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TMI Blog2018 (7) TMI 2094X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was not liable to deduct tax under Section 195 of the Income Tax. Act, 1961, from the payment made to M/s. Bellsonica Corporation Japan towards reimbursement of expenses as the same was not an income chargeable to tax in India. 2.1 That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in observing in complete disregard of the supporting details and written submissions that the Appellant has failed both in the assessment proceedings as well as in the appellate proceedings to demonstrate the nature of reimbursements. 2.2 That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in not appreciating that, similar claim of reimbursement of expenses of the Appellant has been allowed by the department in the previous assessment year i.e. Assessment Year 2010-11. 3. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred on facts and in law in not deleting the disallowance of expenditure the Appellant towards expenditure on account of royalty. 3.1 That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred on facts and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions of the assessee sustained the addition made u/s. 40(a)(ia) and in respect of payment of royalty, the ld.CIT(A) treated 25% of total payment as capital in nature and the balance 75% was treated as revenue expenditure after relying on case laws. Aggrieved by the order of the ld. CIT(A), the assessee as well as the Revenue have come up in appeal before the ITAT. 4. The learned AR reiterated the submissions made before the ld. CIT(A) and submitted that these payments made by the assessee are in nature of reimbursement, therefore, the TDS provision is not applicable on it. He has also referred to the agreement clause 3.05 and submitted that all payments have been made according to the agreement. 5. On the other hand, the ld. DR relied on the orders of the lower authorities and submitted that the assessee had not demonstrated the exact nature of payments made to its group company or payments made to the employees of Bellsonica Corpn. Japan. Therefore, the ld. CIT(A) has rightly dismissed the appeal of the assessee on this issue. 6. We have heard the submissions of both the parties and have gone through the entire material available on record. The assessee had not produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ownership of the technical knowhow remained with the foreign company. The assessee has made license agreement with the foreign company as on 01.10.2006, which is continuously in force till date. The terms of agreement read as under : " ARTICLE 2 LICENSE AND BELLSONIC'S OWNERSHIP 2.01: Scope of License (a) Bellsonica agrees to provide, during the term of this Agreement, technical collaboration and license necessary to the manufacture, testing and quality control of Products, in accordance with the terms and conditions in this Agreement. (b) Bellsonica hereby grants to Licensee during the term of this Agreement, in strict accordance with the terms and subjects to the conditions set forth, the nonexclusive right to use the Licensed Information for the manufacture, testing and quality control of Products within the Territory. 2.02 Bellsonica's Ownership Licensee recognizes and acknowledges Bellsonica's ownership and validity of the Licensed Information and shall not raise or cause to be raised and question concerning or any objection to the ownership or validity of Licensed Information. Licensee shall not apply or cause to be applied for any letters industrial pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranty express or implied, as to description, quality, merchantability, fitness for a particular purpose, performance, productiveness, or any other matter, of any Products, Licensed Information, or any other matter of thing that may be provided by Bellsonica to Licensee at any time under this Agreement or any related agreement, unless the same is in written and signed by Bellsonica. Bellsonica will use its best efforts to verify the accuracy of the Licensed Information furnished it to Licensee, but shall not be liable to Licensee for damages arising out of, or resulting from, any of the Licensed Information made available hereunder or thereof by Licensee. (e) Bellsonica further disclaims any responsibility whatsoever with respect to any representations or warranties, whether express or implied, which Licensee may make with respect to Products manufactured and/or sold by Licensee and, in any event, Licensee agrees to hold and save harmless Bellsonica from any claims, demands or actions which may result from any representations or warranties of Licensee. Notwithstanding the foregoing, any warranty which Licensee proposes to give with respect to Products it manufactures sells sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of this Agreement, Licensee discovers or acquires any improvement with respect to Products, it shall give to Bellsonica full information, instructions, know-how and particulars as to the mode of working and using the same. Such improvement shall be treated as Licensed Information for the purpose of this Agreement. If such information contains improvements of significant commercial value for Bellsonica, Bellsonica will pay reasonable compensation to Licensee for the use thereof. The amount of such compensation will be mutually agreed upon. 3.03 Observance of Standards and Specifications (a) In order to establish a Licensee production standard of quality comparable to the standards of Bellsonica, Licensee shall