY RIGHTS WAS MADE BY LICENSEE OR ITS DIRECTORS, OFFICERS, EMPLOYEES AND SUBCONTRACTORS IN THE COURSE OF OR AS THE RESULT OF THE CHANGE AS SET FORTH IN ARTICLE 19.3 HEREOF, LICENSEE SHALL PROMPTLY DISCLOSE IN WRITING TO LICENSOR ALL SUCH INVENTIONS AND IMPROVEMENTS, AND LICENSEE, INSOFAR AS LAWFULLY MAY, HEREBY GRANTS OR CAUSES TO BE GRANTED TO LICENSOR A TRANSFERABLE RIGHT AND LICENSE TO USE SUCH INVENTIONS AND IMPROVEMENTS IN ANY COUNTRY WITH RIGHT TO SUBLICENSE. THE TERMS OF ANY SUBLICENSE WITH RESPECT TO PATENTED INVENTIONS OR IMPROVEMENTS SHALL BE APPROVED BY LICENSEE PRIOR TO THE GRANTING OF SUCH SUBLICENSE. UPON REQUEST BY LICENSOR, LICENSOR AND LICENSEE SHALL JOINTLY FILE APPLICATIONS FOR APPROPRIATE PATENT OR OTHER STATUTORY INTELLECTUAL PROPERTY RIGHTS WITH-RESPECT TO SUCH INVENTIONS OR IMPROVEMENTS IN ANY COUNTRY. THE RIGHT AND LICENSE GRANTED TO LICENSOR HEREUNDER SHALL BE ROYALTY- FREE DURING THE TERMS OF THIS AGREEMENT AND SHALL, AFTER ANY TERMINATION OR EXPIRATION OF THIS AGREEMENT, CONTINUE FOR SUCH PERIOD AND ON SUCH TERMS AS MAY BE MUTUALLY AGREED UPON. 18.4. LINCENSEE SHALL CLAIM NO TITLE OR PROPERTY RIGHT WHATSOEVER DURING THE EXISTENCE OF THIS AGREEMENT AND IF THIS AGREEMENT IS TERMINATED AS A RESULT OF THE DEFAULT OF LICENSEE, THEN LICENSEE SHALL CLAIM NO RIGHT, TITLE, PROPERTY, INTEREST OR USE 28 WHATSOEVER AT ALL TIMES AFTER THE LIFE OF THIS AGREEMENT AS REGARDS THE INTELLECTUAL PROPERTY RIGHTS, KNOW-HOW, TECHNICAL INFORMATION OR OTHER INFORMATION RECEIVED UNDER THIS AGREEMENT. (EMPHASIS SUPPLIED). 4. ARTICLE 21 CONSIDERATION 21.1. IN CONSIDERATION OF THE LICENSE AND TECHNICAL ASSISTANCE TO BE GRANTED OR PROVIDED BY HONDA HEREUNDER, LICENSEE SHALL PAY TO HONDA AN INITIAL FEE AND A ROYALTY IN THE AMOUNT AND IN THE MANNER SET FORTH IN THIS ARTICLE 21. 21.3. LICENSEE SHALL PAY A ROYALTY ON ANY AND ALL PRODUCTS CARRIED OUT OF THE MANUFACTURING FACILITY OF LICENSEE FOR DELIVERY TO ANY AND ALL PURCHASERS, RENTERS OR OTHER TRANSFEREES WHETHER IN THE TERRITORY OR NOT. SUCH ROYALTY SHALL BE IN THE AMOUNT EQUIVALENT TO FOUR PERCENT (4%) OF THE EX FACTORY SALES PRICE (OR EX WAREHOUSE SALES PRICE IN CASE OF THE PRODUCTS KEPT IN A WAREHOUSE IMMEDIATELY BEFORE SUCH DELIVERY) OF SUCH PRODUCTS INVOICED BY LICENSEE TO THE PURCHASERS, RENTERS OR OTHER TRANSFEREES OF SUCH PRODUCTS, LESS: (I) THE LANDED COST (INCLUDING OCEAN FREIGHTS, INSURANCE PREMIUMS, CUSTOMS DUTIES AND INLAND TRANSPORTATION COSTS) OF THE PARTS IMPORTED IRRESPECTIVE OF SOURCE OF PROCUREMENT; (II) THE COST TO LICENSEE OF THE STANDARD BOUGHT OUT COMPONENT PARTS LISTED IN ANNEX 3 ATTACHED HERETO; (II) THE COST TO LICENSEE OF THE STANDARD BOUGHT-OUT COMPONENT PARTS LISTED IN ANNEX 3 ATTACHED HERETO; ARTICLE 25 CONSIDERATION 25.1. IN CONSIDERATION OF THE RIGHT AND LICENSE GRANTED TO LICENSEE UNDER ARTICLE 2 HEREOF AND OF THE FURNISHING OF THE TECHNICAL INFORMATION HEREOF, LICENSEE SHALL PAY TO LICENSOR THE FOLLOWING MODEL FEE AND RUNNING ROYALTY: (A) MODEL FEE. (2) RUNNING ROYALTY LICENSEE SHALL PAY THE RUNNING ROYALTY TO LICENSOR DURING THE ROYALTY PERIOD ON ANY AND ALL PRODUCTS CARRIED OUT OF THE MANUFACTURING FACILITY OF LICENSEE FOR DELIVERY TO ANY AND ALL PURCHASERS, RENTERS OR OTHER TRANSFEREES WHETHER IN THE TERRITORY OR NOT. SUCH RUNNING ROYALTY SHALL BE (A) THE AMOUNT SPECIFIED IN EXHIBIT 1 ATTACHED HERETO OR (B) THE AMOUNT CALCULATED BY MULTIPLYING BY THE RATE SPECIFIED IN EXHIBIT 1 ATTACHED HERETO (INCLUDING ANY REVISION THERETO) WITH THE EX FACTORY SALES PRICE (OR EX WAREHOUSE SALES PRICE IN CASE OF THE PRODUCTS KEPT IN A WAREHOUSE IMMEDIATELY BEFORE SUCH DELIVERY) OF SUCH PRODUCTS INVOICED BY LICENSEE TO PURCHASER, RENTERS OR TIER 29 (III) EXCISE DUTIES IMPOSED ON LICENSEE BY THE GOVERNMENT OF INDIA AND INCLUDED IN SAID EX-FACTORY SALES PRICE OR EX-WAREHOUSE SALES PRICE. THE ROYALTY SHALL BE PAID ON THE PRODUCTS CARRIED OUT OF THE MANUFACTURING FACILITY OF LICENSEE DURING THE PERIOD OF FIVE (5) YEARS (THE ROYALTY PERIOD'), WITHIN THE TERMS OF THIS CONTRACT, FROM THE DAY TO BE DESIGNATED BY HONDA IN WRITING, WHICH DAY SHALL FALL WITHIN THE PERIOD COMMENCING ON THE DAY ON WHICH THE MANUFACTURE OF ANYONE MODEL OF THE PRODUCTS BY LICENSEE ON A COMMERCIAL BASIS STARTS AND ENDING ON THE THIRD ANNIVERSARY OF THE EFFECTIVE DATE. LICENSEE HEREBY AGREES TO USE ITS BEST EFFORTS THE MANUFACTURER OF THE PRODUCTS ON A COMMERCIAL BASIS WITHIN ONE (1) YEAR AFTER THE EFFECTIVE DATE. TRANSFEREES OF SUCH PRODUCTS, LESS, IN CASE OF (B) HEREIN: ( I)THE LANDED COST INCLUDING OCEAN FREIGHT, INSURANCE PREMIUMS, CUSTOMS DUTIES AND OTHER INLAND EXPENSES) OR THE SUPPLY PARTS IRRESPECTIVE OF SOURCE OF IMPORT; (II) THE COST TO LICENSEE OF THE STANDARD BOUGHT OUT COMPONENT PARTS LISTED IN EXHIBIT IV ATTACHED HERETO; AND (III) EXCISE DUTIES IMPOSED ON LICENSEE BY THE GOVERNMENT OF INDIA AND INCLUDED IN SAID EX FACTORY SALES PRICE OR EX WAREHOUSE SALES PRICE. IT BEING UNDERSTOOD BY THE PARTIES THAT THE AFORESAID DEDUCTION IN RESPECT OF CALCULATION OF RUNNING ROYALTIES SHALL BE IN ACCORDANCE WITH THE PREVAILING POLICY OF THE GOVERNMENT OF INDIA. 