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2018 (2) TMI 1654 - HC - Income TaxAddition made of royalty paid for the use of the brand name phoneytune.com to one Tarun Mohan a director of the assessee - whether Tribunal is not perverse in holding that the transaction was not a colorable devise to reduce the tax liability of the company in which the Managing Director was none other than the beneficiary Proprietor of royalty? - Held that - Questions (i) and (ii) are answered in the assessee s favour in view of the judgment of this Court in the assessee s case Pt. Commissioner of Income Tax -2 Vs. M/s Mobisoft Tele Solutions P. Ltd. 2015 (8) TMI 426 - PUNJAB AND HARYANA HIGH COURT as held that the AO and CIT (Appeals) erred in holding that Tarun Mohan had entered into an agreement with himself. The authorities ignored the fundamental concept that the assessee being a Company incorporated under the Companies Act 1956 is a separate legal juristic entity. It was held that the assessee Company was entitled to use the trade mark as licensee thereof and that the payment of royalty for the same is nothing unusual. Applicability of the provisions of section 47 (xiv) read with section 47A (3) - Held that - The issue raised has no foundation to stand. There are no findings of fact recorded that the provisions of section 47 were invoked for claiming exemption from capital gains while making transfers from the sole proprietary concern to the assessee company. The applicability of section 47A would arise only if it is established that section 47 was pressed into service. In absence thereof the deeming provision of sub-section (3) of section 47A cannot be invoked. There is another angle. From the reading of Article 3 of the agreement it is evident that Tarun Mohan received a consideration of 5, 81, 231/- and royalty for the use of the brand name. This itself shows that exemption of section 47 was not available as proviso (c) to clause (xiv) of section 47 had not been complied with. The appellant has not contended or established that the assessee availed the benefit of Section 47. Copyright fee paid to M/s Phonographic Performance Ltd. - nature of expenditure - revenue expenditure or a capital expenditure - Held that - Copyrights find mention in section 32. The depreciation of copyright etc. can be claimed subject to two conditions viz. it must be owned wholly or partly by the assessee and it must be used for the purpose of business or profession. The word and between the two conditions establishes that both the conditions must subsist for the applicability of Section 32. It has been held in the present case that the assessee company did not own the copyright. It was only granted a license to use the same. Such a case would not be covered under section 32. The finding recorded by the Tribunal that only usage of the license was transferred is neither perverse nor irrational.
Issues Involved:
1. Allowability of royalty payment as business expenditure. 2. Determination of transaction as a colorable device to reduce tax liability. 3. Applicability of provisions of Sections 47 (xiv) and 47A (3) of the Income Tax Act. 4. Treatment of copyright expense as revenue or capital expenditure. 5. Applicability of Supreme Court decision in CIT Vs. IAEC (Pumps) Ltd. to the current case. 6. Treatment of copyright expense with enduring benefits as revenue expenditure. Issue-wise Detailed Analysis: 1. Allowability of Royalty Payment as Business Expenditure: The court addressed whether the royalty payment for the use of the brand name 'phoneytune.com' to a director of the assessee was allowable as business expenditure. The Tribunal had deleted the addition made by the AO and CIT (Appeals). The court referred to its previous judgment dated 07.08.2015 in the assessee’s case for prior assessment years, where it was held that the payment of royalty was legitimate and the assessee company was entitled to use the trademark as a licensee. The court reiterated that the assessee, being a separate legal entity, had entered into a valid agreement for the use of the brand name. 2. Determination of Transaction as a Colorable Device: The court examined whether the transaction was a colorable device to reduce tax liability. It was argued that the Managing Director was the beneficiary proprietor of the royalty. However, the court held that the earlier judgment had already addressed this issue, establishing that the agreement was legitimate and the royalty payment was a genuine business expenditure. 3. Applicability of Sections 47 (xiv) and 47A (3): The court analyzed the applicability of Sections 47 (xiv) and 47A (3), which deal with the transfer of capital assets from a sole proprietary concern to a company. The appellant contended that the consideration paid to the sole proprietor violated the conditions of Section 47, invoking Section 47A (3). The court found that there were no findings of fact indicating that Section 47 was invoked for claiming exemption from capital gains. Therefore, Section 47A (3) could not be applied. Additionally, the court noted that the consideration paid included cash and royalty, which disqualified the transaction from Section 47 exemption. 4. Treatment of Copyright Expense as Revenue or Capital Expenditure: The court addressed whether the license fee paid to M/s Phonographic Performance Ltd. was a revenue or capital expenditure. The Tribunal had treated it as a revenue expenditure, concluding that only a license to use the copyright was granted, not the acquisition of the copyright itself. The court upheld this view, stating that the findings were based on a proper appreciation of facts and were neither perverse nor irrational. 5. Applicability of Supreme Court Decision in CIT Vs. IAEC (Pumps) Ltd.: The court examined the relevance of the Supreme Court decision in CIT Vs. IAEC (Pumps) Ltd., which dealt with whether payments for technical know-how were capital or revenue expenditure. The Supreme Court had held that such payments constituted revenue expenditure. The court found that the Tribunal correctly followed this precedent, as the license fee paid by the assessee was for the use of the copyright and not for acquiring a capital asset. 6. Treatment of Copyright Expense with Enduring Benefits as Revenue Expenditure: The court evaluated whether the copyright expense, despite providing enduring benefits, should be treated as revenue expenditure. The Tribunal had concluded that the license fee was a revenue expenditure. The court agreed, noting that the assessee did not own the copyright but only had a license to use it. Therefore, the expense did not qualify for depreciation under Section 32, which requires ownership of the asset. Conclusion: The court dismissed the appeal, affirming the Tribunal's decision that the royalty payment and license fee were allowable as business and revenue expenditures, respectively. The court reiterated that the transaction was legitimate and not a colorable device to evade taxes, and that the provisions of Sections 47 and 47A were not applicable in this case.
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