TMI Blog2013 (11) TMI 1244X X X X Extracts X X X X X X X X Extracts X X X X ..... so high as to warrant any disallowance under section 40A(2)(b) of the Act, keeping in view the rate of interest, which is charged by the bank in respect of unsecured loan, and even the rate of interest charged by the income-tax department under certain provisions are of 15% per annum. - Deduction allowed - Decided in favor of assessee. Travel expenses - Held that:- it is not necessary that every expenditure incurred by the assessee should result in a corresponding increase in the revenue of the assessee - deduction allowed. Payment made to Advocate for registration of patent rights in foreign countries - revenue or capital in nature - Held that:- the fact that a trade mark after registration could be separately assigned, and not as a part of the good will of the business only, does not also make the expenditure for registration a capital expenditure, that is only an addition and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself. - deduction allowed - Decided in favor of assessee. - ITA No.210,657/Ahd/2010 - - - Dated:- 25-10-2013 - Mukul Kr Shrawat And N S Saini, JJ. For the Appellant : Shri S N Soparkar For the Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into between the parties, and the logo fee was paid at 1% of the turnover. It was further submitted that the logo fee was consistently paid over the past three years, and the amount of Rs.19,16,555/- was paid on account of logo fees in A.Y.2004- 2005 and Rs.26,09,028/- was paid in A.Y.2005-2006, and the said expenditure on payment of logo fee was allowed in full by the AO in the scrutiny assessment made under section 143(3) of the Act for A.Y.2005-2006. Therefore, disallowance of this item of expenditure made by the AO in the assessment year 2006-2007 was totally perverse and unjustified in law. It was further submitted that in the assessment order, the AO has not mentioned as to how and why the logo fees is unreasonable or excessive. He has also not mentioned anything as to what is the reasonable amount. The AO had capriciously disallowed the entire expenditure without appreciating the facts and evidence adduced before him, and it was submitted that payment of log fee was based as per the agreement entered into between the parties, was genuine, reasonable and logo fee of 1% of the turnover cannot be termed as unreasonable or excessive partly when the department has accepted and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g receipt during the relevant period. A close analysis of the profit and loss account of that company reveals that it is surviving on royalty etc. paid by the subsidiary companies. If that company was holding such a tremendous Good Will than it would not be surviving on the receipts from so called brand Logo. Therefore, under these circumstances, there does not appear to be any justification for payment of royalty for alleged use of logo A.T.E which is neither registered as Trade Mark nor shown to be holding any known goodwill in the market. In view of this, it is clear that the amount under reference has been paid by the appellant for the consideration other than the business therefore, the same cannot be allowed as expense from the profits of the relevant period. The disallowance, therefore, made by the A.0 is hereby confirmed and the appellant's ground against the same is rejected." 6. The learned AR of the assessee submitted that the ld. CIT(A) has confirmed the disallowance of logo fee mainly on the ground that the logo was not registered under the Trade Marks Act, 1999. He submitted that the logo was in fact registered in the name of ATE Enterprises Pvt. Ltd., by certificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, where the AO invokes the provisions of section 40A(2) for making disallowance, the assessee crosses the hurdle of section 37 of the I.T.Act. He submitted that in this case, the AO has disallowed the entire expenses claimed by the assessee, whereas the AO is required to find out the market value of the goods and services, and only the excess amount paid over the market value of such goods and services, disallowance can be made by the AO. 7. On the other hand, the learned DR fully justified the action of the AO and submitted that since the logo was not registered in the name of the party to whom the assessee had paid logo fee, therefore, the assessee was free to use the logo and payment made by the assessee was not for the purpose of the business of the assessee. He further argued that by use of the logo, the AO has not shown any windfall profit. He further argued that the assessee was paying commission to the said party, ATE Enterprises Pvt. Ltd., to whom logo fee was paid. Since the assessee was paying the commission to the said party for selling its products, there was no necessity for making the payment for use of logo of the said company, ATE Enterprise Pvt. Ltd. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be right in his submission that even an unregistered prior user of a name can institute action for passing off and seek injunction against the subsequent user of the same name by proving that misrepresentation by the defendant to the public that the goods/services offered by him are that of the plaintiff and such misrepresentation has caused harm to the goodwill and reputation of the plaintiff or the plaintiff demonstrates that it has suffered loss due to such representation, ." In the instant case, we find that no material was brought to show that the logo brand had no market value rather it is observed that logo brand charges was paid at the rate of 1% of the total sale value of the products which was sold with that logo brand. The learned DR could not controvert the submissions of the assessee that similar logo brand charges at very similar rate of 1% was paid by the assessee-company to the very same payee in earlier years 2004-2005 and 2005-2006, which was accepted and allowed by the department in the assessment of earlier assessment year 2005-2006, which was also completed under section 143(3) of the Act. In the above circumstances, there being no change in the facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18% during the relevant previous year. Even, SBI has been charging interest of more than 35% on the amount due on credit cards, and when premier financial institution like SBI, which is owned and controlled by the Govt. of India was charging interest more than 35% on the unpaid balance of credits, it cannot be said that interest paid excessive or unreasonable. 12. The learned CIT(A) after considering the submissions of the assessee confirmed the action of the AO by observing that it was not in dispute that the person to whom the interest was paid on specified person under section 40A(2)(b) of the Act was paid interest at the rate of 14% on the deposits, whereas to other persons, interest on deposits paid ranged between 8.5% to 9%. The CIT(A) has further observed that there were three alternative tests to determine reasonableness of expenditure, as per CBDT s circular No.6P(LXXVI-66) dated 6th July, 1968 viz. (a) fair market value of goods, services or facilities for which the payment is made (b) the legitimate needs of the business or profession, (c) the benefit derived by or accruing to the tax payer from the expenditure. Therefore, under the given circumstances, the AO can disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the rate of interest is higher. In the instant case, the interest was paid to the persons from whom smaller amounts were borrowed and also borrowals were for a shorter duration, and therefore, not strictly comparable with the nature of the borrowings from the director. Moreover, we find that the rate of interest to 14% in respect of unsecured loan cannot be held to be so high as to warrant any disallowance under section 40A(2)(b) of the Act, keeping in view the rate of interest, which is charged by the bank in respect of unsecured loan, and even the rate of interest charged by the income-tax department under certain provisions are of 15% per annum. Hence, we delete the disallowance of Rs.72,000/-, and allow this ground of the appeal of the assessee. ITA No.657/Ahd/2010 (Revenue s Appeal) 16. The ground no.1 of the Revenue s appeal is directed against the order of the CIT(A) in deleting the disallowance of Rs.7,84,948/- made out of travel expenses. 17. Brief facts of the case are that the assessee-company has claimed foreign traveling expenses of Rs.14,51,471/-. Out of the said expenses, Rs.5,81,179/- has been spent in foreign currency and Rs.8,70,292 is spent in Indian ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions of the assessee deleted the addition by observing that details filed before the AO contained the name of the country visited by these persons and the purpose of undertaking such tours. The AO without bringing any infirmity in the details filed by the assessee came to the conclusion that part of such expenses were made for the purposes other than the business. The disallowance made by the AO in the given set of circumstances cannot be held justified. 20. The learned DR supported the order of the AO, whereas the learned counsel for the assessee supported the order of the CIT(A). 21. We have considered rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee claimed deduction on account of traveling expenses of Rs. 14,51,471/- out of which Rs. 5,81,179/- was disallowed by the AO on the ground that there was no increase in the sales of the assessee-company by incurring such expenditure, and therefore, the expenditure was not incurred for the purpose of business of the assessee-company. On appeal, the CIT(A) deleted the disallowance by observing that the details were filed before the AO contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale as against 12.5% to 15% paid in some other cases. The AO, therefore, disallowed Rs.27,125/- out of the commission payment made by the assessee, considering the same to be excessive. Before the AO as well as the CIT(A), the assessee contended that the commission was paid on sales made to M/s.Nienshing Textile Co. Ltd., which includes sales of ACS flyers, the unit selling price of which was US dollar 95 and the price realized by the company on the same products from other customers in the export market was in the range of USD 70 to 80. Since the agent helped the company to fetch higher prices for which additional commission was paid. The learned CIT(A) has deleted the disallowance by observing that the disallowance was made by the AO without appreciating the facts of the case, and therefore, cannot sustained. We find that no material was brought on record by the Revenue to show that the assessee has in fact not realized higher sale price of USD 95 on ACS flyers than the sale made to other persons where the sale price ranged from USD 70 to 80. Since the assessee-company realized higher sale prices for which the assessee made higher commission payment, in our considered opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower authorities and material available on record. In the instant case, the assessee incurred expenditure by way of Advocate fee for registration of patent in foreign countries of Rs. 3,80,764/-. The entire expenditure claimed by the assessee was disallowed by the AO on the ground that it was a capital expenditure. On appeal filed by the assessee, the CIT(A) deleted the disallowance on the ground that the AO without appreciating the nature of the expenses incurred for acquisition of the intellectual property in the form of patent and trade mark, had made disallowance. The assessee has not acquired any capital asset out of the expenses incurred by the assessee, and therefore, there was no justification in disallowing the expenditure as capital in nature. We find that the issue is now covered by the decision of the Hon ble Gujarat High Court in the case of CIT Vs. Cadila Healthcare Ltd., (supra) where the Hon ble High Court decided the following question of law: "C. Whether the Appellate Tribunal has substantially erred in holding that Trademark Registration fee and Patent fee (Rs.37,92,606/0 and Rs.1,15,49,880) are revenue expenses, when the expenses incurred for registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned CIT(A) vacated the disallowance on the ground that the disallowance was made by the AO without bringing cogent material on record. The CIT(A) observed that there was no material on record brought by the AO to show that how the payments were excessive or unreasonable within the meaning of section 40A(2) of the Act. We find that the contention of the assessee is that royalty at the rate of Rs. 4/- per ring on its average selling price was paid to M/s.Stovec Industries, who was the original developer of this product and the company had obtained known-how for manufacture of end-rings. In the absence of any material being brought on record by the AO to show that the payment of royalty by the assessee to M/s.Stovec Industries is higher than the market value of the services received by the assessee, in our considered opinion, no disallowance under section 40A(2)(b) can be made by the AO. Hence, we find no infirmity in the order of the CIT(A), which is confirmed and the ground of the Revenue is dismissed. 37. The ground no.5 of the Revenue s appeal is directed against the order of the learned CIT(A) in deleting the disallowance of commission of Rs.17,09,248/- paid to directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase . Therefore, the CIT(A) held that in the given facts and legal position, there was no justification for the disallowance made by the AO out of the commission paid to its directors and deleted the disallowance. 40. The learned DR supported the order of the AO, whereas the learned AR justified the action of the learned CIT(A) in deleting the disallowance and justified that the commission was paid to the directors as part of the salary, and according to the Companies Act, the company can pay commission to the directors upto 5%, and therefore, submitted that the order of the learned CIT(A) should be upheld. 41. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee company claimed commission payment to directors of Rs. 17,09,248/-, and the same was disallowed by the AO on the ground that the assessee was making payment to M/s.ATE Marketing Pvt. Ltd., who was sole selling agent of the assessee-company, and therefore, the commission payment made to its director was excessive and unreasonable under the provisions of section 40A(2)(b) of the Act. On appeal, the CIT(A) has vacated the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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