5. ARTICLE 32(EFFECT OF EXPIRATION OR TERMINATION) 32.1. IN THE EVENT OF EXPIRATION OF THIS CONTRACT, BUT SUBJECT TO THE DUE PERFORMANCE BY LICENSEE OF ITS OBLIGATIONS (INCLUDING THE PAYMENTS OF ROYALTIES) HEREUNDER IN FULL, LICENSEE MAY CONTINUE TO USE THE KNOW- HOW AND THE INDUSTRIAL PROPERTY RIGHTS FOR THE PURPOSES OF MANUFACTURE, ASSEMBLY, PROCUREMENT, SALE, DELIVERY AND SERVICE OF THE PRODUCTS AND THE PARTS. 32.2 IN THE EVENT OF THE TERMINATION OF THIS CONTRACT: (I) LICENSEE SHALL AT ITS EXPENSE PROMPTLY RETURN TO HONDA ALL DOCUMENTS AND MATERIALS EMBODYING THE KNOW-HOW OR ANY PART THEREOF SUPPLIED BY HONDA UNDER OR IN CONNECTION WITH THIS CONTRACT TOGETHER WITH ANY AND ALL REPRODUCED COPIES OF SUCH DOCUMENTS AND MATERIALS; (II) EXCEPT AS OTHERWISE EXPRESSLY STIPULATED HEREIN OR AGREED UPON BY THE PARTIES HERETO, LICENSEE SHALL IMMEDIATELY CEASE TO USE, ARTICLE 33 (EFFECT OF EXPIRY AND TERMINATION) 33.1. IN THE EVENT OF ANY TERMINATION PURSUANT TO ARTICLE 32.1 ON ACCOUNT OF MATERIAL BREACH BY LICENSOR OF ITS OBLIGATIONS UNDER THIS AGREEMENT, AND SUBJECT TO THE DUE PERFORMANCE BY OF ITS MATERIAL OBLIGATIONS, LICENSEE MAY CONTINUE TO MANUFACTURE, ASSEMBLE, SELL, DELIVER AND SERVICE THE PRODUCTS AND THE APRTS UNTIL THE DUE EXPIRATION DATE OF THIS AGREEMENT AS SPECIFIED IN ARTICLE 31 33.2. IN THE EVENT OF ANY TERMINATION PURSUANT TO ARTICLE 32.1 ON ACCOUNT OF MATERIAL BREACH BY LICENSEE ITS MATERIAL OBLIGATIONS UNDER THIS AGREEMENT, LICENSEE SHALL DISCONTINUE (I) THE MANUFACTURE, SALE AND TOHER 30 AND CAUSE ITS DISTRIBUTORS, DEALERS AND SUBCONTRACTORS TO CEASE TO USE, THE INDUSTRIAL PROPERTY RIGHTS AND THE KNOW-HOW AUTHORIZED BY HONDNA TO BE USED IN ACCORDANCE WITH THIS CONTRACT; (III) LICENSEE SHALL IMMEDIATELY PAY TO HONDA ALL SUMS OWING TO HONDA; (IV) EXCEPT AS OTHERWISE SPECIFICALLY REQUIRED HEREUNDER, LICENSEE SHALL FORTHWITH DISCONTINUE, AND CAUSE ITS DISTRIBUTORS, DEALERS AND SUB- CONTRACTORS TO DISCONTINUE, ALL ACTIVITIES UNDER THIS CONTRACT; (V) HONDA MAY AT ITS OPTION REPURCHASE OR CAUSE TO BE REPURCHASED AT A FAIR AND REASONABLE PRICE ALL OR ANY PORTION OF THE PRODUCTS AND THE PARTS THEN HELD BY LICENSEE OR ANY- OF ITS DISTRIBUTORS, DEALERS OR SUBCONTRACTORS, WHICH REMAIN UNSOLD AND UN USED AT THE TIME OF THE TERMINATION OF THIS CONTRACT; (VI) HONDA MAY AT ITS OPTION SELL, DIRECTLY OR INDIRECTLY, THE PRODUCTS AND THE PARTS REPURCHASED UNDER PARAGRAPH (V) ABOVE IN THE TERRITORY OR ANY OTHER COUNTRY, WITHOUT ANY LIABILITY ON THE PART OF HONDA TO ACCOUNT TO LICENSEE FOR ANY PART OF THE PROCEEDS OF SUCH SALE OR ANY OTHER SUBS WHATSOEVER. DISPOSITION OF THE PRODUCTS AND THE PARTS, AND (II) THE USE OF THE INTELLECTUAL PROPERTY RIGHT AND THE TECHNICAL INFORMATION LICENSED OR FURNISHED BY LICENSOR UNDER THIS AGREEMENT WITHOUT INCURRING ANY OBLIGATION OF LICENSORS CONTINUATION OF THE GRANT OF THE RIGHT AND LICENSE PROVIDED HEREUNDER. 33.3. NOTWITHSTANDING ANYTHING TO CONTRARY CONTAINED IN THIS AGREEMENT, IN THE EVENT THIS AGREEMENT EXPIRES ON ITS OWN TERMS LICENSOR AND LICENSEE AGREE AS FOLLOWS: 33.3.1. SUBJECT TO THE PROVISION OF ARTICLE 33.3.2 HEREIN BELOW, THE LICENSEE SHALL CONTINUE MANUFACTURE, SALE, DISTRIBUTION AND SERVICE AND THE PRODUCTS AND THE APRTS AND THE RIGHT TO USE THE TECHNICAL INFORMATION IN RESPECT OF THE MANUFACTURE, SALE, DISTRIBUTION AND SERVICE OF PRODUCTS AND THE PARTS. 33.3.2. THE CONTINUED RIGHT OF USE BY LICENSEE AS ENVISAGED UNDER ARTICLE 33.3.1 ABOVE IS SINTER ALIA UPON THE FOLLOWING MUTUAL UNDERSTANDING: (I) LICENSEE SHALL PAY THE LICENSOR (A) ANY OUTSTNAIDNG AMOUNT UNDER THE APPLICABLE MODEL AGREEMENT TO LICENSOR AS ON THE DATE OF EXPIRY OR TERMINATION OF THIS AGREEMENT TOWARDS THE COST OF RIGHT OF USE BY LICENSEE OF TECHNICAL INFORMATION FOR THE MANUFACTURE, SALE, DISTRIBUTION AND DISPOSITION OF PRODUCTS; AND (B) THE RELEVANT CONSIDERATION FOR A 31 TERM OF OR ANY THREE YEARS FROM THE DATE OF EXPIRY/TERMINATION, WHICH SHALL BE HALF OF THE CURRENT ROYALTY RATE(S) AS SPECIFIED UNDER THIS AGREEMENT (II) FOR THE AVOIDANCE OF ANY DOUBT, LICENSEE SHALL NOT MAKE ANY FURTHER PAYMENT BEYOND THE PERIOD MENTIONED IN 33.3.2(I)(B) ABOVE IN RESPECT OF SUCH CONTINUED RIGHT TO MANUFACTURE, SALE, DISTRIBUTION AND SERVICE OF THE PRODUCT(S) AND PART(S) AS ENVISAGED IN ARTICLE 33.3.1 ABOVE. 