GKN HOLDINGS PLC Vs. DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)
LAWS(IT)-2014-8-9
INCOME TAX APPELLATE TRIBUNAL
Decided on August 28,2014

Gkn Holdings Plc Appellant
VERSUS
Deputy Director Of Income Tax (International Taxation) Respondents

JUDGEMENT

Shailendra Kumar Yadav, Member (J) - (1.) THIS appeal has been filed by the assessee against the order of Dy. Director of IT (International Taxation) -I, Pune, dt. 29th Nov., 2012 for asst. yr. 2009 -10 on the following grounds: "Ground 1: Treating new licence fee agreements as extension of old licence fee agreements and thereby taxing license fee at a higher rate of 15 per cent • On the facts and in the circumstances of the case and in law, the learned DRP and the learned AO erred in holding that: (i) to take advantage of lower rate of tax of 10 per cent, the assessee has entered into new licence fee agreements with GKN Sinter Metals (P) Ltd., and GKN Driveline (India) Ltd., which are extension of the old agreements; and (ii) thereby taxing the licence fee income at a higher rate of 15 per cent [as per art. 13(2)(a)(ii) of DTAA between India and the UK], as opposed to the rate of 10 per cent [provided under s. 115A(1)(b)(AA) of the IT Act, 1961]. Your appellant prays that the new licence fee agreements entered into by the assessee with GKN Sinter Metals (P) Ltd. and GKN Driveline (India) Ltd. be treated as new and separate agreements as opposed to extension of old agreements and accordingly, licence fee income be taxed at the rate of 10 per cent Ground 2: Rejection of additional evidence filed before the learned DRP. • On the facts and in the circumstances of the case and in law, the learned DRP erred in rejecting to admit additional evidence in the form of old licence fee agreements entered into by the assessee with other GKN group entities, which had a material bearing on the conclusions arrived at by the learned AO. Your appellant prays that the additional evidence in the form of old licence fee agreements entered into by the assessee with other GKN group entities be admitted. Your appellant craves leave to add, amend, alter, withdraw, modify and/or substitute, and to withdraw the above grounds of appeal." The assessee is a company incorporated in the United Kingdom, having its registered office at Ipsely House, Ipsley Church, Redditch, Worcedteshire, B980TL, U.K. It has two associate companies in India namely M/s GKN Sinter Metals Ltd., Pimpri (Pune) and GKN Driveline (India) Ltd., Faridabad. It is the proprietor of certain trade marks and has entered into agreements with M/s GKN Sinter Metals Ltd. and M/s GKN Driveline (India) Ltd., permitting them to use its trade marks in respect of various products and services, in accordance with the terms and conditions mentioned in such agreements. During the year relevant to asst. yr. 2008 -09, the assessee has received Rs. 6,20,94,207 from M/s GKN Driveline (India) Ltd. and Rs. 87,97,966 from M/s GKN Sinter Metals Ltd., offered this income as royalty @ 10.56 per cent as per s. 115A of the Act. 1.1 The trade mark and licence agreement was entered into on 29th May, 2007 between the assessee and M/s GKN Sinter Metals Ltd., India. On perusal of this agreement, the AO found that there was earlier agreement dt. 12th July, 2004 between the same parties. Similarly, for the trade mark licence agreement between the assessee and M/s GKN Driveline (India) Ltd., entered somewhere in 2007, relevant to asst. yr. 2008 -09, the AO found that there was also earlier agreement dt. 1st Dec, 2003. It was the stand of the assessee before the AO that GKN Holdings Plc was charging royalty at the rate of 0.5 per cent of sales to all its group companies till December, 2006. This mechanism had been in operation since 1st Jan., 2003. The charging mechanism was introduced in 2003 through an external consultant who was engaged to assess (assist) in updating and revitalizing the GKN brand. The assessee also referred to some internal publication of 2004 to state that the brand builds a common understanding of what GKN was all about. It was stated that a review of the trade mark royalty mechanism was commenced in 2006 which included qualitative review including discussion with key individuals within the business with involvement and responsibility for brand promotion. A quantitative review to assess B2B royalty rates charged by independent third parties and to assess financial data of the GKN reporting units benefiting from the use of the GKN brand. According to the assessee, this review work resulted in certain changes. The changes were considered to be sufficiently significant to warrant a review of the existing mechanism to ensure that GKN Holdings Plc is compensated appropriately for the intangible assets made available to the licensees. In 2006 mechanism has been changed as 0.5 per cent was an appropriate baseline rate, royalties charged must reflect appropriately the true value of the GKN brand and reimburse GKN Holdings Plc adequately for its continued investment in brand promotion and protection. Therefore new licence agreements were issued in late 2006, becoming effective from 1st Jan., 2007. Since 1st Jan., 2007, royalties have been changed based on sales at rates dependent on the reported operating profit by each overseas legal entity as follows: (a) Where the operating margin for the relevant financial period is less than 3 per cent a rate of 0.5 shall be applied. (b) Where the operating margin for the relevant financial period is 3 per cent or more but less than 7 per cent a rate of 1 per cent shall be applied; and (c) Where the operating margin for the relevant financial period is 7 per cent or more, a rate of 1.5 per cent shall be applied. 