Case Law Details
ACIT Vs CRI Pumps Pvt. Ltd (ITAT Chennai)
ITAT Chennai held that amount of royalty payment to holding company for using brand name is allowable as revenue expenditure.
Facts- The assessee company has paid Rs. 4,12,50,564/- as royalty to M/s. CRI Amalgamations Pvt Ltd, the holding company for using the trade mark ‘CRI’. The assessee claims before the AO that, it is using trade mark CRI for more than three decades and said trade mark was originally with M/s. CRI Amalgamations Pvt. Ltd. AO, however was not convinced with explanation furnished by the assessee and according to the AO, after amalgamation of CRI Industries Pvt. Ltd. with CRI Pumps Pvt. Ltd, the assessee company itself is the owner of the company and thus, question of payment of royalty to M/s. CRI Amalgamations Pvt. Ltd., does not arise and thus, disallowed royalty payment to holding company u/s. 40A(2)(b) of the Income-tax Act, 1961.
CIT(A) deleted the additions made by AO towards disallowance of royalty. Being aggrieved, present appeal is filed by the revenue.
Conclusion- In this view of the matter and consistent with the view taken by the co-ordinate bench in assessee’s own case for earlier assessment years, we are of the considered view that the assessee is entitled for deduction towards royalty payment to holding company for using brand name CRI and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the Revenue is directed against the order passed by the learned Commissioner of Income-tax (Appeals)-1, Coimbatore, dated 11.12.2017 and pertains to assessment year 20 13-14.
2. The Revenue has raised the following grounds of appeal:
1. “The order of the learned Commissioner of Income tax (Appeals)-I, Coimbatore is against facts and circumstances of the case.
2. The learned Commissioner of Income tax (Appeals)-I, Coimbatore has erred in deleting the Royalty payment of Rs. Rs 4,12,50,564/- made to M/s C.R.I Amalgamations P Ltd on the ground that the assessee is the owner of the trade mark CRI”.
3. The Learned Commissioner of Income tax (Appeals) ought to have considered that the trade mark CRI” was given away for a meager consideration of Rs. 1000/only by a family settlement, though an agreement deed was not justifiable.
4. The Ld. CIT(Appeals) ought to have observed that though the payment for trade mark “CRI” fixed by the directors of the transferor company was only Rs.1000/-, then the payment of Rs. Rs 4,12,50,564/- to the holding company is excessive and unreasonable
5. For these and other grounds that they may be adduced at the time of hearing, the order of the Commissioner of Income tax (Appeals) may be cancelled and that of the Assessing Officer restored.”
3. The brief facts of the case are that the assessee company is engaged in the business of manufacture, purchase and sale of agricultural motors, monoblocs, pumps, valves, compressors and cables under the brand name CRI. The appellant had filed its return of income for the assessment year 2013-14 on 29.11.2013, declaring total income of Rs. 44,80,87,360/-. During the previous year relevant to assessment year 2013-14, the assessee company has paid Rs. 4,12,50,564/- as royalty to M/s. CRI Amalgamations Pvt Ltd, the holding company for using the trade mark ‘CRI’. The assessee claims before the AO that, it is using trade mark CRI for more than three decades and said trade mark was originally with M/s. CRI Amalgamations Pvt. Ltd. The AO, however was not convinced with explanation furnished by the assessee and according to the AO, after amalgamation of CRI Industries Pvt. Ltd. with CRI Pumps Pvt. Ltd, the assessee company itself is the owner of the company and thus, question of payment of royalty to M/s. CRI Amalgamations Pvt. Ltd., does not arise and thus, disallowed royalty payment to holding company u/s. 40A(2)(b) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The relevant findings of the AO are as under:
“4.1 During the previous year, the assessee company has paid Rs. 4,12,50,564/Royalty to M/s. C.R.I. AMALGAMATIONS PRIVATE LTD., the holding company, for us the Trade Mark “CRI”. The Assessee is using the trade mark “CRI” for more than decades. The trade mark was originally with M/s. C R.I. INDUSTRIES PRIVATE LIMITED and the same was merged with the assessee company on 31.03.2007. After the merger of M/s. C.R.I. Industries Private Ltd., with the assessee company, assessee company itself is the owner of the trade mark. Hence, the payment of royalty to M/s. C.R.I.AMALGAMATIONS PRIVATE LTD-is not in order. The representative of the assesee company has argued that the Royalty was paid to M/s. C.R.I. Amalgamation Private Limited during the previous year only because of the trade mark “CRI” vests with the said company and the assessee company used the trade mark “CRI” for the year under consideration. According to the Representative, the trade mark was , transferred from the assessee’s hands to M/s.C.R.I. Amalgamation Private Ltd., as per the “family settlement” between the Promoters and their family members. The trade mark “CRI” was given on an assignment for a meagre value of Rs. 1000/- and the se was justified by an assignment deed.