33.4 LICENSEE SHALL PROMPTLY DISCONTINUE THE USE OF THE TRADEMARKS LICENSED BY LICENSOR HEREUNDER AND SHALL NOT CLAIM ANY RIGHT, TITLE AND INTEREST WHATSOEVER IN THE SAID TRADEMARKS. 33.5 THE EXPIRATION OR ANY OTHER TERMINATION OF THIS AGREEMENT HEREUNDER SHALL BE WITHOUT PREJUDICE TO ANY RIGHT WHICH SHALL HAVE ACCRUED TO EITHER PARTY HEREUNDER PRIOR TO SUCH EXPIRATION OR TERMINATION. 33.6 LICENSEE SHALL, TO THE EXTENT IT IS REASONABLE, AND FEASIBLE, RETURN TO LICENSOR ALL PARTICULAR DOCUMENTS AND TANGIBLE PROPERTY SUPPLIED BY LICENSOR IN CONNECTION WITH THIS AGREEMENT AND BELONGING TO LICENSOR AND AIL COPIES AND TRANSLATIONS THEREOF EXCEPT IN THE EVENT OF TERMINATION IN ACCORDANCE WITH ARTICLE 33.1, AND SHALL KEEP ALL INFORMATION RECEIVED BY LICENSEE HEREUNDER SECRET AND CONFIDENTIAL IN ACCORDANCE WITH ARTICLE 32 17 HEREOF. 33.7 LICENSEE SHALL NOT BE ENTITLED TO DEMAND FROM LICENSOR, FOR THE EXPIRATION OR TERMINATION OF THIS AGREEMENT OF THE FAILURE TO RENEW OR EXTEND IT, ANY DAMAGES, REIMBURSEMENTS OR OTHER PAYMENTS ON ACCOUNT OF THE CURRENT OR PROSPECTIVE PROFITS ON LICENSEE'S SALE OR ANTICIPATED SALE OF THE PRODUCTS AND THE PARTS, OR ON ACCOUNT OF LICENSEE'S EXPENDITURES, INVESTMENTS OR COMMITMENT MADE IN CONNECTION WITH THE MANUFACTURE OF THE PRODUCTS AND THE PARTS, OR ON ACCOUNT OF THE ESTABLISHMENT, DEVELOPMENT OR MAINTENANCE OF THING GOODWILL OR OTHER BUSINESS OF LICENSEE, OR ON ACCOUNT OF ANY OTHER CAUSE OR THING WHATSOEVER, EXCEPT IN CASE WHERE THIS AGREEMENT IS TERMINATED FOR ANY REASON DIRECTLY IMPUTABLE TO LICENSOR. 33.8 THE LICENSEE SHALL PROMPTLY DISCONTINUE THE USE OF; (I) THE TRADEMARKS LICENSED BY LICENSOR HEREUNDER SHALL NOT CLAIM ANY RIGHT, TITLE AND INTEREST WHATSOEVER IN THE SAID TRADEMARKS. FURTHER, LICENSEE AGREES TO TERMINATE THE UTILIZATION OF THE PRODUCT IDENTIFICATIONS USED FOR THE PRODUCTS UNDER THIS AGREEMENT AND 1995 LTAA WHICH BEING; (I) INTRODUCED BY LICENSOR, (II) OR ORIGINATED FROM ANY OF OTHER LICENSOR'S PRODUCTS NAMES, CODE OR IDENTIFICATIONS AND, REGARDLESS OF THEIR REGISTRATION STATUS OR OWNERSHIP OF SUCH NAMES, CODE OR IDENTIFICATIONS. FOR THE AVOIDANCE OF DOUBT, THE NAMES 33 OF THE PRODUCTS INTRODUCED BY LICENSOR OR ORIGINATED FROM LICENSORS PRODUCTS NAMES, CODE OR IDENTIFICATIONS SHALL INCLUDE, WITHOUT LIMITATIONS; CB, CBZ, CD AND CD 100. FOR THE PURPOSES OF THIS ARTICLE 33.8, LICENSEES OBLIGATIONS TO DISCONTINUE UNDER PARA (I) AND (II) ABOVE SHALL NOT INCLUDE, WITHOUT LIMITATIONS AMBITION, AMBITION 135, DAWN, SPLENDOR, SPLENDOR + PASSION, PASSION PLUS, JOY, SLEEK, STREET SMART, AND KARIZMA. COMPARATIVE CHART OF COVENANTS OF (I) EXPORT AGREEM ENT, DATED 21.6.2004, BETWEEN HONDA MOTOR CO.LTD. JAPAN AND HERO HONDA MO TORS LTD. AND (II) EXPORT AGREEMENT DT. 1.4.1998, BETWEEN HONDA MOTOR CO.LTD. JAPAN AND SHRIRAM HONDA POWER EQUIPMENT LTD. (NOW KNOWN AS HO NDA SIEL POWER PRODUCTS LTD.) SL.NO. FACTS OF HONDA SIEL POWER PRODUCTS LTD. FACTS OF HERO MOTO CORP LTD. 1. 1. ARTICLE 1.1 DEFINES THE TERM 'PRODUCTS' SHALL MEAN ALL OF PORTABLE GENERATORS, GENERAL PURPOSE ENGINES, WATER PUMPS AND PARTS THEREOF, WHICH HAVE BEEN MANUFACTURED OR ASSEMBLED BY SHPEL IN THE UNION OF INDIA UNDER THE TIC CONTRACT, AND SHALL ALSO INCLUDE SUCH OTHER MODELS OF PORTABLE GENERATORS AND OTHER PRODUCTS SUCH AS GENERAL PURPOSE ENGINES AND WATER PUMPS AS MAY BE DECIDED FROM TIME TO TIME BY 1. ARTICLE 1.1 DEFINES THE TERM 'PRODUCTS TO MEAN TWO/THREE WHEELERS INCLUDING SCOOTERS SPECIFICALLY LISTED IN EXHIBIT 1. 34 MUTUAL WRITTEN CONSENT BETWEEN HONDA AND SHPEL, WHICH SHALL CONSTITUTE AN INTEGRAL PART OF THIS AGREEMENT. 2. ARTICLE 1.2 DEFINES THE TERM 'PERMITTED COUNTRIES' SHALL MEAN A COUNTRY OR COUNTRIES, OTHER THAN USA, CANADA, ISLAMIC REPUBLIC OF IRAN, REPUBLIC OF IRAQ, SOCIALIST PEOPLE'S LIBYAN, ARAB JAMAHIRIYA, KOREA, ANGOLA, MYANMAR, KINGDOME OF LESOTHO, KINGDOM OF SWAZILAND, REPUBLIC OF BOTSWANA & REPUBLIC OF NAMIBIA. ARTICLE 1(4) DEFINES THE DESIGNATED COUNTRIES AND ARTICLE 1(5) DEFINES NOMINATED COUNTRIES AS THOSE LISTED IN EXHIBIT 11(1) AND 11(2). 3. ARTICLE 3.1. (CONSENT TO EXPORT) 3.1 SUBJECT TO THE TERMS AND CONDITIONS HEREIN CONTAINED, HONDA HEREBY GIVES CONSENT TO THE EXPORT AND SALE BY SHPEL OF THE PRODUCTS TO THE DISTRIBUTORS IN THE PERMITTED COUNTRIES. IN THIS CONNECTION, IT IS AGREED TO BY SHPEL THAT HONDA MAY ALSO EXPORT THE PRODUCTS AND THE SPARE PARTS TO AND SELL THEM IN THE PERMITTED COUNTRIES. 3.2 SHPEL SHALL ENSURE THAT EACH DISTRIBUTORS SHALL SELL AND DISTRIBUTE ONLY IN SUCH DISTRIBUTOR'S COUNTRY ALL THE PRODUCTS SUPPLIED BY SHPEL TO IT, AND SHALL NEITHER PERMIT NOR CAUSE EACH DISTRIBUTOR TO SELL SUCH PRODUCTS OUTSIDE SUCH DISTRIBUTOR'S COUNTRY. 