Judgment:
1. This appeal by assessee is arising out of the order of learned CIT(A)-I, Bangalore, dt. 4th Dec., 1997.
"The learned CIT(A) erred in holding that no part of the payment of Rs. 6 crores made by the appellant to M/s BPL Ltd. was admissible as a valid business expenditure. He further erred in coming to the conclusion that the transaction between the appellant and M/s BPL Ltd. was a sham transaction-entered into for the purpose of claiming deductions wrongly." 2.1 The assessee is a part of BPL group of companies. During the year, the assessee paid Rs. 600 lakhs towards use of trademark "BPL" to M/s BPL Ltd. The AO held that l/14th of such expenses is allowable in view of Section 35A. Thus the AO treated the expenses as capital in nature.
Learned CIT(A) held that the transaction between the assessee and the BPL Ltd. is a sham transaction. Since the company's name itself is M/s BPL Refrigerators Ltd., the assessee is entitled to use the word "BPL" in all its products, letterheads, etc. The arrangement is designed to serve the purpose of tax avoidance. He accordingly disallowed the entire sum. The assessee is in appeal before us.
2.2 Learned counsel for assessee, Shri H.V. Gowthama submitted that the assessee, BPL Refrigeration Ltd. and the payee M/s BPL Ltd. are both companies of the BPL group, M/s BPL Ltd. is the owner of a registered trade mark "BPL" together with the various patterns in which this trade mark is presented e.g. BPL with a circle around it, etc. The assessee although a member of the BPL group, is a company distinct and separate from M/s BPL Ltd. As the assessee is not the owner of the trademark, if the trademark has to be used, the assessee will necessarily have to obtain the permission of M/s BPL Ltd. The latter depending on its business policies, could either have refused to grant permission to use the trademark or it could have granted the permission to use the trademark, subject to laying down the conditions under which the trade mark may be used, including limitations, on the period of time, the amount of payment to be made, etc. Accordingly, M/s BPL Ltd. permitted the assessee to use the trademark for a period of ten years on payment of around Rs. 6 crores. In the light of the above facts, the payment should not have been considered as sham. The AO without considering the transaction to be sham, applied the provisions of Section 35A. The CIT(A) ought to have given a finding that the provisions of Section 36A apply only to patents and copyrights and not to trademarks, and that further, for the provisions of Section 35A to apply, the amount spent must be capital in nature, i.e., an outright acquisition. The payment was neither a capital sum, nor was spent for acquiring the same is an admissible revenue expenditure, for permission to use the trademark for a limited period of ten years.
2.3 Learned Departmental Representative, Mr. Amitabh Kumar submitted that even without this arrangement the assessee was using the logo "BPL" in its correspondence, etc. The name itself suggests that the word "BPL" is available to assessee even without entering into any agreement for use of such trademark. Thus the entire transaction is a sham transaction and accordingly the order of learned CIT(A) needs to be upheld.3.1 We have considered the relevant facts and arguments advanced. The amount of Rs. 6 crores spent by the assessee is not in the nature of an outright purchase, nor does it bring any benefit of a permanent nature.
The payment only permits use of the trademark for a limited period of ten years. As held by the House of Lords in W.T. Ramsay v. IRC 54 Tax Cases 183 (HL) and in IRC v. Burmah Oil Co. 54 Tax Cases 213 (HL) both of which were the philosophical forerunners of the Supreme Court decision in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) and as held by the Privy Council in Challenge Corpn. (1987) 1 AC 155 PC a sham transaction is one where the transaction purports to be one thing, but in fact effects something else, or a transaction which pretends to effect something other than what it really effects. In the present case, both the purport and the effect of the transaction were one and the same, viz. the assessee made a payment of Rs. 6 crores for obtaining the right to use the trademark for a period of ten years.
There is no pretence at all involved in this transaction. To demonstrate that a transaction is sham, it will have to be shown that the assessee made a payment of about Rs. 6 crores for some purpose other than it made the payment for trademark for ten years or that it made the payment for no purpose at all. In the absence of this being demonstrated, the transaction cannot be considered as sham.
