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TMI Blog2016 (7) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and sale of Constant Velocity Joints (CVJ). The assessee entered into an agreement with GKN Automotive GmbH, a German group company for use of know-how to manufacture the 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 companies towards know-how fees and trademark/brand royalty. The AO perused the technical collaboration agreement dated 11.1.2003 entered into between the assessee and GKN Automotive, Germany, which was amended from time to time. He observed that the assessee, under these agreements, received technical know-how and technical assistance in relation to design, manufacture and sale of CVJ. On being called 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 decisions to fortify its view. After taking into consideration certain decisions, the AO ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 Agreement to mean: "1. The information and skills available to the Licensor at the Signature date all as defined in Clause 4 hereof concerning the manufacture of Joint components and the assembly of Joints (but excluding any information on forging, forming or extrusion 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-exclusive right to sell the products in the defined territory. What follows from 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective date, then 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 effective date, whichever is earlier. Since this Agreement was entered into on 11.1.2003, these lumpsum payments were made in earlier years. No lumpsum payment was stated to have been made by the assessee during the year, which contention has remained uncontrovered by the ld. DR. Then, there is Clause 9.2 of the Agreement which provides for payment of royalty at the rate of 3% of the selling price of 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 the above discussed clauses of the Agreement manifests that the assessee was granted the use of know-how by GKN Automotive GmbH, Germany; the assessee admitted the Licensor as the owner of proprietary rights in the know-how; the assessee was prevented from disclosing such know-how to others; the assessee could not assign it to others; and at the termination of the Agreement, the assessee could not use the know- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, this provision shall not apply); 13.1.5 by reason of any order of a government or other 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 this Agreement by notice in writing to operate on the date specified in the notice if Licensee shall come under the direct or indirect control whether jointly or otherwise or shall enter into any partnership or joint venture with any concern or concerns interested in or connected with the manufacture, sale or supply of goods which may compete with any of the Joints manufactured, sold or supplied by Licensor or any goods in relation to which Licensor's Know-How or other manufacturing information is or may be used. 13.3 A party having such right may terminate this Agreement by notice in writing to operate on the date specified in the notice, which date may be a date earlier than the date of the notice so as to defeat any title which a trustee in bankruptcy or a receiver or liquidator or other such person might otherwise acquire to the rights conferred hereby. 13.4 No waiver of any antecedent bre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significance. The third situation, which has been accentuated by the ld. DR to bring home his argument, is the termination by the Licensee. Clause 14.1 provides that the Agreement can be lawfully terminated by the Licensee in which case the 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 terminates the Agreement at his volition, say within a short span after signing, he may continue to use the know-how free of charge for an unlimited period, which shows that the payment made by it is for acquisition of know-how 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 is that a Licensee can lawfully terminate the Agreement only in the situations as have been discussed in Clause 13 of the Agreement. When we peruse Clause 13, it emerges that the Licensee ('each party') shall have a right to terminate the Agreement if the Licensor ('the other party') fails to observe any of the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e quite close to those considered and decided by the Hon'ble High Court. All the salient features of transfer 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 consideration 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 transferring the ownership to the assessee. Hence, the amount so paid is eligible for deduction as a revenue expenditure. We, therefore, overturn the assessment order on this point and allow deduction of the amount paid for the use of technical know-how. 15. Now, we take up payment of Rs. 2.23 crore made 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. Recitals of this Agreement provide that the Licensor (GKN Holding, UK) is the proprietor of the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ably required by the Licensor in maintaining the Registrations and/or prosecuting any application therefor. 7.4 The Licensee will not make any representation or do any act which may be taken to indicate that it has any right, title or interest in or to the ownership or use of any of the Trade Marks except under the terms of this Agreement and acknowledge that nothing contained in this agreement shall give the Licensee any right, title, or interest in or to the Trade Marks save as granted by this Agreement." 17. This Clause makes it palpable that the Licensor is the proprietor of the trademarks and the Licensee undertakes not to do anything which might jeopardize the trade mark in any manner. Clause 9 deals with the termination of the Agreement. Para 9.2 of the Agreement provides as under:- "9.2 Upon the termination of this Agreement for whatever reason the Licensee shall cease to make any use of the Trade Marks save that if the Licensee has a stock of Products existing or in the course of manufacture or unfulfilled orders on hand at the date of termination of this Agreement, the Licensee may, but only with the Licensor's specific permission, sell such stock on the terms here ..... X X X X Extracts X X X X X X X X Extracts X X X X
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