4.2 The trade mark of “CRI” was originally with M/s. CRI Industrials and the se was transferred to M/s. C.R.I. Industries Private Limited, Subsequently on 31.03.207, the CRI INDUSTRIES PRIVATE LIMITED was amalgamated to CR.I.PUMPS Pvt Ltd the assessee company. Prior to amalgamation, the assessee company paid “Royalty” to M/s. C.R.I. Industries Private Limited since the trade mark “CRI” was in possession of M/s. C RI Industries Pvt. Ltd., After the merger, the trade mark “CRI” is the property of the assessee company. Normally when any property is assigned or given away and when it is pretty well known that the assigner will use it in future, then the right will be reserved for its use without any consideration. In the instant case, the assessee has assigned the trade mark for a meagre value of Rs.1000/-, as a part of family arrangement, and paid a substantial royalty of Rs. 4,12,50,564/- to the assignee. The action of making the assignment as a part of the family settlement is not accordance with normal business prudence.
4.3 If we presume that, the payment of royalty charges to the holding company is logical as per the deed of assignment entered between two companies then we should enquire the issue of reasonableness of such payment. If the fair market value of” CRI” brand was Rs. 1000/- then payment of any amount in excess to Rs. 1000/ is unreasonable. Here Assessee Company has paid total Rs. 4,12,50,564/- towards royalty charges. Here it is important to note that, when C.R.I.INDUSTRIES PRIVATE LIMITED was holding brand “CRI”, every year it was receiving royalty income from that brand less than Rs. 60 lakhs. Suddenly, for the year under consideration brand “CRI” became so costly without any credible reasons.
4.4 The holding company, M/s. C.R.I. Amalgamations Private limited is having shares in the assessee company with common directors. The assesses company has transferred 55% of its shares to the holding company and allotted shares in exchange of transfer of shares. The directors of Assessee Company are holding more than 80% of shares in the holding company. Therefore, provisions of section 40A (2)(b) shall be attracted in this case.
4.5 Hence the royalty payment of Rs. 4,12,50,564/- is disallowed for the reasons cited above and added to the income returned by the assessee.”
4. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the Ld. CIT(A), the assessee has filed written submissions on the issue along with certain judicial precedence and argued that royalty payment to holding company is in accordance with agreement between the parties for using the brand name CRI and thus, same cannot be disallowed u/s. 40A(2)(b) of the Act. The Ld. CIT(A) after considering relevant submissions of the assessee and also by following his predecessor CIT (Appeals) order for assessment order 2008-09, deleted additions made by the AO towards disallowance of royalty. The Relevant findings of the CIT(A) are as under:
“7. A perusal of the Family Arrangement dated 06.06.2005 read with Assignment Deed between M/s. C.R.I. Industries Pvt Ltd and M/s. C.R.I. Amalgamations Pvt Ltd dated 31.03.2007 and User Agreement dated 02.04.2007 between M/s. C.R.I. Amalgamations Pvt Ltd and M/s. C.R.I. Pumps Pvt Ltd. clearly indicates that the use of ‘CRI’ brand rests with M/s. C.R.I. Amalgamations Pvt Ltd. and the other user i.e. M/s. C.R.I. Pumps Pvt Ltd will have to pay 0.50% of monthly turnover as royalty. The relevant portion of “USER AGREEMENT” dated 02.04.2007 is reproduced below :
Para 7 : ROYAL TY AND ACCOUNTS
a. The “User” shall in consideration of the grant of this Agreement pay a royalty to the “Proprietor” with effect from 01.04.2007, a sum equal to 0.50% of monthly turnover arising out of the sale of the User Goods during the term of this agreement and thereafter until the expiry of the Additional Period of The royalty shall be payable every month within 60 days after the end of the respective month.