1.2 As both the agreements were earlier entered into prior to 1st June, 2005, the AO assessed the royalty @ 15 per cent as per art. 13 of DTAA between India and UK. The AO did not accept the assessee's reasons for entering into the new trade mark licence agreement for the following reasons: (a) There was no significant difference between the old agreements entered in 2003 and 2004, and the new agreements effective from 1st Jan., 2007 except the change in the rate at which royalty was charged. (b) Contention of the assessee that aforesaid mechanism had been consistently applied across all the group entities was not correct because there were no prior agreements before the agreements entered in December, 2006 between the assessee and other group affiliates. (c) The assesses had entered into new agreements effective from 1st Jan., 2007 with the Indian entities to circumvent the provisions of IT Act and to take advantage of the lower rate of tax for royalty/FTS as per s. 115A(1)(b)(BB)or s. 115A(1)(b)(AA). (d) As the assessee company was tax resident of UK, the taxability is to be governed by the provisions of the DTAA between India and UK or provisions of the IT Act, 1961 whichever are more beneficial to the assessee as per s. 90(2) of the Act. Accordingly, the taxability of the assessee has elected to be governed by provisions of the DTAA between India and UK [art. 13(2)(a)(ii) of DTAA between India and UK] and taxable @ 15 per cent without surcharge and education cess. 1.3 On reference before the DRP, the assessee reiterated the contentions made before the AO. Further, it has also produced three trade mark and licence agreements already entered into with its affiliates in Germany, Italy and USA on various dates in the year 2004, to establish that the AO was not correct in holding that the new agreements were recasted only in the cases of Indian affiliates and not applied across all the group entities. It was stated that the AO never gave any opportunity to the assessee to produce those agreements before passing the assessment order and holding therein that such agreements entered into with the group affiliates in Germany, Italy and USA were only for the first time effective from 1st Jan., 2007. 1.4 It was further stated on behalf of the assessee that the revised rate mechanism was considered appropriate given the factors noted above, and it takes into account the different industry and economic environments in which GKN's global divisional businesses operate. This revised mechanism has been consistently applied across all the group entities of the assessee. In view of the above, the rate at which royalty was charged by GKN Holdings Plc was consistent for all the GKN Group entities and new trade mark licence agreement effective from 1st Jan., 2007 was entered by GKN Holdings with all GKN Group entities including GKN Sinter and GKN Driveline. Accordingly, new trade mark licence agreements were not entered for taking benefit of reduced rate (10 per cent) of royalty taxation as per s. 115A(1)(b)(BB). 1.5 After entering into the new licence agreement the prior rights of the parties under the old agreements were extinguished, new rights and obligations have come into existence and that parties were now bound by the terms and conditions of the new agreement. The assessee also placed reliance on the decision of the Mumbai Tribunal in the case of Siemens Aktiencesellschaft vs. Dy. CIT (2011 -TII -52 -ITAT -Mum -INTL) wherein the principles for recognising whether the new agreement entered into is a new and separate agreement or is an extension of old agreement have been laid down. 1.6 The DRP has considered this issue and observed that the old agreements with the group affiliates based in Germany, Italy and USA were never produced before the AO and were produced before the DRP for the first time on 30th July, 2012. It was stated that the AO directly concluded in the draft order that there were no agreements entered into with the other foreign group entities prior to the new agreements effective from 1st Jan., 2007. It was observed from the records that the assessee had produced the new agreements with the Group entities based in Germany, Italy, France and USA before the AO wherein no reference, whatsoever, had been made to any earlier agreement entered into with the above entities. A perusal of the recitals of the new agreements entered into with the Indian affiliates shows that a reference to the old agreements had already been made in the new agreement under the head "recitals" in the case of GKN Driveline India