M/s Mobisoft Tele Solutions P. Ltd., Chandigarh V. ACIT, Chandigarh

ITA 1206/CHANDI/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80986 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 16-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 12-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Keywords: Business expenditure; Avoidance of tax; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A,B, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 684, 1206 & 1207/CHD/2011 ASSESSMENT YEARS : 2006-07, 2007-08 &2008-09 MOBISOFT TELE SOLUTIONS P LTD V A.C.I.T. EARLIER KNOWN AS M/S ITIDA CAD CIRCLE 4(1) SERVICES PVT LTD CHANDIGARH 202, SECTOR 36-A CHANDIGARH AAACI 3573 P (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ROHIT GOEL RESPONDENT BY: SHRI MANJIT S INGH DATE OF HEARING 16.10.2014 DATE OF PRONOUNCEMENT 28.10 .2014 O R D E R PER T.R. SOOD, A.M THESE APPEALS ARE DIRECTED AGAINST THE ORDER OF LD CIT(A), CHANDIGARH DATED 18.3.2011 AND 16.9.2011. ITA NO. 684/CHD/2011 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS: 1 THAT THE LD. CIT(A) IS NOT JUSTIFIED IN HOLDING THAT THE TRANSACTION BETWEEN SHRI TARUN MOHAN, PROP OF M/S PHONEYTUNES.COM AND THE COMPANY WHEREBY 2% OF SALE CONSIDERATION HAS BEEN PAID AS ROYALTY, IS A SHAM T RANSACTION. 2 THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRMIN G THE ADDITION OF RS. 20,31,774/- BEING THE AMOUNT OF ROYALTY PAID TO THE PROP OF M/S PHONEYTUNES.COM ON THE GROUND THAT M/S PHONEYTU NES.COM DID NOT HAVE ANY PRODUCT INVENTED BY IT WITH COPY RIGHT OR PATENT AND THAT THE BRAND VALUE OF PHONEYTUNES.COM HAS NOT BEE N ESTABLISHED JUSTIFYING THE PAYMENT UNDER THE FACTS AND CIRCUMST ANCES OF THE CASE COMPLETELY IGNORING THE FACT THAT M/S PHONEYTU NES.COM IS A WEBSITE REGISTERED UNDER COPY RIGHT ACT/ TRADE MARK S ACT. 3 THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRMIN G THE ACTION OF AL IN TREATING THE AMOUNT OF ROYALTY PAID AS CAP ITAL EXPENDITURE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURIN G ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE 2 ASSESSEE HAS CLAIMED ROYALTY PAYMENT TO SHRI TARAN MOHAN, AMOUNTING TO RS. 20,71,344/-. THE ASSESSEE WAS ASK ED TO GIVE THE DETAILS OF PAYMENT AND JUSTIFICATION FOR THE SA ME. IN RESPONSE IT WAS STATED AS UNDER: ITIDA TOOK OVER THE BUSINESS OF PHONEYTUNES IN 200 3 FEB BY WHICH TIME BRAND PHONEYTUNES HAS BEEN ESTABLISHED A S A BRAND NAME IN INDIA AND GLOBALLY AS A PREMIER PROVIDER FO R MOBILE VAS SERVICES. PHONEYTUNES HAD BEEN BUILT SINGLE HANDED LY BY TARUN MOHAN WITH NO SUPPORT FROM ANY EXTERNAL INVESTOR OR FINANCIAL AGENCY. THIS WAS THE TIME WHEN INDIA MOBILE INDUSTRY HAD PI CKED UP GROWTH. INDIA WAS ACHIEVING STRIDES IN VALUE ADDED SERVICES (VAS) IN A BIG WAY. GROWTH