In CIT v. Hero Motorcorp Ltd, the Delhi High Court held that the payment of export commission made by the Hero Motors to Honda Motor Co. Ltd (HMCL) was not in the nature of payment of royalty or fee for technical services attracting disallowance under Section 40 (a) (i) of the Income Tax Act.
Assessee, manufacturer and saller of motorcycles using technology licensed by Honda Motor Co.Ltd., Japan, set up its plant in the year 1984 to manufacture models of motorcycles by using know-how of HMCL through a Technical Collaboration Contract. Under the contract, the Assessee was provided with technical assistance for manufacture, assembly and service of the products along with information, drawings and designs for the setting up of the plant. On expiry of the said agreement, the assessee entered into a License and Technical Assistance Agreement with HMCL as per which HMCL granted to the Assessee an “indivisible, non-transferable and exclusive right and license, without the right to grant sublicenses, to manufacture, assemble, sell and distribute the products and parts” during the term of the LTAA “within the Territory”.
In the year 2004, both the assessee and the HCML entered into a separate Export Agreement whereby HMCL accorded consent to the Appellant to export specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports. The Assessee explained that the payment of export commission was made by it to HMCL as consideration for HMCL according consent to the Assessee to export two wheelers in the specified overseas territories, which were earlier being supplied only by HMCL or its other affiliates.
Before the High Court, the Revenue urged that the payment of export commission was in the nature of royalty for the purpose of Section 9 (1) (vi) read with Section 40 (a) (i) of the Income Tax Act.
The division bench comprising of Justice S. Muralidhar and Justice Anil Kumar Chawla said that the payment of the export commission was not without consideration. “It permitted the assessee to export specified two wheelers manufactured under the Hero Honda brand to the specified countries. Further, the assessee did not have to pay for using the existing distribution and sales networks in those territories. The attempt at re-characterising the transaction as one involving payment of royalty overlooks the fact that the payment under the LTAA is treated by the Assessee itself as royalty. Such royalty is in effect paid even on the export consignments. Also, to view this as only benefitting the AE is to overlook the fact that not only has the Assessee benefitted in various ways as noted before, but it has also earned during the AY in question profits of Rs. 13.05 crores from exports.”
The bench also observed that there was no principal-agent relationship to justify the payment of the export commission. Moreover, the amount spent on that score by the Assessee was for the benefit of its business and in fact resulted in a benefit.
The bench also noted that the two agreements i.e., the LTAA and EA, in the present case, were distinct and independent. The Revenue has not been able to show that the EA was a colourable device and that the export commission was a disguised royalty payment. It was not a payment for technical services either.
Read the full text of the Order below.