b. The terms relating to Royalty may be changed by mutual agreement between the parties, which agreement may be expressed by mere exchange of letters and such letters shall become part and parcel of this Agreement.
c. The “User” shall send monthly statements to the “Proprietor” on the quantity of “User Goods” manufactured and quantity and value of “User Goods”
d. The “User” shall keep an account of the “User Goods” manufactured and sold by it and the royalty payable / paid thereof and such account shall be open for inspection by the “Proprietor” from time to time as may be deemed fit by the “Proprietor”.
8. A perusal of the above clearly indicates that royalty is paid based on sales. Similar agreement between the assessee and M/s. C.R.I. Industries earlier was allowed by the Department as revenue expenditure. Further, it is noticed that M/s. C.R.I. Industries had declared this in their income when they were receiving royalty in earlier years and the same was continued by M/s. C.R.I. Amalgamations Pvt Ltd when they received
9. The issue of allow ability of royalty in the hands of M/s. R.I. Pumps Pvt Ltd. the assessee first came during the Asst. Year 2008-09. The CIT(A) vide his order dated 08.03.2012 in ITA No.213/10-11 has decided the matter in favour of the assessee with the following reasons :-
“The Internal page 44 of the High Court Order states that Item Nos.1,2,3 and 4, the trade mark “C.R.I.” Is to be retained by M/s. C.R.I. Industries Ltd., the proprietor of the trade mark. Hence the trade mark.. C.R.I.” was not transferred to the appellant In terms of the Scheme of Amalgamation that was ordered by the Hon’ble High Court of Madras by Its order dated 25.09.2007. In view of the above discussion, It Is seen that there Is a factual error committed by the Assessing Officer In coming to the conclusion that after the merger the assessee Company Itself Is the owner of the trade mark. In the earlier years the appellant had been paying royalty to M/s. C.R.I. Industries regularly and was accepted by the Department and allowed as revenue expenditure. M/s. C.R.I. Industries the recipient of royalty payments till Assessment Year 2007-08 has been offering the same to tax which was accepted by the Department. The learned Authorized Representative furnished the I.T. return of M/s. C.R.I. Amalgamation (P) Ltd. In respect of Assessment Year 2008-09 offering to tax the amount of royalty received from the appellant of Rs.1,60,97,339/-. Taking all the facts Into consideration, In my opinion the amount paid as royalty Is the allowable expenditure In the hands of the appellant. The Income received by M/s. C.R.I. Amalgamation (P) Ltd. was also offered to tax for the Assessment Year 2008-09. Hence the Assessing Officer Is directed to allow the expenditure paid as royalty”.
10. I am in agreement with the above reasons cited by the learned CIT(A) for the Asst. Year 2 008-09. Further, for Asst Years 2009-10, 2010-11, 2011-12 and 2012-13 on the same issue, the grounds were decided in favour of the appellant. Following the earlier orders for the Asst. Year 2009-10 [in Appeal No.105/12-13 dated. 20.08.2013]; for Asst. Year 2010-11 [in Appeal No.62/14-15 dated 20.02.2015]; Asst. Year 2011-12 [in Appeal No.23/15-16 dated 28.01.2016] and Asst. Year 2012-13 [in Appeal No.199/15-16 dated 28.10.20161 this ground of appeal is decided in favour of the appellant. Following the orders cited above, the amount paid as royalty is decided as an allowable expenditure in the hands of the appellant company. This ground of appeal is ALLOWED.”