POTENTIAL WAS FULLY REFLECTED BY THE TURNOVE R NUMBERS ACHIEVED BY PHONETUNES. THIS WENT UP FROM 37 LACS IN THE YEAR 2002 TO 93 LACS IN THE YEAR 2003 SHOWING A GROWTH O F 148% IN A YEAR. LOOKING AT THE FUTURE POTENTIAL AND GROWTH OPPORTUN ITY,, ITIDA TOOK OVER ALL BUSINESS ACTIVITY OF PHONEYTUNES ALONG WIT H EXISTING CUSTOMERS AND RIGHTS OF USE OF ITS BRAND NAME. IT WAS A PURE BUSINESS TRANSACTION WITH A DISTINCTIVE SUM SET CLA USE NOT TO PAY ROYALTY FOR FIRST TWO YEARS. THE EXISTING CUSTOMER BASE INCLUDED ALL THE TELCOS IN INDIA AND SOME TELCOS IN SRI LANKA, BANGLALDESH AND THE MIDDL E EAST. THERE WERE SUBSTANTIAL BUSINESS ACTIVITIES WITH INDUSTRY MAJORS ALSO NOKIA, ERICSSON, MOTOROLA AND SIEMENS. IN ADDITION THERE WAS A CLEAR UNDERSTANDING BETWEEN ITIDA AND TARUN MOHAN THAT HE WILL NOT ENTER IN TO BUSINESS O F VAS IN FUTURE. THESE TWO YEAR GAP WAS ADDITIONAL BUSINESS SATISFAC TION TO GAUGE EXPLOITATION OF POTENTIAL GROWTH. AT THE TIME OF TAKE OVER NO DOWN PAYMENT OR CASH CO MPENSATION WAS PAID TO TARUN MOHAN. ITIDA HAS NOT LOOKED BACK SINCE THAT DAY AND CONTUN ES TO PROSPER AND GROW. ON FURTHER ENQUIRY IT WAS EXPLAINED THAT M/S ITIDA CAD SERVICES PVT LTD WAS INCORPORATED IN 1994 AND STARTED THE AC TIVITIES AS A DEALER IN CNC (COMPUTER NUMERIC CONTROL) SHEET META L FABRICATION SOFTWARES. LATER ON THE COMPANY DIVERSIFIED INTO CO NSULTANCY SERVICES FOR SHEET METAL FABRICATION, PLANTS DESIGN , LAYOUT AND PLANT IMPLEMENTATION. IT WAS FURTHER SUBMITTED THAT IN T HE CHANGING ENVIRONMENT AND LOOSING PROFIT, IT WAS DECIDED SOME WHERE IN 2003 WHEN THE COMPANY TOOK A DECISION TO DIVERSIFY THE B USINESS AND TOOK 3 OVER THE PORTFOLIO OF ACTIVITY OF PHONETUNES.COM IN THE VALUE ADDED SERVICE FOR THE UPCOMING MOBLILE INDUSTRY. IT WAS A LSO SUBMITTED THAT TURNOVER OF THE COMPANY INCREASED LATER ON AS UNDER : YEAR TURNOVER PROFIT 2003 19.61 LAKHS -24855/- 2004 304.14 LAKHS 18.11 LAKHS 2005 792.83 LAKHS 111.46 LAKHS 2006 1019.33 LAKHS 191.62 LAKHS THE ASSESSING OFFICER AFTER EXAMINATION OF THE SUBM ISSIONS OBSERVED THAT THE SAID COMPANY IS CLOSELY HELD PRIV ATE COMPANY AND HAD TWO DIRECTORS NAMELY SHRI TARUN MOHAN PROP OF P HONE TUNES) AND HIS FAMILY MEMBER MRS. GAYATRI MOHAN. ACCORDIN G TO THE ASSESSING OFFICER TARUN MOHAN HAVING THE SIGHT OF P OTENTIAL OF HIS PROPRIETORSHIP BUSINESS THOUGHT OF EXPANDING HIS BU SINESS. THERE WAS NO SALE AND PURCHASE OF ASSETS AND IN ANY CASE THERE CANNOT BE ANY SALE BETWEEN THE PROPRIETOR OF PHONEY TUNES AND THE ASSESSEE- COMPANY I.E. BY THE SAME PERSONS. FURTHER THERE WA S NO INVENTION ON THE PART OF PROPRIETARY CONCERN TO WHOM ROYALTY WAS TO BE PAID. THE ASSESSEE HAD NEVER FURNISHED ANY DOCUMENT OR EV IDENCE PROVING THAT THE PRODUCT MADE BY THE PHONEY TUNES I S EXCLUSIVE IN THE MARKET. VARIOUS