TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 1236
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...., New Delhi dated 14/2/2011 is the lead case and hence we shall first deal with it. 2. The grounds of appeal in the main/lead appeal ITA No. 1561/Del/2011 are as follows:- "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in:- 1. Sustaining the disallowance of License Fees of Rs. 22,51,33,484/- payable by the Appellant Firm to Remfry & Sagar Consultants (P) Ltd. (RSCPL) for use of goodwill in 'Remfry & Sagar' for the purpose of the profession of the firm. 2. Holding that the License Fee paid by the Appellant Firm to RSCPL is not business expenditure allowable under section 37 of the Income Tax Act, 1961 and ignoring that the License Fee was paid pursuant to a valid agreement and had direct nexus to the income of the Appellant Firm. 3. Holding that the agreement to pay License Fee is a sham and the transaction is a colorable one for evading taxes even though it was proved to him that if the transaction is considered as a whole there was no loss of revenue. 4. Holding that payment of License Fee to RSCPL is a colourable transaction undertaken with a view to reduce taxes, whereas the fact is that the entire License Fee paid to RSCPL has bee....
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....lan (263 ITR 706), CIT vs. Walfort Shares & Stock Broker (326 ITR 1) and CIT Vs. M/s Glaxo Smith Kline Asia (P) Ltd. [Appeal (Civil) No. 18121/2007] which were specially brought to his notice. 12. Acting perversely by refusing to admit evidence in the form of valuation reports of the goodwill in 'Remfry and Sagar' obtained periodically by the assessee from independent experts despite the fact that these valuation reports were referred o in the submissions before the Assessing Officer and specifically called for production by the Ld. CIT (A) u/s 250(4) of the Act. 13. That the A.O/ACIT erred in confirming the levy of interest u/s 234B & 234D of the Income-tax Act, 1961. 14. That the A.O/ACIT erred in initiating penalty proceeding u/s 271(1) (c) of the Act. 15. The appellant reserves its right to add or amend the grounds of appeal as and when necessitated. 3. The facts of the case are as under:- 3.1 The assessee M/s "Remfy & Sagar" is a partnership firm providing legal service. It describes itself as 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 o....
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....01 entered into a partnership with Mr. P. Sampath Kumar, Mr. Ashwin Julka, Mr. Pamit Nagpal and Mr. Prem Sewak. This partnership firm entered into an agreement dated 5/6/2011 with RSCPL for grant of license for the use of goodwill of "Remfry & Sagar" subject to payment of license fee @ 25% of the amount of bills raised. The agreement was valid for the term of 5 years. This agreement was revised and renewed w.e.f 1/4/2008 and under the renewed arrangement, license fee was payable @ 28% of the amount of bills raised. The assessee firm in all these years under appeal filed paid the license fee as a percentage of gross receipts and claimed the same as an expense. 3.6 The primary issue before us is whether the Assessing Officer was right in disallowing the deduction of license fee paid by the assessee to RSCPL as per the agreement of license for the use of goodwill in the Remfry & Sagar. There are certain other small issues that arise in other years which we would be dealing with as and when necessary. 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 pai....
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.... was in the year 1827. 5.2. He submitted that there are four points to be looked into in respect of goodwill aspect. These are: (i) Goodwill is an intangible asset developed over a period of time, due to distinct reputation gained on account of several factor, like, quality of service, connection with clients/customer etc, together with the circumstances which make the connection durable; (ii). Goodwill can be alienated; (iii). Goodwill in case of a partnership firm ordinarily, attaches to the firm and constitutes property of the firm in which each partners has a share. He submitted that partners can agree that the goodwill may vest in one or more partners of the firm to the exclusion of the others. (iv) Goodwill survives the death of the original partners/founder and the death of Dr. V. Sagar has not affected the business of the firm which has been growing even after his demise. 5.3. That the professional firms in the present day, across the globe, enjoy goodwill, 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....
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..... Sagar had introduced the goodwill in the firm, as his persons goodwill to be exploited by the firm on payment of license fee, even in that hypothetical situation, the firm would necessarily have to pay Dr. V. Sagar, (in his individual capacity), fee for license to use Firm's name and goodwill. 5.9. That personal goodwill of Dr. V. Sagar would not become property of the firm and no other partners could have claimed any right in such goodwill. Upon the demise of Dr. V. Sagar (assuming the goodwill was not alienated), goodwill vesting exclusively in Dr. V. Sagar would have devolved on his legal heirs and the partnership and/or the surviving partners could not claim and right thereto. 5.10. That as the assessee firm could not have practiced in the name of "Remfry & Sagar" and enjoyed the goodwill associated therewith, the payment of license fee was incurred due to commercial expediency and thus, expenditure is incurred wholly and exclusively for the purpose 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 lic....
