Royalty expense allowable when goods are sold to Associated Enterprise on principal-to-principal basis

Honda Motorcycle and Scooters India Pvt. Ltd. Vs DCIT (ITAT Delhi)

Facts-

The appellant, Honda Motorcycle and Scooters India Pvt. Ltd., is a subsidiary of Honda Motor Company Ltd., Japan. As per the agreement, the assessee is liable to pay the royalty of goods manufactured.

Conclusion-

Royalty payment-

It is not in dispute that the goods which are exported by the assessee were manufactured using the technical know-how provided by Honda Motor Company Ltd., Japan under an agreement dated 13^th July 2000. The assessee has sold the goods to the Associated Enterprise on principal to principal basis and has received sales consideration. The royalty is payable on the basis of the goods manufactured. Accordingly, addition made by the AO/TPO by determining the arms’ length price of royalty on exports to the Associated enterprise at ‘NIL’ is deleted.

Capitalization of royalty-

Limited right to use the know-how, without any ownership right, was acquired and as the know-how was used in the existing business of manufacturing through dealer, the royalty expenses were incurred for the purpose of business.

Additional ground-

There is no merit in the contention of the revenue that where the assessee itself had not claimed as deductible in its hands, the same cannot be allowed by the additional ground of appeal. Accordingly, the additional ground of appeal is allowed.

Export commission-

We are of the concerned view that the assessee has successfully demonstrated not only the benefits but has also shown that the profitability is higher. Accordingly, the addition on account of export commission was deleted.

FULL TEXT OF THE ITAT JUDGEMENT

1. 7463/Del/2018 and 7464/Del/2018 are two separate appeals by the assessee preferred against two separate orders dated 30.10.2019 framed u/s. 143 (2) r.w.s. 144C of the Act pertaining to A.Y. 2013-14 and 2014-15 respectively.

2. Since common grounds are involved in both these appeals, therefore, they were heard together and are being disposed of by this by this common order for the sake of convenience and brevity.

3. Since underline facts in the issues are identical in both the years. We have considered the facts of A.Y.2013-14 for disposing all these appeals.

4. The common grievance can be summarised as under :-

1. Addition on account of export Commission

2. Addition on account of royalty on sales to its AEs

3. Disallowance of expenditure being incurred under corporate social responsibility

4. Disallowance of expenditure on signages

5. Disallowance of sales tools expenses

6. Capitalisation of Royalty

7. Disallowance of claim of deduction of expenses in respect of Technical know-how

8. Claim of TDS

5. Representatives of both the sides were heard at length. Case record carefully perused and with the assistance of the counsel we have considered the relevant documentary evidences brought on record in the form of paper book in the light of Rule 18 (6) of the ITAT Rules.

6. On the agreement of both the representatives we have considered the facts of A.Y.2013-14 since facts of A.Y. 2014-15 are identical.

7. Appellant is a subsidiary of Honda Motor Company Ltd,. Japan,Group and is engaged in the business of manufacture and sale of motor cycles and scooters. The details of the international transactions and specified domestic transactions entered by the assessee with its AE during the year under consideration which are as under :-

8. With this background we will first address the issues which have already been decided by the coordinate benches in earlier assessment years on identical set of facts.

1. Payment of royalty on sales to its AE – Identical issue was considered and decided by the Tribunal in assessee’s own case in A.Y. 2008-09 in ITA No.132/Del/2013. The relevant finding read as under :-

“12. We have heard rival submissions and perused the material on record. The assessee has made payment of royalty as per the technology know-how agreement dated July 13, 2000. The relevant clauses of the agreement, namely Articles 2,3 & 11 regarding payment of consideration read as under :-

“ARTICLE 2 – GRANT OF LICENSE

2.1. Subject to the terms and conditions herein contained, the LICENSOR hereby grants to the LICENSEE an indivisible and non-transferable exclusive right and license, without the right to grant sublicenses, to manufacture, use and sell the Products and the Licensed Parts within the Territory under the Intellectual Property Rights and by using the Technical Information and Technical Material provided by the LICENSOR to the LICENSEE hereunder.

2.2. Notwithstanding the provision of Article 2.1 above, the LICENSOR reserves the right to sell or otherwise supply even within the Territory to any third party the Parts for repair or replacement of the Products or other products of the LICENSOR.

ARTICLE 3 – FURNISHING OF TECHNICAL INFORMATION

3.1. During the term of this Agreement, the LICENSOR shall Amish the LICENSEE with the Technical Information and Technical Material to the extent deemed necessary by the LICENSOR, by disclosing it in a documentary form, and advising them as to the application of the Technical Information and/or otherwise, in the manner mentioned in this Article 3.