5. The ld. DR submitted that the Ld. CIT(A) erred in deleting the royalty payment made to M/s. CRI Amalgamations Pvt. Ltd., without appreciating fact that the trade mark CRI was given away for a meager consideration of Rs. 1,000/- only at a family settlement, though, an agreement deed was not justifiable. Therefore, the AO has rightly disallowed royalty payment u/s. 40A(2)(b) of the Act, but the CIT(A) has allowed without assigning any reasons.
6. The Ld. Counsel for the assessee on the other hand submitted that this issue is covered in favors of the assessee by the decision of ITAT, Chennai Benches in assessee’s own case for assessment year 2008-09 in ITA No. 1246/Mds/2012, where on identical set of facts and on identical agreement between the parties, the payment of royalty to holding company has been allowed.
7. We have heard both the parties, perused materials available on record and gone through orders of the authorities We find that an identical issue had been considered by the Tribunal in assessee’s own case for assessment year 2008- 09 in ITA No. 1246/Mds/2012, where the Tribunal considering relevant agreement between the parties, for payment of royalty to holding company for using brand name CRI and also by following certain judicial precedence including the decision of Hon’ble Madras High Court in the Scheme of Amalgamation between group companies including assessee, held that royalty paid by the assessee is of revenue in nature, which is an allowable expenditure. The relevant findings of the Tribunal are as under:
4.5 We have heard both sides, perused the materials available on record and gone through the orders of authorities below. We have also perused the paper book filed by the assessee, wherein, the assessee has filed copy of the assignment deed, user agreement, order of the Hon’ble High Court sanctioning the Scheme of Amalgamation and also written submission filed by the Sr. AR of the Department Shri R. Duraipandian, JCIT. In this case, the assessee paid 0.5% of its turnover as royalty for the trade mark “CRI” which was assigned to M/s. CRI Amalgamations through assignment deed executed between CRI Industries Pvt. Ltd. & CRI Amalgamation Pvt. Ltd. The Scheme of Amalgamation was duly sanctioned by the Hon’ble Madras High Court vide its order dated 25.09.2007 w.e.f. 31.03.2007. While approving the Scheme of Amalgamation, the Hon’ble High Court has specifically provided that the transfer of all assets of the transferor companies to the transferee company, except those set out in clause 5.6 of Schedule G of the Scheme. As per Assignment Deed executed on 31.03.2007, the assignor M/s. CRI Industries Private Limited consist of several manufacturing and non-manufacturing companies have agreed to give away the trade mark “CRI” for a consideration of ₹.1,000/- to M/s. CRI Amalgamation Pvt. Ltd. However, the damages proposed to be paid by M/s. CRI Amalgamation Pvt. Ltd. for using the trade mark “CRI” was not mentioned in the assignment deed. However, through a User Agreement executed on 02.04.2007 between the CRI Amalgamations Pvt. Ltd. and the assessee have agreed for payment of royalty to the proprietor with effect from 01.04.2007 a sum equal to 0.50% of monthly turnover arising out of the sale of the User Goods. Once the Proprietor and the User have agreed and fixed the rate of royalty, no provisions of section of Income Tax Act or Income Tax Rules shall interfere either to reduce or enhance the rate of royalty.
4.6 The Assessing Officer simply comparing the payment of royalty with the consideration paid towards acquiring the trade mark “CRI” by the proprietor to whom the royalty was paid. If any claim of expenditure made without any evidence or found false or bogus, then the Assessing Officer has every right to reject the claim after recording salient findings. What is required to be expended has to be seen from the businessmen point of view and not from the view of the Assessing Officer. In this case, the Hon’ble Madras High Court has sanctioned the Scheme of Merger vide its order dated 25.09.2007 w. e. f. 31.03.2007 between CRI Industries and five group concerns along with the assessee provided specifically for the transfer of all assets of the transferor companies to the transferee company, except those set out in Schedule G of the Scheme as per clause 5.6 (page 22 of the Hon’ble High Court order), wherein it has been stated as under:
“The trade mark belonging to various transferor companies as are specifically enumerated in Schedule G hereto are already the subject matter of an agreement of assignment in favour of M/s. CRI Amalgamations Private Limited, to be effective from 31.03.2007, and so these Trade Marks shall not stand transferred to or vested in the Transferee Company”.
