Russia vs LLC OTIS LIFT, December 2021, Arbitration Court of Moscow, Case № А40-180523/20-140-3915

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The Russian company LLC OTIS LIFT carries out service and maintenance activities for lifts and escalators both under the registered trademarks and designations of Otis and lifts and escalators of other manufacturers. A License Agreement was in force between the Russian subsidiary and its US parent OTIS ELEVATOR COMPANY (NJ) (Licensor). In accordance with the License Agreement, LLC OTIS LIFT should pay to OTIS ELEVATOR COMPANY (NJ) an amount equal to three and a half percent (3.5%) of the net amount invoiced by Otis Lift for Goods and Services as payment for the right to manufacture, promote, sell, install, repair and maintain Goods under the registered trademarks and designations “Otis”. Hence, the License Agreement did not provide for charging royalties from the revenue for the services provided by LLC OTIS LIFT for the maintenance of lift equipment of third-party manufacturers.

Following an audit it was established that in violation of the terms and conditions of the license agreement the royalties accrued LLC OTIS LIFT in favour of the Licensor – OTIS ELEVATOR COMPANY (NJ) were calculated and paid from the total amount of all invoices issued to customers for maintenance services and not only from invoices for maintenance of goods under the trademarks. Hence the company overstated its expenses. On that basis an assessment of additional taxable income was issued.

This assessment of additional income was brought to court by LLC OTIS.

Judgement of the Arbitration Court

The court dismissed the complaint of LLC OTIS LIFT and decided in favor of the tax authorities.

Excerpts
“In support of its conclusion that the expenses for the payment of royalties for the use of the designation “Otis” in the provision of services for maintenance of lifts, escalators under other trademarks and designations are economically justified, the Company provides the following arguments: during the audited period the Company used the trademark “Otis” in its corporate name in all its activities, including the provision of services for maintenance of lift equipment of third party manufacturers;
However, the Court considers it necessary to note the following.
In view of the fact that royalties represent an equitable payment for the right to use intellectual property, it should be noted that the formula established by the license agreement for calculating the royalty as a percentage of revenue related only to sales and maintenance of Otis-branded goods is economically justified, since Otis Group has designed, developed, improved, maintained, promoted and protected intellectual property related directly to the goods produced.
Accordingly, it is reasonable to assume that it is the Otis group that has the most knowledge, the most technology and the most competence to maintain its own equipment.
At the same time, there is no reason to believe that the unique knowledge of the Company’s service personnel in the design and maintenance of Otis-branded lift equipment, including from foreign group companies, gives them an unconditional advantage in repairing and servicing equipment of other manufacturers.
In the course of additional tax control measures the issue of using the business reputation of the Licensor in the course of rendering services on maintenance of the lift equipment of third-party manufacturers was investigated. In particular, whether potential contractors were guided by the company’s brand, trademark, reputation of the company in the world and other characteristics when choosing the Company as a supplier of maintenance services for lift equipment.
The analysis of the documents submitted by the Company’s counterparties does not establish whether the potential counterparties were guided by the company’s brand, trademark and reputation in the world when selecting the Company as a supplier of services for maintenance of lift equipment.
In accordance with paragraph 1 of Art. 252 of the Tax Code of the Russian Federation, the taxpayer reduces the income received by the amount of the costs incurred. Expenses are considered to be justified and documented expenses made (incurred) by the taxpayer. Reasonable expenses are economically justified costs, the assessment of which is expressed in monetary form.
Therefore, the argument that the Company’s expenses on payment of the license fees for the use of the “Otis” trademark in the course of providing maintenance services for lift equipment of third parties does not comply with the provisions of Article 252 of the Tax Code of the Russian Federation on documentary confirmation and justification of the expenses charged by the taxpayer to expenses.
Regarding the fact that the Company’s use of the Licensor’s intangible assets relating to the Otis trademark had a positive effect on the cost of maintenance services for third-party lift equipment, it should be noted that the Company has not provided any evidence of this and (or) calculations of this benefit effect.”

“Thus, the Company’s argument that it used OTIS know-how when servicing lift equipment of third party manufacturers rather than the requirements stipulated by the Russian legislation is unfounded.
Otis Lift LLC also failed to document that in providing maintenance services for third-party lift equipment, the use of the Licensor’s intangible assets relating to the Otis trademarks gave them a competitive advantage over other manufacturers and service companies engaged in the maintenance of such equipment or had any other positive effect on the cost of services for the maintenance of third-party lift equipment. Since the Company has not provided any evidence of this and (or) calculations of such benefit effect.
Thus, there is no objective connection between the incurred expenses on payment of the license fee to OTIS ELEVATOR COMPANY (NJ) and the focus of the Company’s activities on obtaining profit when providing services for repair of lift equipment of third-party manufacturers.
Furthermore, the Company’s argument that the tax authority suggests the Company’s gratuitous use of the Licensor’s tangible assets is unfounded and contrary to the facts of the case, as the Inspectorate has not made any claims against the Company in respect of license fees for maintenance of lift equipment (goods) under the registered trademark “OTIS”.
On the basis of the above, the applicant’s claims are not subject to satisfaction.”

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Russia vs Otis A40-180523-2020_20211217

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