3.2. Furnishing of the Technical Information in documentary form, that is the Technical Materials, the items of which are described in Exhibit II hereto as written in the English language, shall be effected within one year after the Effective Date hereof with regard to the Technical Information existing as of the Effective Date hereof and shall be effected from time to time at the time when the LICENSOR deems it necessary to do so, or effected within one year from the day when the LICENSOR approves the LICENSEE’s request, or effected within one year from the day when the LICENSOR and the LICENSEE agree to a Model Change of the product Prnilitett pursuant to Article 1 (2) hereof

ARTICLE 11- CONSIDERATION

11.1 In consideration of the right and license granted to the LICENSEE under Article 2 hereof and upon furnishing of the Technical Information under Article 3.2 hereof the LICENSEE shall pay to the LICENSOR the following :

a) the amount of lump-sum fee in respect of the initial model at the rate specified in the Exhibit I hereto .

b) the amount of additional lump-sum fee and the manner of payment thereof shall, for each additional model or type of product as agreed upon by the parties, be decided under New Model Agreement for each such additional model or type of product.

c) the amount of additional Jump-sum fee and the manner of payment thereof shall, for each model change as agreed upon by the parties, be decided under the change Model Agreement for each such model change.

Such lump scan fee shall be non-refundable to the LICENSEE non-creditable against any other payments made or to be made by the LICENSEE to the LICENSOR for any reason whatsoever.

11.2 The amount of lump-sum fee in respect of the initial model, two million U.S. dollars (US$ 2,000;000), shall be paid by the LICENSEE in U.S. dollars by bank transfer remittance to the bank account designated by the LICENSOR in three (3) installments in accordance with the following payment schedule;

(a) The first installment in the amount of six hundred sixty six thousand six hundred sixty„six-…..„ (US$666.666) shall be paid within sixty (60) days after the day on which the manufacture of the product on a commercial basis has started provided that such day shall be confirmed in writing by the parties hereto.

(b) The second installment in the amount of six hundred sixty six thousand six hundred sixty seven (US$666,667) shall be paid within one hundred twenty days (120) days after the day on which the manufacture of the Products on a commercial basis has started

(c) The third installment in the amount of six hundred sixty six thousand six hundred sixty seven (US$666,667) shall be paid within one hundred eighty days (180) days after the day on which the manufacture of the Products on a commercial basis has started.

11.3 Payments and remittances by the LICENSEE hereunder shall be free and clear of any deductions for taxes or other charges in the Territory, except for the taxes and other governmental charges set forth in Article 12 hereof. Receipt by the LICENSOR of any payment tendered hereunder shall not constitute the LICENSOR’: acceptance of any account, schedule or figure on which such payment is bas_ed. All payments made or to be made by the LICENSEE to the LICENSOR hereunder shall not be refundable to the LICENSEE, even V any of the Intellectual Property Rights licensed to the LICENSEE will have been extinguished or otherwise come into nonexistence for any reason whatsoever, or even if any of the Know-How contained in the Information furnished to the LICENSEE will have become public for any reason whatsoever. If the LICENSEE fails to make any payment hereunder on the due date, the LICENSEE agrees to pay a late payment fee in the amount equivalentlop:our percent (4%) per annum calculated on the basis- of a 365-day year, subject to any regulatory approvals. that may be required.”    

As per the agreement, the assessee is entitled to use the technology know-how provided by the MM. Honda Motors Company Ltd., Japan for manufacturer and sale of two wheelers and parts. The assessee is liable to pay the royalty of the goods manufactured whether the smile is sold in India or outside India. It is not in dispute that the goods which are exported by the assessee were manufactured by using technical know-how provided by M/s. Honda Motors Company Ltd., Japan under agreement dated July 13, 2000. The finding of the TPO that the position of the assessee with regard to export was that of a contract manufacturer, is without any basis and is contrary to the facts on record. It is evident from the financial results of the assessee that it has independent sales both domestic as well as exports. The assessee has sold the goods to the AEs on principal to principal basis and has received the sales consideration. The royalty is payable on the basis of manufacture of goods. Based on the submissions made before us and also the chart showing the price earned by the assessee from exports of goods to the AEs as well as non-AEs, the assessee has earned a premium which would not be in the case of a contract manufacturer. In case of sister concern of the assessee, identical payment of royalty was held to be allowable by the Tribunal in the case of M/s. Hero MotoCorp Ltd. in ITA No.5130/De1/2010. The relevant finding of the Tribunal reads as under :-