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....gency, but carried on the same as part of his legal practice of Attorneys at law in the name of "Remfry & Sagar". 6.2. The factual aspect is that the legal profession in the proprietary name of "Remfry & Sagar" carried on by Dr. V. Sagar was a practice in law with all its attendant functions and responsibilities. It was not a continuation of the agency business carried out earlier by "Remfry & Sons". 6.3. That the deed of gift executed by Dr. V. Sagar on 1st June, 2011 in favour of RSCPL records that the gift was made to ensure continuity of the said practice. The partnership firm was constituted on 5th June 2001 by Dr. V. Sagar and his erstwhile associates in the practice of Attorney-at-law under the name and style of "Remfry & Sagar". 6.4. Dr. V. Sagar also sold to RSCPL, the entire infrastructure of the said practice in the form of office equipment and facilities including the library. 6.5. RSCPL in turn made available this infrastructure 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 "cl....
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....ried on RSCPL had no other alternative but to lease back the goodwill to Dr. V. Sagar's firm as all these arrangements admittedly constituted an integral part. 6.15. Goodwill is a current right but it can have value when the business is transferred and it is an intangible asset to a business. 6.16. In the case of a professional or personal service partnerships, goodwill is likely to be personal to the partners individually and therefore incapable of transfer. He relied on certain judgments of foreign courts for the preposition that goodwill of a law firm may not be sold or transferred for a valuable consideration because of ethical reasons. He relied on the legal Ethics by 'Drinker' for the preposition that a "Lawyers clients are not merchandise, nor is a law practice the subject of Barter." Legally and analytically, the sale of a law practice is more than a sum of money and books for a library. 6.17. Goodwill of 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 w....
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.... be alienated from the practice itself. Apart RSCPL could not do legal practice as it does not have license or rights to do the same. 6.23. Mr. G. C. Srivastava submitted that the entire arrangement does not serve business purpose and hence, the payment in question is not deductable u/s 37 of the Act and that it was merely a device to transfer profits of the firm from the assessee to the company belonging to Dr. V. Sagar's children. 6.24. He reiterated his arguments that the legal heirs of Dr. V. Sagar had every right to share the goodwill after his death or after his retirement, but even at this stage, it could not be regarded as an expense of the firm within the meaning of Section 37 of the Act. He submitted that the Assessing Officer has rightly disallowed the claim of the assessee as expenses by way of license fees paid towards RSCPL and submitted that this action of ther A.O should be upheld. 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....
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....parties. On a careful consideration of the same we hold as follows: 8.1. Before we adjudicate the issue as to whether the disallowance of license fee paid by the assessee to RSCPL for license to practice as 'Remfry & Sagar' and for use of the said name, trade mark and goodwill by the A.O is to be upheld or not, for the purpose of the ready reference we recapitulate the facts of the case as below: Facts Year 1827: A sole proprietorship firm was established as "Grant and Remfry", by a British immigrant, Mr. Henry Oliver Remfry, which was subsequently converted into partnership firm and operated by five generations of Remfry family, until the year 1957. Year 1957: Mr. Hollaway, Mrs. Silverstone, Mr. Bernier and Mr. Burrington joined 'Remfry & Son' (the name of the partnership firm at that time) as partners. 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. Sil....
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....ame and goodwill of the business 'Remfry & Sons' is distinct and seperate from the other assets of the partnership firm and that it vested only in two partners of the firm and not the firm. This is clear from reading of Clause 2 & 3 of the said partnership deed. 8.3. On the fourth day of April 1973, Mr. Vidya Sagar purchased by way of sale, from Mr. Holloway and Mrs. Silver Stone, the business carried on under the name and style of 'Remfry & Sons' along with all its assets including capital asset as on 31st March 1973 and the name and goodwill thereof which was referred to as "the said business" in that agreement for a total consideration of Rs. 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 proprie....
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....e 2001. While Clause No. 16.1 of this agreement, the license fee in question is to be paid in pursuance to this agreement. 8.9. It is clear that Dr. V. Sagar has arranged his affairs in such a way that the goodwill earned by him over the years is enjoyed by his children who are his legal heirs. All the documentation shows that this is a very well thought out strategy by Dr.V.Sagar to retain his hard earned as well as purchased goodwill and to use it for his future generations, irrespective of the fact whether 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 ....
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....uary 1948, wherein he retained/reserved the right of goodwill of the profession carried on by him earlier in sole proprietorship. On 2nd June 1951, he retired from the said partnership. The goodwill in the partnership was sold to the other partner and the consideration was to be paid to the Chartered Accountant at the certain rate and after his death to his wife and thereafter his son were to paid annual consideration. The question before the Hon'ble Court was whether such the amounts paid to the 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', t....
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....rt of the argument. Only several submissions have been made. Certain judgements of Foreign Courts were cited, which were based on "ethical considerations" and not legal prohibition. In any event, the ITAT has no power or authority to adjudicate the issue as to whether, the gift of goodwill by Dr.V.Sagar of his profession of law, to a company is violating the Advocates Act, 1961 or the Bar Council Rules. No authority has held that this arrangement violates any Act or law of the land, 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....