Appellan I v. M/S Mobisott Tele Solutions P. Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. LTA. No. 434 of 2015 (O&M )DATLBK OF DECISION : 22 02020 Pr. Commissioner of Income lax-2, Chandigarh APPELLAN I Versus M/s Mobisott Tele Solutions P. Ltd. — RERESPONDEN| CORAM :- HON BLE MR. JUSTICE S.J. VAZIFDAR, CHIEF JUSTICEHON'BLE MR. JUSTICE AVNEESH JHINGANHON'BLE MR. JUSTICE AVNEESH JHINGAN Present:Ms. Urvashi Dhugga, Advocate,for the appellant.for the appellant. Ms. Radhika Suri, Senior Advocate, withMr. Manpreet Singh Kanda, Advocate,for the respondent. Mr. Manpreet Singh Kanda, Advocate,for the respondent. "KO O AVNEESH JHINGAN, J. This 1s an appeal against the order of the Income Tax AppellateTribunal setting aside the orders of the CIT (Appeals) and the AssessingOfficer (for short, the AO'). The addition made of royalty paid for the useof the brand name phoneytune.com’ to one Tarun Mohan, a director of theassessee, was deleted. The licence fee paid to M/s PhonographicPerformance Ltd. was held to be revenue expenditure by the Iribunal. |The matter pertains to the assessment year 2009-10,‘3According to the appellant, the following substantial questionsof law arise 1n this appeal :- ITA No. 434 of 2015 -)- (1)Whether on the facts and in the circumstances of the caseand in law, the royalty payment would be allowable asbusiness expenditure, where the same has not beenexclusively and wholly incurred for business purposes?(11)Whether on the facts and in the circumstances of the caseand in law, the order of the Tribunal is not perverse inholding that the transaction was not a colorable devise toreduce the tax lability of the company in which theManaging Director was none other than the beneficiaryProprietor of royalty particularly when no evidence ofany patented product in possession of the Proprietorcould be produced and all the stipulates in the agreementshowed that it was for the exclusive benefit of theproprietor, and also when no proof of brand value ofphoneytune.com was established? (111) Whether on the facts and 1n the circumstances of the caseand in law, the Hon'ble ITAIT was correct in notappreciating the applicability of the provisions of section47 (x1v) read with section 47A (3)? (iv) Whether on the facts and 1n the circumstances of the caseand in law, the Hon ble ITAI was right 1n treating thecopyright expense as a revenue expense when theIncome Tax Act, 1961 alongwith the Income Tax Rules,w.e.f. A.Y. 1999-2000, has explicitly mentionedcopyrights as an intangible asset? (v) Whether on the facts and in the circumstances of the caseand in law, the Hon'ble ITAT was right in treating thecopyright expense as a revenue expense relying on thedecisions of Hon'ble Supreme Court 1n the case of CITVs. IAEC (pumps) Ltd. 232 ITR 316 (SC) which wasdelivered prior to amendments in section 32 (1) (11) ofthe Income Tax Act, 1961 and in Rule 5 (1) of the ITA No. 434 of 2015 -34 Income lax Rules, 1962, w.e.f. A.Y. 1999-2000, wherebyintangible assets, inter-alia, copyrights have beenincluded in the appendix | prescribing intangible assetsas a separate block of assets on which depreciation isapplicable @ 25'% (v1)Whether on the facts and 1n the circumstances of the caseand in law, the Hon'ble ITAT was right in treating thecopyright expense with enduring benefits as revenueexpenditure?” Re:Questions No. (1) and (11) ITA No. 434 of 2015 -34 Income lax Rules, 1962, w.e.f. A.Y. 1999-2000, wherebyintangible assets, inter-alia, copyrights have beenincluded in the appendix | prescribing intangible assetsas a separate block of assets on which depreciation isapplicable @ 25'% (v1)Whether on the facts and 1n the circumstances of the caseand in law, the Hon'ble ITAT was right in treating thecopyright expense with enduring benefits as revenueexpenditure?” Re:Questions No. (1) and (11) 4 Questions (1) and (11) are answered in the assessee's favour 1nview of the judgment of this Court dated 07.08.2015 1n the assessee's casePt. Commissioner of Income Tax -2 Vs. M/s Mobisoift Tele Solutions P. Ltd.ITA Nos. 193-194-197 of 2015. These questions arose in the appeals filedby the revenue in the case of the assessee for the assessment years 2006-07,2007-08 and 2008-09. This court vide order dated 07.08.2015 passed in ITANos. 