“92. We have heard both the parties and pursued the material placed before us we have already concidered similar Issue while considering the disallowance of royalty and the export commission. While considering the disallowance of the export commission, we have noted that the payment of royalty and the export commission are for two different purposes, The assessee is paying royalty as per technical know-how agreement dated 02.06.2004 with HMCL. As per this agreement, the assessee is entitled to use technical know-how provided by HMCL for manufacture and sale of two wheelers and parts. Royalty is to be paid for the goods manufactured by the assessee, whether :cid within India or outside India. It is not in dispute that the 92 IPA-5130/De1/2010 motorcycles which were exported by the assessee, were manufactured by using the technical know-how provided by HMCL under the technical know-how agreement dated 02.06.2004. Therefore, royalty is payable on such manufacturing of goods. The contention of the learned TPO that the goods are exported to subsidiaries of the Associate Enterprise i.e. LE of Honda Japan and the assessee also paid export’ commission, would be no ground for disallowance of the royalty or determining arm’s length price of the royalty at nil. The assessee is exporting goods to AE of Honda on principal to principal basis and the price at which export is made is higher than the domestic price. While discussing the disallowance of export commission, we have discussed this issue at length and have noted that even after reditcing the export commission, the assessee derived the benefit of ‘13.05 crores by export. At the cost of repetition, we would like to mention that the export sale value was more than the domestic sale rate and the assessee: has given a detailed working thereof which ds enclosed with this order in the form of Annexure-1 In the above working, the assessee has reduced the export commission. Therefore, by export to the AE of Honda Japan, the assessee has been benefited and was not at a loss. The further finding of the TPO that thb position of the assessee company with regard to export was that of a contract manufacturer, in our opinion, is without any basis and inflict contrary to the facts on record. The raw materials have been purchased by the assessee in its own right. It is not the case of the TPO that the raw materials have been supplied by the AE. The assessee has sold the goods to 4E on principal to principal basis and has received the sales consideration. In view of the above, in our opinion, there is no justification for disallowance of the royalty on the export. We may’reiterate that the Revenue has disallowed the entire royalty paid even on domastic sale which has been considered at length by us in the earlier paragraph of this order and we have arrived at the conclusion 93 ITA-5130/Del/2010 that the payment or royalty was a revenue expenditure,incurred for the purpose of business. Accordingly,the addition made by the TPO  by determining arm’s length price of royalty on export at nil is deleted.

13.  In view of the above reasoning, we are of the view that there is no justification for disallowance of royalty on the export made to the AEs. Accordingly,the addition made by the AO/TPO by determining the ALP  of royalty on exports to the AEs at “nil” is deleted.

1.1 As no distinguishing decision has been brought to our notice respectively following the decision of the coordinate bench (supra) we direct the AO/ TPO to delete the addition on this account. This ground is accordingly allowed.

2. Disallowance of CSR expenditure – A similar issue was considered by the Tribunal in assessee’s own case in A.Y. 2012-13 in ITA No. 7714/Del/2017. The relevant findings read as under :-

“13. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the allowability of expenditure incurred by the assessee under the head CSR-expenditure. The assessee claimed that the expenditure has been incurred towards maintenance charges of GSS, Gurgaon for the benefit of the children of the employees of the assessee company. The assessee has placed on record the list of the expenditure before us. The perusal of the same reflects the expenditure on certain renovation work at Mohindergarh including providing chairs and tables by the assessee. Further expenses are debited on account of Tools for Honda Training Center Lab-Mohindergarh. All the said expenses are incurred for efficiently carrying out the business of the assessee and thus fulfill the condition of wholly and exclusively for the purpose of business. Further, the donation to Brahma Kumaris merits to be disallowed in the hands of the assessee, as it is case of charity. The same may be looked into as per the provision of section BOG of the Act. Further, expenditure incurred towards display of name/logo of the assessee on various items is undoubtedly for the promotion of the business of the assessee as it promotes goodwill. Hence, the expenditure is to be allowed as revenue expenditure.