COMPANIES WERE INVOLVED IN THI S 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 NO T 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 COMPANYS PROFIT. IN THIS BACKGROUND THE ASSESSING OFFICER INVOKED THE PRINCIPLE OF MCDOWELL AND CO. LTD V COMMERCIAL TAX OFFICE, 154 4 ITR 148 AND DISALLOWED THE ROYALTY PAID. ALTERNATIV ELY THE ASSESSING OFFICER HAS ALSO OBSERVED THAT IN ANY CASE ROYALTY PAID TO THE DIRECTOR WAS CAPITAL EXPENDITURE BECAUSE IT GAVE EN DURING BENEFIT TO THE ASSESSEE-COMPANY AND THE FACT THAT INSTEAD LUMP SUM PAYMENT, THE PAYMENT WAS SPREAD OVER THE YEARS AND THEREFORE WAS NOT ALLOWABLE. 4 ON APPEAL BEFORE THE LD. CIT(A) IT WAS SUBMITTED AS UNDER: THE COMPANY HAS ENTERED INTO AN AGREEMENT FOR TAKE OVER OF BUSINESS OF PHOEYTUES.COM AND ACCORDING TO AGREEMEN T ALL THE ASSTS OF THE FIRM WERE TAKEN OVER EXCEPT THE BRAND NAME. THE AGREEMENT HAS CLEARLY MENTIONED THAT ASSESSEE COMP ANY SHALL BE USING EH BRAND NAME PHONEYTUNES.COM AND SHALL BE PAYING ROYALTY @ 2% OF TURNOVER. THE CLAUSE IS REPRODUCED BELOW: THE INTELLECTUAL PROPERTY RIGHTS IN THE BUSINESS EX CEPT THE BRAND NAME OF PHONEYTUNES.COM SHALL BE TRANSFERRED AND FO R USING THE BRAND NAME ITIDA HAS TO PAY 2% OF GROSS REVENUE REC EIPTS AS ROYALTY, AFTER TWO YEARS OF THE CLOSING DATE. BASED ON THE AGREEMENT CLAUSE AND THE BUSINESS CONT RACTS PHONEYTUNES.COM WAS HAVING AT THAT TIME (COPIES OF CONTRACTS ENCLOSED), THE ASSESSEE-COMPANY WAS PAYING ROYALTY TO TARUN MOHAN AND CLAIMING IT AS BUSINESS EXPENDITURE. HER E THE COMPANY HAS NOT ACQUIRED ANY ASSET BUT ONLY RIGHT TO USE IT AND HENCE ANY AMOUNT PAID FOR UTILIZING THE BRAND NAME IS BUSINES S EXPENDITURE. THE BRAND NAME WAS CREATED BY PHONEYTUNES.COM BY DE VELOPING SOFTWARE TO CONVERT THE SONGS, PICTURE SAND OTHER O BJECTS INTO MOBILE USABLE. AT THE TIME OF TAKEOVER THE PHONEYT UNES.COM WAS HAVING A RECOGNIZED NAME IN THE VAS FILED. THE NAM E HAS NOT JUST INVENTED AS MENTIONED BY THE ASSESSING OFFICER BUT WAS CREATED WITH HARD WORK AND DEVELOPMENT OF REQUIRED SOFTWARE . IN PARA 5(II) OF THE ASSESSING OFFICER HAS SAID THA T THERE IS NO INVENTION ON THE PART OF PROPRIETOR TO WHOM ROYALTY IS PAID. IT IS RIGHT, BECAUSE THE BRAND NAME CAN NEVER BE INVENTED OUT CREATED AND THAT IS THE REASON THE PROPRIETOR IS BEING PAID THE ROYALTY. IF WE GO THROUGH THE BILLING DONE BY THE ASSESSEE-COMP ANY AFTER AGREEMENT, IT WAS DONE IN THE NAME OF PHONEYTUNES.C OM BECAUSE THIS IS THE NAME RECOGNIZED IN THE MARKET NOT THE I TIDA CAD SERVICES PVT LTD. IN NPARA 5(III) THE ASSESSING OFFICER HAS SIGHTED T HE HON'BLE SUPREME COURT CASE OF M/S DOWELL & CO. LTD V. COMME RCIAL TAX OFFICER, 154 ITR 148 THAT COLOURABLE DEVICES CAN NO T BE PART OF TAX PLANNING AND ITS WRONG O ENCOURAGE AVOIDANCE OF TAX BY DUBIOUS METHODS. FURTHER SAYS THAT ITS OBLIGATION OF EVERY CITIZEN TO PAY TAXES HONESTLY WITHOUT RESTORING TO SUBTERFUGES. THE CASE LAW 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. 