TMI Blog2016 (11) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of the Income Tax Act, 1961 (hereinafter called the Act ) r.w.s. 144C in relation to assessment year 2009-10. 2. 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 ₹ 16,931,247/- as royalty which was treated as capital in nature by the AO and a sum of ₹ 12,698,435/- was disallowed and depreciation @ 25% was allowed. Also a disallowance of ₹ 1,444,726/- u/s 14A read with Rule 8D was made. The assessee has approached the ITAT and has raised the following grounds of appeal: 1. Transfer Pricing-Management Consultancy and Business Auxiliary Services 1.1 On the facts and in law, the Addl. Commissioner of Income Tax, Ld. Transfer Pricing Officer-1(2), New Delhi and Deputy Commissioner of Income Tax, The Ld. Assessing Officer erred in determining and the Hon ble Dispute Resolution Panel erred in confirming the arm s length price of the international transaction pertaining to payment of management consultancy and business auxiliary services by the assessee to its Associated Enterprises for AY 2009-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature and thereby disallowing ₹ 12,698,435 after allowing depreciation of 25% 3.2 On the facts and in law, the Ld. AO and the Hon ble DRP erred in treating the revenue expenditure of ₹ 62,094,207 on License fee as capital in nature. 3.3 On the facts and in law, the Ld. AO and the Hon ble DRP erred in observing that the license granted to the assessee under the Technical Collaboration Agreement/Trademark agreement tantamount to acquisition of intangible asset. 3.4 On the facts and in law, the Ld. AO and the Hon ble DRP erred in observing that the usage and terms under the agreements have almost attained perpetuity in reality as against temporariness exhibited in term of agreement. 3.5 On the facts and in law, the Ld. AO and the Hon ble DRP erred in disregarding the order of the Hon ble High Court in the assessee s own case for AY 2004-05 wherein this ground has been decided in favour of the assessee. 4. Corporate Tax Disallowance u/s 14A of the Act 4.1 On the facts and in law, the Ld. AO erred in proposing and the Hon ble DRP erred in confirming disallowance relating to expenditure incurred for earning tax exempt income from investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, placing reliance on the decision of the Hon ble Apex Court in Southern Switchgear Ltd. vs. CIT 232 ITR 359 and Jonas Woodhead Sons (India) Ltd. 224 ITR 342, the AO made a net addition of ₹ 12,698,435/- towards royalty. The Ld. AR submitted that by way of the agreements, the assessee had obtained a right to use technical know-how for manufacturing CVJ s in the assessee s plant as well as the use of brand name GKN to sell its products. It was submitted that the technical know-how was required for usage in manufacturing process in the ordinary course of running of business of the assessee and that the same did not relate to the acquisition of technology during the course of setting up of business. It was submitted that the issue had earlier been settled by the decision of the ITAT till assessment year 2004- 05 in favour of the assessee, vide ITAT s order dated 08/05/2009 and thereafter, the dismissal of the Department s appeal by the Hon ble Delhi High Court on 31/05/2010. 3.2 On the issue of 14A disallowance, the Ld. AR submitted that the disallowance had been incorrectly calculated at ₹ 1,444,726/-. As per the AR, the correct amount of disallowance was & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 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 invalidate any registration of the registered Trade Marks or application thereof nor to do any act which might assist or give rise to an application to remove any of the registered Trademarks from the Register or which might prejudice the right or title of the Licensor to any of the Trade Marks. 7.3 The Licensee will on request give to the Licensor or its authorized representatives any information as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means of a non-exclusive License. It has been made clear in the Agreement that the ownership in the trade marks 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 a mere use of an asset falls in the realm of 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. 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. 5.1 In view of the detailed findings by the ITAT in assessee s own case in AY 2008-09 on identical issue and which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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