14. Before parting, we may also refer to the alternate observations of the Assessing Officer that the Explanation (2) to section 37(1) which has been introduced w.e.f. 01.04.2015 is to be applied retrospectively. We find that the Raipur Bench of Tribunal in Jindal Power Ltd. (supra) and Delhi Tribunal in National Small Industries Corpn. Ltd. vs DCIT (supra) have held that the said explanation is prospective in nature. Consequently, we find no merit in the stand of the Assessing Officer in this regard except expenditure of Rs.50,000/-, the balance expenditure is allowed in the hands of the assessee. Thus, Ground of appeal Nos. 3 to 3.3 are partly allowed.”

2.1 In the light of the above we direct the AO to delete the impugned addition. However, we make it clear that amount of Rs.50,000/- being paid to Brahma Kumaris need not be deleted. This ground is partly allowed.

3. Disallowance of expenditure on signages – A similar issue was considered and decided by the Tribunal in A.Y.2012-13 in ITA No.7714/Del/2017. The relevant findings read as under:-

“26. We have heard the rival contentions and perused the record. The expenditure was incurred on signage for display of the name of the assessee at the dealer’s premises. However, once the same is fixed at dealers site then the Courts have held that it does not satisfy the test of ownership with the assessee and the expenditure is to be allowed as revenue expenditure, We find support from the ratio laid down by the Hon’ble Delhi High Court in CIT vs Honda Siel Power Products Ltd.(supra). Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not/the entire expenditure. Ground of appeal No.6 is thus partly allowed.”

3.1 Respectfully following the decision of the coordinate bench, we hold accordingly.

4. Disallowance of sales tools expenses – An identical issue was decided by the Tribunal in A.Y. 2012-13 in ITA No. 7714/Del/2017. The relevant findings read as under :-

“30. We have heard the rival contentions and perused the record. The expenditure incurred by the assessee on sales tools/fixtures which are placed at dealer’s outlets are specifically manufactured by third party manufacturers in accordance with the specifications provided by the assessee. As per the terms of the agreement between the assessee and the third party manufacturers, 50% of the price of the sales tools is directly paid by the assessee as advance to the third party manufacturer at the time of placement of order and balance 50% is paid by the authorized dealers, post inspection and approval of the ordered items by the Inspecting Officer of the assessee before delivery at dealer’s outlet. Such sales tools/ fixtures inter-alia includes the following:-

• Reception Counter;
• Customer Lounge Partition with Monitor Stand;
• Shelf Partition for Parts and Accessories;
• Frost Glass Partition;
• Digital Graphic Panel;
• Specifications Panel;
• Two-Wheeler Display Base (Window);
• Two-wheeler Display Base (Corner);
• Sing Ring;
• Catalogue Stand.

31. The question which arises is whether the assessee is incurring expenditure to maintain standard format of displaying its products all over India in order to induce prospective customers to clearly identify the exclusive dealers of assessee’s products in India and expenditure incurred was wholly and exclusively for the purpose of his business.

32. The Ld. DR for the Revenue placed reliance on the orders of the authorities below.

33. We have heard the rival contentions and perused the record. We have perused the Agreement between the assessee and its dealer and Article 11.2 of the Dealership Agreement reads as under:-

11.2. “The company shall provide the necessary information, materials and such other assistance from time to time at the dealer’s cost and expense, wherever applicable, which support the dealer’s advertising and sales promotion efforts for the products, in accordance with the provisions of the policy, guidelines, and operations standards with regard, to advertising issued, by the Company from time to time. The company may at discretion, provide subsidy on the advertising material.”

34. Clause 7.2 of the Dealership Agreement states as follows:-

7.2. “The Dealer agrees to comply at all times during the validity of this agreement with the minimum requirements concerning the dealership premises including interalia sales office, showroom, workshop, spare parts and accessories shop and other necessary equipment, machinery, tools specified by the company from, time to time. The list of equipments, machinery and tools with detailed specifications and quantities based on dealer’s sales/service capacity will be issued by the Company to the dealer from time to time alongwith guidelines and procedures for procuring file same. This may include recommended purchase prices for such equipments, machinery and. tools based on arrangement for bulk purchases/quantity discounts etc. with the suppliers and on training, after sales service infrastructure/support etc. provided by the Supplier.”

35. In view of the aforesaid, we are of the view that the expenditure incurred on Signages expenses was in the nature of advertisement expenditure, which are recurring in nature, incurred for the purpose of business and in the absence of any capital asset being acquired/owned by the assessee, the same was allowable as business deduction under section 37(1) of the Act.

