ITA Nos. 2048 and 2045/Del/2011, (Assessment Year: 2003-2004). Case: 1. ACIT, New Delhi, 2. Hero Honda Motors Ltd. Vs 1. Hero Honda Motors Ltd., 2. ACIT, New Delhi. ITAT (Income Tax Appellate Tribunal)

Case Number:ITA Nos. 2048 and 2045/Del/2011, (Assessment Year: 2003-2004)
Party Name:1. ACIT, New Delhi, 2. Hero Honda Motors Ltd. Vs 1. Hero Honda Motors Ltd., 2. ACIT, New Delhi
Counsel:For Appellant: Ajay Vohra, Adv. and For Respondents: R.S. Gill, Sr. DR
Judges:B.C. Meena, Member (A) and A.T. Varkey, Member (J)
Issue:Income Tax Act, 1961 - Sections 143, 147, 153A, 154, 155, 234D, 245D, 250, 254, 260, 262, 263, 264, 28, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 28(iii), 28(III)(a), 28(iiib), 28(iiid), 28(IV), 37(1), 80-IA, 80HHC, 80HHC(3), 80IA, 80IA(4)
Judgement Date:May 15, 2014
Court:ITAT (Income Tax Appellate Tribunal)
 
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Order:

A.T. Varkey, Member (J), (ITAT Delhi 'C' Bench)

1. Both these appeals have been preferred against the order of the ld. CIT(A)-XX, New Delhi dated 31.01.2011 for the Assessment Year 2003-04.

2. The grounds of appeal raised by revenue in ITA No. 2048/Del/2011 are as follows:-

1. On the facts and circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition of Rs. 17,22,60,688/- made by the Assessing Officer on account of royalty expenses.

2. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 2,65,37,236/- made by the Assessing Officer on account of model fee for obtaining use of technical know how.

3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 73,98,784/- made by the Assessing Officer on account of Expenditure on software claimed u/s. 37(1).

4. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs. 80,40,300/- made by the Assessing Officer on account of Transfer Pricing Adjustment (difference in arm's length price in international transactions of purchase of spare parts)

5. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.

3. The grounds of appeal preferred by the assessee ITA No. 2045/Del/2011 are as follows:-

1. That the CIT(Appeals) erred on facts and in law in upholding the action of the Assessing Officer in deleting the benefit of deduction under section 80HHC of the Act on the custom duty benefit under DEPB Scheme, amounting to Rs. 16,31,41,138/-.

1.1. That the CIT(Appeals) erred in facts and in law in reducing the entire amount of DEPB benefit from the profits of the business, without appreciating that only profit on transfer of DEPB licenses ought to be excluded in terms of proviso to sub-section (3) of section 80HHC read with section 28(iiid) of the Act.

1.2. That the CIT(Appeals) erred on facts and in law in treating interest income of Rs. 2,40,81,432/- as "income from other sources" and consequentially excluding the same from "profits of the business" for the purposes of computing deduction under section 80HHC of the Act.

1.3. Without prejudice, that the CIT(Appeals) erred on facts and in law in not allowing netting of interest expenditure amounting to Rs. 1,73,23,592/-, incurred during the year, against interest income of Rs. 2,40,81,432/- earned during the year, while computing deduction under section 80HHC of the Act.

1.4. Without prejudice, that the CIT(Appeals) erred on facts and in law in not directing for computation of deduction under section 80HHC by taking amount of profits of business finally assessed in the assessment order.

2. That the CIT(Appeals) erred on facts and in law in upholding the action of the Assessing Officer in disallowing deduction under section 80IA of the Act, amounting to Rs. 2,28,86,196/-, claimed by the appellant in respect of the captive power generating unit at Gurgaon.

2.1. That the CIT(Appeals) erred on facts and in law in upholding the action of the Assessing Officer in computing profits of the power generating unit by adopting the rate of supply of power at Rs. 4.05 per unit, at which power was supplied by State Electricity Board, as the 'market price' of the power, as against rate of Rs. 5.92 per unit (cost of generation of power at Rs. 5.15 per unit + mark-up of 15% adopted by the appellant for the purposes of computing deduction under section 80IA of the Act for captive power generating unit.

3. That the CIT(Appeals) erred on facts and in law in upholding the levy of interest under section 234D of the Act.

4. First of all we will decide the Revenue's Appeal. Ground No. 1. Apropos, deletion of addition of Rs. 17,22,60,688/- made by the Assessing Officer on account of Royalty Expenses by CIT(A).

5. Brief Facts of the case is that the assessee is engaged in the business of manufacture and sale of motorcycles. The assessee pursuant to Technical Collaboration Agreement (TCA), has been paying royalty to its joint Venture Partner M/s. Honda Motor Company, Japan (Honda). During the relevant previous years, the assessee has paid royalty of Rs. 68,90,42,672/- on different models at ex-factory sale price of the product in pursuance of Article 25.1(2) of the Technical Assistance Agreement (Agreement) dated 2nd June, 1995, read with Third Supplementary Amendment to the said agreement entered into with Honda.