After carefully perusing the order of the Hon’ble Madras High Court, it is clear that all the assets of the transferor companies were amalgamated with transferee company, except the Trade Mark. Therefore, the Assessing Officer was factually not correct to conclude that after merger, the trade mark “CRI” was the property of the assessee company.
4.7 The Assignment Deed was executed on 31.03.2007 between the CRI Industries Ltd. and CRI Amalgamation Pvt. Ltd., by which, the latter become the proprietor of the trade mark on the consideration duly agreed by both assignee company and assignor. Further, the User Agreement was executed on 02.04.2007 between the Proprietor of the trade mark viz., CRI Amalgamations Pvt. Ltd. and User i.e., assessee by agreeing for payment of royalty, a sum equal to 0.50% of monthly turnover by the User company for using the trade mark “CRI”. In the earlier years the assessee has been paying royalty to M/s. CRI Industries regularly and was accepted by the Department and allowed it as revenue expenditure. M/s. C. R. I. Industries, the receipt of royalty payments till assessment year 2007-08 has been offering the same to tax which was accepted by the Department. Moreover, for the assessment year 2008-09, the royalty recipient company M/s. C.R.I. Amalgamations (P) Ltd. has offered to tax the royalty received from the assessee of ₹. 1,60,97,339/-.
4.8 The main contention of the ld. DR is that the sum of royalty paid by the assessee attracts the provisions of section 40A(2)(b) of the Act without giving any appropriate reasons. Just because the Assessing Officer was of the opinion that such expenditure is excessive or unreasonable, the expenses towards royalty, deduction cannot be denied. The provisions of section referred to by the ld. DR relates and shall have effect notwithstanding anything to the contrary contained in any other provision of the Income Tax Act relating to the computation of income under the head “Profits and gains of business or profession”, where the assessee incurs any expenditure in respect of which payment has been made to any person referred to in clause (b) of sub-section (2) to section 40A of the Act and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The case of the assessee does not come under the purview of any person referred to in clause (b) of sub-section (2) to section 40A of the Act. Accordingly, we reject the contention of the ld. DR.
4.9 In the case of ACIT v. Shriram Transport Finance Co. Ltd. [2011] 9 ITR (Trib) 543 (Chennai), the Coordinate Bench of the Tribunal has observed that the payment for nonexclusive user of logo based on turnover and not lump sum payment should be treated as revenue expenditure. In the present case, the assessee paid the royalty for exclusively using the trade mark “CRI” based on monthly turnover at the rate of 0.50%, which was duly agreed and executed a User Agreement between the proprietor and user. Therefore, the expenses incurred towards payment of royalty should be treated as revenue expenditure.
4.10 In the case of CIT v. Sharda Motor Industrial Ltd. 319 ITR 109, the Hon ’ble Delhi High Court has held that the finding of the ld. CIT(A) that the payment of royalty was purely a revenue expenditure, which was annual expenditure depending upon the quantum of production in the relevant year was a finding of fact rightly arrived at. In the present case also, the User being assessee shall pay a royalty to the Proprietor [M/s. C.R.I. Amalgamations Pvt. Ltd.] with effect from 01.04.2007, a sum equal to 0.50% of monthly turnover arising out of the sale of the user goods during the term of the agreement.
4.11 Under the above facts and circumstances and in view of various decisions (supra), we hold that the royalty paid by the assessee is of revenue in nature, which is an allowable expenditure in the hands of the assessee. Therefore, the ld. CIT(A) has rightly directed the Assessing Officer to allow the expenditure paid as royalty. Thus, the ground raised by the Revenue is dismissed.”
8. In this view of the matter and consistent with the view taken by the co-ordinate bench in assessee’s own case for earlier assessment years, we are of the considered view that the assessee is entitled for deduction towards royalty payment to holding company for using brand name CRI and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.
9. In the result, the appeal filed by the Revenue is
Order pronounced in the court on 18th November, 2022 at Chennai.
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