36. The Assessing Officer while disallowing the claim of the assessee has strongly placed reliance on the decision of Hon’ble Supreme Court in Honda Siel Cars India Ltd. vs CIT [395 ITR 713] (SC). However, the facts of the said case are distinct as in the facts of the said case expenditure was on account of setting up of manufacturing facility and was not for running of the business. The Tribunal in assessee’s own case for Assessment Year 2011-12 while deciding the issue in appeal filed against the order passed u / s 263 of the Act had distinguished the said decision and allowed the claim of the assessee. Hence, Ground of appeal No.7 raised by the assessee is allowed.”

4.1 Respectfully following the decision of the coordinate bench, we hold accordingly.

5. Capitalisation of royalty – A similar issue was decided by the Tribunal in A.Y. 2012-13 in ITA No. 7714/Del/2017. The relevant findings read as under :-

“37. Now coming to Ground of appeal No.8 raised by the assessee under which the assessee is aggrieved by the orders of the authorities below in disallowing 25% of Royalty expenses. The Ld.AR for the assessee pointed out that Ground of appeal No.9(a) which is the additional ground of appeal raised by the assessee may be taken up alongwith this ground of appeal.

38. Briefly in the facts of the case relating to the issue, the assessee has claimed expenses on technical knowhow fees and royalty during the year amounting to Rs.488.65 crores (approx.). The said amount was paid to the foreign company i.e. Honda Motor Company, Japan, in view of technical knowhow and technology assistance received from them, the assessee claimed it to be revenue expenditure in its hand. The Assessing Officer after considering the reply of the assessee was of the view’ that the Agreement executed between the assessee and Honda Motor Company, Japan for the purpose of transferring of technical know-how and technology reflects that the payment in lumpsum as well as variable was paid for acquiring asset of enduring benefit. The plea of the assessee was that the aforesaid payment was in respect of information of production process of product which included the planning sheet of production, control sheet of quality, flow chart of the production process and drawings, concept drawings brochures, jigs, assemble and inspection tools, information for quality control of the products etc. The Assessing Officer was of the view that the kind of knowledge which was shared by Honda Motor Company, Japan comprises the life cycle of the product i.e. starting from production process till the output of the final product. He further observed that this not only increases the goodwill of the assessee company in the market but also other intangibles, through which the assessee company got enduring benefit. Vide para 13.5 at page 35 of the assessment order, the Assessing Officer has enlisted the benefits arising to the assessee as Assessing Officer had show caused the assessee with regard to lumpsum payment of Rs.l 10.45 crores (approx.) and Royalty of Rs.378.20 crores (approx.) totaling to Rs.488.65 crores (approx.). Relying on the findings of the earlier year, it was proposed by Assessing Officer that the said amount is disallowed in the hands of the assessee.

39.The DRP directed the Assessing Officer to provide an opportunity to the assessee to file submissions in this regard. In the final assessment order at page 37, the Assessing Officer notes that out of total technical knowhow of Rs.l 10.45 crores (approx.), the assessee had already capitalized sum of Rs.75.58 crores (approx.) and rest was shown as intangible assets and not claimed as an expense during the year. So, the contention of the assessee with regard to technical know-how expenses was not accepted. In relation to the Royalty expenses incurred during the year, against which the assessee filed elaborate submissions before the Assessing Officer, the Assessing Officer noted that the arguments of the assessee that this was running Royalty, therefore, it was treated as revenue expenditure. The Assessing Officer on perusal of the technical know-how and Royalty Agreement came to a finding that the Royalty Agreement was extension of payment towards technical know-how. He thus observed that. “Any payment which has been made on account of technical know-how and royalty should be read, into one and cannot be bifurcated as the assesses has done. It is further noted that the royalty without technical knowhow do not have any existence per se. Therefore the same is inextricable from the technical know-how. The assessee claimed that the royalty paid was a running royalty therefore, the same would he allowable expenditure however it failed to acknowledge the. fact that the royalty was conjoint with the technical know-how and without which the same did not have any existence therefore, the same should be treated, as capital in nature.”

40. The Assessing Officer did not accept the plea of the assessee that the same Royalty being paid for more than 15 years and being allowed in the hands of the assessee, was not accepted in view of the decisions of Hon’ble Supreme Court and Hon’ble Allahabad High Court and 25% of the Royalty expenditure of Rs.378,20 crores (approx.), which worked to Rs. 94,45,04,266/- was treated as capital expenditure being spent towards acquisition of capital assets. Depreciation on the same was allowed and balance sum of Rs.70,83,78,.200/- was added in the hands of the assessee. The assessee is in appeal against the order of the Assessing Officer.