3.3 IT IS SPECIFICALLY UNDERSTOOD AND AGREED TO BY ARTICLE 2 SUBJECT TO THE TERMS AND CONDITIONS CONTAINED HEREIN, LICENSOR HEREBY GIVES CONSENT TO THE EXPORT TO THE DESIGNATED COUNTRY BY LICENSEE WITHOUT A RIGHT TO RE-EXPORT; (I)OF THE PRODUCTS FOR THE SALE THEREOF WITHIN THE DESIGNATED COUNTRY ONLY. (II) OF THE COMPONENT PARTS FOR THE ASSEMBLY OF THE PRODUCTS THEREIN AND FOR THE SALE THEREOF WITHIN THE SPECIFIC DESIGNATED COUNTRY ONLY, AND (III) OF THE SERVICE APRTS ONLY FOR THE PURPOSE OF REPAIR OR REPLACEMENT OF THE PRODUCTS EXPORTED TO AND SOLD IN THE DESIGNATED COUNTRY BY LICENSEE HEREUNDER. IN THIS CONNECTION, IT IS AGREED TO BY LICENSEE THAT 35 BOTH PARTIES THAT THE ENTIRE PROVISION OF ARTICLE 4 (EXPORTS OF THE TIC CONTRACT SHALL MUTATIS MUTANDIS BE APPLICABLE TO THE EXPORT BY SHPEL HEREUNDER WITH THE DELETION OF THE WORDINGS, 'BUT ONLY THROUGH HONDA' APPEARING IN (I), (II) AND (III) OF ARTICLE 4.2 THEREOF TO THE EXTENT THAT THERE IS NO PROVISION TO THE CONTRARY HEREIN OR PROVIDED THAT SUCH APPLICATION DOES NOT CONTRADICT THE INTENTION OF THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, NO PROVISIONS OF ARTICLE 4.4 OF THE TIC CONTRACT SHALL BE APPLICABLE AND HONDA SHALL BE EXEMPTED FROM PERFORMING ITS OBLIGATIONS THEREUNDER WITH REGARD TO THE EXPORT BY SHPEL HEREUNDER. LICENSOR AND THIRD PARTIES MAY ALSO EXPORT THE PRODUCTS AND THE SERVICE PARTS TO AND SELL THEM IN THE DESIGNATED COUNTRY. 4. ARTICLE 4 (TRADEMARKS AND COUNTRY OF ORIGIN) 4.1 SUBJECT TO THE TERMS AND CONDITIONS HEREINAFTER CONTAINED, HONDA HEREBY GIVES CONSENT THAT THE TRADEMARKS TO BE USED FOR OR IN CONNECTION WITH THE PRODUCTS EXPORTED BY SHPEL HEREUNDER SHALL BE 'HONDA AND SHRIRAM HONDA, AND THE PROVISIONS OF ARTICLES 24.2 THROUGH 24.4 OF THE T/C CONTRACT SHALL MUTATIS MUTANDIS APPLY TO SUCH TRADE MARKS HONDA AND SHRIRAM HODNA. 4.2. THE COUNTRY OF ORIGIN SHALL BE CLEARLY INDICATED ON ARTICLE 3 (TRADE MARKS AND COUNTRY OF ORIGIN) 3.1.THE PRODUCTS, AND WHEREVER DESIGNATED BY LICENSOR, THE SERVICE PARTS TO BE EXPORTED BY LICENSEE HEREUNDER SHALL BEAR THE TRADE MARK HERO HONDA OR TRADE MARKS AS MAY BE DESIGNATED BY LICENSOR (THE TRADE MARK HERO HONDA AND SUCH DESIGNATED TRADE MARKS BEING HEREINAFTER COLLECTIVELY REFERRED TO AS TRADE MARK.. 3.2. THE COUNTRY OF ORIGIN SHALL BE CLEARLY INDICATED ON ALL PRODUCTS AND SERVICE PARTS TO BE EXPORTED BY 36 ALL PRODUCTS TO BE EXPORT BY SHPEL HEREUNDER, IF SO REQUESTED BY THE DISTRIBUTOR. LICENSEE HEREUNDER AND/OR ON ALL PACKAGES OF SUCH PRODUCTS AND SERVICE PARTS. 5. ARTICLE 5.1 (CONSIDERATION) IN CONSIDERATION OF THE CONSENT FOR EXPORT AND USE OF TRADE MARKS AND COOPERATION AND ASSISTANCE GRANTED OR PROVIDED BY HONDA HEREUNDER, SHPEL SHALL PAY TO HONDA A CONSIDERATION IN THE AMOUNT EQUAL TO 8% OF THE EXPORT PRICE, F.O.B. PORT OF INDIA OF THE PRODUCTS SHIPPED BY OR ON BEHALF OF SHPEL FOR EXPORT HEREUNDER. THIS CONSIDERATION SHALL BE PAYABLE ONLY IF RELEVANT DISTRIBUTOR IS ANY OF THE HONDAS DISTRIBUTORS AND SHPELS DISTRIBUTORS APPOINTED WITH HONDAS REFERENCE OR ASSISTANCE. XXXX XXXXXX XXXX ARTICLE 5.1. IN CONSIDERATION OF THE CONSENT AND THE ASSISTANCE GIVEN BY LICENSOR HEREUNDER, LICENSEE SHALL PAY TO LICENSOR A COMMISSION IN AN AMOUNT EQUIVALENT TO FIVE (5) PER CENT OF THE EXPORT PRICE, F.O.B. PORT OF THE TERRITORY, OF EACH OF THE PRODUCTS SHIPPED BY OR ON BEHALF OF LICENSEE FOR EXPORT HEREUNDER; PROVIDED THAT SUCH CONSIDERATION BECOMES PAYABLE ONLY WHEN THE RELEVANT DISTRIBUTOR IS A DISTRIBUTOR OF THE LICENSOR. COMMISSION AGAINST EXPORT TO NEPAL AND BHUTAN SHALL BE PAID SUBJECT TO THE LOCAL REGULATIONS/APPROVALS IN INDIA. 6. ARTICLE 6 HONDA AND SHPEL MUTUALLY CONFIRM THAT IT IS MOST PREFERABLE TO UTILIZE FOR THE PURPOSE OF DISTRIBUTION OF THE PRODUCTS EXPORTED BY SHPEL HEREUNDER THE EXISTING DISTRIBUTION AND SERVICE NET WORK IF ANY. ARTICLE 4.2. LICENSOR AGREES THAT LICENSEE WILL UTILIZE THE DISTRIBUTION AND SERVICE NET WORK ESTABLISHED BY DISTRIBUTORS OF LICENSOR GOODS, AND LICENSEE HEREBY AGREES TO SHIP AND MAKE ALL ITS EXPORTS OF THE PRODUCTS AND THE SERVICE PARTS FOR THE DESIGNATED COUNTRY TO (IF THE DISTRIBUTOR 37 IN THE DESIGNATED COUNTRY IS THE EXCLUSIVE DISTRIBUTOR OR, EVEN IF A NON EXCLUSIVE DISTRIBUTOR, THE ONLY DISTRIBUTOR IN THE DESIGNATED COUNTRY) THE DISTRIBUTOR FOR THE LICENSOR GOODS OR (IF THERE ARE MORE THAN ONE DISTRIBUTOR)THE DISTRIBUTOR THAT LICENSOR WILL DESIGNATED AFTER MUTUAL CONSULTATION WITH LICENSEE, IN THE DESIGNATED COUNTRY). 7.6. THE LD.D.R. COULD NOT SPECIFICALLY POINT OUT S UBSTANTIVE DIFFERENCE/VARIATION IN THE CLAUSES BETWEEN BOTH TH E AGREEMENTS. IN OUR VIEW THE CLAUSES IN THESE AGREEMENT ARE PARA MATERI A. HENCE WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE STANDS COVERE D BY THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S HERO MOTOR CORP.LTD . (SUPRA), WHEREIN THE ISSUE WAS CONSIDERED AS FOLLOWS. 