3.2 If the assessee had not made the payment at all and used the trademark without the permission of the. owner, this would have been a violation of Section 29 of the Trades and Merchandise Marks Act. If the Revenue were to consider that a disallowance is called for because the transactions are between closely connected parties, such a disallowance could have been made only of the excess paid over the fair market value payable in an arm's length transaction by invoking provision of Section 40A(2). Revenue has not made out any case that in an arm's length transaction, the fair market value of the right to use the trademark for a period of ten years could be determined as nil. Only a determination of the value at nil could justify disallowance of the entire payment. As it has not been demonstrated that the fair market value of the trademark was anything less than the amount of about Rs. 6 crores paid, by invoking provision of Section 40A(2), Revenue to have held-that the entire payment of about Rs. 6 crores was an admissible amount. The following observations of the learned CIT(A) in para 17 of the order: "It is quite obvious that the agreement with BPL in this relevance is only a ruse to pass huge amounts to that company and justify it as out of business needs and simultaneously enabling BPL Ltd. to claim it as a receipt not liable to tax. The arrangement between the assessee and M/s BPL Ltd. in this case has to be held to be sham designed to serve the purpose of tax avoidance." are factually incorrect and therefore, the conclusion, that the transaction is a sham designed to serve the purpose of tax avoidance is totally misdirected. Even if the claim of the licence fee paid for trademark had not been made, the total income figure of the assessee would have come to a loss and irrespective of whether the claim had been made or not, no tax would have been payable by the assessee. On the other hand, BPL Ltd. which shows the corresponding amount as receipt, pays tax on this amount, as it is a profit making company. If therefore, the transactions of the group as a whole are taken, tax on Rs. 6 crores is leviable on the assesses BPL Ltd. If on the other hand, M/s BPL Ltd. had allowed the assessee to use the trademark free, then no tax would have been payable either by BPL Ltd. or by the assessee.
Such a transaction of nonpayment would, in fact, have been a sham transaction designed to avoid tax, as the transaction of payment of licence fee was beneficial to Revenue. The CIT(A), therefore, erred in coming to the conclusion that the transaction is an artificial device or a sham for the avoidance of tax, whereas the transaction in fact results in a higher tax liability for the group as a whole; this itself would go to prove that the transaction cannot be a sham.
3.3 It may be useful to refer the Hon'ble Madhya Pradesh High Court as reported in CIT v. M.B. Umbrella Industries. (1984) 145 ITR 292 (MP).
In the said case, the assessee paid a sum of Rs. 25,001 per year for use of trademark without acquiring the same. The agreement was for a limited period of five years. Hon'ble High Court considering the fact, held that the payments are to be treated as revenue in nature and allowed the claim of assessee. The facts before us also are identical.
Though the assessee is part of BPL group of companies yet the trademark does not belong to it. The two companies are separate legal entities.
If the assessee wanted to use the trademark "BPL". which is otherwise exclusive right of BPL Ltd. only, the payment has to be made. It is also established that BPL Ltd. got the trademark registered much prior to allowing the assessee use of the same. In view of our discussion above, we hold that the amount paid is allowable deduction under Section 37 of the Act.
"The learned CIT(A) erred in considering that the enhanced rate of depreciation of 40 per cent as specified in Item III (2)(iii) of Appen. I of the IT Rules, 1962 was not applicable to the assessee's case." 4.1 Similar issue arose before us in one of the group concern related to assessee in ITA Nos. 88 & 89/Bang/1998 in BPL Sanyo Utilities & Appliance Ltd v. Asstt. CIT wherein it was held as under : "We have carefully considered the relevant facts and arguments advanced. Much reliance was placed on the decision of Hon'ble Karnataka High Court in AMCO Batteries case (supra). In the said case, Hon'ble High Court has held that the dies and moulds used in the manufacture of plastic covers for batteries are entitled to higher depreciation though the assessee has not been selling the covers as such to anybody. In the present case also though some parts, are used in manufacture of washing machine, vacuum cleaners, etc. yet these parts are manufactured by assessee itself. These parts are admittedly rubber and plastic goods. Thus the moulds used in manufacture of such rubber and plastic goods are to be held as used in rubber and plastic goods factories. There need not be a separate and distinguishable factory for production of such items and the moulds need not be used in such separate factory. Once the moulds are used for manufacture of rubber and plastic goods parts though in a composite factory manufacturing washing machine, vacuum cleaners, etc., the assessee is eligible for deduction at higher rate of depreciation, i.e., 40 per cent as per Appen. I to the IT Rules. We are, therefore, in agreement with the submission of learned counsel for assessee. In view of our discussion above, we reverse the finding of learned CIT(A) and allow the claim of assessee." Common arguments were advanced in both the cases. In view of our finding therein the claim of assessee is to be allowed.
5. The next ground of appeal is against disallowance of expenditure incurred for issue of non-convertible debentures and partly convertible debentures. At the time of hearing, learned counsel for assessee submitted that he is not pressing this ground of appeal. In view of the submission by Shri Gauthama, this ground is dismissed for want of prosecution.