TaxTMI 
TaxTMI 
2010 (5) TMI 532
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....r the Revenue has raised the following ground :- (1) The ld. CIT(A) has erred in law and on facts in directing the A.O. to delete the addition of Rs.8,27,773/- in respect of royalty payment though it is in violation of Section 40(A)(2). 3. The main issue involved in this appeal and other appeals is about claim of royalty expenses paid to Mr. Rajan Patwa. The brief facts of the case are that during the course of assessment proceedings in the first round AO noted that assessee company has paid royalty of Rs.8,22,773/- @ 3% of the net value of the "electrical yarn cleaner & classikin". When enquired it was explained that 'electrical yarn cleaner is a product which is originally manufactured by few companies in the world. It requires high degree of technology and is costly if imported. Shri Rajan Patwa is a technical expert who invented an electrical yarn cleaner in India. These instruments are now manufactured by the assessee company. Shri Rajan Pata gave advice and guidance right from the design, development and manufacturing stage. It was for the said services that company has paid royalty @ 3% to him. The AO however, held that payments to Shri Rajan Pata were unjustified and unre....
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....inventor. Thereafter it is claimed that Shri Rajan Patwa entered into agreement dated 4.4.96 with Patwa Kinariwala Electronics Ltd. (PKEL) when the firm with the same name was converted in the company with the same name. It is claimed that with the agreement dated 4.4.1996 Shri Rajan Patwa and P.K.E.L. agreed to continue the earlier arrangements on the same terms for 10 years and accordingly PKEL would continue to pay 3% royalty to Shri Rajan Patwa. On the basis of these facts, the ld. CIT(A) held that :- (a) Shri Rajan Patwa was the inventor of the device. (b) There was an agreement between Shri Rajan Patwa and RJK Industries to allow PKE to exploit the device commercially on payment of royalty. (c) the payment of royalty was under contractual obligation, and (d) the agreement was carried on vide agreement dated 4.4.96 between Shri Rajan Patwa and M/s PKEL (the successor to PKE). On this basis, he further held that payment was not made to a stranger. There is a contractual agreement between the company and the assessee. The payment of royalty was not without consideration as Shri Patwa provided valuable services to the company. It is immaterial that Shri Rajan Patwa himself i....
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....e the royalty payment. Since 1978 onwards the manufacturer of these instruments are paying royalty and Shri Patwa is enjoying it @ 3%.. The patent was registered in the name of RJK industries (KRJK) and Ahmedabad Texteile Industries Association (ATIRA). The partnership firm in the name of Patwa Kinariwala Electrical Industries has started manufacturing these instruments/devices. Licence was given to this firm who paid the royalty to KRJK and Shri Rajan Patwa. The royalty is being paid since 1978, initially by the firm. The firm is now converted into a company under the same name and the royalty is being paid by the company to Shri Patwa @ same rate of 3%. For this arrangement agreement was entered into between the assessee company and Shri Rajan Patwa on 4.4.96. 7. The ld. AR submitted that in the past no disallowance of royalty paid has been made. Therefore, following the principle of consistency, payment of this royalty should have been allowed in the case of assessee company. Ld. AR submitted that payment is being made as per the agreement. Shri Rajan Patwa, the Managing Director is not receiving any other payment for managing the affairs of the company. He is not taking any re....
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....Managing Director thereof. Other shareholders of the company are the family members of Shri Patwa. The patent certificate issued in 1978 expired after 14 years. There is no evidence as to what extent Shri Patwa has rendered services to the company except a general statement that he is continuously engaged in development of the product, providing technical services, advice and guidance. It is also clarified that Shri Patwa is not claiming any remuneration from the company except royalty. It is also emphasized by the ld. AR that claim of royalty has been allowed in the assessment of the firm and, therefore, merely because firm is now converted into a company the claim should not be disallowed. 11. In our considered view consistency is the recognized principle and carves out an exception from the principle of res judicata, if facts and circumstances of the case remain the same and position of law has not changed. In any case there is a necessary condition inherent in the "principle of consistency" that stand of the AO in the past should be legally correct and there is no error, either of law or of fact. It is also a judicially recognized principle that there is no heroism to continue....
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....at the exclusivity of the right in relation to the thing for which royalty is paid should be with the guarantor of that right. Mere passing of information concerning the design of a machine which is a tailor made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user so as to term the payment made therefore as royalty. The expression 'royalty' defined in Explanation-2 of section 9(1)(vi)(b) means consideration including any lump sum consideration paid for imparting any information concerning the working of or use of a patent, invention, model, design, secret formula, or process or trade mark or similar property. The dictionary meaning of the term royalty connotes payment of periodic or at one time for user by one person of such exclusive right belonging to any other person. Thus the necessary ingredient for treating the payment as royalty is exclusiveness of the right. After patent having expired it cannot be said that Shri Patwa had exclusive right over the design or invention invented by him in 1978. In fact he never had any such patent in his name. We agree with ld. DR that after expiry of life of patent exclusiveness comes to an ....
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....of Income Tax has erred in law and on facts of the appellant' s case in passing an order U/s 147 r.w.s.143[3) of the Act. The appellant's most humbly submits that the order passed u/s 147 r.w,s 143(3) of the Act is bad in law and prays that the Hon' ble Tribunal be pleased to hold so now and quash the order passed. (2) The Learned Asst. Commissioner of Income Tax has erred in law and on facts of the appellant's case in disallowing entire royalty expense of Rs . 7, 19, 774/- paid on the erroneous plea that the same has been paid to the promoter. The appellant most humbly submits that on the facts and circumstances of it's case and in law no part of royalty paid is disallowance as royalty expenses have been incurred wholly & exclusively for the purpose of it's business and looking to the nature of the business of the appellant and the benefit derived from it, same is reasonable. In view of the above, the appellant prays that the Hon'ble Tribunal be pleased to hold so now and delete the additions made. 15. The first ground is regarding reopening of assessment which is not pressed and hence dismissed as not pressed. 16. Ground No.2: In this year the AO has disallowed a....