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2016 (7) TMI 109 - ITAT DELHI

2016 (7) TMI 109 - ITAT DELHI - TMI - Payment for use of technical know-how and trademark/logo - Revenue expenditure or capital expenditure - Held that:- All the salient features of transfer of technical know-how, 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 tech .....

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y means of a non-exclusive License. It has been made clear in the Agreement that the ownership in the trademarks shall remain the intellectual 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 .....

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he 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 Ground nos. 1 to 6 were withdrawn by the ld.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 Procedure (MAP) proceedings. These grounds, therefore, stand dismissed as withdrawn. 3. The only effective ground is against the confirmation of disallowance of ₹ 2,94,77,926/- on account of payment for .....

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f trademarks in respect of the products manufactured. The assessee paid a total sum of ₹ 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 s .....

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. He, therefore, proposed the disallowance of ₹ 2.94 crore in the draft order. The assessee remained successful before the Dispute Resolution Panel (DRP) which observed that this issue has been in dispute between the assessee and the Revenue for the immediately two preceding assessment years and, still, there was no finality. The AO made the addition in the impugned order. The assessee is aggrieved against this addition. 5. We have heard the rival submissions and perused the relevant mater .....

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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, .....

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3.1.1. the exclusive right (subject to Sub-clause 3.2) to use the Know-How to manufacture the Joints in the Licensee s Plants from components (other than the bought out components listed in Schedule 2) manufactured by Licensee or purchased by Licensee from Licensor or from a source approved by Licensor; 3.1.2 The non-exclusive right to sell the Joints in the Territory; 3.1.3 The non-exclusive right to export the Joints to all countries except (otherwise than t\with the consent of Licensor) wher .....

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r 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. .....

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all the proprietary rights in it. Clause 7 of the Agreement has been captioned as Confidentiality which reads as under:- Licensee shall keep secret and confidential and use its best endeavours to prevent disclosure of the Know-How and to limit access thereto such of its employees or such others (including permitted sub-licensees under Clause 13) as 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 f .....

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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 event of this Agreement being lawfully terminated by the Lice .....

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ation 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 .....

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o others; and at the termination of the Agreement, the assessee could not use the know-how provided to it. When we consider the nature of payment for use of technical know-how made during the year, which is @ 3% of the selling price for the use of technical know-how , there remains no doubt that this payment is in the nature of a revenue expenditure. 11. The ld. DR vehemently argued that Clause 14 of the Agreement empowers the Licensee to terminate the Agreement and, thereafter, use the know-how .....

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eement, 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. .....

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ischarge its obligations under this Agreement; 13.1.4 an order is made or a resolution is passed for windingup or liquidation of the other party (except that where any such event is only for the purpose of amalgamation with another or reconstruction and the resultant company emerging is or agrees to be bound by the terms hereof and is a company whose shares are owned by persons not in competition with the other party except to an amount not exceeding five percent, this provision shall not apply) .....

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s 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 i .....

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is lawfully terminated by Licensor:- 14.2.1 Licensee shall cease manufacture of the Joints and shall not use any part of the Know-How and shall return to Licensor all tangible Know-How material and all copies made thereof; 14.2.2 Licensee shall have a period of nine (9) months to dispose of stocks of the Joints in hand and to fulfil orders 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 .....

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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 .....

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and remains hardly of any 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 v .....

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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 terms or fails to perform its duties or becomes insolvent or goes into winding up or liquidation etc. in terms of sub-clauses 13.1.1 to 13.1.4. Thus it is discernible that the Licensee can terminate the Agreement only when there is some default or insolvency, etc., of the Licens .....

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ement, 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 L .....

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rom the Licensor, which remains his exclusive property. 14. The Hon ble jurisdictional High Court in CIT VS. Hero Honda Motors Ltd. (2015) 372 ITR 481 (Del) has held that where the ownership and the intellectual property rights in the knowhow or technical information were never transferred or became an asset of the respondent assessee; the ownership rights were protected by the licensee and the proprietorship in the intellectual property was not conveyed to the assessee but only a limited and re .....

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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 p .....

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der:- 2. GRANT The Licensor grants to the Licensee, on the terms set out in this Agreement, a non-exclusive Licence:- 2.1 under the registrations; and 2.2 to use the Trade Marks in those countries in the Territory where they are not registered; 16. It emerges from a simple reading of the above clause that GKN Holdings, UK granted a non-exclusive License to the assessee to use the trademarks. Clause 6.1 of the Agreement provides that: All use of any Trade Marks by the Licensee shall be for the be .....

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y 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 .....

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or or its authorized representatives any information as to its use of the Trade Marks which the Licensor may require and will (subject to the provisions of clause 8) render any assistance reasonably required by the Licensor in maintaining the Registrations and/or prosecuting any application 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 .....

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on 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 hereof or such other terms as may be agreed. 18. This clause provides in unambiguous terms that upon the termination of .....

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January, 2007 to 31st March, 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 .....

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