5 THE ASSESSING AUTHORITY HAS JUST CONSIDERED THE ONE ASPECT THAT PAYMENT OF ROYALTY IS JUST AN EXPENDITURE CLAIMED B Y 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 H IS ROYALTY INCOME FROM THE ASSESSEE-COMPANY. SO THERE IS NO Q UESTION 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 ADVA NCE TO AVOID TAXES BECAUSE AT THE TIME OF AGREEMENT NEITHER OF T HE 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 I TS SAME 30%. THE TAX RATE FOR THE COMPANY FOR ASSESSMENT YEAR 2 006-07 WAS 30% PLUS SURCHARGE AND WAS SAME FOR INDIVIDUAL IF H E IS IN 30% SLAB AND HAVING INCOME MORE THAN 10 LACS. HERE TAR UN MOHAN WAS IN 30% SLAB AND HAVING INCOME MORE THAN 10 LACS AND WAS PAYING SURCHARGE ALSO. THE SECOND ARGUMENT IS THAT IF THE INTENTION WOULD HAVE BEEN TO AVOID DIFFERENTIAL TAX BY PAYING ROYALTY TO TARUN M OHAN, AS HAS BEEN ALLEGED, THE SAME COULD HAVE BEEN CONVENIENTLY DONE BY PAYING HIM HIGHER REMUNERATION AS THERE IS NO LIMIT ATION ON MANAGERIAL REMUNERATION IN PRIVATE LTD COMPANY UNDE R THE COMPANY ACT, 1956. THE ABOVE FACTS ARE CLEARLY ESTABLISHING THAT THE C ONCEPT OF THE AGREEMENT WAS NOT FOR ANY AVOIDANCE OF TAX BUT PURE LY A BUSINESS AGREEMENT. THE ASSESSEE-COMPANY HAS TAKEN OVER THE BUSINESS OF THE PROPRIETARY CONCERN OF THE DIRECTOR EXCEPT THE BRAN D NAME OF THE FIRM. THE ASSESSING OFFICER IS ERRED IN PRESUMING T HAT SELLER AND PURCHASER ARE THE SAME PERSON. IN PARA 5 OF THE ASSESSMENT ORDER THE ASSESSING OFF ICER HAS STATED THAT THERE IS NO ACTUAL SALE PURCHASE OF ASSTS AND AS MR. TARUN MOHAN HAS SIGNED THE AGREEMENT AS PROPRIETOR OF PHO ENYTUNES.COM AND DIRECTOR OF ITIDA CAD SERVICES PVT LTD AND BEIN G SELLER AND PURCHASER ARE THE SAME. BUT HE HAS SIGNED THE AGRE EMENT IN DIFFERENT CAPACITIES AS IN CASE OF COMPANIES DIRECT ORS ARE SIGNING DOCUMENTS ON BEHALF OF THE COMPANY AND NOT IN INDIV IDUAL CAPACITY. SO BY THIS ACT THE ASSESSING OFFICER HAS CONSIDERED THE CONTRACT NOT VALID, WHICH IS TOTALLY UNJUSTIFIED. THE ASSESSING OFFICER HAS ACTED BEYOND HIS JURISDIC TION BY COMMENTED ON THE COMMERCIAL PRUDENCE OF THE MEMBERS OF THE ASSESSEE-COMPANY TO ENTER IN TO SUCH AN AGREEMENT. THE FACT HAS BEEN EXPLAINED IN SUBMISSION 2 ABOVE. WHILE FRAMIN G ORDER THESE FACTS HAVE BEEN IGNORED. SUBMISSION: AS EXPLAINED IN SUBMISSION 2. THE ASSESSING OFFICER HAS NOT PROPERLY CONSIDERED T HE EXPLANATION OF THE ASSESSEE AND HAS ACTED UNREASONABLY. SUBMISSION: THE ASSESSING OFFICER HAS MENTIONED IN PARA 6(I), ( II) AND (III) THAT WE HAVE SUBMITTED IN OUR REPLY THAT THERE IS NO ACQ UISITION OF ASSETS. WE HAVE SUBMITTED THE SAME BUT IN