193, 194 and 197 of 2015 answered these questions against therevenue. It was held that the AO and CIT (Appeals) erred in holding thatTarun Mohan had entered into an agreement with himself. The authoritiesignored the fundamental concept that the assessee being a Companyincorporated under the Companies Act, 1956 is a separate legal juristicentity. It was held that the assessee Company was entitled to use the trademark as licensee thereof and that the payment of royalty for the same 1snothing unusual. Re:Question No. (ill) 45This question is also answered in favour of the assessee by the ITA No. 434 of 2015 -4_ said judgment. Mrs. Dhugga, the learned counsel for the appellant, howeversubmitted that the judgment did not consider the effect of Sections 47 (xiv)and 47A (3). 6 The AO finalised the assessment under Section 143 (3) of theIncome Tax Act, 1961, vide order dated 29.12.2011. Among other things,the AQ) made an addition of=17,97,858/- on account of royalty paid to theassessee's director Shri Tarun Mohan. The earlier assessment order passed 1nthe case of the assessee for the assessment year 2008-09 was followed.Further licence fee of=2,03,78,978/- paid to M/s_ PhonographicPerformance Ltd. was treated as capital expenditure. TdThe CIT (Appeals) partly allowed the assessee'’s appeal vidorder dated 25.09.2012. The addition made by the AO on account of royaltypaid to Shri Tarun Mohan was upheld, relying upon the earlier decisions 1nthe case of the assessee for the assessment years 2007-08 and 2008-09. Thelicence fee paid was held to be capital expenditure as the acquired asset hasbenefit which 1s enduring 1n nature. |Agerieved by the order of the CIT (Appeals), the assessee aswell as the revenue filed appeals before the Tribunal. The Tribunal by theimpugned order dated 03.07.2015 partly allowed the appeal of the assesseeand dismissed the appeal of the revenue. Q The assessee company filed its return for the relevantassessment year. In the return, among other things, the amount of royaltypaid to Shri Tarun Mohan was claimed as a business expenditure. Thelicence fee paid to M/s Phonographic Performance Ltd. was claimed to be a ITA No. 434 of 2015 -S- revenue expenditure. [he case was taken up 1n scrutiny. [he AO sought anexplanation from the assessee on various issues, including on the issues ofroyalty and the licence fee paid. Ihe assessee filed a reply. [he AO was notsatisfied with the reply filed. |Agerieved by the order of the CIT (Appeals), the assessee aswell as the revenue filed appeals before the Tribunal. The Tribunal by theimpugned order dated 03.07.2015 partly allowed the appeal of the assesseeand dismissed the appeal of the revenue. Q The assessee company filed its return for the relevantassessment year. In the return, among other things, the amount of royaltypaid to Shri Tarun Mohan was claimed as a business expenditure. Thelicence fee paid to M/s Phonographic Performance Ltd. was claimed to be a ITA No. 434 of 2015 -S- revenue expenditure. [he case was taken up 1n scrutiny. [he AO sought anexplanation from the assessee on various issues, including on the issues ofroyalty and the licence fee paid. Ihe assessee filed a reply. [he AO was notsatisfied with the reply filed. 10)One Tarun Mohan carried on business 1n the firm's name andstyle of phonytunes.com as the sole proprietor thereof. The assessee|company entered into an agreement dated 18.02.2003 to take over thebusiness of the proprietory concern of Tarun Mohan. The agreement wassigned by Shri Tarun Mohan as proprietor of the selling concern and as adirector of the assessee i.e. the purchaser. He had invented a technologyfrom which ring tones could be created of songs. It appears that he hadregistered his copyright in respect of the word “phoneytunes.com”. In theagreement the assessee-respondent 1s referred to by its previous name —ITIDA. PI’ in the agreement is a reference to the firm namephoneytunes.com. Articles 2 and 3 of the agreement read as under :- “Article 2 — Transfer In consideration of the agreement and subject tothe terms and conditions hereto, PT herebyagrees to sell, assign, transfer and convey theassets to ITIDA (assessee’s previous name) asprovided herein and ITIDA would purchase andacquire the assets on and from the closing datesubject to the terms and conditions of thisagreement. The assets relating to the businesswhich are to be sold, assigned, transferred andconveyed shall include without limitation thefollowing:- ITA No. 434 of 2015 l. Fixed assets. 