25. FROM THE READING OF THE AGREEMENT, IT IS EVIDE NT THAT VARIOUS CLAUSES OF THE AGREEMENT DO NOT SUPPORT THE FINDING OF THE ASSESSING OFFICER. THE INFERENCE OF THE ASSESSING OFFICER IS THAT THE PAYM ENT UNDER THIS AGREEMENT IS FOR ACQUISITION OF TECHNICAL KNOW-HOW AND TECHNICAL INFORMATION FOR MANUFACTURING OF TWO WHEELERS AND, THEREFORE, HE HELD THE PAYMENT TO BE CAPITAL IN NATURE FOR ACQUISITION OF INTANGIBLE ASSET AND ALLOWED DEPRECIATION AT THE RATE OF 25% THEREON. WH ILE ARRIVING AT THE CONCLUSION, HE HAS OBSERVED THAT THE ASSESSEE HAS A N EXCLUSIVE RIGHT OF MANUFACTURE, SALE AND DISTRIBUTION. HOWEVER, FROM ARTICLE 2 OF THE AGREEMENT, IT IS EVIDENT THAT THE EXCLUSIVE RIGHT I S ONLY AGAINST THE THIRD PARTIES AND NOT AGAINST HMSI. ARTICLE 17 OF THE AGR EEMENT CLEARLY PROVIDES THAT THE KNOW-HOW, TECHNICAL INFORMATION AND ANY OT HER BUSINESS INFORMATION OF LICENSOR SHALL REMAIN THE SOLE AND E XCLUSIVE PROPERTY OF THE LICENSOR AND SHALL BE HELD IN TRUST AND CONFIDENCE BY THE LICENSEE. ARTICLE 38 18 OF THE AGREEMENT PROVIDES THAT THE LICENSEE (I.E . THE ASSESSEE) SHALL NOT PERMIT ANY THIRD PARTY TO USE THE INTELLECTUAL PROP ERTY RIGHT OR THE TECHNICAL INFORMATION PROVIDED UNDER THIS LICENSE. PARAGRAPH 18.3 OF THE AGREEMENT PROVIDES THAT EVEN IN RESPECT OF ANY INVENTIONS AND IMPROVEMENTS MADE BY THE LICENSEE I.E. THE ASSESSEE, THE LICENSEE IS REQ UIRED TO DISCLOSE IT TO THE LICENSOR I.E. HMSI AND IT IS THE HMSI WHO WILL HAVE A TRANSFERABLE RIGHT TO USE SUCH INVENTIONS AND IMPROVEMENTS WITH RIGHT TO SUB-LICENSE. THEREFORE, NOT ONLY THE ORIGINAL INFORMATION AND KNOW-HOW PROV IDED BY THE LICENSOR IS THE PROPERTY OF THE LICENSOR AND NOT THE ASSESSEE B UT EVEN ANY INVENTIONS AND IMPROVEMENTS MADE BY THE ASSESSEE WOULD BE TRAN SFERRED TO THE LICENSOR BY THE LICENSEE. PARAGRAPH 18.4 CLEARLY PR OVIDES THAT THE ASSESSEE SHALL NOT CLAIM ANY TITLE OR PROPERTY RIGHT IN RESP ECT OF ANY INTELLECTUAL PROPERTY RIGHTS, KNOW-HOW, TECHNICAL INFORMATION ET C. PROVIDED UNDER THIS AGREEMENT. ARTICLE 25 PROVIDES THE CONSIDERATION TO BE PAID BY THE ASSESSEE FOR THE USE OF TECHNICAL INFORMATION PROVI DED TO THE ASSESSEE UNDER THIS LICENSE. THE CONSIDERATION IS IN THE FOR M OF MODEL FEE AS WELL AS THE RUNNING ROYALTY. PARAGRAPH 33.6 OF THE AGREEMEN T PROVIDES THAT THE LICENSEE I.E. THE ASSESSEE SHALL RETURN TO THE LICE NSOR ALL DOCUMENTS AND TANGIBLE PROPERTY SUPPLIED BY LICENSOR IN CONNECTIO N WITH THIS AGREEMENT. THIS PROVES BEYOND DOUBT THAT THE INTANGIBLE PROPE RTY CONTINUES TO BE OWNED OF THE LICENSOR AND THE ASSESSEE HAS NOT ACQU IRED ANY KNOW- HOW OR LICENSE BY VIRTUE OF THIS AGREEMENT WHICH CAN BE SAID TO BE INTANGIBLE ASSET OF THE ASSESSEE. 26. IN THE LIGHT OF THESE FACTS LET US EXAMINE TH E VARIOUS DECISIONS DISCUSSED ABOVE SO AS TO ARRIVE AT THE FINDING WHIC H OF THE DECISIONS IS APPLICABLE IN THE CASE OF THE ASSESSEE. 27. IN OUR OPINION, THE FACTS OF THE ASSESSEE'S CAS E ARE IDENTICAL TO THE FACTS IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. (SUPRA). IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. (SUPRA), THE ASSESSEE CO MPANY MADE THE LUMP SUM PAYMENT AND ALSO THE RUNNING ROYALTY. THE RUNNI NG ROYALTY WAS CALCULATED AS A PERCENTAGE OF SALES. THE LUMP SUM P AYMENT WAS TREATED AS CAPITAL EXPENDITURE BY THE ASSESSEE COMPANY AND THE RUNNING ROYALTY WAS TREATED AS REVENUE EXPENDITURE. THE ASSESSING O FFICER DISALLOWED THE RUNNING ROYALTY HOLDING IT TO BE CAPITAL EXPENDITUR E WHICH WAS CONFIRMED BY THE LEARNED CIT(A) AS WELL AS THE ITAT. THE HON' BLE JURISDICTIONAL HIGH COURT ALLOWED THE APPEAL. THE FACTS OF THE ASSESSEE 'S CASE ARE IDENTICAL BECAUSE THE ASSESSEE ALSO IN THE YEAR 1984 ENTERED INTO AN AGREEMENT BY WHICH THE ASSESSEE WAS PROVIDED WITH TECHNICAL ASSI STANCE FOR SETTING UP OF THE PLANT AND ALSO FOR MANUFACTURE, ASSEMBLY AND SERVICE OF THE MOTORCYCLES. THE ASSESSEE MADE LUMP SUM PAYMENT OF $5,00,000 FOR THE TECHNICAL ASSISTANCE FOR CONSTRUCTION OF PLANT AND PAID A RUNNING ROYALTY AS A PERCENTAGE OF SALES IN RESPECT OF TECHNICAL ASSIS TANCE FOR MANUFACTURE, ASSEMBLY AND SERVICE OF THE MOTORCYCLES. THE RUNNIN G ROYALTY WHICH WAS PAID ANNUALLY WAS CLAIMED AS REVENUE EXPENDITURE AN D WAS DISALLOWED 39 BY THE ASSESSING OFFICER TREATING THE SAME AS CAPIT AL EXPENDITURE. THUS, THE FACTS OF THE ASSESSEE'S CASE ARE IDENTICAL TO T HE FACTS BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CLIMATE SYSTEMS INDIA LTD. (SUPRA). 