CONTEST TO WHEN I T WAS ASKED TO EXPLAIN THE REVENUE OR CAPITAL NATURE OF THE EXPEND ITURE ROYALTY OR 6 IN RELATION TO FIXED ASSETS. HOWEVER, THE ASSESSEE -COMPANY HAS ACQUIRED THE RIGHT TO USE THE BRAND NAME BY VIRTUE OF THE AGREEMENT. THERE WE HAVE SUBMITTED THAT AS THE ASS ESSEE- COMPANY IS USING THE BRAND NAME AND HENCE NOT ACQUI RED ANY ASSET WHERE WE CAN TREAT THIS AS CAPITAL IN NATURE. BUT THE ASSESSING OFFICER HAS TAKEN IT IN CONTEXT TO AGREEM ENT. THE CLAUSES IN THE AGREEMENT WERE CLEAR AND HOW WE CAN CONTRADICT THE AGREEMENT WHICH WAS SUBMITTED BY US TO THE ASSE SSING OFFICER. IT WAS FURTHER SUBMITTED THAT AFTER MERGER OF PHONE YTUNES.COM THE PROPRIETARY CONCERN LOST ITS EXISTENCE. 5 THE ASSESSEE WAS FURTHER ASKED TO SHOW WHEN PHONEYTUNES.COM WAS ESTABLISHED AND WHAT KIND OF TE CHNOLOGY WAS USED FOR CREATION OF THE BRAND NAME? THE ASSES SEE WAS ALSO ASKED TO GIVE THE DETAILS OF INCOME BEFORE IT WAS SOLD TO ITIDA. DETAIL NOTE ON THE NATURE OF BUSINESS WAS C ALLED. SOME OTHER ENQUIRIES WERE ALSO RAISED. THE LD. CIT(A) AF TER 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 IN TO BY PHONEYTUNES.COM WITH ITIDA. THE ASSESSEE COULD NOT PROVIDE ANY EVIDENCE SO AS PROPRIETARY CONCERN PHONEYTUES.C OM HAD DEVELOPED ANY PRODUCT ON WHICH THERE WAS A COPY RIG HT OR PATENT. NO PROOF WAS GIVEN. THE MAIN CONTENTIONS WAS THAT SINCE THE REVENUE OF THE COMPANY HAD INCREASED IMME NSELY PART OF IT WAS GIVEN AS ROYALTY. SHE FURTHER OBSERV ED THAT ASSESSEES BUSINESS HAD NO CONNECTION WITH PHONEYTU NES.COM. SHE ALSO REITERATED THE OBSERVATION OF THE ASSESSIN G OFFICER THAT THE ASSESSEE HAD INCURRED 64% OF TOTAL INCOME IN OUTSOURCING OF SERVICES AND THEREFORE THE ASSESSING OFFICER WAS RIGHT THAT ASSESSEE HAS NOT PURCHASED ANY THING FOR WHICH 7 ROYALTY WAS REQUIRED TO BE PAID. IN THIS BACKGROUN D ACTION OF THE ASSESSING OFFICER WAS CONFIRMED. 6 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBMI TTED THAT THE SHRI TARUN MOHAN WAS AN IIT GRADUATE. HE D EVELOPED A TECHNOLOGY BY WHICH FILMING SONGS WERE MADE AS RING TONES WHICH CAN BE DOWNLOADED BY MOBILE USERS FOR A PARTI CULAR FEES. IN THIS CONNECTION PHONEYTUNES HAD ENTERED INTO AN AGREEMENT WITH VARIOUS MOBILE SERVICE PROVIDERS LIKE AIRTEL, VODAFONE ETC. THESE COMPANIES WERE USING THE SERVICES AND CHARGIN G THE CUSTOMERS TO MAKE A PARTICULAR FILMING SONG AS THEI R RING TUNE. OUT OF THIS CHARGE SOME FEES WAS BEING PASSED TO TH E ASSESSEE. THE ASSESSEE IN TURN WAS REQUIRED TO PAY ROYALTY CHARGES TO THE MUSIC COMPANY WHICH WAS HOLDING THE RIGHTS OF A PARTICULAR SONG. THIS BUSINESS WAS RUN AS AN PRO PRIETARY CONCERN AND LATER ON SAME WAS SOLD TO THE ASSESSEE- COMPANY. THE ASSESSEE-COMPANY COULD USE THIS TECHNOLOGY OF PHONEYTUNES.COM FOR WHICH ASSESSEE-COMPANY WAS REQU IRED TO PAY ROYALTY OF 2%. DURING MERGER ALL THE ASSETS WE RE ACQUIRED BY THE ASSESSEE-COMPANY. THE RIGHTS DEVELOPED BY TH E ASSESSEE ARE BASICALLY IN THE NATURE OF INTELLECTU AL PROPRIETARY RIGHTS KNOWN AS IPR FOR WHICH THERE CAN NOT BE ANY EVIDENCE. 