2. All inventories to the extent listed in Schedule-]. 3. The intellectual property rights in the businessexcept the brand name of phoneytunes.comshallbe transferred andfor_using the brand nameITIDA has to pay 2% of gross revenue receipts asroyaltyafter two years ofthe closing date. 4. All other current assets including cash & bankbalances and loans & advances. The assets as mentioned above shall be sold,transferred, conveyed and assigned to ITIDA freeand clear from any encumbrances, liens,charges, claims, restrictions of whatsoevernature. Article 3 — Consideration In consideration of PT agreeing to sell, assign,transfer and convey the assets to ITIDA on theterms and conditions stated in this agreement,ITIDA shall pay to Mr. Tarun Mohan, soleproprietor of PI a_ purchase price” consideration of a sum ofc~S§1,231/- and inconsideration of all intellectual property rights(other than brand name) andfor the use ofbrandname ofphoneytunes.com a consideration of2%of the gross revenue receipts under the relevantbusiness after 2 years of closing date.’(emphasis supplied) From the above Articles, it 1s evident that Shri Tarun Mohanpermitted the assessee to use the intellectual property vested 1n him, viz. themark phoneytunes.com’. He had not assigned the same to the assessee ITA No. 434 of 2015%E% Company. He was entitled to receive royalty of 2% of the gross revenuereceipts under the relevant business after two years of the closing date. Itwould be appropriate to note at this stage that the transfer of assets etc. bythe sole proprietor was against consideration of|L5,81,231/-. Shri TarunMohan also acquired shareholding 1n the assessee company. 11.AS we noted earlier, question No. (111) 18 also covered in theassessee's favour by virtue of the judgment dated 07.08.2015 in ITA Nos,193, 194 and 197 of 2015. Mrs. Dhugga however contended that thejudgment does not consider Sections 47 (xiv) and 47A (3) which read asunder :- ITA No. 434 of 2015%E% Company. He was entitled to receive royalty of 2% of the gross revenuereceipts under the relevant business after two years of the closing date. Itwould be appropriate to note at this stage that the transfer of assets etc. bythe sole proprietor was against consideration of|L5,81,231/-. Shri TarunMohan also acquired shareholding 1n the assessee company. 11.AS we noted earlier, question No. (111) 18 also covered in theassessee's favour by virtue of the judgment dated 07.08.2015 in ITA Nos,193, 194 and 197 of 2015. Mrs. Dhugga however contended that thejudgment does not consider Sections 47 (xiv) and 47A (3) which read asunder :- 47. Nothing contained in section 45 shall applyto thefollowing transfers :—to thefollowing transfers :— (i) to (xili) x x x (xiv) where a_ sole proprietary concern isucceeded by a company in the businesscarried on by it as a result of which thesole proprietary concern Sells or otherwisetransfers any capital asset or intangibleasset to the company:succeeded by a company in the businesscarried on by it as a result of which thesole proprietary concern Sells or otherwisetransfers any capital asset or intangibleasset to the company: Providedthat — | (a)all the assets and liabilities of thesole proprietary concern relating tothe business immediately before thesuccession become the assets andliabilities of the company;sole proprietary concern relating tothe business immediately before thesuccession become the assets andliabilities of the company; (b)the shareholding of the _ soproprietor in the company is not lessthan fifty per cent ofthe total votingproprietor in the company is not lessthan fifty per cent ofthe total voting ITA No. 434 of 2015 -s- power in the company and. hishareholding continues to remain assuch for a period offive years fromthe date ofthe succession; and (c)the sole proprietor does not receiveany consideration or