28. SIMILAR WERE THE FACTS BEFORE THE HON'BLE JURIS DICTIONAL HIGH COURT IN THE CASE OF SHARDA MOTOR INDUSTRIAL LTD. ( SUPRA). IN THAT CASE ALSO, SMIL MADE A LUMP SUM PAYMENT AND ALSO RUNNING ROYAL TY AT A SPECIFIED PERCENTAGE BASED UPON THE PRODUCTION. THE LUMP SU M PAYMENT WAS TREATED AS CAPITAL EXPENDITURE AND RUNNING ROYALTY WAS CLAIMED AS REVENUE EXPENDITURE. THE ASSESSING OFFICER TREATED THE ROYALTY AS CAPITAL EXPENDITURE AND THE HON'BLE JURISDICTIONAL HIGH CO URT AFFIRMED THE VIEWS OF THE TRIBUNAL THAT THE PAYMENT OF RUNNING ROYALTY WAS REVENUE EXPENDITURE. IN THIS CASE, THE HON'BLE JURISDICTION AL HIGH COURT HAS CONSIDERED THE DECISION OF HON'BLE APEX COURT IN TH E CASE OF SOUTHERN SWITCHGEARS LTD. (SUPRA) RELIED UPON BY THE REVENUE . 29. IN THE CASE OF LUMAX INDUSTRIES LTD. (SUPRA) TH E ASSESSEE WAS PAYING LICENSE FEE ON YEAR TO YEAR BASIS FOR ACQUIS ITION OF TECHNICAL KNOWLEDGE. THE L1L CLAIMED THE SAID PAYMENT AS REVE NUE EXPENDITURE WHICH WAS DISALLOWED BY THE ASSESSING OFFICER HOLDI NG THAT BY VIRTUE OF THE AGREEMENT, THE L1L HAD DERIVED AN ASSET OF ENDU RING NATURE. ON APPEAL, THE CIT(A) ALLOWED THE ASSESSEE'S CLAIM AND THE TRIBUNAL UPHELD THE ORDER OF THE CIT(A). ON FURTHER APPEAL, THE HON 'BLE JURISDICTIONAL HIGH COURT UPHELD THE ORDER OF THE ITAT AND HAS ALSO OBS ERVED THAT EVEN IF THE ASSESSEE HAD OBTAINED THE LONG TERM ADVANTAGE OF EN DURING BENEFIT, THAT BY ITSELF WOULD NOT CONVERT ANY EXPENDITURE INCURRE D BY THE ASSESSEE INTO CAPITAL EXPENDITURE. THIS DECISION OF HON'BLE JURIS DICTIONAL HIGH COURT IS AFTER CONSIDERING THE DECISION OF HON'BLE APEX COU RT IN THE CASE OF JONAS WOODHEAD AND SONS (INDIA) LTD. (SUPRA) RELIED UPON BY THE REVENUE. THE DECISIONS OF HON'BLE APEX COURT IN THE CASE OF SOUT HERN SWITCH GEAR LTD. (SUPRA) AND JONAS WOODHEAD AND SONS (INDIA) LTD. (S UPRA) HAVE SLIGHTLY DIFFERENT FACTS BECAUSE IN BOTH THE CASES, THERE WA S A COLLABORATION AGREEMENT BY WHICH TECHNICAL ASSISTANCE WAS PROVIDE D FOR SETTING UP OF THE FACTORY AND ALSO MANUFACTURE AND SALE OF PRODUC T. THE PAYMENT OF ROYALTY WAS LUMP- SUM PAYMENT AND, THEREFORE, THE H ON'BLE APEX COURT UPHELD THE VIEW OF THE REVENUE THAT 25% OF THE PAYM ENT IS CAPITAL IN NATURE. IN THE CASE OF THE ASSESSEE ALSO, THE COLLA BORATION 'AGREEMENT WAS FOR GRANT OF TECHNICAL ASSISTANCE FOR SETTING UP OF THE FACTORY AND ALSO FOR THE MANUFACTURE AND SALE OF THE PRODUCT. BUT THE AS SESSEE MADE SEPARATE PAYMENT FOR THE TECHNICAL ASSISTANCE FOR SETTING UP OF THE FACTORY WHICH WAS $5,00,000. THIS SUM WAS TREATED AS CAPITAL EXP ENDITURE BY THE ASSESSEE ITSELF. THE ANNUAL PAYMENT FOR THE ROYALTY WAS BASED UPON THE PERCENTAGE OF SALE OF THE MOTORCYCLES. THUS, THE FACTS IN THE CASE OF THE ASSESSEE ARE DIS TINGUISHABLE THAN THE FACTS BEFORE THE HON'BLE APEX COURT. ON THE OTHER H AND, THE FACTS OF THE 40 ASSESSEE'S CASE ARE IDENTICAL TO THE FACTS BEFORE T HE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CLIMATE SYSTEMS INDIA LTD . (SUPRA) AND SHARDA MOTOR INDUSTRIAL LTD. (SUPRA) AND ALSO THE DECISION OF ITAT IN ASSESSEE'S OWN CASE CITED SUPRA. WE, THEREFORE, RESPECTFULLY F OLLOWING THE ABOVE DECISIONS OF HON'BLE JURISDICTIONAL HIGH COURT, HOL D THAT THE ANNUAL PAYMENT OF ROYALTY WAS A REVENUE EXPENDITURE. ACCOR DINGLY, GROUND NO.6 OF THE ASSESSEE'S APPEAL IS ALLOWED. 7.7. THOUGH THE ASSESSEE HAS RELIED ON A NUMBER OF DECISIONS, IN VIEW OF THE FINDING OF THE COORDINATE BENCH, WE DO NOT D EEM IT NECESSARY TO DEAL WITH THE SAME. IN THE RESULT GROUND NO. 3 TO 3.5 AND GROUND NO.4 ARE ALLOWED. 7.8. GROUND NOS. 5 TO 5.7 ARE ON THE DISALLOWANCE M ADE ON PAYMENT OF EXPORT COMMISSION U/S 40(A)(I). AFTER HEARING RIVA L CONTENTIONS WE FIND THAT THE ISSUE IN QUESTION HAS BEEN CONSIDERED BY THE DELHI C BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO. 5130/DEL/2010 (SUPRA). 7.9. THE TRIBUNAL IN THE CASE OF HERO MOTOR CORP.L TD. (SUPRA) AT PARA 71 PAGE 65 OF THE ORDER HELD AS FOLLOWS WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BOTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WHILE CONSID ERING THE ADJUSTMENT MADE BY THE TPO IN RESPECT OF EXPORT AGREEMENT, WE HAVE DISCUSSED BOTH THESE AQREERNENTS. THE TECHNICAL KNOW-HOW AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND HMCL IN THE YEAR 1984 WHIC H WAS RENEWED IN THE YEAR 1994 AND THEN IN 2004. UNDER THE TECHNICAL KNOW-HOW AGREEMENT, THE ASSESSEE WAS PERMITTED TO MANUFACTUR E, ASSEMBLE, SELL AND DISTRIBUTE THE PRODUCTS WITHIN THE TERRITORY W HICH WAS DEFINED AS REPUBLIC OF INDIA. THUS, SINCE 1984 TO 2004, THE A SSESSEE WAS NOT ALLOWED TO EXPORT ANY PRODUCT. THE EXPORT AGREEMENT WAS ENTERED INTO WITH HMCL ONLY ON 21 ST JUNE, 2004 BY WHICH HMCL GAVE ITS CONSENT FOR EXP ORT OF THE GOODS TO THE DESIGNATED COUNTRIES ON THE PAY MENT OF EXPORT COMMISSION. THEREFORE, THE CONTENTION OF THE REVENU E THAT CUMULATIVE EFFECT 41 OF THE AGREEMENTS IS TO BE CONSIDERED CANNOT BE