TMI Blog2010 (5) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... 2448/2005, - - - Dated:- 31-5-2010 - Bhavnesh Saini Judicial Member J. D.C. Agrawal Accountant Member J. Revenue by : Shri M. C. Pandit, Sr. DR Assessee by : Shri S. N. Soparkar, AR ORDER Per D. C. Agrawal, Accountant Member. These are four appeals one filed by the Revenue for Asst. Year 1997-98, i.e. ITA No.2781/Ahd/2008 and the other three are filed by the assessee i.e. ITA Nos.934/Ahd/2006, 2448/Ahd/2005 2826/Ahd/ 2006 for Asst. ITA No.2781/Ahd/2008 Asst . Year :1997-98 ITA Nos.934/Ahd/2006,2448/Ahd/2005 2826/Ahd/2006 Asst . Years : 1998-99, 2002-03 2003-04 Years 1998-99, 2002-03 2003-04 respectively. These appeals involve common issue and therefore, they are taken up together for the sake of convenience. The lead year in which the issue has first arisen is Asst. Year 1997-98 being the appeal filed by the Revenue and hence it is taken up first. 2. In this year the Revenue has raised the following ground :- (1) The ld. CIT(A) has erred in law and on facts in directing the A.O. to delete the addition of Rs.8,27,773/- in respect of royalty payment though it is in violation of Section 40(A)(2). 3. The main issue involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Patwa and RJK to commercially exploit the invention, by providing licence to others. In that case it was mutually agreed that 4.5% of the value of the sales would be charged and which would be shared as 1.5% to M/s R.J.K. Industries and 3% to Shri Rajan Patwa. This agreement was considered valid for 21 years. Shri Rajan Patwa succeeded in developing the technology for clearing yarn by opto electric method in 1978 and patent certificate was issued by Patent Office on 23.10.1978 registering the invention. The device was allowed to be manufactured by M/s Patwa Kinariwala Electronics firm whose managing partner was Shri Patwa himself. It paid the royalty @ 4.5% which was shared by M/s R.J.K. Industries @ 1.5% and Shri Rajan Patwa at 3%. This arrangement continued upto 4.4.1996 and as per earlier agreement the right of the technology claimed to have reverted back to Shri Rajan Patwa the inventor. Thereafter it is claimed that Shri Rajan Patwa entered into agreement dated 4.4.96 with Patwa Kinariwala Electronics Ltd. (PKEL) when the firm with the same name was converted in the company with the same name. It is claimed that with the agreement dated 4.4.1996 Shri Rajan Patwa and P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Director himself or his family members on behalf of the company could sign the agreement. Therefore, such an agreement cannot become the basis for reducing the taxable income by claiming expenses which are otherwise not supported by any evidence. Even before the Tribunal evidences for alleged royalty payment were not furnished. 6. Against this, ld. AR for the assessee submitted that Assessee Company is carrying on the business of manufacturing of electronic equipments for textile industries. These instruments are electronic yarn cleaner (EYC. The assessee company has exclusive right of manufacturing these products. The technology was invented by Shri Rajan Patwa who is B.E., M.S. Electronic from USA. He is a technical expert. Royalty has been paid to Shri Rajan Pata following agreement dated 12.12.76. The patent was also registered in the name of the firm and Shri Rajan Patwa was allowed to share the royalty payment. Since 1978 onwards the manufacturer of these instruments are paying royalty and Shri Patwa is enjoying it @ 3%.. The patent was registered in the name of RJK industries (KRJK) and Ahmedabad Texteile Industries Association (ATIRA). The partnership firm in the name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt or upgradation of technology used by an assessee company cannot be made equivalent to a patent or any intellectual property right entitling the assessee company to make the payment of royalty. It may be the payment for technical services rendered by Shri Patwa but not a payment against intellectual property right. Further evidence of services rendered justifying payment of royalty to Shri Patwa have not been provided. 10. We have considered the rival submissions and perused the material on record. What is undisputed is that Shri Patwa is a technocrat. He has originally invented the devices which were later got patented in 1978 in the name of two concerns namely ATIRA and RJK Industries. Licences were issued to PKE a firm run by Shri Patwa. Royalty @ 4.5% was paid by the firm which was shared @ 3% by Shri Patwa and 1.5% by RJK Industries. It is not known as to whether payment @ 1.5% continued to the firm RJK Industries. However, payment @ 3% continued upto 4.4.96 by the firm to Shri Patwa. The firm was taken over by the company and Shri Patwa became the Managing Director thereof. Other shareholders of the company are the family members of Shri Patwa. The patent certificate issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at patent certificate(s) were submitted to the AO while making the assessment of the firm so that they could know that patent had expired after 14 years and, therefore, claim of royalty is required to have a re-look. After formation of the company in 1996, the effect of allowability of the claim in earlier years in the firm no longer survives in the subsequent years. Once there is no patent or any intellectual right vested in Shri Patwa no claim of royalty can be allowed to him. The term royalty has been defined by Courts as a payment of any kind received as consideration for the use of or the right to use industrial, commercial or scientific equipment. If normally connotes, the payment made to a person, who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. Hon. Madras High Court in Commissioner of Income-tax v. Neyveli Lignite Corporation Ltd . (2000) 243 ITR 459 (Mad) had an occasion to explain the term royalty . The Hon. Court held that the exclusivity of the right in relation to the thing for which royalty is paid should be with the guarantor of that right. Mere passing of inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im can be allowed in the hands of the company to the extent, payment of remuneration is permissible to Shri Patwa under Companies Act. We, therefore, restore the matter to the file of AO to calculate the permissible payment of remuneration to Shri Patwa as Managing Director of assessee company and to allow the claim of expenditure to that extent. If permissible claim under Companies Act is more that the payment of royalty then entire claim should be allowed but in case any restriction is placed for which no material is placed before us, then to the extent of maximum permissible limit remuneration should be allowed as deduction in the hands of the assessee company. In view of this, we restore the matter to the file of AO for calculating the allowable remuneration as deduction to the assessee. 14. As a result, appeal filed by the Revenue is allowed but for statistical purposes. ITA No.934/Ahd/2006 for Asst. Year 1998-99 15. This appeal is filed by the assessee raising following grounds :- (1) The Learned Asstt. Conunissiloner of Income Tax has erred in law and on facts of the appellant' s case in passing an order U/s 147 r.w.s.143[3) of the Act. The appellant s most humb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation expenses. The issue is covered in favour of the assessee by the decision of the Tribunal in ITA No.55/A/02 for Asst. Year 1997-98. Following the same this ground of assessee is allowed. 21. Similarly disallowance of telephone expenses is decided in favour of assessee following above referred decision of the Tribunal. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes. 22. There are three issues the first is about royalty expenses of Rs.4,41,285/- and the other two issues are regarding disallowance of 1/3 motor car and depreciation and 25% of telephone expenses. 23. The issue regarding royalty is set aside to the file of AO following our decision for Asst. Year 1997-98 as above and to follow direction as given there this year also. 24. The issue regarding motor car and telephone expenses are allowed following our decision in ITA No.55/Ahd/2002 for Asst. Year 1997-98. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes. 25. In the result, appeal of Revenue is allowed for statistical purposes and the appeals of assessee are partly allowed for statistical pur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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