Ltd., as under: "In or around 1st Dec, 2003, the licensor and the licensee entered into a licence agreement (the 'prior agreement') under which the licensee was granted (inter alia) to use certain of the trade mark." 1.7 According to the DRP, except the change in date which is 12th July, 2004 in GKN Sinter Metals Ltd., there is no other change in the recital in the other group entity in India. Moreover, in none of the new agreements entered into with the foreign group affiliates there is any reference in the recitals or anywhere else which showed that there was any earlier agreement with those parties. The assessee has not produced any proof in the shape of any return of income or any other proof from where it was possible to deduce that the agreements now produced before the DRP gave rise to any income in the hands of the assessee. In the absence of any such proof the additional evidence now used before the DRP was rejected. 1.8 An analysis of the various clauses of the old and new agreements with the Indian affiliates, it was found by the DRP that there were no significant changes in the agreements entered into by the assessee effective from 1st Jan., 2003 and 1st Jan., 2007 except that the rate at which the royalty is charged has been changed. Earlier, the royalty was charged @ 0.5 per cent on annual sales, in the new agreement it is now being charged at staggered rates depending upon the operating margin for the relevant financial period as discussed above. A change in rates at which the royalty is charged has not changed the rights, liabilities and obligations between the parties. Almost all the clauses have been literally lifted from the old agreement and incorporated in the new agreement. The DRP has observed that the assessee can run its affairs in a particular manner suiting to it but in the facts of this particular case where the assessee is holding more than 50 per cent of the issued capital of the licensee, it has to be seen, verified and proved as to the circumstances occurring between the period when the old agreement was entered into and the new agreement came into existence which gave rise to a new agreement. 1.9 The assessee has not shown any reason for the increase in the royalty rates and the consequent entering into new agreement. A mere change in the royalty rates in the old agreement would also have been sufficient w.e.f. 1st Jan., 2007 rather than entering into a new agreement. The assessee has generally referred to its resolve to strengthen its trade mark and has also referred to some internal publications of 2004, to state that the brand built a common understanding about GKN. It also referred to a review of the trade mark royalty mechanism in 2006, wherein the key individuals were consulted and the royalty rates charged by the independent third parties were compared. It came to the conclusion that the assessee must be adequately reimbursed for its continued investment in brand promotion and protection. However, no proof in the shape of any expenditure incurred for the promotion and protection of brand has been filed either before the AO or before the DRP. Further, neither any internal publication nor the review of the trade mark royalty mechanism as compared to the royalty charged by the independent third parties was produced. No balance -sheet showing any valuation of the trade mark or brand has been furnished. In the absence of any proof with respect to the change in trade mark valuation in 2006 as compared to 2003, the DRP has observed that it was not possible to change in royalty rates was necessitated by any other consideration except to take advantage of the lower rate of tax. In view of the above, the DRP has decided the issue against the assessee.
(2.) BEFORE us, the stand of the learned Authorized Representative has been that the assessee had entered into three trade mark and licence agreements with its affiliates in Germany, Italy and the USA on various dates in the asst. yr. 2004 to establish that the AO was not correct in holding that the new agreements were recasted only in the cases of Indian affiliates and not applied across all the Group entities. The learned Authorized Representative further stated that the revised rate mechanism was considered appropriate given in new facts as discussed above, and it takes into account the different industry and economic environments in which GKN's global divisional businesses operate. This revised mechanism has been consistently applied across all the Group entities of the assessee. In view of the above, the rate at which royalty was charged by GKN Holdings Plc was consistent for all the GKN Group entities and new trade mark licence agreement effective from 1st Jan., 2007 was entered by GKN Holdings with all GKN Group entities including GKN Sinter and GKN Driveline. Accordingly, new trade mark licence agreements were not entered for taking benefit of reduced rate (10 per cent) of royalty taxation as per s. 115A(1)(b)(BB) of the Act. In view of the new licence fee agreements cannot be treated as extension of old licence fee agreements and thereby taxing license fee at a higher rate. The DRP