ACC EPTED. BOTH AGREEMENTS WERE ENTERED INTO IN DIFFERENT PARTS OF TIME, ONE IN YEAR 1984 AND, THE OTHER IN THE YEAR 2004 AND BOTH THE AGREEM ENT OPERATE UNDER DIFFERENT FIELDS. BY THE FIRST AGREEMENT, HMCL PROV IDED TECHNICAL KNOW- HOW FOR MANUFACTURE AND SALE OF TWO WHEELERS WITHIN THE TERRITORY OF INDIA. BY THE EXPORT AGREEMENT, HMCL PERMITTED THE ASSESSE E TO EXPORT THE DESIGNATED GOODS TO THE DESIGNATED COUNTRIES OUTSID E INDIA. THEREFORE, BOTH THE AGREEMENTS ARE TO BE INTERPRETED INDEPENDE NTLY. ON THE PERUSAL OF THE EXPORT AGREEMENT, WE ARE UNABLE TO AGREE WITH T HE REVENUE THAT THE EXPORT AGREEMENT IS IN THE NATURE OF ROYALTY OR FEE S FOR TECHNICAL SERVICES. WE FIND THAT THE AUTHORITY FOR ADVANCE RULING HAS C ONSIDERED THE ISSUE OF TDS ON THE EXPORT COMMISSION IN THE CASE OF SPAHI P ROJECT P.LTD. (SUPRA). IN THAT CASE, THE FACTS ARE THAT THE ASSESSEE, AN INDI AN COMPANY ENGAGED IN THE MANUFACTURING AND SUPPLY OF INDUSTRIAL PESTICID ES, PROPOSED TRANSACTIONS WITH ZAIKOG, A NON-RESIDENT COMPANY IN CORPORATED IN SOUTH AFRICA; WHICH PROMOTED AND DISTRIBUTED VARIOUS PROD UCTS. ZAIKOG OFFERED ITS SERVICES TO PROMOTE AND MARKET A PRODUCT FOR TERMIT E CONTROL. AND FOR THIS ZAIKOG WAS TO RECEIVE A COMMISSION OF 3% ON EVERY C OMPLETED TRANSACTION. THE ROLE OF ZAIKOG WAS TO COMMUNICATE THE DETAILS O F THE INTERESTED PARTIES TO THE APPLICANT WHICH WOULD PURSUE THE PROPOSAL FO R CONFIRMED ORDERS WHICH WERE TO BE EXECUTED DIRECTLY BY THE APPLICAN T. THE SALE CONSIDERATION WAS TO BE RECEIVED IN INDIA BY THE AP PLICANT AND THE COMMISSION WAS PAYABLE TO ZAIKOG IN INDIA. ON THESE FACTS, THE ASSESSEE SOUGHT THE RULING OF THE AUTHORITY ON THE FOLLOWING QUESTIONS, INTER ALIA: (A) WHETHER THE AMOUNTS PROPOSED TO BE PAID BY TH E APPLICANT TO ZAIKOG WERE SUBJECT TO DEDUCTION OF TAX AT SOURCE U NDER SECTION 195 OF THE INCOME-TAX ACT, 1961; (B) WHETHER THE AMOUNTS TO BE PAID BY THE APPLICA NT TO ZAIKOG WERE TAXABLE IN THE HANDS OF ZAIKOG, WHICH DID NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA; AND (C) WHETHER THE AMOUNT PAYABLE TO ZAIKOG WOULD BE TAXABLE AS FEES FOR TECHNICAL SERVICES IN INDIA. ON THESE FACTS, THE AUTHORITY RULED AS UNDER:- '(I) THAT, IN VIEW OF CIRCULAR NO.23, DATED JULY 23 , 1969, AND NO.786 DATED FEBRUARY 7, 2000 ([2000] 241 ITR (ST.) 132), WHICH REITERATED THAT CIRCULAR, ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES, THE PA YMENTS MADE TO ZAIKOG TOWARDS COMMISSION FOR SERVICES RENDERED BY IT ABRO AD WERE NOT LIABLE TO BE TAXED IN INDIA EITHER UNDER THE INCOME-TAX ACT, 1961, OR UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND SOUTH AFRICA (DTAA). CONSEQUENTLY, THE APPLICANT WAS NOT LIABLE TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT. VIEWED FROM THE ANGLE OF SECTION 9(1) OF THE ACT, ZAIKOG DID NOT EARN ANY INCOME OR ACCOUNT OF B USINESS CONNECTION IN INDIA. NOR COULD ZAIKOG BE SUBJECTED TO TAX IN INDI A IN THE ABSENCEOF A PERMANENT ESTABLISHMENT IN INDIA . 42 (II) THAT ZAIKOG WOULD NOT BE RENDERING SERVICES OF A MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE AND, THEREFORE, LIABILITY TO TAX COULD NOT BE FASTENED ON IT BY INVOKING THE PROVISIONS DEALING WITH FEES FOR TECHNICAL SERVICES. 72. THE RATIO OF THE ABOVE DECISION OF AUTHORITY F OR ADVANCE RULING WOULD BE SQUARELY APPLICABLE TO THE CASE OF THE ASS ESSEE. EVEN OTHERWISE, AS PER THE PROVISIONS OF THE INCOME-TAX ACT, THE EX PORT COMMISSION PAID BY. THE ASSESSEE WOULD NOT FALL WITHIN THE AMBIT OF EIT HER ROYALTY OR FEE FOR TECHNICAL SERVICES. THE 'ROYALTY' HAS BEEN DEFINED IN EXPLANATION-2 AFTER SECTION 9(1)(VI) OF THE INCOME-TAX ACT, WHICH READS AS UNDER:- 'EXPLANATION 2. - FOR THE PURPOSES OF THIS CLAUSE. 'ROYALTY' MEANS, CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECI PIENT CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS') FOR- (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECR ET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; (II) THE IMPARTING OF ANY INFORMATION CONCERNING TH E WORKING OF, OR THE USE OF, A PATENT, INVENTION, MODEL, DESIGN, SECRET FORM ULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; (III) THE USE OF ANY PATENT INVENTION, MODEL, DESI GN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TE CHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR S KILL; [(IVA) THE USE OR RIGHT TO USE ANY INDUSTRIAL, COMM ERCIAL OR 'SCIENTIFIC EQUIPMENT BUT NOT 'INCLUDING THE AMOUNTS REFERRED T O IN SECTION 44BB;} (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT LITERARY, ARTISTIC OR SCI ENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISIO N OR TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING, BUT NOT INCLUDI NG CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS; OR (VI) THE RENDERING OF ANY SERVICES IN CONNECTION WI TH THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO (IV), (IV A) AND (V). 