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TMI Blog2016 (11) TMI 1236X X X X Extracts X X X X X X X X Extracts X X X X ..... f diversion of profits is devoid of merit. The assessee firm had to seek permissions and licences to coneinue and carry on this profession under this name as it is run doing. Hence obtaining a license is a must for assessee firm to continue and carry on its profession as the goodwill is not owned by it the payment made in pursuance of an agreement which enables the assessee firm to carry on its profesions, in the manner in which it is now doing, is definitely an expenditure laid down wholly and exclusively for the purpose of business or profession. The argument of the Ld. Special Council that the purpose test contemplated u/s 37 of the Act is not satisfied is devoid of merit. Irrespective of whether the gift of Dr. V.Sagar to RSCPL being ethical or not and irrespective of the fact whether the gift is legally valid or not, from the view point of the assessee firm, as it could not have continued and carried on the profession of Attorneys-at-Law in the name of “Remfry & Sagar” and use its goodwill and all its associated rights without the impugned agreement with RSCPL. Hence the payment has to be held as that which is incurred wholly and exclusively for the purpose of business or prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a view to reduce taxes, whereas the fact is that the entire License Fee paid to RSCPL has been offered to tax by RSCPL and hence there is no loss of revenue whatsoever. 5. Perversely ignoring the fact that the Appellant firm and RSCPL together have paid ₹ 20,86,47,812/- as taxes whereas they would have paid ₹ 20,63,59,286/- as taxes if the License Fee had not been paid; the revenue has thereby gained ₹ 22,28,526. Hence, the allegation by the Ld. CIT(A) that the purpose of paying the License Fee was to reduce the income of the firm is clearly unwarranted and misleading and not borne out from the facts on record. 5. Perversely ignoring the fact that the Appellant firm and RSCPL together have paid ₹ 20, 86,47,812/- as taxes whereas they would have paid ₹ 20,63,59,286/- as taxes if the License Fee had not been paid; the revenue has thereby gained ₹ 22,28,526/-. Hence, the allegation by the Ld. CIT(A) that the purpose of paying the License Fee was to reduce the income of the firm is clearly unwarranted and misleading and not borne out from the facts on record. 6. Sustaining the disallowance of License Fee in the hands of Appellant Firm ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty and corporate laws. It is a fullservice intellectual property firm engaged inter alia in, advising clients worldwide on their trademarks, patents, designs, copyright, geographical indications, domain names and unfair competition issues. 3.2 A British immigrant, Mr. Henry Oliver Remfry established the sole proprietorship firm under the name and style of "Grant and Remfry" in the year 1827 in the field of intellectual property. He operated both as a sole proprietor as well as in partnership under various names. These sole proprietorship and partnerships continued to be run by 5 generations of Remfry's until the year 1957. Thereafter four Englishmen, joined as partners. On 31/3/1972 two partners retired and Mr. Holloway, Mrs. Silverstone and Mrs. Remfry entered into a fresh deed of partnership. On 4/4/1973, Mr. Holloway and Mrs. Silverstone transferred absolutely, by way of sale, to Dr. V. Sagar the business along with the goodwill in "Remfry and son". Mr. V. Sagar became the sole and absolute proprietor of this business of "Remfry & Son" along with the goodwill attached to it. He continued the business of "Remfry & Son" till 31st of December 1989. 3.3 Prior to the acquisition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 passed under section 143(3) of the act for the Assessment Year 2007-08, disallowed for the first time, license fee paid by the assessee to RSCPL for the use of goodwill on the ground that, the entire transaction was a colourable device adopted to transfer profits of the assessee firm to the family members of Dr. V. Sagar, who held majority shares in RSCPL and to evade tax. The observations of the A.O are as follows: a) goodwill of the law practice did not belong to RSCPL as it has no capability; b) no activity was carried out by RSCPL to enhance the goodwill of the law practice in the name of the "Remfry & Sagar" c) the goodwill, if any, was of Dr. V. Sagar which could not have been separated from him, much less by way of gift to M/s RSCPL and d) Dr. V. Sagar was enjoying the benefits of this goodwill by being a majority partner, having higher profit-sharing ratio, in the assessee partnership firm and enjoying other additional benefits, like controlling rights etc. 3.8 The Assessing Officer, for the very same reasons, disallowed the license fee paid for all the subsequent assessment years i.e. A.Y. 2008-09 and 2010-11. The assessments for the Assessment Year 2000-01 to 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the founding fathers are no longer part of the practice. For example, Mulla & Mulla, Little & Co. Ernst & Young, etc. 5.4. That Dr. V. Sagar is entitled to gift a goodwill to RSCPL. He further submitted that the goodwill of the firm "Remfry & Sons" was with Mr. Holloway and Mrs. Silverstone & not with Mrs. Remfry, who was an inactive partners, by virtue of a partnership deed entered in the year 1970. These two persons were entitled and empowered to sell, all or any of the assets of the partnership firm, including the name and goodwill of the business. The business in the name of "Remfry & Sons", was acquire by Dr. V. Sagar in the year 1973 for valuable consideration and this demonstrates that the goodwill of the firm was an intangible asset, capable of alienation. Thereafter Dr. V. Sagar carried on the said business under the name and style of "Remfry & Sons" between 1973 to 1990 as a sole proprietor. Thereafter on merger of his own practice as sole proprietor in the name of 'Sagar & Co.' in the year 1990 and carried on practice in the name of "Remfry & Sagar". 