TMI Blog2017 (9) TMI 1157X X X X Extracts X X X X X X X X Extracts X X X X ..... r warranty claim is an allowable expenditure. The ground raised by the assessee is allowed and the ground raised by the Revenue is dismissed. - ITA No.1416/Del/2015, ITA No.1616/Del/2015 And ITA No.843/Del/2016 - - - Dated:- 20-9-2017 - SHRI R. K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The Assessee : Shri Manoj Pardasani, Adv. For The Department : Shri H. K. Choudhary, CIT-DR ORDER PER R. K. PANDA, AM : ITA No.1416/Del/2015 and ITA No.1616/Del/2015 are cross-appeals and are directed against the order passed u/s 143(3) r.w.s. 144C(13) of the I.T. Act, 1961 for the assessment year 2010-11. ITA No.843/Del/2016 filed by the assessee is directed against the order dated 22.12.2015 passed u/s 143(3) r.w.s. 144C(13) of the I.T. Act for the assessment year 2011-12. For the sake of convenience, the above appeals were heard together and are being disposed of by this common order. ITA No.1416/Del/2015, A.Y. 2010-11 (By Assessee) : ITA No.1616/Del/2015, A.Y. 2010-11 (By Revenue) : 2. Grounds of appeal no.1 and 2 by the assessee were withdrawn by ld. counsel for the assessee because of the settlement of dispute under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,977/- to GKN holding Plc. and GKN Driveline International GMBH, Germany. The AO observed that GKN holding Plc. was given license and logo fee of ₹ 9,19,44,918/- and GKN Driveline International GMBH, Germany was given royalty of ₹ 2,43,61,059/-. The Assessing Officer asked the assessee to explain as to why the payments towards royalty and logo fees should not be held as capital in nature, since there is no change in the facts and circumstances of the case as compared to the earlier assessment year. The assessee submitted the same reasons as submitted in the preceding year before the Assessing Officer as well as the TPO. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. Referring to the reasons given in assessment year 2008-09, the Assessing Officer treated the royalty payment made by the assessee as capital in nature and consequently allowed depreciation at the rate of 25% as applicable to intangible assets. The assessee approached the DRP, who directed the Assessing Officer to allow the consequential relief as per the decision of the Hon ble Delhi High Court vide order dated 12.03.2009 and 31.05.2010 for assessment years 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the issue relating to royalty should be decided in favour of the assessee. 6. The Ld. DR on the other hand heavily supported the order of the Assessing Officer. 7. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer/TPO/DRP and the Paper Book filed on behalf of the assessee. We have also considered the decision of the Tribunal as well as the Hon'ble High Court in assessee s own case. We find the Tribunal in assessee s own case for assessment year 2007-08 vide ITA No.5669/Del/2011 order dated 30.06.2016 has decided the issue in favour of the assessee and has held that the payment of ₹ 2.94 crores made by the assessee for use of technical knowhow and trademark is a revenue expenditure and cannot be treated as a capital expenditure. 8. We find the Tribunal following the above decision has again decided the issue vide ITA no. 5923/Del/ 2012 order dated 1.7. 2016 for A.Y. 2008-09 in favour of the assessee and held that the total payment of ₹ 6.39 crores made by the assessee for use of technical knowhow and trademark is revenue expenditure and cannot be treated as capital expenditure. The relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and skills available to the Licensor at the Signature date all as defined in Clause 4 hereof concerning the manufacture of Joint components and the assembly of Joints (but excluding any information on forging, forming or extrusion used in the manufacture of components for Joints); and 2. any further information passed from Licensor to Licensee during the term of this Agreement. 10. 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 2.3, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears. 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 the year amounting to ₹ 71 lac. A careful perusal of the above discussed clauses of the Agreement manifests that the assessee was granted the use of know-how by GKN Automotive GmbH, Germany; the assessee admitted the Licensor as the owner of proprietary rights in the know-how; the assessee was prevented from disclosing such know-how to others; the assessee could not assign it to 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 knowhow', 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 em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by notice in writing to operate on the date specified in the notice if Licensee shall come under the direct or indirect control whether jointly or otherwise or shall enter into any partnership or joint venture with any concern or concerns 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 in bankruptcy or a receiver or liquidator or other such person might otherwise acquire to the rights conferred hereby. 