41. The Ld.AR for the assessee pointed out that under same Agreement, the assessee had paid to Honda Motor Company, Japan two considerations i.e. one’ was the lumpsum Royalty on account of model fee and second was the recurring Royalty. He further pointed out that both the payments flowed from the same Agreement and the plea of the assessee was that there was no enduring benefit to the assessee vis-a-vis the recurring Royalty, The Ld.AR for the assessee pointed out that in earlier years, the same was allowed as revenue expenditure and only in the year under consideration, the same was disallowed. He referred to the order of Assessing Officer and who in turn relied on the decision of Hon’ble Supreme Court in Honda Siel Cars India Ltd. vs CIT [395 ITR 713] (SC) to disallow 25% of the expenses. The Ld.AR for the assessee pointed out that in the case of Honda Siel Cars India Ltd. vs CIT (supra) itself, in later years Tribunal has allowed entire Royalty expenses as revenue after considering the decision of Hon’ble Supreme Court (supra), on the ground that the Royalty payment was for availing know-how” for new models. The Ld.AR for the assessee pointed out that in assessee’s own case relating to Assessment Year 2011-12, the Commissioner invoked the provision of section 263 of the Act to disallow 25% of Royalty expenditure for similar reasons. He referred to the decision of Tribunal placed at page 458 and pointed out that the order u/s 263 of the Act,, was quashed after considering the decision of Hon’ble Supreme Court in Honda Siel Cars India Ltd. vs CIT (supra) in later decision of the Tribunal in said case itself. He further pointed out ‘that under the said Agreement, limited right to use the know-how without any ownership right was acquired and as the know-how was used in existing business of manufacturing through dealers, the expenses was incurred for the purpose of business. He fairly pointed out that the lumpsum fee paid of Rs.110 crores was capitalized in the books of accounts as well as for income tax purpose and the assessee was claiming depreciation on the same. But by way of Additional Ground of appeal No.9(a), the same is being claimed as revenue expenditure. The Ld.AR for the assessee stressed that where the assessee had acquired only limited rights in the Agreement, then same reasons are applicable for running Royalty, and lumpsum Royalty payment should also be allowed as expenses. In this regard, reliance was placed on the following decisions:-

(ij CIT v. Hero Honda Motors Ltd. 372 ITR 481 (Del.HC)

(lij CIT V. Munjal Showa Ltd. 329 ITR 449 (Del.HC)

(in) Maruti Suzuki India Ltd. vs Addl. CIT (ITA No.6021/Del/2012) (Assessment Year 2008-09]

42. The Ld.AR for the assessee further pointed out that this was a legal issue raised by the assessee where the facts were already on record and in the light of the decision of Hon’ble Supreme Court in National Thermal. Power Co.Ltd. vs CIT (1998] 229 ITR 383 (SC), the additional ground to be admitted and claim to be allowed. He further stressed that there is no estoppel in law for raising the said issue; in view of correct legal position in the eyes of law.

43. The Ld.DR for the Revenue strongly opposed the admission of the additional ground of appeal. He stressed that the discretion of Court can be exercised only in extraordinary circumstances. He stressed that the assessee had claimed it to be capital expenditure so the Department was stopped from making investigation and it was pointed out that it was investigation into facts. Our attention was drawn to the Agreement placed at pages 44 onwards of the Paperbook and he pointed out that the parent company was …Japanese Company and 99% holding of the assessee was with Japanese company. He objected to the Ld.AR’s statement that the facts were on record and pointed out that all. the facts were not on record. He also stated that, the plea of no knowledge was very much weak where best legal minds were available to the assessee. He relied on the decision of Hon’ble Delhi High Court in Manish Build Well (P.) Ltd. (2011] 16 com 27 (Delhi) and the decision of Honhle Supreme Court in Keshav Mills Co.Ltd. vs CIT (1965] 56 ITR 365 (SC).

44. The Ld.AR for the assessee also pointed out that the issue stands covered by the decision of Hon Tile Supreme Court and strong reliance was placed on the observations of the Assessing Officer in this regard. The Ld.AR for the assessee in re-joinder pointed out that the sole argument of the Ld.DR for the Revenue was placing reliance on the decision of .Hon’ble Supreme Court in the case of Honda Siel Cars India Ltd. vs CIT (supra), wherein the facts were different and hence that decision was not applicable to the facts of the present case. On an without prejudice basis, it was pointed out that even if there was some consideration for manufacturing in earlier years then in the present years, the knowhow was only imparted for the newer models. He again placed reliance in the later decision of Hon’ble Delhi High Court in CIT vs Hero Honda Motors Ltd. (ITA Nos. 694, 696, 698, 699 of 2011 and 625 and 633 of 2012) relating to Assessment Year 2000-01 to 2002-03 vide order dated 03.02.2015.

