TMI Blog2015 (9) TMI 1615X X X X Extracts X X X X X X X X Extracts X X X X ..... r showing that the warranty provisioning was done on a scientific basis - Issue requires a fresh look by the AO - thus allowed for statistical purpose. Nature of royalty paid on sales - revenue out go or a capital out-go? - Held that:- Just because the consideration was calculated as a percentage applied on net ex-factory selling price, we cannot say that it was a revenue outgo - assessee was free to use the technical knowhow obtained by it from HCCL even after the period of agreement - the agreement between the parties resulted in an enduring benefit to the assessee and thus the consideration paid by the assessee to HCCL was a percentage of the sale value, still it retained all qualities of a capital out go - addition made by the AO is reinstated. - I.T.A No.667/Bang/2014 - - - Dated:- 23-9-2015 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER Assessee by : Shri. S. Anantha, CA Revenue by : Shri. G. R. Reddy, CIT DR-I O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : In this appeal filed by Revenue directed against an orde3r dt.14.02.2014, it has altogether raised six grounds of which, grounds 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly hundi discounting charges. On the reliance placed by the AO on the case of Tin Box Co. (supra), submission of the assessee was that there concerned assessee had given interest free loans to sister concerns and the facts were entirely different. Thus as per the assessee, disallowance was unjustified. 05. CIT (A) was appreciative of these contentions. According to him, the sum of ₹ 4,97,44,398/- out of total ₹ 4,98,17,000/- shown as interest expenditure was hundi discounting charges. As per the CIT (A), cash-flow statement filed by the assessee clearly supported its case that cash- inflow from operations came to ₹ 229.51 crores. He thus held that assessee had its own money for funding its investments in capital work-in-progress. Taking this view of the matter, he deleted the disallowance. 06. Now before us, Ld. DR strongly assailing the order of the CIT (A) submitted that existence of interest-free funds was never proved by the assessee. 07. Per contra, Ld. AR submitted that audited cash-flow statement for relevant previous year was filed by the assessee before the lower authorities. Placing reliance on paper book page 3, he submitted that the audited s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the assessee was that in view of judgment of Hon ble Apex Court in the case of Rotork Controls India P. Ltd (supra), claim of warranty was allowable. Assessee also pointed out that similar issue had come up in its own case for A. Y. 2006-07 and the CIT (A) had allowed the claim. CIT (A) after going through the findings of his predecessor for A. Y. 2006-07 held that the claim was allowable. 12. Now before us, Ld. DR strongly assailing the order of CIT (A) submitted that provision for warranty unless and until it was made on a scientific basis could not be allowed. As per the Ld. DR, assessee had not produced any details regarding the actual warranty expenditure nor had it furnished the scientific basis on which the provisioning was done. Ld. DR submitted that CIT (A) s order for A. Y. 2006-07 could not be cited as a reason for allowing the claim this year also. According to him, assessee might have been able to give full details of warranty provisioning for the A. Y. 2006-07, but for the impugned assessment year it was unable to produce such particulars. 13. Per contra, Ld. AR strongly supporting the order of CIT (A) submitted that provision for warranty account clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. It also could not give historical data for showing that the warranty provisioning of ₹ 23,36,000/- was done on a scientific basis. We are of the opinion that the CIT (A) allowed the claim of the assessee without verifying these facts. Issue therefore in our opinion requires a fresh look by the AO. Orders of the lower authorities on this issue is set aside and remitted back to the AO for consideration afresh in accordance with law. Ground 3 of the Revenue is allowed for statistical purpose. 15. Ground 4 of the Revenue reads as under : On the facts and in the circumstances of the case the opinion of the learned CIT (A), that the very fact that the Royalty payment is 1% of the sales, elucidate the nature as revenue expenditure, is not acceptable as the grant of right for manufacture by the Hitachi, brings in enduring nature of benefit to the assessee. 16. Facts apropos are that assessee had charged in its profit and loss account a sum of ₹ 91,06,005/- as royalty expenditure. Assessee explained before the AO that such royalty payments were made to Hitachi Construction Co. Ltd ( HCCL in short), Japan, which was an associated enterprise, and the rate was 1% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 91,06,005/- considering it as capital outgo. 17. Aggrieved assessee moved in appeal before the CIT (A). As per the assessee, there were no lumpsum payment as technical knowhow fees. Argument of the assessee was that there was no enduring benefit received by it. Specific reliance was placed on Hon ble Delhi High Court in the case of CIT v. EKL Appliances Ltd [(2012) 345 ITR 241], Hon ble Gujarat High Court judgments in the case of CIT v. Ashoka Mills Ltd [(1996) 218 ITR 526] and CIT v. Raipur Manufacturing Co. [(1998) 231 ITR 598]. CIT(A) was appreciative of these contentions. According to him, assessee s agreement with HCCL was one for technology sales, where no lumpsum knowhow fees was to be paid by the assessee. As per the CIT (A), payment of royalty was a percentage of the sales and this by itself reflected its revenue nature. Agreement, as per the CIT (A) resulted only in a right of use of technical know how and conferred only a limited domain over the rights. Assessee had no right to transfer such know how. According to him, judgment of Hon ble Delhi High Court in the case of EKL Appliances Ltd (supra) was squarely applicable. He deleted the addition made by the AO. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rights to Telecon 2.2 Subject to the terms and conditions of this Agreement, Hitachi hereby grants to Telcon, an exclusive but non-transferable license, to manufacture and/or assemble the Hitachi License Products within the Territory using Technical Know How furnished by Hitachi pursuant hereto and to sell or otherwise dispose of the Hitachi License Products, in the manner specified below: 2.2.1 Telcon shall be entitled to undertake, on an exclusive basis, the manufacture, marketing and sale of Hitachi License Products in Category I Territory. 