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I-T - Payment made to acquire trade mark which facilitates entry into a particular market is revenue expenditure: HC

 

By TIOL News Service

NEW DELHI, APRIL 25, 2018: THE ISSUE BEFORE THE HIGH COURT WAS - Whether payment made to acquire a trademark is revenue expenditure, where its ownership remains with the assignor and only a right to use was given. YES IS THE ANSWER.

Facts of the case

The assessee company is a leading importer & supplier of automobile accessories and rubber products. It entered into a Trade Mark license agreement for a period of ten years, which was later substituted with a license agreement, with one M/s Hilton Rubbers Ltd. (HRL). Under the agreement, the assessee could use the trademark of HRL on two of its products. Ownership of the trademark remained with HRL and it also received royalty on domestic sales made by the assessee. Also such agreement could be terminated if the assessee misused the trademark. Subsequently, a second license agreement was also entered into, for which the assessee paid Rs 1 crore to HRL. On such expenditure, the assessee claimed deduction u/s 37(1), on the rationate that it was a revenue expenditure.

On assessment for the relevant AY, the AO noted that the payment of Rs 1 crore was absent in the earlier agreement & had been made for use of the brand. Hence the AO held the expenditure of Rs 1 Crore as not being related to the assessee's business. It was further held that such expenditure was of capital nature and was of an enduring nature. On appeal, the CIT(A) relied on a decision of the Apex Court and held such payment to be revenue expenditure on which assessee could claim deduction. It was also held that the expenditure incurred in connection with right to use the trademark was important in the business operations of the assessee & also for its efficiency and profitability. Subsequently, the Tribunal overturned the findings of the CIT(A) and held that while one agreement was for use of trademark, and the other was for sale of shareholding, the payment of Rs 1 crore was not made for a pure trademark license. The Tribunal further held that since the right to use the trademark was for an unlimited period, and there was no clause for renewal or any further consideration, the trademark though termed as a license, was in effect, final sale of the mark. Thus, the Tribunal held the payment of Rs 1 Crore to be an enduring benefit & hence capital in nature.

On hearing the matter, the High Court held that,

++ the fundamental test to determine as to whether a particular mark has been licensed or assigned is to see if the licensor or assignor has retained any rights in the mark. If rights are retained with the owner, usually it is a license and if no rights are retained by the owner, then it would usually be an assignment. A license is, therefore, nothing but a permissive use of the mark, which permission, is revocable. A `right to use' is usually a license and not an assignment, except in certain circumstances;

++ the first agreement contains an acknowledgment that HRL was the owner of the mark. The agreement grants an exclusive right to use “HILTON” owned by HRL to the assessee. The assessee could not, without HRL's permission apply for registration of the mark on its own or dispute the ownership of HRL. If any infringement came to the knowledge of the assessee, it had to seek the prior written consent of HRL, which had the right to decide as to what action it would take whether with or without the assessee, in respect of such infringer. An application could have been filed to register the assessee as a registered user and such application could have been made jointly only. The termination clause was clear. Though the initial period was 10 years, the agreement could have been terminated with 12 months? written notice by either party. The termination was automatic under some circumstances as detailed in the agreement. One of the reasons for termination could be the termination of the joint venture agreement. Upon termination of the license agreement, the appellant would not have any rights to use or seek registration of the mark “HILTON”. This agreement was in the nature of a license agreement and had all the trappings of a license. The rights of HRL were completely preserved and only a right to use was being given to the assessee. No long term benefit accrued to the assessee;

++ the settled position in law is that use by a licensee would also inure to the benefit of a licensor, for it would continue to remain the owner, unless there was also part transfer of title. In this case, title and ownership of the mark was not transferred. The assessee only had permission and approval to use the mark. Thus, the benefit of the use of the mark “HILTON” during the period when it stood licensed to the assessee inures to HRL. The use of the mark “HILTON” thus, merely facilitated the assessee's business in India i.e. it facilitated the assessee's entry into India under the brand name and the trade name which was familiar to the industry and market. The advantage of having used the mark “HILTON” between 1992 and 2005 could endure and benefit the appellant as a permitted and authorized user, but it cannot be called an acquisition and benefit of capital nature so as to constitute capital expenditure. The assessee did not purchase and acquire title in the trademark. It did not retain any rights in the mark. Thus, the payment of Rs.1 crore was for the purpose of obtaining an advantage in carrying on its business and is therefore in the revenue field.

(See 2018-TIOL-779-HC-DEL-IT)


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