45. The appeal was fixed for clarification and the Ld.AR for the assessee pointed out that the decision of the Hon’ble Supreme Court in Honda Siel Cars India Ltd. vs CIT (supra) was with regard to the expenditure in first year wherein Hon’ble Apex Court held that since the information was passed for establishing the manufacturing facilities, the same was capital in nature. The Ld.AR for the assessee stressed that under Ground of appeal No.8, the claim was made in respect of recurring Royalty which is always been allowed as revenue expenditure in the hands of the assessee. Ground No.9a was against allowance of technical know-how paid for new models, which come into the market and this lumpsum Royalty which in turn is model fee has been, allowed as an expenditure in the case of the CIT vs Hero Honda Motors Ltd. (supra), The SLP against the order of Hon’ble Delhi High Court has been dismissed. The Ld.AR for the assessee also pointed out that the amount has been paid in respect of the new models introduced during the year.

46. We have heard the rival contentions and perused the record. The assessee had entered into a technical know-how agreement with Honda Motors Company, Japan under which it was paying lumpsum fee which was the amount in connection with the new models introduced in a year. The total amount paid during the year was Rs. 110.45 crores (approx.) which was’ capitalized by the assessee in its books of accounts and also in the P&L A/c. The assessee also paid running Royalty which was paid for grant of the right to license and manufacturing of two-wheelers in India. The total running Royalty paid was Rs.378.20 crores (approx.). The said Royalty which is the recurring Royalty paid by the assessee from year to year had been allowed as revenue expenditure in the hands of the assessee in the preceding years. We find no merit in the said exercise carried out by the Assessing Officer and accordingly we direct the Assessing Officer to allow the running Royalty as business expenditure in entirety. Ground of appeal No.8 raised by the assessee is thus allowed.”

5.1 Respectfully following the decision of the Coordinate Bench, we hold accordingly.

6. Additional claim of deduction of expenses in respect of technical know-how– A similar issue has been decided in A.Y. 2012-13. The relevant findings read as under :-

47. Now coming to the next issue raised which is by way of additional ground of appeal. Since it is legal issue, it is admitted for adjudication. The assessee fairly poin ted out. that the lumpsum Royalty was capitalized in its books of accounts and also not claimed as an expenditure in the return of income. However, because of the settled position by way of the decision of the Jurisdictional High Court in CIT v. Hero Honda Motors Ltd. (supra), the same is being claimed as business expenditure. The relevant findings are as under:-

“The Hon’ble ITAT in the appellant’s own case for assessment Year 2011- 12 reiterated that the facts in the case of the appellant differ from, the facts of Honda Siel Cars Ltd. (supra) because the amount expended is in relation to the running royalty and not for the purpose of setting up of plant.

Further, reference is also made to the decision of the Delhi Tribunal in the case of Honda Cards India Ltd vs DCIT : ITA No.4491/Del/2014 dated 18.08.2017 (pages 414­457 of the CLPB) and also confirmed by Hon’ble Delhi High Court in ITA No.45/2019 vide order dated. 13.05.2019 (refer pages 457A-457F of the CLPB), wherein the Tribunal after referring to the decision of the Supreme Court in the case of Honda Siel Cars (supra) observed that the Supreme Court has carved out the distinction between the payments at the time of setting up of the manufacturing facility and the payments made once the manufacturing process has already began. In the former case, royalty expenditure for setting up the manufacturing facility is capital in nature while in the latter case, the royalty expense is revenue in nature. ”

48. The SLP filed against the said decision has been dismissed by the Hon’ble Supreme Court. Applying the said ratio, we are of the view that the assessee was entitled to claim the aforesaid expenditure as revenue expenditure in the hands of the assessee.

49. Coming to the stand of the Revenue that where the assessee itself had not claimed as deductible in its hands, then the same cannot be allowed by the additional ground of appeal. We find no merit in the stand of the Ld. DR for the Revenue as there is no estoppel in law; especially where the issue has been decided by the Jurisdictional High Court on similar facts. Accordingly, we allow the additional ground of appeal raised by the assessee.

