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TMI Blog2014 (10) TMI 988X X X X Extracts X X X X X X X X Extracts X X X X ..... d justifying the payment under the facts and circumstances of the case completely ignoring the fact that M/s Phoneytunes.com is a website registered under copy Right Act/ Trade Marks Act. 3 That the Ld. CIT(A) is not justified in confirming the action of al in treating the amount of royalty paid as capital expenditure under the facts and circumstances of the case." 3 After hearing both the parties we find that during assessment proceedings the Assessing officer noticed that the assessee has claimed royalty payment to Shri Taran Mohan, amounting to Rs. 20,71,344/-. The assessee was asked to give the details of payment and justification for the same. In response it was stated as under: "ITIDA took over the business of Phoneytunes in 2003 Feb by which time brand phoneytunes has been established as a brand name in India and globally as a premier provider for mobile VAS services. Phoneytunes had been built single handedly by Tarun Mohan with no support from any external investor or financial agency. This was the time when India mobile industry had picked up growth. India was achieving strides in value added services (VAS) in a big way. Growth potential was fully reflected by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be any sale between the proprietor of Phoney tunes and the assessee- company i.e. by the same persons. Further there was no invention on the part of proprietary concern to whom royalty was to be paid. The assessee had never furnished any document or evidence proving that the product made by the phoney tunes is exclusive in the market. Various companies were involved in this business and services of various companies were also undertaken. Though the Assessing officer noted that the assessee is a B.Sc Textile from IIT and any person with little technical knowledge can tap the potential. He also observed that proprietor does not have any goodwill or trade mark. He also noted that the assessee has not purchased any thing for which royalty was required to be paid and has only various clauses in the business sale agreement to avoid tax by reducing the company's profit. In this background the Assessing officer invoked the principle of McDowell and Co. Ltd V Commercial Tax Office, 154 ITR 148 and disallowed the royalty paid. Alternatively the Assessing officer has also observed that in any case royalty paid to the Director was capital expenditure because it gave enduring benefit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quoted by the Assessing officer is not applicable in assessee case as there is no tax avoidance at all. The fact is explained in next submission. The assessment has been framed on the premise that the contract has been entered into just to avoid taxes. The assessing authority has just considered the one aspect that payment of royalty is just an expenditure claimed by the assessee- company and hence reduced its tax liability on that amount. But the assessing authority has just ignore the second aspect that the receiptant of royalty Tarun Mohan is already paying taxes in 30% Slab as individual and is also paying same tax on his royalty income from the assessee-company. So there is no question of avoiding the tax. The second part is that clause of agreement clearly says that royalty is payable after two years of closing date of the agreement. How somebody can plan two years in advance to avoid taxes because at the time of agreement neither of the parties knows how much will be the royalty after two years. Even if we presume that the agreement is meant for avoiding taxes than what is the quantum of tax in both the cases its same 30%. The tax rate for the company for Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and hence not acquired any asset where we can treat this as capital in nature. But the Assessing officer has taken it in context to agreement. The clauses in the agreement were clear and how we can contradict the agreement which was submitted by us to the Assessing officer." It was further submitted that after merger of phoneytunes.com the proprietary concern lost its existence. 5 The assessee was further asked to show when phoneytunes.com was established and what kind of technology was used for creation of the brand name? The assessee was also asked to give the details of income before it was sold to ITIDA. Detail note on the nature of business was called. Some other enquiries were also raised. The Ld. CIT(A) after examining the same observed that the assessee was a private Ltd company having two directors namely Shri Tarun Mohan and Indu Mohan. Shri Tarun Mohan was also running a proprietary concern known as ponoeytunes.com. She referred to various clauses of the agreement and entered into by Phoneytunes.com with ITIDA. The assessee could not provide any evidence so as proprietary concern phoneytues.com had developed any product on which there was a copy right or patent. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that the assessee had simply raised a colourable device to reduce any tax liability. 9 On the other hand, Ld. D.R for the revenue strongly supported the order of the Assessing Officer and the Ld. CIT(A). 10 We have considered the rival submissions carefully in the light of material on record and paper book filed by the assessee. We find that Shri Tarun Mohan was running a proprietary concern known as Phoneytunes.com which was engaged in the business of providing value added telecom services to various mobile companies for ring tones/images/wall papers etc. Phoneytunes.com had entered into an agreement with various music companies like Sound Buzz India, Phone Graphic, Cuber Music Ltd etc. Through these agreements Phoneytunes. Com had acquired rights of various music companies and also the right to make a ring tone on the basis of such songs which could be provided to an individual mobile user through cellular operating companies. Phoneytones.com was required to pay some royalty to such music company and in turn was charging money from cellular company. This shows why phoneygues.com was paying charges to outsiders. We further find that said mobile company i.e. cellular compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. There is nothing illegal about this. As per the copy of business agreement all the fixed assets and other assets were required to be taken over by the assessee- company from phoneytunes.com. Authorities below have observed that no asset has been taken over which is not correct. Copies of balance sheet have been filed for phoneytunes.com as well as ITIDA Cad Services Pvt Ltd before us. Balance sheet of phoneytunes.com clearly show that total assets were for Rs. 27,50,583/- as on 31.3.2003. Perusal of balance sheet of ITIDA Cad services Pvt Ltd clearly show that these assets have been added in the fixed assets schedule as well as current assets have been added in the respective heads. In fact note No. 2 to the accounts reads as under: "Acquisition of running business of phoneytunes.com During the year, the company entered into an agreement with one of its director, Tarun Mohan to acquire the business of his Sole Proprietary concern running in the name and style of phoneytunes.com. All assets and liabilities of the concern were acquired at the book value as on Ist April, 2003. As per the agreement for the takeover of the firm, the company has to pay royalty after 2 years of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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