73. SIMILARLY, 'FEE FOR TECHNICAL SERVICES' HAS BEE N DEFINED BY WAY OF EXPLANATION-2 AFTER SECTION 9(L)(VII) OF THE INCOME -TAX ACT. FROM A PLAIN READING OF THE ABOVE DEFINITIONS OF 'ROYALTY' AS WE LL AS 'FEE FOR TECHNICAL SERVICES', IT WOULD BE EVIDENT THAT THE PAYMENT OF EXPORT COMMISSION WOULD NOT FALL IN ANY OF THE ABOVE DEFINITIONS. BY WAY OF TECHNICAL AGREEMENT, THE ASSESSEE RECEIVED THE TECHNICAL KNOW-HOW TO MANUFAC TURE, ASSEMBLE, SELL AND DISTRIBUTE THE TWO WHEELERS WITHIN THE TERRITOR Y OF INDIA. THE PAYMENT MADE IN PURSUANCE TO SUCH AGREEMENT WAS ROYALTY AND HAS BEEN TREATED BY THE ASSESSEE ITSELF AS ROYALTY. BY WAY OF SECOND AGREEMENT I.E. EXPORT AGREEMENT, HMCL PERMITTED THE ASSESSEE TO EXPORT ~ THE SPECIFIED TWO 43 WHEELERS TO THE SPECIFIED COUNTRIES. THEREFORE, BY EXPORT AGREEMENT, THE ASSESSEE HAS NOT BEEN TRANSFERRED OR PERMITTED TO U SE ANY PATENT, INVENTION, MODEL, DESIGN OR SECRET FORMULA. SIMILAR LY, HMCL. BY WAY OF EXPORT AGREEMENT. HAS NOT RENDERED ANY MANAGERIAL. TECHNICAL OR CONSULTANCY SERVICES. IN VIEW OF THE ABOVE, WE HOLD THAT EXPORT COMMISSION WAS NEITHER ROYALTY NOR FEE FOR TECHNICAL SERVICES AND, THEREFORE, THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE O N THE PAYMENT OF EXPORT FEE. ONCE THE ASSESSEE WAS NOT REQUIRED TO D EDUCT THE TAX AT SOURCE, IT CANNOT BE SAID THAT THE ASSESSEE FAILED TO DEDUC T TAX AT SOURCE SO AS TO APPLY SECTION 40(A)(IA). 74. WHILE CONSIDERING THE DISALLOWANCE MADE BY THE TPO BY WAY OF TRANSFER PRICING ADJUSTMENT, WE HAVE DISCUSSED AT L ENGTH AND HAVE ARRIVED AT THE CONCLUSION THAT THE EXPORT AGREEMENT WAS FO R THE BENEFIT OR THE ASSESSEE AND NOT DETRIMENTAL TO THE ASSESSEE. THERE FORE, THE FINDING OF THE ASSESSING OFFICER THAT THE EXPENDITURE INCURRED BY THE ASSESSEE BY WAY OF EXPORT AGREEMENT WAS NOT INCURRED FOR THE PURPOSE O F_BUSINESS OF THE ASSESSEE CANNOT BE UPHELD. WE HOLD THAT THE EXPORT COMMISSION PAID BY THE ASSESSEE WAS FOR THE PURPOSE OF ASSESSEE'S BUSI NESS. 75. THE ASSESSING OFFICER HAS ALTERNATIVELY HELD TH E PAYMENT OF EXPORT COMMISSION TO BE CAPITAL EXPENDITURE. AFTER CONSIDE RING THE ARGUMENTS OF BOTH THE SIDES AND THE FACTS OF THE CASE, WE ARE UN ABLE TO ACCEPT THIS VIEW OF THE ASSESSING OFFICER. BY WAY OF EXPORT AGREEMEN T, HMCL HAS ONLY PERMITTED THE ASSESSEE TO EXPORT .THE SPECIFIED GOO DS TO THE SPECIFIED COUNTRIES, THAT TOO, SUBJECT TO RUNNING PAYMENT OF THE EXPORT COMMISSION. THE ASSESSEE HAS NOT ACQUIRED ANY ASSET OR EVEN THE INTANGIBLE RIGHT IN THE NATURE OF A CAPITAL ASSET. THE ASSESSING OFFICER HA S DISALLOWED THE ROYALTY PAYMENT PAID BY THE ASSESSEE BY WAY OF TECHNICAL KN OW-HOW AGREEMENT HOLDING THE SAME TO BE CAPITAL EXPENDITURE. FROM PA RAGRAPH NO.7 TO PARAGRAPH NO.29, WE HAVE DISCUSSED AT LENGTH AND HA VE COME TO THE CONCLUSION THAT THE PAYMENT OF RUNNING ROYALTY CANN OT BE SAID TO BE CAPITAL EXPENDITURE. WHILE DOING SO, WE HAVE ALSO RELIED UP ON SEVERAL DECISIONS OF HON'BLE JURISDICTIONAL HIGH COURTS AT PAGES 17 TO 2 4. FOR THE SAKE OF BREVITY, WE ARE NOT REPRODUCING THE SAME AGAIN BUT , WE REITERATE THAT THE RATIO OF THOSE DECISIONS IN THE CASES OF LUMAX INDU STRIES LTD. (SUPRA), SHRIRAM PISTONS & RINGS LTD. (SUPRA), SHARDA MOTOR INDUSTRIAL LTD. (SUPRA), J.K.SYNTHETICS LTD. (SUPRA), CLIMATE SYSTEMS INDIA LTD. (SUPRA) AND MUNJAL SHOWA LTD. (SUPRA) WOULD ALSO BE APPLICABLE SO AS T O ARRIVE AT THE CONCLUSION THAT THE PAYMENT OF RUNNING EXPORT COMMI SSION PAID AS A PERCENTAGE OF EXPORT AMOUNT EVERY YEAR CANNOT BE SA ID TO BE CAPITAL EXPENDITURE. IN VIEW OF THE ABOVE, WE DELETE THE D ISALLOWANCE OF EXPORT COMMISSION MADE BY WAY OF TRANSFER PRICING ADJUSTME NT AND ALSO BY WAY OF GENERAL PROVISIONS OF THE INCOME TAX ACT. 44 8. RESPECTFULLY FOLLOWING THE SAME WE ALLOW THESE G ROUNDS OF THE ASSESSEE. AS THE CONTENTIONS OF THE ASSESSEE THAT PAYMENT OF ROYALTY, PAYMENT OF TECHNICAL GUIDANCE FEE AS WELL AS EXPORT COMMISSION ARE HELD TO BE IN THE REVENUE FILED, THE QUESTION OF ADJUDIC ATION OF THE ALTERNATE CONTENTION OF THE ASSESSEE, THAT DEPRECIATION BE GR ANTED, IN CASE THE EXPENDITURE IS HELD TO BE IN THE CAPITAL FIELD, DO ES NOT ARISE. IN THE RESULT THESE GROUNDS OF THE ASSESSEE ARE ALLOWED. 9. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH JULY, 2014. SD/- SD/- (U.B.S. BEDI) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 25 TH JULY, 2014 *MANGA 45 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT (A); 5.DR; 6.GUARD FILE BY ORDER ASST. REGISTRAR DT. OF HEARING: 14 TH MARCH,2014 DT. OF DFA SENT: 20.3.2014 DT. OF PRONOUNCEMENT: 25 TH JULY,2014