6. In the assessment order, the Assessing Officer while relying upon the decision of the Apex Court in the case of southern Switchgear Ltd. Vs. CIT: 232 ITR 359 held that 25% of royalty constituted capital expenditure.

7. On appeal, the ld. CIT(A) deleted the disallowance treating the expenditure incurred on account of royalty as revenue expenditure while following its earlier order passed in the assessment year 2002-03.

8. Aggrieved by the said order of the ld. CIT(A) the revenue is before us. ld. DR contended that a perusal of the 'License and Technical Agreement' comprising of 41 clauses, it is very clear that the Intellectual Property Rights developed by Honda has been transferred to the assessee. The agreement states that Honda has acquired and possesses certain Intellectual Property Rights, manufacturing information and know-how, quality standards and marketing methods relating to such 2/3 wheelers. Thus, as asset of enduring benefit which was the exclusive property of Honda has been transferred for use by the assessee company.

9. The ld. DR contended that the patent over the new developed project has also been transferred to licensee and the licensor has transferred its intellectual property rights to licensee, the assessee company. The licensor has developed model Nos. CD-100 STD, CD100OX, CD-100 Splendor, C-100 to cite some examples after sustained research and development at their end. The model developed by licensor has been admittedly patented.

10. The ld. DR contended that over and above, the transfer of the right of Intellectual Property Right and patent, the licensor has also agreed to set up manufacturing facilities for the licensee, the assessee company and other rights exclusively handed over to the licensor inter alia are:-

(a) know-how and technical information and any other non-public technical or business information being the sole and exclusive property of licensor to be held in trust and confidence by licensee.

(b) use of trademark

(c) the know-how is not limited to drawings, specifications, process manuals etc.

11. According to the ld. DR the technical assessment agreement is renewable, the initial term being for ten year, since extended to another ten years, as on date. Therefore, according to the ld. DR it is crystal clear that a capital asset in terms of intellectual property rights and patented have been transferred for whole by the licensor to the assessee company. The licensor has parted with its assets in pursuance to the Agreement. For acquiring this capital for which payment made, would also have to fall within the four walls of capital expenditure. Therefore according to the ld. DR the Assessing Officer was right in holding that royalty formed an integral element of capital expenditure. Therefore the Assessing Officer was right in holding that Rs. 17,22,60,688/- capital in nature, therefore the said order may be restored. On the other hand, the ld. counsel for the assessee Shri Ajay Vohra pointed out that in the assessee's own case for the Assessment Year 2000-01 to 2002-03 and for Assessment Year 2006-07 and 2007-08 the Tribunal allowed royalty and technical guidance fee both to Honda under section 37(1) of the Act as revenue expenditure and does not want us to disturb the order of the ld. CIT(A).

12. We find that the co-ordinate Bench of ITAT held in the case of Hero Motocorp Limited Vs. ACIT in ITA No. 5130/Del/2010 for the Assessment Year 2006-07 as under:-

26. In the light of these facts, let us examine the various decisions discussed above so as to arrive at the finding which of the decisions is applicable in the case of the assessee.

27. In our opinion, the facts of the assessee's case are identical to the facts in the case of Climate Systems India Ltd. (supra). In the case of Climate Systems India Ltd. (supra), the assessee company made the lump sum payment and also the running royalty. The running royalty was calculated as a percentage of sales. The lump sum payment was treated as capital expenditure by the assessee company and the running royalty was treated as revenue expenditure. The Assessing Officer disallowed the running royalty holding it to be capital expenditure which was confirmed by the learned CIT(A) as well as the ITAT. The Hon'ble Jurisdictional High Court allowed the appeal. The facts of the assessee's case are identical because the assessee also in the year 1984 entered into an agreement by which the assessee was provided with technical assistance for setting up of the plant and also for manufacture, assembly and service of the motorcycles. The assessee made lump sum payment of $5,00,000 for the technical assistance for construction of plant and paid a running royalty as a percentage of sales in respect of technical assistance for manufacture, assembly and service of the motorcycles. The running royalty which was paid annually was claimed as revenue expenditure and was disallowed by the Assessing Officer treating the same as capital expenditure. Thus, the facts of the assessee's case are identical to the 34 ITA-5130/Del/2010 facts before the Hon'ble Jurisdictional High Court in the case of Climate Systems India Ltd. (supra).

28. Similar were the facts before the Hon'ble Jurisdictional High Court in the case of Sharda Motor Industrial Ltd. (supra). In that case also, SMIL made a lump sum payment and also running royalty at a specified percentage based upon the production. The lump sum payment was treated as capital...

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