7 IN THIS CONNECTION HE REFERRED TO VARIOUS AGREE MENTS ENTERED INTO BY THE ASSESSEE-COMPANY WITH PHONEYTUN ES.COM AND ALSO AGREEMENTS ENTERED BY THE COMPANY WITH MUS IC COMPANIES ETC. HE ALSO REFERRED TO A CERTIFICATE I SSUED BY THE REGISTRAR OF COPY RIGHTS TO SHRI TARUN MOHAN FOR TH IS TECHNOLOGY. 8 IN ANY CASE WHATEVER ROYALTY WAS RECEIVED BY SHRI TARUN MOHAN HAS BEEN DULY SHOWN TO THE INCOME-TAX DEPARTM ENT AND 8 FULL TAX HAS BEEN PAID. IN FACT SHRI TARUN MOHAN HA S PAID THE TAXES @ 31.88%, 32.70% AND 33.67% IN ASSESSMENT YEA R 2006-07 2007-08 & 2008-09. EFFECTIVE RATE OF TAX I N THESE YEARS IN CASE OF A COMPANY WAS 34.31%, 31.90% & 33. 99%. WHICH IS ALSO SAME, THEREFORE BY NO STRETCH OF IMAG INATION IT CAN BE SAID THAT THE ASSESSEE HAD SIMPLY RAISED A C OLOURABLE DEVICE TO REDUCE ANY TAX LIABILITY. 9 ON THE OTHER HAND, LD. D.R FOR THE REVENUE STRONG LY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND TH E LD. CIT(A). 10 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY 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 TE LECOM SERVICES TO VARIOUS MOBILE COMPANIES FOR RING TONES/IMAGES/WALL PAPERS ETC. PHONEYTUNES.COM HAD E NTERED INTO AN AGREEMENT WITH VARIOUS MUSIC COMPANIES LIKE SOUND BUZZ INDIA, PHONE GRAPHIC, CUBER MUSIC LTD ETC. TH ROUGH THESE AGREEMENTS PHONEYTUNES. COM HAD ACQUIRED RIG HTS 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 C ELLULAR COMPANY. THIS SHOWS WHY PHONEYGUES.COM WAS PAYING C HARGES TO OUTSIDERS. WE FURTHER FIND THAT SAID MOBILE COMP ANY I.E. CELLULAR COMPANY WOULD COLLECT FROM THE CUSTOMERS F OR DOWN LOADING RING TONE AND OUT OF ABOVE CHARGES SOME FEE S WAS PAID 9 TO THE PHONEYTUNES.COM. THEREFORE THE ASSESSING OFF ICER AND THE LD. CIT(A) ARE NOT RIGHT THAT PHONETUNES.COM H AS NOT INVENTED ANYTHING. PHONEYTONES.COM HAD INVENTED THE TECHNOLOGY THROUGH WHICH RING TONES CAN BE CREATED OF VARIOUS FILMY SONGS ON THE BASIS OF ABOVE RIGHTS OBTAINED F ROM MUSIC COMPANIES AND SUCH RING TONES CAN BE DOWN LOADED BY THE INDIVIDUAL MOBILE USER. THIS BUSINESS WAS BEING DON E BY PHONEYTUNES.COM AS A PROPRIETARY CONCERN OF TARUN M OHAN. FOR THIS PHONEYTUNES.COM HAD OBTAINED COPY RIGHT FR OM THE REGISTRAR OF COPY RIGHTS, NEW DELHI AND COPY OF CER TIFICATE HAS BEEN PLACED AT PAGE 106 WHICH CLEARLY SHOWS THAT CO PY RIGHTS /CERTIFICATE OF TRADE MARK WAS REGISTERED IN THE NA ME OF TARUN MOHAN. IT IS FURTHER SHOWN THAT THIS IS A CASE UND ER CLASS NO. 42 AND THE SERVICES HAVE BEEN DESCRIBED AS SOFTWAR E SERVICES TOWARDS MOBILE APPLICATION, CONTENT AND PLATFORMS I NCLUDED IN CLASS 42. 