TMI Blog2016 (7) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... llectual property of the Licensor and the assessee shall have a mere right to use them. Further, upon the termination, the Licensee shall cease to make any use of such trademarks. Thus, it is patent that the payment has been made by the assessee for ‘use of ’ trademarks and not for acquiring trademarks as an owner. It goes without saying that any payment made for a mere use of an asset falls in the realm of a revenue expenditure and cannot be treated as a capital expenditure. - Decided in favor of assessee. - ITA No. 5669/Del/2011 - - - Dated:- 30-6-2016 - Shri R. S. Syal, Accountant Member And Shri Sudhanshu Srivastava, Judicial Member For the Assessee : Shri Manoj Pardasani and Shri Jatin Budhiraja, CAs For the Department : Shri Amrendra Kumar, CIT, DR ORDER Per R. S. Syal, AM This appeal by the assessee emanates from the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 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 Ground nos. 1 to 6 were withdrawn by the ld.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 Procedur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how and for trademarks/logo. Out of total payment of ₹ 2.94 crore, the assessee paid ₹ 71 lac as technical know-how fees to GKN Automotive GmbH, Germany and the remaining amount of ₹ 2.23 crore to GKN Holdings, UK for use of brand name. Since there is a distinction between the nature of these two payments and different consequences can follow as regards their treatment for tax purpose, we proceed to discuss them separately. 6. Firstly, we are taking up the payment of ₹ 71 lac made by the assessee to GKN Automotive GmbH, Germany, towards technical know-how. The assessee entered into an agreement with GKN Automotive GmbH, Germany, on 11.1.2003, a copy of which is available on pages C-1 onwards of the paper book. This Agreement provides that GKN Automotive GmbH, Germany, is a Licensor which is engaged in the manufacture of CVJ in automotive drive shafts and is in a position to provide know-how in respect of the design, manufacture and sale of such CVJ. The assessee-Licensee is engaged in manufacture and sale of certain types of CVJ by using technical know-how received under an earlier Agreement dated 30th June, 1987, which was subsequently amended from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess thereto such of its employees or such others (including permitted sub-licensees under Clause 13) as reasonably require the same for the purpose for which the Know-How is stated in Clause 3 to be supplied and without prejudice to the extent of the foregoing obligation shall in particular take all measures by contract and otherwise which a prudent, determined and reasonable 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 accordance with the provisions of this clause. 10. A perusal of this clause of the Agreement divulges that the assessee shall keep secret and confidential the know-how received from the Licensor and shall ensure that it is not disclosed to others. Clause 11 of the Agreement deals with Assignment and Sub-Licence . Clause 11.2 provides that the : Licensee shall not be entitled to assign its rights or obligations under this Agreement without the prior consent in writing of Licensor . Clauses 13 and 14 deal with Termination and effects of expiration/termination. Clause 14.2 of this Agreement provides that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epth 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 of the Agreement, which are as under :- 13. Termination 13.1 Each party shall have the right to terminate this 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 the terms hereof to a material and significant extent and to remedy such failure (where it is capable of being remedied) within 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 from 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 has a receiver appointed over the whole or any part of its assets or execution or distress levied upon its assets provided that in the case of execution or distress it is such as would materially affect the ability of that party to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders in hand subject to payment of royalty in accordance with Sub-clause 9.2. 14.3. On termination of this Agreement whether terminated 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 under 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, namely, by Licensee, by Licensor and by effluxion of time. In case the Agreement 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 Licensor all tangible Know-How material and all copies made thereof. In other words, the Licensee will be debarred from using the know-how after the termination of the Agreement by the Licensor. If the Agreement is terminated by effluxion of time, then clause 14.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensee 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 crystal clear that the Licensee cannot, at his own sweet will, terminate the Agreement and, thereafter, continue to use the know-how received from Licensor free of charge. Such a right to terminate the Agreement vests in the Licensee only if the default is committed by the Licensor. The 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 Agreement, which has been greatly harped on by the ld. DR, does not defend the case of the Revenue because the assessee cannot, at its pleasure, terminate the Agreement and use the technical know-how without any consideration. When we consider the effect of termination of the Agreement in totality, what emerges is that the Licensee, on such termination, shall be bound to return the know-how acquired from the Licensor, which remains his exclusive property. 14. The Hon ble jurisdictional High Court in CIT VS. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icensee shall be for the benefit of the Licensor and the goodwill accrued to the Licensee arising from its use of the Trade Marks (but no greater or other goodwill) shall accrue to and be held in trust by the Licensee for the Licensor which goodwill the Licensee agrees to assign free of charge to the Licensor at its request at any time whether during or after the term of this Agreement. On going through the above clause of the Agreement, it becomes crystal clear that the assessee has been allowed user of trademarks held by the Licensor, which shall remain the exclusive property of the Licensor alone. Clause 7 of the Agreement, which is relevant for our purpose, 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 Territory infringes the rights of any third party. The Licensor gives no warranty as to the validity or enforceability of the Registration. 7.2 The Licensee undertakes not to do or permit to be done any act which would or might jeopardizes or inva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 2007 relating to the previous year relevant to the assessment year under consideration. Under this later Agreement, the rate 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 Financial Period is less than 3%, a rate of 0.5% shall be applied; - Where the Operating Margin for the relevant Financial Period is 3% or more but less than 7%, a rate of 1% shall be applied; and - Where the Operating Margin for the relevant Financial Period is 7% or more, a rate of 1.5% shall be applied. 19. All other relevant clauses of the later Agreement are similar to the clauses of the earlier Agreement dated 1.12.2003, under which the assessee paid royalty for use of trademarks. When we consider all the relevant clauses of the royalty Agreement, it becomes clear that the assessee did not acquire any ownership right in trademarks by paying the consideration as set out therein. Such payment was 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 that the ownership in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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