The Delhi High Court has ruled that the license fee paid by intellectual property law firm Remfry & Sagar for the use of its name and goodwill qualifies as a legitimate business expense under the Income Tax Act, 1961.
The case revolved around the firm’s agreement to pay a fee to Remfry & Sagar Consultants Private Limited (RSCPL), a company owned by the family of its founder, Dr. V. Sagar. The tax authorities initially argued that the arrangement was a financial maneuver to divert income to non-lawyer family members. However, the Court found that the goodwill had been lawfully transferred and monetized, making the payments valid.
Tracing its origins to 1827, Remfry & Sagar underwent multiple transformations, with Sagar acquiring the firm in 1973. In 2001, he transferred its goodwill to RSCPL, which then granted the law firm continued rights to use its established brand in exchange for a fee tied to its billing revenue. Tax authorities had sought to disallow these payments, contending that RSCPL, not being a legal entity, could not claim goodwill.
The Court rejected this argument, emphasizing that goodwill is an asset that can be monetized, transferred, or gifted. It ruled that the firm’s expenditure was a necessary cost to maintain its brand identity and market presence. It also dismissed concerns over the revenue-sharing structure, clarifying that the percentage-based fee was merely a mechanism to compute the payment for using the firm’s reputation, not a violation of legal ethics.
With this decision, the High Court upheld prior rulings that affirmed the legitimacy of the expense, rejecting the tax department’s challenge.