13.4 No waiver of any 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 unlimited period, which shows that the payment made by it is for acquisition of know-how and not its mere use and hence lies in the capital field. It is, no doubt, true that if the Licensee lawfully terminates the Agreement, it may continue to use the know-how free of charge, but, the important thing is that a Licensee can lawfully terminate the Agreement only in the situations as have been 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 insolvenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 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 royalty for trademark/ brand. The assessee entered into an Agreement dated 16.2.2008, with its group company, a copy of which is available on record. Such Agreement has been made effective from 1.1.2007. Recitals 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 service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 Agreement and acknowledge that nothing contained in this agreement shall give the Licensee any right, title, or interest in or to the Trade Marks save as granted by this Agreement. 19. This Clause makes it palpable that the Licensor is the proprietor of the trademarks and the Licensee undertakes not to do anything which might jeopardize the trade mark in any manner. Clause 9 deals with the termination of the Agreement. Para 9.2 of the Agreement provides as under:- 9.2 Upon 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. 20. This clause provides in unambig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, GKN, Germany and GKN, UK for use of know-how and trademarks. The TPO, inter alia, proposed a transfer pricing adjustment for a sum of ₹ 3.46 crore. Since the transfer pricing adjustment recommended by the TPO at ₹ 3.46 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 issue of transfer pricing adjustment, inter alia, on account of payment of know-how and trademarks. It has been brought to our notice that such proceedings have attained finality and the transfer pricing adjustment has been reduced. Ergo, the grounds challenging the addition towards transfer pricing adjustment, cannot survive, which have been rightly withdrawn by the ld. AR. As we have held hereinabove that the payment for use of know- how and trademarks is a revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scientific principle. 4.4 On the facts and in the circumstances of the case, the Ld. AO further erred in not appreciating the fact that the provision for warranty had been made on scientific principle and is based on past trends. 4.5 On the facts and in the circumstances of the case, the Ld. AO erred in disregarding the ruling of the Hon ble Delhi Tribunal, in assessee s own case for AY 1995-96 and AY 1996-97 (ITA No.3150/3151 Del 03), wherein it was held that the assessee satisfies the requirements for claiming the deduction and that the provision made by the assessee is of a liability, which is certain to be incurred and can be quantified with reasonable certainly. 4.6 On the facts and in the circumstances of the case, the Ld. AO erred in disregarding the judgment of Hon ble Supreme Court ( SC'), in the case of Rotork Controls (I) Private Limited Vs CIT [314 ITR 62], wherein it was held that warranty is an integral part of the sale price and if the warranty expenses are properly ascertainable and discounted on accrual basis, deduction is allowable u/s.37 of the Income Tax Act, 1961 ( the Act ). b) Revenue 2. On the facts and in circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for warranty made by the assessee is on the basis of technical estimation and, therefore, such provision was in respect of ascertained liability and the quantification thereof was to be made on a later date. Accordingly, the Tribunal allowed the appeal of the assessee. Similar view has been taken by the Tribunal in assessee s own case for various other years. 16. We find the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. vs. CIT reported in 314 ITR 62 has held that as under :- The assessee sold value actuators. At the time of sale the assessee provided a standard warranty whereby in the event of any actuator or part thereof becoming defective within 12 months from the date of commissioning or 18 months from the date of dispatch, whichever was earlier, it undertook to rectify or replace the defective part free of charge. Right from the assessment year 1983-84 the claim for allowance of this warranty had been allowed. For the assessment year 1991-92, it had made a provision for warranty of ₹ 10,18,800/- at the rate of 1.5 per cent the turnover. Since this provision exceeded the actual expenditure, the assessee reversed ₹ 5,00,246/- as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. 17. Respectfully following the decision of the Tribunal in assessee s own case as well as the decision of the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. (supra), we hold that the provision for warranty claim is an allowable expenditure. The ground raised by the assessee is allowed and the ground raised by the Revenue is dismissed. 18. Ground no.5 in assessee s appeal relating to disallowance u/s 14A was not pressed by the ld. counsel for the assessee because of smallness of the amount. Accordingly, the ground no.5 is dismissed as not pressed. 19. Ground no.6.1 of assessee s appeal is relating to initiation of penalty proceedings u/s 271(1)(c) of the I.T. Act being premature at this juncture is dismissed. 20. Ground no.6.2 of assessee s appeal is relating to levy of interest u/s 234B being consequential in nature is dismissed. ITA No.843/Del/2016, A.Y. 2011-12 (By Assessee) : 21. Ld. counsel for the assessee at the outset did not press the ground no.2 relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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