5.5. Mr. Vohra, argued that the goodwill attached to the name "Remfry & Sagar" vested exclusively in Dr. V. Sagar who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled that payment made for exclusive license to manufacture and sell products in India using technology and know-how licensed by the licensor are allowable as business expenditure. On the same anology this expenditure is allowable. 5.11. On the finding of the Assessing Officer that goodwill is attached to the persona of Dr. V. Sagar, it was submitted that since inception of the practice in 1827, there have been lot of changes in the partners of the firm, which form time to time, varied from 20 partners to even 100 partners. He submitted that the goodwill belonged to the patent/IPR practice carried on over a period of 175 years which was represented in the name of "Remfry & Sagar", which legally vested in RSCPL, subsequent to transfer in 2001. Thus, it is argued that the goodwill of the practice was not identifiable with any particular partner. 5.12. It was further submitted that after the demise of Dr. V. Sagar in February, 2011, the income and turnover of the firm increased, year after year and this demonstrates that the goodwill is not associated with the persona Dr. V. Sagar. 5.13. That the Assessing Officer was wrong in coming to a conclusion that the gift of goodwill by D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he use of goodwill given by RSCPL and the agreement for use of infrastructure and office etc. 6.6. That the agreement "clearly stipulated" that the License Agreement, the Deed of Partnership, the Agreement for use of infrastructure and the Agreement for Support Services were all an integral part. 6.7. The assessee has claimed deduction of his license fee paid to RSCPL, U/s 37 of the Act and hence, the allowability or otherwise of expenditure would depend on the fulfillment of the conditions laid down in Section 37 of the Act. The provisions contained in Section 37(1) stipulate that any expenditure, not being a capital expenditure of the assessee, laid out wholly and exclusively for the purposes of business or profession shall be allowed as a deduction. 6.8. That the purpose test contemplated in Section 37 of the Act should be applied and for the same, the events that unfolded in the year 2001 have to be examined. Thus he argued that the correctness of the so called transfer/gift of goodwill and its license back to Dr. V. Sagar in the year 2001 has to be examined. 6.9. The son and daughter of Dr. V. Sagar do not have the requisite qualification to carry on the profession of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause of the loss of reputation and the client base. 6.18. The son and daughter of Dr. V. Sagar who formed the company were not entitled to carry on the legal profession u/s 29 of the "Advocates Act, 1961". Neither did the legal profession was owned or retained or developed or put to any use by the company i.e RSCPL. Only artificial rights have been created in this case. Ownership is recognized only when right to exercise the IP rights exists. RSCPL cannot exercise the rights associated with the name or goodwill of a legal practice. 6.19. The Ld. Special Counsel for the Revenue further submitted that the argument of the Ld. Counsel for the assessee that there is no legal bar on the transfer of goodwill attached to a professional practice to an independent entity really does not take into account the situation, like the present one, where the goodwill has been gifted to a person or entity not entitled to carry on legal profession. The goodwill representing the loyalty of the customer or the reputation of legal practice will really have no meaning to a person or entity not entitled to practice law. 6.20. License fee paid by the assessee is a mode of Revenue sharing and not an exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practice of law but was in the business of trade mark and patents and that post acquisition by Dr. V. Sagar started legal practice in the name of "Remfry & Sagar" was not correct. It was submitted that Dr. V. Sagar was carrying on independent legal practice and it was only in the year 1990 that this legal practice in the name of 'Sagar & Co' got merged into "Remfry & Sons". 7.1. He submitted that the goodwill in the name of "Remfry & Sons" pertains to the business carried on by the concern and the said goodwill is related to the field of trade mark and patents and had considerable value, even for the legal practice carried on by Dr. V. Sagar in the same field. He emphasized that, if the aforesaid goodwill of business of "Remfry & Sons" had no value, there was no occasion for Dr. V. Sagar to purchase the same for consideration and merge his sole proprietary legal practice in "Remfry & Sons". Thus, the distinction sought to be drawn by Revenue that goodwill in the name "Remfry & Sons" was of business and not of legal practice is irrelevant and needs to be ignored. 