and the AO have erred in holding that to take advantage of lower rate of tax of 10 per cent, the assessee has entered into new licence fee agreements with GKN Sinter Metals (P) Ltd., and GKN Driveline (India) Ltd. which are extension of the old agreements; and thereby taxing the licence fee income at a higher rate of 15 per cent [as per art. 13(2)(a)(ii) of DTAA between India and the UK], as opposed to the rate of 10 per cent [provided under s. 115A(1)(b)(AA) of the IT Act, 1961]. In this background, the learned Authorized Representative has requested that new licence fee arrangements entered into by the assessee with GKN Sinter Metals (P) Ltd., and GKN Driveline (India) Ltd., as discussed above be treated as new and separate agreements as opposed to extension of old agreements and accordingly licence fee income be taxed @ 10 per cent. On the other hand, the learned Departmental Representative has submitted that the DRP and the AO were justified in holding that the assessee entered into new licence agreement with GKN Sinter Metals (P) Ltd. and GKN Driveline (India) Ltd., to take advantage of lower rate of tax of 10 per cent which is nothing but extension of old arrangement, thereby they were justified in taxing the licence fee at higher rate of 15 per cent as per art. 13(2)(a)(ii) of DTAA between India and the UK as opposed to rate of 10 per cent provided under s. 115A(1)(b)(AA) of the Act and the same should be upheld. After going through the rival submissions and material on record, we find that the assessee is a company incorporated in the UK, having its registered office at Ipsely House, Ipsley Church, Redditch, Worcedteshire, B980TL, UK. It has two associate companies in India namely M/s GKN Sinter Metals Ltd., Pimpri (Pune), and GKN Driveline (India) Ltd., Faridabad. It is the proprietor of certain trade marks and has entered into agreements with M/s GKN Sinter Metals Ltd. and M/s GKN Driveline (India) Ltd., permitting them to use the trade marks in respect of various products and services, in accordance with the terms and conditions mentioned in such agreements. During the year relevant to asst. yr. 2008 -09, the assessee has received Rs. 6,20,94,207 from M/s GKN Driveline (India) Ltd., and Rs. 87,97,966 from M/s GKN Sinter Metals Ltd., offered this income as royalty @ 10.56 per cent as per s. 115A of the Act. The objection of lower forums has been that the subsequent agreements entered into in the year 2007 relevant to asst. yr. 2008 -09 is nothing but extension of existing agreements between the contracting parties. Since it was extension of earlier agreements, the assessee will not get advantage of provisions of s. 115A(1)(b)(BB) or 115A(1)(b)(AA), wherein there is a provision for lower rate of taxability i.e., 10 per cent of reduced rate as discussed above. For the sake of convenience, the provisions of s. 115A(1)(b)(AA) of the Act is reproduced as under: "An amount of income -tax calculated on the income by way of royalty, if any, included in the total income, @ 10 per cent if such royalty is received in pursuance of an agreement made on or after the 1st day of June, 2005." 3.1 So, as per provisions of s. 115A(1)(b)(AA), the rate of tax on licence fee income to be taxed @ 10 per cent at the strength of the agreement. It is undisputed that the assessee was having earlier agreement dt. 12th July, 2004 with M/s GKN Sinter Metals Ltd., and the same has been renewed from 1st Jan., 2007. The provision of s. 115A(1)(b)(AA) does not debar the assessee to enter into new agreements after change of situation in the provision of s. 115A(1)(b)(AA) as far as the reduced rate of royalty is concerned. It is undisputed that the new agreements entered into on 29th May, 2007 between the assessee and GKN Sinter Metals Ltd., and in the same year with GKN Driveline (India) Ltd., are independent agreements. The assessee can manage its affairs within the framework of statute. The Revenue authorities cannot sit into the business decisions of the assessee. By no stretch of imagination, the new agreement entered into in 2007 can be said to be the extension of old agreements entered into between the parties. Even if the assessee has managed its affairs as far as renewal of agreement in question is concerned, the Revenue authorities should not interfere with the same, unless it is proved beyond doubt that it is nothing but colourable device. 3.2 Even if the assessee had entered into new licence agreement with GKN Sinter Metals Ltd., and in the same year with GKN Driveline (India) Ltd., to take advantage of lower rate of tax of 10 per cent, the same cannot be denied to the assessee on the ground that the same is nothing but extension of old agreement which is not correct otherwise. According to us, the new licence fee agreement entered into by the assessee with GKN Sinter Metals Ltd., and in the same year with GKN Driveline (India) Ltd., is nothing but new and separate agreement. Accordingly, licence fee income should be taxed at 10 per cent. The AO is directed accordingly. In the result, appeal filed by the assessee is allowed. ;


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