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TMI Blog2016 (7) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... ultancy and Business Auxiliary Services including human resources, global operations systems and global quality, global purchasing, global engineering, sales and marketing, information systems/information technology and regional services etc. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determination of the arm's length price (ALP), inter alia, of this international transaction. The TPO determined `Nil' ALP of this international transaction by setting out the reasons in his order. The AO in the draft and the final order, apart from making addition on account of transfer pricing adjustment on this score, also made a further disallowance of the equal amount as corporate disallowance by observing that the assessee did not produce any new submissions before him in support of the claims. The assessee filed appeal before the tribunal challenging the corporate disallowance made by the AO and also transfer pricing adjustment for the equal sum. 4. We have heard the rival submissions and perused the relevant material on record. It is seen that the AO has made double disallowance of Rs. 18.09 crore, firstly, as a corporate disallowance and then as a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the TPO in respect of Management Consultancy and Business Auxiliary Services, whose copy was made available to the AO as well. Such details as placed before the TPO and replaced before the AO, running into more than 600 pages, are available on pages 432 to 1059 of the paper book. This shows that the material produced before the TPO in support of the claim for deduction of expenses, which was found by the AO to be unsatisfactory, was found satisfactory in the MAP proceedings which accepted the genuineness of availing such Management Consultancy and Business Auxiliary Services. In that view of the matter, the AO's case that the assessee was not entitled to corporate deduction of Rs. 18.09 crore, automatically fails. It is further relevant to mention that similar claim was made by the assessee for payment of Managerial Services and Business Auxiliary Services in its accounts for the immediately succeeding assessment year 2009-10, which was accepted by the AO as such. A copy of the final assessment order passed by the AO for the AY 2009-10 has been placed on record from which it is palpable that no corporate disallowance was made in respect of payment of Managerial Services and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment recommended by the TPO at Rs. 3.46 crore was less than the addition made by him at Rs. 4.79 crore, the AO did not make any separate addition on account of transfer pricing adjustment. He, however, mentioned in the final assessment order that if the transfer pricing adjustment gets modified at any appellate stage, then the addition made by him, to that extent, will get revised. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). The AO made the addition of Rs. 4.79 crore and odd in the impugned order. The assessee is aggrieved against this addition. 7. We have heard the rival submissions and perused the relevant material on record. It is noticed that the AO as well as the DRP have proceeded by treating total payment of Rs. 6.39 crore as royalty without making a distinction between the payment made for know-how and for trademarks/logo. Out of total payment of Rs. 6.39 crore, the assessee paid Rs. 1.19 crore as technical know-how fees to GKN Automotive GmbH, Germany and the remaining amount of Rs. 5.19 crore to GKN Holdings, UK for use of brand name. Since there is a marked distinction between the nature of these two payments and different consequences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement which, as per clause 2.3, is ten years from the Effective date or seven years from the date of commencement of the commercial production. Clause 3.3 of the Agreement provides as under:- "Licensee acknowledges that Licensor is the owner of the Copyright and all other proprietary rights in Know-How supplied by Licensor to Licensee hereunder." 11. Through the above clause of the Agreement, the assessee admits that the Licensor is the owner of the copyright and intellectual property rights of the know-how supplied, who holds 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 13. The ld. DR vehemently argued that Clause 14 of the Agreement empowers the Licensee to terminate the Agreement and, thereafter, use the know-how free of charge. It was submitted that the free user of the technical know-how meant that the payment made for use of technical know-how was a capital expenditure entitling the assessee to use such know-how in perpetuity. 14. This argument of the ld. DR, though appears attractive at first flush, but, loses its shine on an in-depth analysis. In order to appreciate the contention of the ld. DR in correct perspective, it would be relevant to note Clause 13 and relevant parts of Clause 14 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 here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antecedent breach and no grant of time or indulgence shall prejudice any subsequent right to terminate this Agreement." "14. Effect of Expiration/Termination. 14.1 In the event that this Agreement expires by effluxion of time, or is lawfully terminated by Licensee, Licensee may continue to use the Know-How free of charge. 14.2 In the event that this Agreement 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 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms 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 Licensor and not otherwise at his own sweet will. Clause 13.1.5 provides that the assessee can terminate the Agreement if the continued operation of this Agreement is prevented by reason of any order of Government or any other authorities. Clauses 13.2 to 13.4 either deal with the right of the Licensor to terminate the Agreement or the procedural aspects of the termination. Thus, it is apparent that the assessee-Licensee can terminate the Agreement, under all the sub-clauses of Clause 13.1 of the Agreement, either due to some default or incapacity of the Licensor or Government order. All these situations make it 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 ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this Agreement provide that the Licensor (GKN Holding, UK) is the proprietor of the trademarks and the Licensor wishes to permit the Licensee (the assessee) to use the trademarks in respect of the products and the services. Clause 2 of the Agreement reads as under:- "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;" 18. 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 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 becom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the Licensor's specific permission, sell such stock on the terms hereof or such other terms as may be agreed." 20. This clause provides in unambiguous terms that upon the termination of this Agreement for whatever reason, the assessee shall cease to make any use of the trade marks. Clause 4 of the Agreement is 'Consideration clause'. 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." 21. When we consider all the relevant clauses of the trademark royalty Agreement, it becomes manifest 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 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payment for use of knowhow and trademarks is a revenue expenditure, the disallowance made by the AO to the tune of Rs. 4.79 crore, after allowing depreciation at the rate of 25%, shall be deleted. Consequently, the unwritten off portion of this amount carried forward to subsequent years, should also be removed for the purposes of granting depreciation in later years, so that no double allowance is made, once in the year under consideration by allowing the deduction in entirety by treating it as a revenue expenditure and then again as depreciation in the later years by treating it as a capital expenditure. However, the amount of transfer pricing adjustment retained in the MAP proceedings for the year under consideration shall stand as disallowance. The AO is directed to make addition on this score only to the extent of the transfer pricing adjustment retained in the MAP proceedings. 24. The last effective ground is against the disallowance u/s 14A of the Act amounting to Rs. 3,546/-. The ld. AR did not press this disallowance due to smallness of the amount. He, however, reserved the right to argue this matter in later years when the quantum of disallowance is high. This gr ..... 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