7.2. On the submission that the son and daughter of Dr. V. Sagar were not entitled to carry on the legal practice, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assets of the partnership firm, including the name and goodwill of the business. Year 1973: Mr. Holloway and Mrs. Silverstone transferred absolutely, the business with all assets including name and goodwill thereof, vesting in 'Remfry & Son' for valuable consideration, to Dr. V. Sagar, with effect from April 1, 1973. Year 1990: Dr. V. Sagar merged his own sole-proprietorship practice in the name of 'Sagar & Co.' into 'Remfry & Son', and changed the name of the proprietorship to 'Remfry & Sagar'. Year 2001: (i) By a Deed of Gift executed on June 1, 2001, Dr. V. Sagar gifted the good will vesting in 'Remfry & Sagar' to a private limited company, viz., Remfry & Sagar Consultants Private Limited ('RSCPL'), wherein substantial shareholding was held by Dr. Sagar's children, viz., Ms. Rosemary Sagar and Mr. Hemant Sagar, who were not lawyers. At the time of the said transfer, goodwill was valued at ₹ 45 crores on which stamp duty of ₹ 90 lakhs was paid by Dr. V. Sagar. (ii) On June 5, 2001, Dr. V. Sagar entered into partnership with Mr. R. Sampath, Mrs. Ashwin Julka, Mr. Ramit Nagpal and Mr. Prem Sewak to continue the said practice of law. (iii) By an agreement date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patent agents carried on in the name and style of 'Remfry & Sons' and changed the name of the proprietorship into 'Remfry and Sagar'. Dr. V. Sagar was carrying practice and profession of "Attorneys-at-Law" with specialization in the areas of intellectual Property Law and Corporate Law under the name and style of 'Remfry & Sagar', in New Delhi and Mumbai. The goodwill in the name of 'Remfry & Sagar' and all the rights associated thereof (including intellectual property rights) belong exclusively to Dr. V. Sagar. Dr. V. Sagar by way of a gift deed executed on the day of 1st June 2001, granted conveyed and transferred by way of gift to RSCPL the said goodwill in the name of 'Remfry & Sagar' and all the rights associated therewith(hereinafter referred collectively referred to as "goodwill"). Dr. V. Sagar also sold and transferred to RSCPL, the infrastructure associated with his practice. 8.6. From the above, it is clear that from 1st June 1990 to 31st May 2001, Dr. V. Sagar was only carrying on the practice and profession of Attorney-At-law, which included the business of "Remfry and Sons" acquired by him. In other words, prior to 1st June, 1990, the Goodwill of "Remfry and Sons" was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Advocates Act, 1961. 8.11. At the same time, the revenue concedes that the legal heirs of the advocates would be entitled to the benefit of the goodwill earned and created by the legal practitioner. It was submitted that the legal heirs may be entitled to consideration for the goodwill on behalf of the deceased father but they cannot be regarded as the lawful owners of the goodwill or having the rights of owning the goodwill or to license the same. In our view, we find a contradiction in these submissions. When it contended that the legal heirs of a practitioner are entitled to receive consideration for goodwill on behalf of the deceased parent, it would be difficult to hold that, the goodwill cannot be separated from the legal practice and the fruits of such goodwill cannot be enjoyed by the legal heirs of the legal practitioner or that it can be enjoyed by the legal heirs only in a particular manner. 8.12. Be it as it may, the submission of the assessee that goodwill is a separate intangible asset which can be alienated and that which cannot be attached to a firm and that it can be vested in one or more partner of the firm, in exclusion of others, is well settled. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of dissolution used expressions such as 'agreed to sell' and 'the purchase price of the goodwill', these expressions were not determinative of the exact nature of the transaction; (ii) neither clause 2 nor any other provision in the deed fixed any lump sum as price in respect of which annual payments were provided; (iii) the duration of payment was indefinite and the amount was indefinite and depended upon the rise and fall in the profits of the business, (iv) clause 6 indicated that the payments were to be made so long as the business was carried on in the name of D.V.&Co. And not otherwise; and (v) the document was silent as to what was to happen to the goodwill if A or his partners were to cease to carry on business in that name or at all." Justice S.M. Sikri C.J, has written a dissenting judgment, the pith and substance of which is that the entire arrangement was made for evasion of taxes. He held as follows: " In my view, it is a very ingenious attempt to avoid payment of tax by making it appear somehow that the payment of purchase money may be treated as payment of a royalty. In the view I take of the deed, it is not necessary to discuss the numerous cases referred to by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se is a must for assessee firm to continue and carry on its profession as the goodwill is not owned by it the payment made in pursuance of an agreement which enables the assessee firm to carry on its profesions, in the manner in which it is now doing, is definitely an expenditure laid down wholly and exclusively for the purpose of business or profession. The argument of the Ld. Special Council that the purpose test contemplated u/s 37 of the Act is not satisfied is devoid of merit. Irrespective of whether the gift of Dr. V.Sagar to RSCPL being ethical or not and irrespective of the fact whether the gift is legally valid or not, from the view point of the assessee firm, as it could not have continued and carried on the profession of Attorneys-at-Law in the name of "Remfry & Sagar" and use its goodwill and all its associated rights without the impugned agreement with RSCPL. Hence the payment has to be held as that which is incurred wholly and exclusively for the purpose of business or profession. 8.19. The contention of the Special Council for the Revenue that the arrangement is just a revenue shown arrangement is just an inference and is not supported by any material. Thus the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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