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TMI Blog2017 (5) TMI 435X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the fact that the Assessee has to export motorcycles to underdeveloped countries in very restrictive environment and on such terms and conditions which were detrimental to the Assessee and were for the benefit of the subsidiaries of the AE." Background facts 3. The background facts relevant to the question projected are that the Assessee is engaged in the business of manufacture and sale of motorcycles using technology licensed by Honda Motor Co.Ltd., Japan ("HMCL"). The Assessee set up its plant in the year 1984 to manufacture models of motorcycles by using know-how of HMCL through a Technical Collaboration Contract dated 24th January, 1984. Under the said agreement, the Assessee was provided with technical assistance not only for manufacture, assembly and service of the products but was also provided with information, drawings and designs for the setting up of the plant. The said agreement expired in 1994. 4. On 2nd June, 1995 a License and Technical Assistance Agreement ("LTAA") was entered into between HMCL and the Assessee on fresh terms for a further period of ten years. By another LTAA dated 2nd June, 2004, the earlier LTAA was extended for an additional period of ten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort the vehicles. On this basis, the TPO proceeded to hold that the Arm's Length Price ("ALP") of the said transaction i.e., the payment of export commission was nil. He recommended a TP adjustment of the entire sum of Rs. 12.19 crores paid by the Assessee to its AE as export commission during the AY in question. After the DRP concurred with the TPO and the Assessing Officer ("AO") passed the final assessment order on that basis, the Assessee filed an appeal before the ITAT. 8. By the impugned order, the ITAT reversed the above orders of the TPO, the DRP and the assessment order by holding that there was no basis for treating the payment of export commission as an international transaction. The ITAT analysed the clauses of the Agreement dated 21st June, 2004 for the payment of export commission and came to the conclusion that "the allegation of the Revenue that export agreement between the assessee and HMCL was not for the benefit of the assessee and by way of export, instead of the assessee, the subsidiaries of the AEs have been benefited, is factually incorrect." Based on the model-wise figures of export sales placed before it by the Assessee, and which was unable to be cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic bar (in the form of a negative covenant) that prevented the Assessee from using the know-how to manufacture vehicles for export outside India. Within a few days on 21st June, 2004, a separate EA was entered into permitting export of the vehicles so manufactured to certain countries. The EA was in fact nothing but an extension of the LTAA itself. The preamble clauses of the EA expressly referred to the LTAA and also described the parties thereto as the Licensor and the Licensee. It is submitted that the consideration for the negative covenant under the LTAA i.e., abstaining from exporting the product outside India was monetised in the EA in the form of the export commission and was therefore a payment of royalty. 13. Mr. Singh submitted that in the absence of any principal-agent relationship between HMCL and the Assessee in terms of the EA, the payment of export commission thereunder was without consideration. It was nothing but a payment of royalty for the use of the know-how to manufacture vehicles for export to the countries specified. If at all any payment had to be made, it had to be to the subsidiaries of the AE who were selling vehicles in those territories. The EA was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same result i.e., payments by the Assessee to the AE i.e., HMCL. However, when the entire history of the collaboration between the Assessee and HMCL is viewed, then the picture becomes clear. As rightly noted by the ITAT, the technical know- how was licensed by HMCL to the Assessee since 1984. This was continued in 1995 and then in 2004 by the LTAA dated 2nd June, 2004. The EA which was entered into on 21st June, 2004 could not therefore be said to be contemporaneous. 17. Secondly, the specific clauses in the EA further bring out the nature of the transaction involved therein. The payment of the export commission was not without consideration. It permitted the Assessee to export specified two wheelers manufactured under the Hero Honda brand to the specified countries. Further, the Assessee did not have to pay for using the existing distribution and sales networks in those territories. The attempt at re- characterising the transaction as one involving payment of royalty overlooks the fact that the payment under the LTAA is treated by the Assessee itself as royalty. Such royalty is in effect paid even on the export consignments. Also, to view this as only benefitting the AE is to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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