License Fee for Goodwill is Revenue Expenditure, Not Prohibited by Law: Delhi HC Rules in Favour of Remfry & Sagar [Read Judgment]

The Delhi High Court has dismissed a batch of appeals filed by the Principal Commissioner of Income Tax–21, challenging the allowance of licence fees paid by M/s Remfry & Sagar for the use of goodwill. The Court observed that the issues raised were already settled in five connected matters from earlier years in favour of the assessee.

The appeals centred on the licence fee paid for using “Remfry & Sagar,” a name carrying significant goodwill in the legal services sector. The Revenue contended that the payment violated the Bar Council of India Rules, asserting that the arrangement amounted to an impermissible sharing of remuneration with a non-advocate entity.

According to the Revenue, such an arrangement was prohibited by law, and therefore fell within the mischief of Explanation 1 to Section 37 of the Income Tax Act, 1961, warranting disallowance. The Revenue also argued that the Tribunal had failed to properly assess whether the use of goodwill constituted a permissible purpose under the Act.

On the other hand, M/s Remfry & Sagar argued that the licence fee was paid solely for the right to use the goodwill associated with the established name of the firm, a commercial asset validly acquired and capable of being monetised like any other intangible.

It was submitted that the payment was not a device for sharing professional remuneration, but compensation for the benefit derived from long-standing goodwill. Furthermore, it was emphasised that the purpose of the expenditure was legitimate and wholly connected to its business, and could not be equated with any act prohibited by law. An earlier judgment of the Court, Principal Commissions v. M/S Remfry & Sagar, was also placed on record to supplement the contentions.

The Bench, comprising Justice V. Kameswar Rao and Justice Mini Pushkarna, reviewed its prior ruling where it had analysed the purpose test under Section 37, and clarified that no offence or unlawful purpose was involved in the use of goodwill.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

The Court reiterated that the Bar Council Rules proscribe sharing of fees with non-lawyers, not legitimate payments for the use of an asset such as goodwill. It further noted that the Revenue had not disputed the existence or transferability of the goodwill, nor had it shown any perversity in the Tribunal’s findings.

Finding that the substantial questions of law were already answered in favour of the assessee and no new question arose, the Court held that the appeals were without merit. All connected appeals were accordingly dismissed in favour of M/s Remfry & Sagar.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates