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GKN Driveline (India) Ltd. Versus ACIT, LTU, New Delhi

2016 (7) TMI 393 - ITAT DELHI

Addition towards payment for Management Consultancy and Business Auxiliary Services - tpa - Held 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 ₹ .....

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and Business Auxiliary Services. In view of the foregoing discussions, we are satisfied that the AO was not justified in making the corporate disallowance of ₹ 18.09 crore which is hereby deleted. At the same time, it is made clear that the disallowance of ₹ 71 lac and odd sustained in MAP proceedings will continue and the AO will make addition for this sum. In other words, the corporate disallowance of ₹ 18.09 crore will stand deleted and the addition on account of transfer pr .....

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he 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. - Payment made by the assessee to GKN Holding, UK, towards royalty for trademark/ brand - When we consider all the relevant clauses of the trademark royalty Agreement, it becomes manifest .....

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rks. 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. We, therefore, hold that whole of the payment of ₹ 5.19 crore made by the assessee for use of trade mark is a revenue expenditure. - Decided in favour of assessee - As we have held her .....

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ety 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. - ITA No.5923/Del/2012 - Dated:- 1-7-2016 - SHRI R.S. SYAL, ACCOUNTANT MEMBER AND S .....

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te addition of ₹ 18,09,04,254/- made by the AO towards payment for Management Consultancy and Business Auxiliary Services. 3. Succinctly, the facts of the case are that the assessee, an Indian company, is a part of GKN Group. It is engaged in the business of manufacture and sale of Constant Velocity Joints (CVJ). The assessee made a payment of ₹ 18.09 crore to its Associated Enterprise, GKN Driveline Headquarters Ltd., UK, on account of Management Consultancy and Business Auxiliary S .....

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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 .....

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he total transfer pricing adjustment of ₹ 18.09 crore, the Competent authorities of both the countries under the MAP proceedings, allowed deduction for a sum of ₹ 17.38 crore, thereby retaining the disallowance at ₹ 71 lac. The Competent authorities dealt with this issue in the following terms, as has been reproduced in the assessment order giving effect to the MAP proceedings :- GSA: The Company s methodology, allocation key and 5% markup on costs for the GSA recharge was agre .....

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ology, allocation key and 5% mark-up on costs has been accepted as valid and bona fide. It is only over and above the 5% mark up on costs incurred that has been disallowed under MAP proceedings. The MAP proceedings are albeit restricted to the transfer pricing adjustment, but, in the instant case, throw a light on the actual availing of the Management Consultancy and Business Auxiliary Services by the assessee along with a proper allocation. The reasons ascribed by the AO in making a corporate d .....

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order pursuant to the assessee s reply that the detailed submissions were made 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 .....

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eeding 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 Business Auxiliary Services. In view of the foregoing discussions, we are satisfied that the AO was not justified in making the corporate disallowance of ₹ 18.09 crore which is hereby deleted. At the same time, .....

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/logo. The factual matrix of this case is that 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 ₹ 6.39 crore to these two companies towards know-how fees and trademark/brand royalty. The A .....

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iture did not result into an enduring benefit and fell in the revenue field. The assessee relied on certain decisions to fortify its view. The AO treated the entire payment of ₹ 6.39 crore as a capital expenditure. After allowing depreciation for a sum of ₹ 1,59,96,422, at the rate of 25%, the AO made disallowance of ₹ 4,79,89,269 in the draft order. The AO also referred the matter of determination of the arm s length price (ALP) of the international transactions of payment to .....

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g 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 ₹ 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 ₹ .....

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ose, we proceed to discuss them separately. 8. Firstly, we are taking up the payment of ₹ 1.19 crore 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 in 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 .....

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e 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) where the Licensor or any Company in the GKN Group manufactures or has existing licensing arrangements for Joints, namel .....

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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, is ten years from the Effective date or seven years from the date of commencement of the commercial production. .....

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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 an .....

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nment 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 Licensor, the Licensee shall cease to manufacture all the Joints and shall not use any part of the know-how and shall .....

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, 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 .....

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e 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 us .....

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y 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) m .....

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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); 13.1.5 by reason of any order of a government or other authority the continued operation of this Agreement in a .....

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ts 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 her .....

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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 da .....

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.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 read with clause 14.3.1 and 14.3.2. come into play. Albeit there is some dichotomy in these clauses, .....

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me 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 unlimit .....

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all 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 Licensor and not otherwise at his own sweet will. Clause 13.1.5 provides that the assessee can terminate the Agreement .....

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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 por una parte and also reap the benefits of free user of technical know-how por otra parte. Ergo, Clause .....

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al 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 restricted right to use on strict and stringent terms was granted, the payment was ded .....

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hat 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 full amount paid for the use of technical know-how. 17. Now, we take up payment of ₹ 5.19 crore made by the assessee to GKN Holding, UK, towards r .....

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sor 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 an .....

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all remain the exclusive property of the Licensor alone. Clause 7 of the Agreement, which is relevant for our purpose, runs 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 enforceabilit .....

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esentatives 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 under the terms of this .....

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s 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. 20. This clause provides in unambiguous terms that upon the termination of this Agreement for whate .....

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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 trademarks shall remai .....

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e, hold that whole of the payment of ₹ 5.19 crore made by the assessee for use of trade mark is a revenue expenditure. 22. To sum up, total payment of ₹ 6.39 crore made by the assessee for use of technical know-how and trademarks is a revenue expenditure and cannot be treated as a capital expenditure. Ex consequenti, the disallowance made by the AO for a sum of ₹ 4.79 crore (after allowing depreciation @ 25%) is hereby deleted. 23. Before parting with this ground, we want to cl .....

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.46 crore was less than the addition made by the AO at ₹ 4.79 crore, the AO did not make any separate addition on account of transfer pricing adjustment. The assessee, apart from challenging the action of the AO in treating the amount of ₹ 6.39 crore as a capital expenditure, subject to depreciation, also challenged the transfer pricing adjustment in the instant appeal. In the meantime, the assessee took recourse to the Mutual Agreement Procedure (MAP) proceedings for settling the is .....

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