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PR. Commissioner of Income Tax – 10 (2) Versus Groz Engineering Tools Pvt. Ltd.

2015 (9) TMI 663 - DELHI HIGH COURT

Use of drawings, procedure and trademark of MPL - whether was going to bring an advantage of an enduring nature to the Assessee, therefore, capitalized as royalty paid by the Assessee to MPL also confirmed by CIT(A)? - ITAT was of the view that the CIT(A) was not justified in enhancing the addition made by the AO by capitalising the royalty - Held that:- There was sufficient opportunity for the AO, if he doubted the genuineness of the payment of royalty by the Assessee to MPL, to have conducted .....

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asis for the CIT(A) to simply conclude that this was a sham transaction and proceed to enhance the disallowance. The interpretation of the agreement by the ITAT appears to be plausible. The Court is not persuaded to hold that the impugned order of the ITAT is perverse. - Decided in favour of assessee. - ITA No. 386/2015, ITA No. 474 to 476 /2015 - Dated:- 4-9-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr Pranjal Srivastava, Adv For the Respondent : Mr Raghvendra Singh, Junior .....

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e AY 2005-06, the Assessee's case was selected for scrutiny. A notice under Section 143(2) of the Act along with the questionnaire was sent to the Assessee on 18th June, 2007. In its return of income, the Assessee had claimed royalty expenses amounting to ₹ 50,20,122/- paid to M/s Macnaught Pvt. Ltd., Australia (MPL). The Assessee by reply dated 20th September, 2007 stated that MPL had agreed to allow the Assessee to manufacture and sell a limited number of 'Macnaught' products .....

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essee pointed out that royalty was linked to the volume of sales and, therefore, should be allowed as business expenditure. 3. In its order dated 16th November, 2007 for AY 2005-06, the Assessing Officer (AO) did not accept the above explanation of the Assessee and concluded that the use of these drawings, procedure and trademark of MPL was going to bring an advantage of an enduring nature to the Assessee. He, therefore, capitalized the royalty paid by the Assessee to MPL. However, he allowed 25 .....

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er so it does not carry proper legal sanction'. It was held that the sanctity of the royalty agreements was 'prima facie doubtful' and that the justification for the royalty payments was 'also not properly known'. The CIT (A) enhanced the disallowance to ₹ 57,27,094/-. 5. A similar view was taken by the AO and CIT (A) for the other AYs i.e. 2006-07, 2007-08 and 2008-09. The CIT (A) has in the order dated 29th July, 2013 for AY 2008-09, while affirming the order of the A .....

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ry same agreement, that the royalty is essentially being paid for use of the trademark 'Macnaught' on the products of the Assessee and for using the drawings etc. The expenditure was incurred wholly and exclusively for the purposes of the business of the Assessee. From the payments made to MPL, the Assessee had deducted tax at source and deposited it with the Government. The genuineness of the payment was also not in doubt. In the circumstances, the ITAT was of the view that the CIT(A) w .....

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