2022 (11) TMI 1581 - AT - Income Tax

Royalty paid to holding company for 'CRI' trademark use after amalgamation upheld as deductible business expense

The dominant issue was whether royalty paid by the assessee to its holding company for use of the 'CRI' trade mark was disallowable under s. 40A(2)(b) or ... Royalty payment made for use of trade mark CRI - Addition of royalty payment to holding company u/s. 40A(2)(b) - Nature of expenditure - assessee company has paid royalty to holding company for using the trade mark ‘CRI’ - assessee claims before the AO that, it is using trade mark CRI for more than three decades and said trade mark was originally with holding company - AO 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 HELD THAT:- As in assessee’s own case for assessment year 2008- 09 in [2017 (7) TMI 174 - ITAT CHENNAI] 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. 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. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the royalty paid for use of the 'CRI' trade mark was allowable as a revenue expenditure, or disallowable on the basis that the assessee itself owned the trade mark after amalgamation. (ii) Whether disallowance could be sustained under section 40A(2)(b) on the ground that the payment to a related party was excessive or unreasonable, including by comparing the royalty with the nominal consideration stated in the assignment of the trade mark. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Allowability of royalty; ownership/vesting of the 'CRI' trade mark Legal framework (as discussed): The Court examined the allowability of royalty as business expenditure in the context of the contractual documents governing assignment and user of the trade mark, and the effect of the amalgamation arrangement as sanctioned, particularly insofar as the trade mark was excluded from transfer to the amalgamated entity. Interpretation and reasoning: The Court accepted that the right to use the 'CRI' brand rested with the proprietor entity under the family arrangement/assignment deed and the subsequent user agreement. It relied on the contemporaneous documents showing (a) assignment of the trade mark to the proprietor entity effective from the relevant date, and (b) a user agreement requiring the assessee to pay royalty computed at 0.50% of monthly turnover for use of the brand. The Court rejected the assessing authority's factual premise that, by reason of amalgamation, the assessee became owner of the trade mark; on the sanctioned amalgamation arrangement, the trade mark was specifically carved out and did not vest in the assessee. The Court further treated the royalty as a recurring payment linked to sales/turnover under the user agreement, supporting its character as revenue expenditure. Conclusion: The royalty paid for use of the trade mark under the user agreement was held to be an allowable deduction; the disallowance based on alleged post-amalgamation ownership of the trade mark by the assessee was not sustainable. Issue (ii): Applicability of section 40A(2)(b) and 'excessive or unreasonable' payment Legal framework (as discussed): The Court considered the statutory condition that disallowance under section 40A(2) is attracted where payment is made to specified related persons and the assessing authority forms an opinion that the expenditure is excessive or unreasonable having regard to fair market value, legitimate business needs, or benefit derived, and then disallows only the excessive/unreasonable portion. Interpretation and reasoning: The Court declined to uphold the disallowance which was principally founded on (a) the nominal amount stated as consideration for assignment of the trade mark, and (b) a broad allegation that royalty had increased compared to earlier years. It emphasised that, once the proprietor and user have contractually agreed the royalty rate for use of the trade mark, the assessing authority cannot substitute its own view merely by benchmarking it to the assignment consideration. The Court also noted the continuing acceptance of similar royalty arrangements in earlier years and that royalty receipts were offered to tax by the recipient entity, reinforcing the genuineness and business character of the payment. On the section 40A(2)(b) objection, the Court followed the earlier co-ordinate view that the case did not warrant disallowance on the stated basis, and in any event a mere opinion of excessiveness without proper application of the statutory yardsticks could not justify denying the deduction as made. Conclusion: Disallowance under section 40A(2)(b) was not sustained; the royalty remained allowable, and the revenue's challenge to deletion of the disallowance failed.