Relief to CRI Group: Royalty paid to Holding Company for Using Brand Name Deductible from Total Income, rules ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chennai bench has held that the amount of royalty paid to the Holding Company for using the brand name, being a revenue expenditure, shall be deductible under the Income Tax Act, 1961.

The Assessing Officer, while processing the return of the assessee, M/s. CRI Pumps Pvt. Ltd, held that 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.

The assessee contended that theroyalty 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 ITAT relied on the Tribunal order wherein the ITAT relied on a Madras High Court approving the Scheme of Amalgamation. While approving the Scheme of Amalgamation, the 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.

The ITAT in that case, further observed that “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.”

A bench of Shri Mahavir Singh, Vice President and Shri G. Manjunatha, Accountant Member held that “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.”

To Read the full text of the Order CLICK HERE

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