2.2.2 Telcon shall be entitled, on a non-exclusive basis, to undertake the marketing and sale of Hitachi License Products in Category II Territory, without any permission from Hitachi. Accordingly, Telcon shall be entitled to establish subsidiaries, branch offices, rep offices and/or liaison offices in such Category II Territory to undertake and facilitate and service its marketing and sales business, without prior intimation to or approval from Hitachi. Telcon shall not be entitled to undertake manufacture of the Hitachi License Products in Category II Territory. 2.2.3 Telcon shall not be entitled, on a non-exclusive basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply to Telcon Technical Know How for Key Components A, except for dimensional drawings necessary for assembly and after-sales-service of Hitachi License Products: 3.1.1 Product information and Product application 3.1.2 Production drawings for Parts/ Components/ Assemblies 3.1.3 Parts List (bill of material) and Parts Standard List and information about sources of procurement 3.1.4 Functional test and inspection standards and procedures for manufactured items and acceptance test and inspection standards for procured items. 3.1.5 Drawings of jigs, fixtures, gauges and tools necessary for manufacture, assembly and inspection. 3.1.6 Table of materials for Hitachi's production schedule including operational sequences. 3.1.7 Hitachi's design and engineering standards of material and processes. 3.1.8 Schematic (outline and installation) drawings and / or procurement and performance tests / specifications in case of Components and Spare Parts not manufactured by Hitachi but purchased from outside sources as would be essential for Telcon to have in order to develop them indigenously. 3.1.9 Copies of operation/ maintenance manuals (handling), parts cata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Hitachi License Product sold by Telcon, for either a period of seven (7) years from the date of commencement of commercial production of such Product, or ten (10) years from the execution of this Agreement, whichever is earlier (hereinafter referred to as the Royalty Period ). 15.3 The royalty shall be computed semi-annually as of the last days of June and December of each year and shall be paid to Hitachi within ninety (90) days, after the respective last days mentioned above. 15.4 Telcon shall, at the time of each payment of royalty, submit to Hitachi the written report of the production, quantity and exfactory sale price of the products manufactured during each six-month period certified by Chartered Accountant within sixty (60) days after the last days of June and December. Article 16 Payments 16.1 The royalty and lump sum fee shall, unless otherwise specified by Hitachi, be made in Japanese Yen to a bank account designated by Hitachi, subject to all regulatory approvals and requirements. 16.2 All payments for the Components and Spare Parts supplied by Hitachi shall be made by Telcon in a manner to be mutually agreed by the Parties from time to time. 16.3 Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovals, be extended by mutual agreement of the Parties and upon terms and conditions that may be mutually agreed. Negotiations for the purpose may be commenced by the Parties not less than 12 months prior to the expiry of the term of this Agreement. 24. 4 Notwithstanding expiry or any termination of this Agreement, the provisions hereof relating to Warranties and indemnity, Secrecy, supply of Spare Parts and arbitration shall survive and remain valid and binding upon the Parties. 23. It is clear from the above article that assessee could continue manufacture and sale of Hitachi licensed products and based on shareholders agreement, Hitachi was obliged to renew its commitments with no obligation on the assessee. It would be relevant to have a look at articles 26 27 also which read as under : Article 26 Procedure for termination and consequences thereof 26.1 Termination of this Agreement shall not release either Party from any liability to the other Party, which at the time of such termination has already accrued, nor affect in any way the survival of any right or obligation of a Party, which is expressly stated elsewhere in this Agreement to survive such terminati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g such notice period, Telcon shall be entitled to continue manufacture and marketing / sales thereof against payment of royalty for such Products, in accordance with the provisions of this Agreement,-(but without the us of the Hitachi brand name / trade name), and Hitachi shall be obliged to continue supplies of Components for such Products to Telcon in terms of this Agreement. (c) Hitachi shall be obliged to continue supplies of Spare Parts for such Products to Telcon in terms of this Agreement for a period of seven (7) years from such termination. (d) During such notice period, Telcon (but not Hitachi) shall remain bound by the non-compete provisions of Article 18 of this Agreement. 26.4 In the events of breach by Hitachi specified under Article 25,2(i) 25.2(iii) or 25.4 above, the following provisions will apply: 26.4.1 With respect to Hitachi License Products not yet in commercial production by Telcon, Telcon shall have the right to forthwith terminate this Agreement in which event all further rights and obligations of the Parties (other than those already accrued) shall cease immediately and Hitachi shall refund promptly to Telcon, all payments until then made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement the technical know how shall revert back to HCCL and assessee would cease the use of such technical know how on the termination mentioned there in. However as per article 26 whether termination was based on agreement between assessee and HCCL or was through a written notice, the right or obligation of the parties expressly stated in the agreement clearly survived. Thus in our opinion assessee had every right to use the technical know how obtained by it from HCCL, even after the expiry or the seven or ten year period mentioned in the agreement. Assessee could not have used the Hitachi brand name after the said period, but it could still use the technical knowhow. Technical knowhow obtained by the assessee in our opinion did give it an enduring benefit. 25. Coming to the judgment of Hon ble Delhi High Court in the case of EKL Appliances Ltd (supra), question before their Lordship was whether disallowance of brand fee / royalty payment made to an associated enterprise abroad was justified. The payments effected by the assessee in said case was brand-fee, at the rate of 0.5% on the net sales for the brand name Kelvinator. Here what we find is that the payments effected by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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