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2016 (11) TMI 1236

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..... essee firm to continue and carry on its profession as the goodwill is not owned by it the payment made in pursuance of an agreement which enables the assessee firm to carry on its profesions, in the manner in which it is now doing, is definitely an expenditure laid down wholly and exclusively for the purpose of business or profession. The argument of the Ld. Special Council that the purpose test contemplated u/s 37 of the Act is not satisfied is devoid of merit. Irrespective of whether the gift of Dr. V.Sagar to RSCPL being ethical or not and irrespective of the fact whether the gift is legally valid or not, from the view point of the assessee firm, as it could not have continued and carried on the profession of Attorneys-at-Law in the name of “Remfry & Sagar” and use its goodwill and all its associated rights without the impugned agreement with RSCPL. Hence the payment has to be held as that which is incurred wholly and exclusively for the purpose of business or profession. Thus the deduction claimed by the assessee of license fee paid to M/s RSCPL has to be allowed as a deduction U/s 37 of the Act.- Decided in favour of assessee Addition on account of secretarial, accounting & .....

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..... with a view to reduce taxes, whereas the fact is that the entire License Fee paid to RSCPL has been offered to tax by RSCPL and hence there is no loss of revenue whatsoever. 5. Perversely ignoring the fact that the Appellant firm and RSCPL together have paid ₹ 20,86,47,812/- as taxes whereas they would have paid ₹ 20,63,59,286/- as taxes if the License Fee had not been paid; the revenue has thereby gained ₹ 22,28,526. Hence, the allegation by the Ld. CIT(A) that the purpose of paying the License Fee was to reduce the income of the firm is clearly unwarranted and misleading and not borne out from the facts on record. 5. Perversely ignoring the fact that the Appellant firm and RSCPL together have paid ₹ 20, 86,47,812/- as taxes whereas they would have paid ₹ 20,63,59,286/- as taxes if the License Fee had not been paid; the revenue has thereby gained ₹ 22,28,526/-. Hence, the allegation by the Ld. CIT(A) that the purpose of paying the License Fee was to reduce the income of the firm is clearly unwarranted and misleading and not borne out from the facts on record. 6. Sustaining the disallowance of License Fee in the hands of Appella .....

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..... a leading law firm specializing in intellectual property and corporate laws. It is a fullservice intellectual property firm engaged inter alia in, advising clients worldwide on their trademarks, patents, designs, copyright, geographical indications, domain names and unfair competition issues. 3.2 A British immigrant, Mr. Henry Oliver Remfry established the sole proprietorship firm under the name and style of Grant and Remfry in the year 1827 in the field of intellectual property. He operated both as a sole proprietor as well as in partnership under various names. These sole proprietorship and partnerships continued to be run by 5 generations of Remfry s until the year 1957. Thereafter four Englishmen, joined as partners. On 31/3/1972 two partners retired and Mr. Holloway, Mrs. Silverstone and Mrs. Remfry entered into a fresh deed of partnership. On 4/4/1973, Mr. Holloway and Mrs. Silverstone transferred absolutely, by way of sale, to Dr. V. Sagar the business along with the goodwill in Remfry and son . Mr. V. Sagar became the sole and absolute proprietor of this business of Remfry Son along with the goodwill attached to it. He continued the business of Remfry Son till .....

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..... 3.7 The Assessing Officer in his assessment order dated 30/12/2009 passed under section 143(3) of the act for the Assessment Year 2007-08, disallowed for the first time, license fee paid by the assessee to RSCPL for the use of goodwill on the ground that, the entire transaction was a colourable device adopted to transfer profits of the assessee firm to the family members of Dr. V. Sagar, who held majority shares in RSCPL and to evade tax. The observations of the A.O are as follows: a) goodwill of the law practice did not belong to RSCPL as it has no capability; b) no activity was carried out by RSCPL to enhance the goodwill of the law practice in the name of the Remfry Sagar c) the goodwill, if any, was of Dr. V. Sagar which could not have been separated from him, much less by way of gift to M/s RSCPL and d) Dr. V. Sagar was enjoying the benefits of this goodwill by being a majority partner, having higher profit-sharing ratio, in the assessee partnership firm and enjoying other additional benefits, like controlling rights etc. 3.8 The Assessing Officer, for the very same reasons, disallowed the license fee paid for all the subsequent assessment years i.e. A.Y. .....

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..... and are being continued to be run in the name of the original founders, despite the fact that the founding fathers are no longer part of the practice. For example, Mulla Mulla, Little Co. Ernst Young, etc. 5.4. That Dr. V. Sagar is entitled to gift a goodwill to RSCPL. He further submitted that the goodwill of the firm Remfry Sons was with Mr. Holloway and Mrs. Silverstone not with Mrs. Remfry, who was an inactive partners, by virtue of a partnership deed entered in the year 1970. These two persons were entitled and empowered to sell, all or any of the assets of the partnership firm, including the name and goodwill of the business. The business in the name of Remfry Sons , was acquire by Dr. V. Sagar in the year 1973 for valuable consideration and this demonstrates that the goodwill of the firm was an intangible asset, capable of alienation. Thereafter Dr. V. Sagar carried on the said business under the name and style of Remfry Sons between 1973 to 1990 as a sole proprietor. Thereafter on merger of his own practice as sole proprietor in the name of Sagar Co. in the year 1990 and carried on practice in the name of Remfry Sagar . 5.5. Mr. Vohra, argue .....

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..... of profession and hence was an allowable deduction in terms of section 37(1) of the Act. That it is well settled that payment made for exclusive license to manufacture and sell products in India using technology and know-how licensed by the licensor are allowable as business expenditure. On the same anology this expenditure is allowable. 5.11. On the finding of the Assessing Officer that goodwill is attached to the persona of Dr. V. Sagar, it was submitted that since inception of the practice in 1827, there have been lot of changes in the partners of the firm, which form time to time, varied from 20 partners to even 100 partners. He submitted that the goodwill belonged to the patent/IPR practice carried on over a period of 175 years which was represented in the name of Remfry Sagar , which legally vested in RSCPL, subsequent to transfer in 2001. Thus, it is argued that the goodwill of the practice was not identifiable with any particular partner. 5.12. It was further submitted that after the demise of Dr. V. Sagar in February, 2011, the income and turnover of the firm increased, year after year and this demonstrates that the goodwill is not associated with the persona Dr. .....

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..... ucture to the assessee by way of a separate agreement for specified fee. The partnership was dependent upon the license for the use of goodwill given by RSCPL and the agreement for use of infrastructure and office etc. 6.6. That the agreement clearly stipulated that the License Agreement, the Deed of Partnership, the Agreement for use of infrastructure and the Agreement for Support Services were all an integral part. 6.7. The assessee has claimed deduction of his license fee paid to RSCPL, U/s 37 of the Act and hence, the allowability or otherwise of expenditure would depend on the fulfillment of the conditions laid down in Section 37 of the Act. The provisions contained in Section 37(1) stipulate that any expenditure, not being a capital expenditure of the assessee, laid out wholly and exclusively for the purposes of business or profession shall be allowed as a deduction. 6.8. That the purpose test contemplated in Section 37 of the Act should be applied and for the same, the events that unfolded in the year 2001 have to be examined. Thus he argued that the correctness of the so called transfer/gift of goodwill and its license back to Dr. V. Sagar in the year 2001 has to .....

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..... a law practice once divested of the legal profession is of no value and if artificially separated and transferred, the entire value would be lost, because of the loss of reputation and the client base. 6.18. The son and daughter of Dr. V. Sagar who formed the company were not entitled to carry on the legal profession u/s 29 of the Advocates Act, 1961 . Neither did the legal profession was owned or retained or developed or put to any use by the company i.e RSCPL. Only artificial rights have been created in this case. Ownership is recognized only when right to exercise the IP rights exists. RSCPL cannot exercise the rights associated with the name or goodwill of a legal practice. 6.19. The Ld. Special Counsel for the Revenue further submitted that the argument of the Ld. Counsel for the assessee that there is no legal bar on the transfer of goodwill attached to a professional practice to an independent entity really does not take into account the situation, like the present one, where the goodwill has been gifted to a person or entity not entitled to carry on legal profession. The goodwill representing the loyalty of the customer or the reputation of legal practice will reall .....

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..... 7. In his rejoinder, Mr. Vohra submitted that the submission of the revenue that Remfry Sons , prior to take over by Dr. V. Sagar in 1973 were not engaged in the practice of law but was in the business of trade mark and patents and that post acquisition by Dr. V. Sagar started legal practice in the name of Remfry Sagar was not correct. It was submitted that Dr. V. Sagar was carrying on independent legal practice and it was only in the year 1990 that this legal practice in the name of Sagar Co got merged into Remfry Sons . 7.1. He submitted that the goodwill in the name of Remfry Sons pertains to the business carried on by the concern and the said goodwill is related to the field of trade mark and patents and had considerable value, even for the legal practice carried on by Dr. V. Sagar in the same field. He emphasized that, if the aforesaid goodwill of business of Remfry Sons had no value, there was no occasion for Dr. V. Sagar to purchase the same for consideration and merge his sole proprietary legal practice in Remfry Sons . Thus, the distinction sought to be drawn by Revenue that goodwill in the name Remfry Sons was of business and not of legal .....

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..... Year 1970: Mr. Bernier and Mr. Burrington retired. Mr. Holloway, Mr. Silverstone and Mrs. Remfry entered into a fresh deed of partnership. As per the partnership deed, Mr. Holloway and Mrs. Silverstone were entitled and empowered to sell all or any of the assets of the partnership firm, including the name and goodwill of the business. Year 1973: Mr. Holloway and Mrs. Silverstone transferred absolutely, the business with all assets including name and goodwill thereof, vesting in Remfry Son for valuable consideration, to Dr. V. Sagar, with effect from April 1, 1973. Year 1990: Dr. V. Sagar merged his own sole-proprietorship practice in the name of Sagar Co. into Remfry Son , and changed the name of the proprietorship to Remfry Sagar . Year 2001: (i) By a Deed of Gift executed on June 1, 2001, Dr. V. Sagar gifted the good will vesting in Remfry Sagar to a private limited company, viz., Remfry Sagar Consultants Private Limited ( RSCPL ), wherein substantial shareholding was held by Dr. Sagar s children, viz., Ms. Rosemary Sag .....

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..... nd the name and goodwill thereof which was referred to as the said business in that agreement for a total consideration of ₹ 3 lacs. Thus when Dr.V.Sagar purchased the Goodwill along with other assets, this Goodwill was of business and not of any profession of law. 8.4. Thus, Dr. Sagar become an absolute owner of the business carried on in the name and style of Remfry and Sons which is in the business of trade mark and patent agent. 8.5. On 1st June, 1990, Dr. V. Sagar merged his legal practice in the name of Sagar Co. with the business of trade mark and patent agents carried on in the name and style of Remfry Sons and changed the name of the proprietorship into Remfry and Sagar . Dr. V. Sagar was carrying practice and profession of Attorneys-at-Law with specialization in the areas of intellectual Property Law and Corporate Law under the name and style of Remfry Sagar , in New Delhi and Mumbai. The goodwill in the name of Remfry Sagar and all the rights associated thereof (including intellectual property rights) belong exclusively to Dr. V. Sagar. Dr. V. Sagar by way of a gift deed executed on the day of 1st June 2001, granted conveyed and transfer .....

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..... ether they were in the practice of law. Such well considered and thought out arrangements cannot be said to be colourful devices. These are transparent and legally documented arrangements. 8.10. The issue for consideration is whether such an arrangement is permissible in law. The pith and substance of the argument of the revenue is that such segregation of goodwill from the legal practice cannot be permitted. It is further argued that under the Advocates Act, 1961, the goodwill earned by an advocate cannot be alienated to any person or company which is not entitled to practice under the Advocates Act, 1961. 8.11. At the same time, the revenue concedes that the legal heirs of the advocates would be entitled to the benefit of the goodwill earned and created by the legal practitioner. It was submitted that the legal heirs may be entitled to consideration for the goodwill on behalf of the deceased father but they cannot be regarded as the lawful owners of the goodwill or having the rights of owning the goodwill or to license the same. In our view, we find a contradiction in these submissions. When it contended that the legal heirs of a practitioner are entitled to receive conside .....

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..... wife and thereof to the son is allowable deduction or not under the Income tax Act. 8.14. The Larger Bench consisting of four Judges of Hon ble Supreme Court in the case of Devidas Vithaldas Co. Vs. CIT, Bombay, reported in 84 ITR 277 (S.C.), held as follows. Held, by Shelat, Khanna andMitter JJ (SDhri CJ dissenting), reversing the decision of the High Court, that the transaction under the deed of dissolution was a licence and not a sale of the goodwill and the payments were in the nature of royalty and had to be treated as admissible deductions; because (i) though clause 2 of the deed of dissolution used expressions such as agreed to sell and the purchase price of the goodwill , these expressions were not determinative of the exact nature of the transaction; (ii) neither clause 2 nor any other provision in the deed fixed any lump sum as price in respect of which annual payments were provided; (iii) the duration of payment was indefinite and the amount was indefinite and depended upon the rise and fall in the profits of the business, (iv) clause 6 indicated that the payments were to be made so long as the business was carried on in the name of D.V. Co. And not otherwis .....

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..... , though the assessee firm has been carrying on its profession of Attorneys at law under this arrangement for the last many years. 8.18. Another important fact that has to be considered is that, Dr. V. Sagar had the sole and exclusive rights to the said goodwill. The goodwill was held by him. Without legal authorization from him, the assessee firm could not use the name and style of Remfry Sagar along with its goodwill and other assets and rights. The assessee firm had to seek permissions and licences to coneinue and carry on this profession under this name as it is run doing. Hence obtaining a license is a must for assessee firm to continue and carry on its profession as the goodwill is not owned by it the payment made in pursuance of an agreement which enables the assessee firm to carry on its profesions, in the manner in which it is now doing, is definitely an expenditure laid down wholly and exclusively for the purpose of business or profession. The argument of the Ld. Special Council that the purpose test contemplated u/s 37 of the Act is not satisfied is devoid of merit. Irrespective of whether the gift of Dr. V.Sagar to RSCPL being ethical or not and irrespective of t .....

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