benefit, directlyor indirectly, in any form or manner,Other than by way of allotment ofshares in the company;any consideration or benefit, directlyor indirectly, in any form or manner,Other than by way of allotment ofshares in the company; 47A. (3) Where any of the conditions laid downin the proviso to clause (xili) or the proviso toclause (xiv) of section 47 are not complied with,the amount of profits or gains arising from thetransfer of such capital asset or intangible assetnot charged under section 45 by virtue ofconditions laid down in the proviso to clause(xiii) or the proviso to clause (xiv) of section 47shall be deemed to be the profits and gainschargeable to tax of the successor company forthe previous year in which the requirements ofthe proviso to clause (xili) or the proviso toclause (xiv), as the case may be, are not compliedwith. 12.Section 45 deals with tax on capital gains. Section 47 excludescertain transfers from the purview of Section 45. Such transfers would notbe regarded as transfers for the purpose of section 45. Clause (xiv) ofsection 47 deals with transfers where a proprietary concern 1s succeeded bya company in the business carried on by it, as a result of which the soleproprietary concern sells or otherwise transfers the capital assets to the ITA No. 434 of 2015%A% company. The proviso to clause (xiv) provides three conditions. Proviso (c)provides that the sole proprietor has not received directly or indirectly anyconsideration, except by way of allotment of shares in the company. ShriTarun Mohan has admittedly received consideration 1n cash ofL5,381,23 1/which includes payment of royalty for the use of the brandname. Moreoverhe has admittedly not received shares as consideration for the same. [hus,Section 47 has no application to the case. ITA No. 434 of 2015%A% company. The proviso to clause (xiv) provides three conditions. Proviso (c)provides that the sole proprietor has not received directly or indirectly anyconsideration, except by way of allotment of shares in the company. ShriTarun Mohan has admittedly received consideration 1n cash ofL5,381,23 1/which includes payment of royalty for the use of the brandname. Moreoverhe has admittedly not received shares as consideration for the same. [hus,Section 47 has no application to the case. 13.The case set up by the appellant 1s that as larun Mohan 1s beingpaid royalty, therefore, there 1s a violation of clause (xiv) of section 47, asthe consideration, apart from allotment of shares, has passed to the soleproprietor. On this basis, sub-section (3) of section 47A should be invokedand the said consideration would be deemed profit and gain of the assesseecompany. Section 47A lays down the conditions, which if violated, wouldresult in withdrawal of exemption as provided under section 47. Sub-section(3) of section 47A deals with violation of clause (x11) or proviso to clause(xiv) of section 47. The result of violation would be that the amount ofprofits or gains arising from the transfer will be treated as deemed profitsand gains of the successor company chargeable to tax 1n the previous year inthe hands of the company, 14.The issue raised has no foundation to stand. There are nofindings of fact recorded that the provisions of section 47 were invoked forclaiming exemption from capital gains while making transfers from the soleproprietary concern to the assessee company. The applicability of section47A would arise only if it is established that section 47 was pressed into ITA No. 434 of 2015 -|Q- service. In absence thereof, the deeming provision of sub-section (3) ofsection 47A cannot be invoked. 15)There is another angle. From the reading of Article 3 of theagreement, it 1s evident that Tarun Mohan received a consideration of45,81,231/- and royalty for the use of the brand name. This itself shows thatexemption of section 47 was not available, as proviso (c) to clause (xiv) ofsection 47 had not been complied with. The appellant has not contended orestablished that the assessee availed the benefit of Section 47| 16)The question 1s, therefore, answered against the appellant, Re:Questions No. (iv), (v) and (v1) 17)Questions No.