11 IN 2003 IT WAS DECIDED TO SELL THE BUSINESS OF PHONETUNES.COM TO A COMPANY KNOWN AS ITIDA CAD SERV ICES PVT LTD. THIS COMPANY IS ALSO OWNED BY A FAMILY ME MBER OF TARUN MOHAN. THE ASSESSING OFFICER AS WELL AS THE LD. CIT(A) HAS REFUSED TO RECOGNIZE THE SALE AGREEMENT BECAUS E I HAS BEEN SIGNED BY TARUN MOHAN AS PROPRIETOR OF PHONEYT UNES.COM ON ONE SIDE AND ON THE OTHER SIDE AGAIN BY SHRI TAR UN MOHAN AS DIRECTOR OF ITIDA CAD SERVICES PVT LTD. ACCORDI NG TO AUTHORITIES BELOW SAME PERSON CANNOT ENTER INTO AN AGREEMENT WITH HIMSELF. WE FIND THAT THIS IS NOT CORRECT. EV ERY COMPANY UNDER COMPANIES ACT HAS SEPARATE LEGAL ENTITY KNOWN AS JURISTIC ENTITY. IN OTHER WORDS, THE COMPANY HAS A SEPARATE ENTITY CRATED BY THE LAW AND THE COMPANY CAN DEAL O N ITS BEHALF 10 WITH ANY ONE. IT CAN PURCHASE OR SELL THE PROPERTY , REGISTER THE PROPERTY IN ITS OWN NAME AND CARRY ON ANY BUSINESS. EVEN U/S 2(31) OF THE INCOME-TAX ACT, 1961 WHICH DEFINES A P ERSON THE COMPANY IS RECOGNIZED AS A SEPARATE PERSON DIFFEREN T FROM INDIVIDUAL. IN FACT A PARTICULAR PERSON CAN HAVE DI FFERENT CAPACITIES SAY AS AN INDIVIDUAL OR AS A PARTNER OR AS A DIRECTOR IN A COMPANY. IN THE CASE BEFORE US, SHRI TARUN MOH AN HAS CLEARLY ACTED INTO TWO CAPACITIES NAMELY AS INDIVID UAL BEING PROPRIETOR OF PHONEYTUNES.COM AND AT THE SAME TIME HIS SECOND CAPACITY IS ON BEHALF OF ITIDA CAD SERVICES PVT LTD AS AN DIRECTOR OF THAT 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 HAV E OBSERVED THAT NO ASSET HAS BEEN TAKEN OVER WHICH IS NOT CORRECT. COPIES OF BALANCE SHEET HAVE BEEN FILED F OR PHONEYTUNES.COM AS WELL AS ITIDA CAD SERVICES PVT L TD BEFORE US. BALANCE SHEET OF PHONEYTUNES.COM CLEARLY SHOW THAT TOTAL ASSETS WERE FOR RS. 27,50,583/- AS ON 31.3.2003. P ERUSAL OF BALANCE SHEET OF ITIDA CAD SERVICES PVT LTD CLEARLY SHOW THAT THESE ASSETS HAVE BEEN ADDED IN THE FIXED ASSETS SC HEDULE AS WELL AS CURRENT ASSETS HAVE BEEN ADDED IN THE RESPE CTIVE 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 AGREEM ENT WITH ONE OF ITS DIRECTOR, TARUN MOHAN TO ACQUIRE THE BUSINES S OF HIS SOLE PROPRIETARY CONCERN RUNNING IN THE NAME AND STYLE O F 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 TAKEOVER AT SCALING DOWN S LABS OF 5% TO 3% OF GROSS REVENUE RECEIPTS UNDER THE RELEVANT BUSINE SS: THE BOOK VALUE AT WHICH THE ASSETS AND LIABILITIES WERE ACQUIRED, ARE AS FOLLOWS: 11 ASSETS AMOUNT (RS.) FIXED ASSTS 530,788 CASH AND BANK BALANCE 372,014 SUNDRY DEBTORS 1542,533 OTHER CURRENT ASSTS 305,247 2750,582 LESS LIABILITIES ACCOUNT PAYABLE 328,945 SUNDRY CREDITORS & ADVANCES 1840,406 2169,351 BALANCE DUE TO PROPRIETOR 581,231 AS A RESULT, THERE DOES NOT ARISE ANY GOODWILL OR C APITAL RESERVE. ABOVE CLEARLY SHOW THAT THESE ASSETS AND LIABILITIE S HAVE BEEN TAKEN OVER BY THE ASSESSEE-COMPANY. 