Pr. Commissioner Of Income Tax-2, Chandigarh v. M/S Mohbisoftt Tele Solutions P. Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITAS1931941972015 (O&M)Date of decision:07.08 .2O1L Pr. Commissioner of Income Tax-2, Chandigarh ..Appellant Versus M/s Mohbisoftt Tele Solutions P. Ltd. ...Respondent CORAMHONBLE MR. JUSTICE S.J. VAZIFDAR, ACTING CHIEF JUSTICEHON5BLE MR. JUSTICE G.S. SAANDHAWALI Present: Ms. Urvashi Dhugga, Advocate, for the appellant. | ee S.J. VAZIFDAR, A.C.J. (QRAL) These appeals are against the orders of the Income Tax AppellateTribunal dated 28.10.2014 setting aside the order of the CIT (Appeals) forthe assessment years 2006-2007, 2007-2008 and 2008-2009. 2 |The CIT (Appeals) dismissed the respondent/assessee’s appeal against the order of the Assessing Officer adding back the amounts paid bythe assessee to one Tarun Mohan by way of royalty for the use of the brandname phoneytunes.com. — 3According to the appellant, the following substantial questionsof law arise in these cases:- (i) Whether on the facts and in_ thecircumstances of the case and in law, theHon’ble ITAT is justified in holding thatroyalty payment to a related person would beallowable for business expenditure u/s 37(1)of the Act whereas the same has not beenexclusively and wholly incurred for businesspurposes? (ii) Whether on the facts and in _ thcircumstances of the case and in law, theHon’ble ITAT is justified in holding thatroyalty payment would be allowable business | expenditure u/s 37(1) when the same has notbeen paid to the owner/holder of the patent,design, copyright and technical know how orfo an inventor aqnd where there is notransfer/acquisition ofany assets? (ili) Whether on the facts and in _ thcircumstances of the case and in law, theHon’ble ITAT is justified in holding thatroyalty payment would be allowable businessexpenditure u/s 37(1) inspite of the fact thatexpenditure on royalty payment is capital innature? (iv) Whether onfacts and circumstances ofthecase and in law, the order of the Tribunal is’not perverse in holding that the transactionwas not a colourable device to reduce the taxliability of the company in which theManaging Director was none other than thebeneficiary proprietor of royalty particularlywhen no evidence of any patented product inpossession of the proprietor could beproduced and all the stipulations in theagreement showed that it was for theexclusive benefit of the proprietor and alsowhenlO|proofof|brandvalueofphoneytunes.com was established? 4 4The matter is in fact uncomplicated. The said Tarun Mohan isalso a Director in the assessee-company. He and his family members are theonly share-holders of the assessee-company. The said Tarun Mohan carriedon business in the name and style of phoneytunes.com as the sole proprietorthereof. The business comprised of providing value added telecom servicesto various mobile companies for ring tones, images, wall papers etc. He hadentered into agreements with various music companies under which heacquired their rights as also the right to make ring tones on the basis thereof.In turn, he provided individual mobile users the tones through cellularoperating companies. He paid royalty to the music companies inconsideration of these agreements. He in turn was remunerated by collectingfees from the customers for downloading the ring tones etc. The Tribunal has come to a finding of fact that the said Tarun Mohan had inventedtechnology through which ring tones can be created of the said songs.Whether it was an invention or not is not relevant. The fact is that he devisedthe manner of providing the said services. It appears that Tarun Mohan hadalso registered his copyright in respect of the word ‘phoneytunes.com’. 5 _On 18.02.2003, Tarun Mohan entered into an agreement withthe respondent/assessee. Articles 2 and 3 of the agreement read as under:- ,Article 2 — Transfer has come to a finding of fact that the said Tarun Mohan had inventedtechnology through which ring tones can be created of the said songs.Whether it was an invention or not is not relevant. The fact is that he devisedthe manner of providing the said services. It appears that Tarun Mohan hadalso registered his copyright in respect of the word ‘phoneytunes.com’. 