(iv), (v) and (v1) in fact raise a common question,viz. whether the copyright fee paid to M/s Phonographic Performance Ltd,is a revenue expenditure or a capital expenditure. 18)The findings recorded by the Tribunal on this issue are basedon appreciation of the facts. They cannot be said to be perverse or irrational.The three questions raised are not substantial questions of law. 19.The relevant clauses of the agreement between the assesseecompany and M/s Phonographic Performance Ltd., are as below :- Grant of License 211The Licensor grants to the Licenseeand its authorized representative and/or agentsduring the Term, throughout the Territory, a non-exclusive, non transferable license for the use ofLicensed Works for the sole purpose ofprovidingthe Services as mentioned in this Agreement : ("%"%to use, reproduce, modify, edit, ITA No. 434 of 2015 compile, and/or adapt the Licensed Works so as,and only to the extent necessary, to create RingTones; this right has been temporarily granteduntil such time that the copyright owners are notmaking available the Licensed Works for use asringtones, ("%"(to copy the Ring Tones to Licensee'swholly owned or controlled secure serverslocated at the named premises within theTerritory and/or in the US and/or computerSEV VeroftheSub-Licensees/partners(“Computer Servers”), ("%"*to Download or transmit the RingTones to Licensee's or the Sub-Licensee's End-Users who have subscribed to and paid or agreedto payfor such services (“Subscribers”), ("%"%to use, reproduce, modify, edit, ITA No. 434 of 2015 compile, and/or adapt the Licensed Works so as,and only to the extent necessary, to create RingTones; this right has been temporarily granteduntil such time that the copyright owners are notmaking available the Licensed Works for use asringtones, ("%"(to copy the Ring Tones to Licensee'swholly owned or controlled secure serverslocated at the named premises within theTerritory and/or in the US and/or computerSEV VeroftheSub-Licensees/partners(“Computer Servers”), ("%"*to Download or transmit the RingTones to Licensee's or the Sub-Licensee's End-Users who have subscribed to and paid or agreedto payfor such services (“Subscribers”), ("%",to prepare and publicly performexcerpts and samples of the Licensed Works ofduration not exceeding fifteen (15) seconds formonophonic format and thirty (30) seconds forpolyphonic format, solely for promotionalpurposes on the Licensee's and the Sub-Licence'swebsite/IVR/WAP or such other method ofsampling; ("%"0to use the track title/title of theLicensed Works, names ofthe Licensors' membersrepresented on the Licensed Works and any otherrelated material, for the purpose of identifyingthe Licensed Works on the Service.PROVIDED that :- 2?16.]each Ring Tone can be created fromonly one Licensed Work; ITA No. 434 of 2015 ("%"C"(each Ring Ione cannot exceed thirty(30) seconds in monophonicformat andforty five(45) seconds in polyphonic format; ("%"C"*the Ring Tones shall not be copied orstored by any other third party onto whatevermedia except onto the dLLicensee's/Sub Licensee ComputerServersServers b.End Users Cellular phone, hand heldDevices or such wireless devices.Devices or such wireless devices. ("%"C",the Licensee shall not itself orindirectly through any other person in respect ofany copying pursuant to this Agreement segue,mix or re-mix or overlap, edit, change orotherwise manipulate the sounds ofany LicensedWorks, other than as otherwise authorizedherein, ("%"C"0the substantial identity of anyLicensed Work or relevant part thereof shall notbe changed in the corresponding Ring Tone; ("%"C"CLicensee shall not incorporate anyvoice-over of any kind or interview or othercommentary during the playing of any LicensedWorks; ("%"C"4Any use by Licensee of the RingTones for a purpose other than in furtherance ofthe Licensee's Service (s) shall be subject toseparate negotiation and agreement between theparties. ("(Notwithstanding the rights grantedunder 2.1.1, 2.1.2 & 2.1.3 the Licensor reservesthe right to store the Licensed Works (as Ring ITA No. 434 of 2015 -|3- Tones) at its wholly owned and fully controlledcomputer servers and make it available to theLicensee to be distributed to its End-Users.” ()|The Tribunal on appreciating the