6.1 Respectfully following the findings of the coordinate bench we decide accordingly.

7. Now, we will address to the grievance relating to addition on account of payment of export commission – Under technical knowhow agreement dated 13.07.2000 the assessee was entitled to use technical knowhow provided by Honda Motor Company Limited Japan for manufacture and sale of two wheelers and parts in India and was not authorized to sell its products or part in any other territory than in India without prior written consent of HMJ. The assessee entered into a separate export agreement dated 13.07.2000 under which HMJ accorded consent to the assessee to export specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports.

7.1 Under TNMM analysis the operating profit ratio of the assessee @ 4.60% was higher than average of operating margin of -2.24% earned by the comparables companies. Considering that the operating profit margin of the selected comparable companies was lower than the OPM of the assessee, such international transactions were considered as being at arms length TNMM.

7.2 The TPO held that the assessee has not received any services that an independent entrepreneur would be willing to pay for and accordingly considered the arms length price of the said transaction of payment of export commission of nil.

7.3 While treating the ALP as nil the TPO held that the assessee is a contract manufacturer and further held that by its export activities the assessee is developing the brand of the AE and actually has carried out service to the AE.

7.4 It was also pointed out that the assessee has made export to AE’s related parties in Chile, Peru and Mexico and such exports are apparently for the benefit of the AE’s of parent company.

7.5 The TPO/ DRP/ DR were of the strong belief that the services rendered by the AE for facilitating exports were unclear.

7.6 At the very outset we have to state that the observations of the TPO/DRP that the assessee was only a contract manufacturer has been outrightly rejected by the Tribunal in assessee’s own case in earlier assessment years.

7.7 The primary issue which needs to be examined is whether the assessee was benefited by making such export sales. The following chart would throw light on this issue :-

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7.8 From the above chart it can be seen that the average price in respect of exports to AE’s was higher than the price of the same product sold in the domestic market to non AE.

7.9 Further we find from the comparative profitability statement, the profitability derived by the assessee from export of goods at 8.91 % is significantly higher than the profitability derived by the assessee from sale of goods in the domestic market @ 5.50%. The comparative profitability statement is as under :-

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7.10 For the sake of repetition, the entire edifice of the TPO/DRP^’s finding is based upon the assumption that the assessee is operating as a contract manufacturer with respect to export of good.

7.11 In our understanding of the facts of the case in hand, we are of the considered view that the TPO/ DRP have grossly failed in distinguishing between the function of the license manufacturers and contract manufacturers.

7.12 A perusal of the business profile of the assessee viz-a-viz agreement with the parent, we find that the assessee is a licensed manufacturer such as the assessee, the seller is entitled to compensation which includes returns attributable to exploitation of intangibles such technical know-how etc i.e. market determined prices. On the other hand, in the case of a contact manufacturer, the manufacturer acts in accordance with the instructions of the buyer and is only entitled to routine cost plus returns. It would be pertinent to refer to the decision of the Tribunal in assesee’s own case in ITA No.132/Del/2013 held as under :-

7.13 A similar decision was taken by the Tribunal in the case of Hero Motocorp Limited in ITA No. 5130/Del/2010 wherein the Tribunal has held as under :-

7.14. In the light of the above the first limb of finding of the TPO/DRP is removed.

7.15. We find that while making the disallowance the TPO has held that assessee failed to demonstrate the benefits derive by it. This proposition of the TPO / DRP also do not hold any water in the light of the principle laid down by the Hon’ble jurisdiction High Court of Delhi in the case of Cushman and Wakefield (367 ITR 730). It would not be out of place to mbention here that in earlier assessment years, this quarrel was restored to the files of the TPO to decide the issue afresh in the light principle laid down by the Hon’ble High Court in the case of Cushman and Wakefield (supra).

7.16. We have been told that in the set aside assessment proceedings the TPO has once again made the addition following the earlier findings that the assessee had failed to provide evidence.

7.17 Considering the facts of the case as mentioned elsewhere we are of the considered view that the assessee has successfully demonstrated not only the benefits but has also shown that the profitability is higher (as per the charts exhibited elsewhere). Considering the totality of the facts we have no hesitation in directing the AO / TPO to delete the impugned addition on account of export commission.

7.18. This ground is accordingly allowed.

9. The other issue relates to the claim of TDS. The AO is directed to allow the credit of the TDS as per the provisions of law.

10. As mentioned at the beginning since facts of A.Y.2013-14 and 2014­15 are identical, therefore, for the detailed reasoning given here in above the appeal of A.Y.2014-15 is also decided accordingly.

11. In the result, both the appeals filed by the assessee are allowed.

Order pronounced in the open court on 30.09.2020.