12 AS SEEN ABOVE PHONEYTUNES.COM HAD INVENTED TECHN OLOGY OF CREATING RING TONES AND IT CAN BE DOWN LOADED BY INDIVIDUAL MOBILE USER AND FOR THIS INVENTION THE COMPANY HAS AGREED TO PAY A ROYALTY @ 2%. THE REVENUE HAS REJECTED THIS CONTENTION IN THE ABSENCE OF ANY DOCUMENTARY EVIDENCE. IT HA S TO BE APPRECIATED THAT IN CASE OF INTELLECTUAL PROPERTY, IT IS NOT NECESSARY THAT THERE WOULD BE A DOCUMENTARY EVIDENC E BECAUSE INVENTION IS A TECHNOLOGY AND STORED IN THE COMPUTER. THE LAST ALLEGATION OF REVENUE IS THAT THIS IS A CO LOURABLE DEVICE USED BY THE ASSESSEE TO REDUCE THE PROFITS. WE HAVE ALREADY SEEN THAT THIS IS NOT A COLORABLE DEVICE BU T A PURE AND SIMPLE TRANSACTION THROUGH WHICH THE BUSINESS OF PHONEYTUNES.COM HAVE BEEN SOLD TO THE ASSESSEE-COMP ANY AND THE ASSESSEE-COMPANY HAS AGREED FURTHER TO GIVE ROY ALTY @ 2%. SECONDLY IT IS VERY IMPORTANT THAT THE ASSESSE E-COMPANY AND TARUN MOHAN HAVE DULY PAID THE TAXES ON FULL AM TS RECEIVED AGAINST ROYALTY AND HAVE NOT BEEN SET OFF AGAINST ANY 12 LOSSES ETC. PAGE 108 OF PAPER BOOK GIVES CHART OF COMPARATIVE TAX PAID BY THE ASSESSEE-COMPANY AND TARUN MOHAN: AY GROSS RECEIPTS NET PROFIT BEFORE TAX NET TAXABLE INCOME TAX LIABILIT Y EFFECTI VE RATE OF TAX ROYALT Y @ 2% TO TARUN MOHAN SALARY TO TARUN MOHAN TARUN MOHAN S TAXABLE INCOME TAX LIABILIT Y EFFECTI VE RATE OF TAX 200 6-07 1019332 52 1916198 1 160353 10 55021 96 34.31 20317 74 24000 00 314987 70 10041 46 31.88 200 7-08 1016174 12 1799935 98 201696 70 68373 97 33.90 19200 77 30000 00 582850 0 INCLUDI NG ROYALTY ) 19057 73 32.70 200 8-09 1459789 13 1877420 4 166254 10 56509 77 33.99 22215 53 48000 00 103879 90 (- DO) 34979 14 33.67 ABOVE CLEARLY SHOW THAT TARUN MOHAN WAS PAYING TAXE S AT THE HIGHEST SLAB WHICH IS CHARGEABLE TO TAX PAID BY THE ASSESSEE- COMPANY AND THERE IS NO REVENUE LOSS AT ALL. 13 IN VIEW OF ABOVE DISCUSSION IT IS ABSOLUTELY CLE AR THAT THE ASSESSEE-COMPANY HAS PAID ROYALTY FOR THE PARTICULA R INVENTION WHICH BELONGED TO PHONEYTUNES.COM AND THEREFORE IN OUR OPINION, THE CLAIM FOR PAYMENT OF ROYALTY DESERVES TO BE ALLOWED. THEREFORE WE SET ASIDE THE ORDER OF LD. C IT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW CLAIM FOR ROY ALTY. 14 IN ITA NO. 1206 & 1207/CHD/2011 SAME ISSUE OF NO N ALLOWANCE OF ROYALTY IS INVOLVED AND THEREFORE FOLL OWING OUR ORDER IN ABOVE NOTED PARAS IN ITA NO. 684/CHD/2011 FOR ASSESSMENT YEAR 2006-07 THESE APPEALS ARE ALSO ALL OWED. 15 IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE A RE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.10.2014 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28.10.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR 13