agreement rightly came to the conclusion that only a license to use the copyright was granted to theassessee company. The assessee company had not acquired the copyright. Insuch circumstances, the license fee paid 1s a revenue expenditure. In thisregard, the Iribunal rightly followed the decision of the Supreme Court inthe case ofCIT Vs. LAE.C (Pumps) Ltd.,232 1TR 316. The question raisedbefore the Hon'ble Apex Court was | “whether the amount paid by the respondent-assessee to the foreign collaborator for technicalknow-how 1s a capital expenditure or a revenueexpenditure’? The Supreme Court held as under ; “We heard counsel. We are of the view thatthe High Court posed the correct question thatarose for consideration and also applied theproper principles of law to the instant case. Byapplying the proper principles of law to theagreement in question, the High Court concludedthat the amounts paid to the collaborator is onlya “licence fee” and not the price for acquisitionof a “capital asset”. It was concluded that theentire payment constitutes revenue expenditureand the questions were answered in favour oftheassessee. Ian Mrs. Dhugga relied upon section 32. She argued that ITA No. 434 of 2015 “whether the amount paid by the respondent-assessee to the foreign collaborator for technicalknow-how 1s a capital expenditure or a revenueexpenditure’? The Supreme Court held as under ; “We heard counsel. We are of the view thatthe High Court posed the correct question thatarose for consideration and also applied theproper principles of law to the instant case. Byapplying the proper principles of law to theagreement in question, the High Court concludedthat the amounts paid to the collaborator is onlya “licence fee” and not the price for acquisitionof a “capital asset”. It was concluded that theentire payment constitutes revenue expenditureand the questions were answered in favour oftheassessee. Ian Mrs. Dhugga relied upon section 32. She argued that ITA No. 434 of 2015 copyright’ finds mention in section 32. [he result 1s that depreciation canbe claimed on copyright. On the said basis, it is argued that copyright fee 1sa capital expenditure. [he argument has no merit. Relevant portion ofsection 32 1s re-produced below :- *("(1) In respect ofdepreciation of— (i)buildings, machinery, plant orfurniture, being tangible assets;furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licences, franchises or anyother business or commercial rightsof similar nature, being intangibleassets acquired on or after the Istday ofApril, 1996,marks, licences, franchises or anyother business or commercial rightsof similar nature, being intangibleassets acquired on or after the Istday ofApril, 1996, owned, wholly or partly, by the assesseeand used for the purposes of the businessor profession, the following deductionsshall be qllowed —and used for the purposes of the businessor profession, the following deductionsshall be qllowed — (i)in the case of assets of anundertaking engaged in generationor generation and distribution ofpower, such percentage on_ thactual cost thereofto the assessee asmay be prescribed;undertaking engaged in generationor generation and distribution ofpower, such percentage on_ thactual cost thereofto the assessee asmay be prescribed; (ii)in the case of any block of assets,such percentage on the written downvalue thereofas may be prescribed.such percentage on the written downvalue thereofas may be prescribed. ‘Copyrights’ find mention in section 32. The depreciation of copyright etc.can be claimed subject to two conditions viz. 1t must be owned wholly orpartly by the assessee and it must be used for the purpose of business or ITA No. 434 of 2015 -|4S profession. [he word “and” between the two conditions establishes thatboth the conditions must subsist for the applicability of Section 32,22.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 bythe Tribunal that only usage of the license was transferred is neitherperverse nor irrational. 4|The questions are answered against the appellant. DL.The appeal is, therefore, dismissed. (S.J. VAZIFDAR )CHIEF JUSTICE February 22, 2018 (L (AVNEESH JHINGAN )JUDGE Whether speaking/reasonedYesWhether ReportableYes