use its best efforts to provide and maintain adequate manufacturing and testing facilities, with the assistance and cooperation of Bellsonica in accordance with this Agreement. Bellsonica may also, in consultation with Licensee, examine and test materials used for Products for the purpose of enabling Licensee to reach the required standards of quality. (b) In order to protect and maintain the quality of Products manufactured by Licensee pursuant to this Agreement, L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and subject to approval by the Government of India. (b) Licensee shall bear, or upon the receipt of Bellsonica's statement reimburse to Bellsonica, the following expense and fees for each Bellsonica's despatched personnel: (1) round-trip air fare between Japan and India, in business class for official general manager and above positions whereas in economy class for all others. (2) twenty five thousand Japanese yen (¥ 25,000.-) per person for the inland transportation expense within Japan (3) travel and transportation expenses (including business class air fare and driver's expenses if applicable) within India, and (4) daily technical advisory fee for despatched personnel in the amount of forty thousand (40,000.-) for managers or greater while twenty thousand (20,000) for all other, both in Japanese yen and uniformity applied which rate is subject to increase upon mutual agreement between the parties hereto. Licensee shall, in addition, provide at its own expense to Bellsonica's despatched personnel accommodation suitable to their respective status. Licensee shall bear all taxes and charges imposed by the Government of India or any authority therein or thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t period as an evidencing document. (c) All royalty payment by Licensee shall be done in Japanese Yen. Licensee may make payment of royalty to Bellsonica net of taxes, on an understanding that Licensee shall furnish such documents, details and information in regard to the deduction of tax on daily technical advisory fee which may be required by Bellsonica. All other expenses incurred in connection with making such payments including expenses of currency conversion shall be borne by Licensee and no deduction shall be made by Licensee from such payment. (d) Notwithstanding of the provisions in Article 3.06 (a) and (b) royalty payment by Licensee may forbear, subject to Licensee's prior written notice and consent to the same by Bellsonica, further provided that the Licensee's gross profit is so long as and substantially negative for the first 3 (three) fiscal years from Licensee's incorporation. In such event of forbearance, royalty payment thereby shall only begin at the closing of Licensee's fourth fiscal year and further. 3.07: Delayed or non-payment In the event Licensee fails to make any payment specified in this Agreement to Bellsonica when due and payable for any re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llsonica to render any advice or assistance relating to Product or any manufacturing and operating preparations including, but not limited to, machineries, facilities and tooling or alike which requires special or unusual work or analysis and is not covered by this Agreement and in the event Bellsonica agrees to render such advice and assistance, Licensee agrees to pay Bellsonica a reasonable fee to be mutually agreed upon therefore. This fee shall be paid in Japanese Yen. ARTICLE 4: PURCHASE OF PRODUCTION MACHINERY 4.01: Purchase of Production Machinery With regard to the production machinery to be purchased by Licensee for the manufacture of Products by Licensee, Bellsonica shall render advice and assistance to Licensee in the selection and purchase production machinery, at the request of Licensee. ARTICLE 5: OTHER OBLIGATION OF LICENSEE 5.01: Not to manufacture similar products During the term of this Agreement or any extension thereof, Licensee shall not, except with the prior written consent of Bellsonica, either directly or indirectly enter into any other License agreement or supply with any other manufacturer or seller of four- wheelers, two-wheelers or sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligation to undertake performance of any of its obligations contained herein. (c) Bellsonica shall obtain or complete, if required, such approvals, validations, registrations and filings in Japan with respect to this Agreement as set forth in paragraph (b) above by the end of October, 2006, and Licensee shall obtain or complete such approvals, validations, registrations and filings in India with respect to this Agreement as set forth in paragraph (b) above by the end of October 2006. Upon failure of either party to obtain or complete such approvals, validation, registrations and filings within the specific period stated herein from or with their respective Governments or regulatory authorities therein, each party shall have the right and option to declare this Agreement null and void and of no effect. (d) In the event that either party hereto fails or delays to obtain any such validation, approval or registration referred to in paragraph (a) above of this Article 6.02 as may be required during the term of this Agreement and as is capable of obtaining the payment of any fees, expense or any other money provided for in this Agreement due and payable by Licensee to Bellsonica sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the other party hereto under any applicable bankruptcy reorganization or insolvency law and such proceeding shall not have been discharged or stayed within a period of 90 (ninety) days; or (v) the other party hereto shall institute or consent to any proceeding in respect of itself under any applicable bankruptcy, reorganization or insolvency law or shall make assignment for the benefit of, or into any composition with, it creditors. (b) Notwithstanding anything to the contrary herein and in addition to and without prejudice to the right to terminate this Agreement provided elsewhere herein, either party hereto may, upon its election and in addition to any other legal remedies that it may have, terminate this agreement by giving a written notice of termination to the other party, in case Licensee shall at any time abandon, or cease to pursue, its plan to manufacture and sell products within the Territory as contemplated by this Agreement. (c) Upon such notice of termination being given in accordance with paragraph (a) or (b) of this Article 6.04, this Agreement shall, except as otherwise provided herein, forthwith cease and terminate automatically as of the date of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are silent, and may be held, if the Tribunal considers it appropriate, in an informal and summary manner to shorten the total time of the arbitration proceedings on the basis that it shall not be necessary to observe or carry out the usual formalities or procedures, including the delivery of pleadings, the making of discovery or the observance of the strict rules of evidence. The decision of such arbitrator shall be final and binding upon the parties hereto and judgment thereon may be entered in any court having jurisdiction thereon or application may be made to such court for judicial acceptance of the award and/or order of enforcement, as the case may be. 7.02 No waiver The failure with or without intent of either party hereto to insist upon performance by the other party of any term or provision of this Agreement in strict conformity with the literal requirements hereof shall not be treated or deemed to construct a modification of any term or provision hereof, nor shall such failure or election be deemed to constitute a waiver of the right of such party at any time whatsoever thereafter to insist upon performance by the other party strictly in accordance with any term or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Private Limited, Plot No, 1, Phase 3A, IMT Manesar, Distt. Gurgaon - 122 051, Haryana India Attention: Managing Director Any written notice given pursuant to this Article 7.07 will be deemed to have been served and be effective when delivered in person at the address herein specified for the addressee or, in the case of airmail, when 20 (ten) days shall have passed after the same shall have been placed in mail. 7.08: Force Maieure No party to this Agreement shall be liable or responsible in any manner whatsoever to the other party for losses or damages due to failure or delay to perform or fulfill any provisions of this Agreement when such failure or delay is due to fires, floods, earthquakes, strikes, act of God, legal acts of public authorities, or delays and default caused by public carriers, or for any other acts or causes whatsoever, whether similar or dissimilar, which cannot be reasonably be forecasted or provided against, provided, however, that the party so affected shall promptly give a written notice to the other party setting forth the reason or cause for such delay or non-performance and shall use its best efforts to avoid or remove such reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively." 10. After going through the terms of agreement dated 01.10.2006, we find that when the agreement is terminated, the ownership of technical knowhow will not remain with the assessee company. In the decision relied on by the assessee, the royalty payment in the similar facts and circumstances, has been decided to be a revenue in nature. The observation of ITAT Delhi Bench in the case of Moser Baer (supra) read as under : "9.4. We have perused submissions advanced by both sides in the light of records placed before us. 9.5. The issue before us is regarding treatment of payment made to various parties with whom assessee entered into a know-how agreement. Assessee during year made payments to various parties which were treated as revenue expenses. Assessee contends that expenditure incurred on acquisition of right to know-how/technical information would not satisfy test of enduring benefit. Assessee placed reliance upon decision le Supreme Court in the case of CITv. Ciba India Ltd. [1968] 69 ITR 692. 9.6. Whereas Department contends that right acquired by assessee enabled assessee in trading results in practical and commercial sense and therefore satisfies test for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24th January, 1984. After expiry of the first agreement, the second agreement dated 2nd June, 1995, ensured continuity in manufacture, development, production and sale. The period of agreement, 10 years in the present case, would be inconsequential for the agreement merely permitted and allowed use of technology subject to payment of royalty and compliances and the proprietorship and ownership right was never granted or transferred. The factum that after 10 years and after returning the tangible properties, the respondent assessee could still have continued to use technical knowhow and information would be a trivial and inconsequential factum as in the automobile industry, technology upgradation is constant and rapid. Gone are the days when one or two manufacturers e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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