5 _On 18.02.2003, Tarun Mohan entered into an agreement withthe respondent/assessee. Articles 2 and 3 of the agreement read as under:- ,Article 2 — Transfer In consideration of the agreement and subjectto the terms and conditions hereto, PT herebyagrees to Sell, assign, transfer and convey theassets to ITIDA as provided herein and ITIDAwould purchase and acquire the assets on andfrom the closing date subject to the terms andconditions of this agreement. The assetsrelating to the business which are to be sold,assigned, transferred and conveyed shallinclude without limitation thefollowing:- IT. Fixed assets. 2. All inventories to the extent listed in'Schedule-]. 3. The intellectual property rights in theDUuSsINeSExceptthebrandHhdaiof|phoneytunes.com Shall be transferred andforusing the brand name ITIDA has to pay 2% ofgross revenue receipts as royalty after twoyears of the closing date. 4. All other current assets including cash &bank balances and loans & advances. — The assets as mentioned above shall be sold,transferred, conveyed and assigned to ITIDAfree and clearfrom any encumbrances, liens,charges, claims, restrictions of whatsoevernature. Article 3— Consideration In consideration of PI agreeing to sell,assign, transfer and convey the assets toITIDA on the terms and conditions stated in A this agreement, ITIDA shall pay to Mr. TarunMohan, sole proprietor of PT a purchaseprice or consideration of a sum ofa5,81,231/- and in_ consideration of allintellectual property rights (other than brandname) and for the use of brand name ofphoneytunes.com a consideration of2% ofthegross revenue receipts under the relevantbusiness after 2 years ofclosing date.” 6.)It is clear, therefore, that Tarun Mohan retained the brand namephoneytunes.com. He merely permitted the assessee to use the intellectualproperty right acquired by him, namely, the brand name/trade-markphoneytunes.com. He had not assigned the same to the assessee, but onlylicensed the same to the assessee. J |The Assessing Officer and the CIT (Appeals) wrongly came to.the conclusion that Tarun Mohan being a Director of the respondent was notentitled to enter into an agreement for the transfer of his assets to thecompany. They held that the same person cannot enter into an agreementwith himself. This ignores the fundamental concept that the assessee being acompany incorporated under the Companies Act, 1956 is a separate legalJuristic entity. 8 |The Tribunal, therefore, rightly disagreed with this finding. TheTribunal also rightly observed that Tarun Mohan had in any event paid theentire taxes in respect of the royalty received by him. That, however, wouldnot make a difference for if the deduction sought by the assessee iswrongful, the Assessing Officer is bound to disallow the same. OQThe CIT (Appeals) observed that there was no evidence toprove that Tarun Mohan had developed any product tor which he had any copyright or trade mark. Firstly, as we noted earlier, he had obtained thecopyright in respect of the artistic work comprised in the namephoneytunes.com. Registration of the copyright is, however, not compulsory. In any event, phoneytunes.com was a part of his trading styleand constitutes a trade mark. This is not a ground for challenging hisentitlement to the trade mark. The assesee was entitled, therefore, to use thetrade mark as a licensee thereof. The payment of royalty for the same isnothing unusual or out of place. 10.In these circumstances, the deletion by the Tribunal of theaddition of royalty by the Assessing Offficer and confirmed by the CIT(Appeals) was rightly set aside by the Tribunal. No question of law arises. 11.The appeals are accordingly dismissed. — copyright or trade mark. Firstly, as we noted earlier, he had obtained thecopyright in respect of the artistic work comprised in the namephoneytunes.com. Registration of the copyright is, however, not compulsory. In any event, phoneytunes.com was a part of his trading styleand constitutes a trade mark. This is not a ground for challenging hisentitlement to the trade mark. The assesee was entitled, therefore, to use thetrade mark as a licensee thereof. The payment of royalty for the same isnothing unusual or out of place. 10.In these circumstances, the deletion by the Tribunal of theaddition of royalty by the Assessing Offficer and confirmed by the CIT(Appeals) was rightly set aside by the Tribunal. No question of law arises. 11.The appeals are accordingly dismissed. — (S.J. VAZIFDAR)ACTING CHIEF JUSTICE(G.S. SANDHAWALIA) |JUDGE 07.08.2015Amodh