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2008 (5) TMI 659 - AT - Income TaxRunning Royalty paid to NR company - Treated as Capital or Revenue expenditure - brand name of United Colors of Benetton - Granted exclusive licence to use the trade-marks in India - whether the assessee acquired assets itself or it was merely granted the license to use the trade-marks on the products being manufactured by it - HELD THAT - On Persual of the license agreement, it is clear that the assessee was only granted non-assignable licence, right and privilege with reference to the licensed marks to manufacture on the mark and distribute the licensed product in India and to use the expression Benetton . The assessee did not become the owner of the licensed marks or the holder of the trade-marks. Such license marks at all times remain the property of the licensor. The license was initially granted for a period from October, 1992 till fall/winter season of 1999-2000. However, to continue to use the license mark for manufacturing of the licensed products, the assessee was to pay royalty @ 5 per cent of the amount of net sales. By paying the royalty the assessee did not acquire any right in the licensed trade-marks. Only the products manufactured by the assessee i.e. garments will bear the licensed marks for which the license has been granted. Accordingly it can be said that the assessee has not acquired any capital asset but has merely paid to the licensor for use of such trade-marks. Therefore, expenses are to be treated as revenue expenditure and not capital expenditure. It is seen that the assessee was required to pay royalty every year. But for payment of royalty every year the assessee could not continue receiving the license to use the licensed marks on the products manufactured by it. Thus making payment every year, it cannot be said that the assessee received advantage of enduring nature primarily to bring it as capital expenditure. Royalty payment is not a one time but rather recurring expenditure merely to use licensed marks. As rightly contended by the learned counsel for the assessee that granting of exclusive license to the assessee alone in India does not alter the character of payment from revenue to capital. In the case of Avery India Ltd. 1993 (4) TMI 25 - CALCUTTA HIGH COURT the Hon'ble Calcutta High Court held that even if the assessee was granted exclusive license, it will not convert the revenue expenditure into capital expenditure. Similar view has been held by Full Bench in the case of Praga Tools Ltd. vs. CIT 1979 (11) TMI 80 - ANDHRA PRADESH HIGH COURT . We accordingly hold that the expenditures are revenue in nature and even do not bring into existence any capital asset or the assessee receives any advantage of enduring nature so as to treat it as capital expenditure. In the result, Appeals are dismissed.
Issues Involved:
1. Treatment of royalty payment by the assessee as capital or revenue expenditure. Issue-wise Detailed Analysis: 1. Treatment of Royalty Payment by the Assessee: The primary issue in both assessment years (2002-03 and 2003-04) was whether the royalty payment made by the assessee should be treated as capital expenditure or revenue expenditure. The Assessing Officer (AO) classified the royalty payment as capital expenditure, while the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as revenue expenditure. Arguments by the AO: The AO argued that the royalty payment should be considered capital expenditure for the following reasons: (a) It allowed the assessee to manufacture and sell products using the technology and patents of the Italian company. (b) The right to manufacture was linked to the receipt of technical information, making the royalty payment capital in nature. (c) The acquisition of technical know-how provided an enduring benefit to the assessee. Arguments by the Assessee: The assessee, a public limited company engaged in manufacturing and selling readymade garments and accessories under the brand "United Colors of Benetton," contended that the royalty payment was for using the brand names and trade-marks as per the agreement with Benetton Group SpA. Key points of the agreement included: - A non-transferable, non-assignable license to use the brand names and trade-marks. - Payment of running royalty at 5% of net sales for the use of the brand name and trade-mark. - The agreement was valid for 7 years, extendable, and terminable at will by either party. - The proprietary rights in the brand/trade-mark remained with Benetton Group SpA. The assessee argued that since they only acquired a limited right to use the brand names/trade-marks during the agreement's duration, the royalty payment was a revenue expenditure. They cited various case laws to support their position, including: - CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC) - Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC) - CIT vs. Indian Oxygen Ltd. (1996) 218 ITR 337 (SC) Arguments by the Revenue: The learned Departmental Representative supported the AO's stance and cited decisions such as: - Dy. CIT vs. Saraf Chemicals Ltd. (2006) 287 ITR 124 (Mumbai)(AT) - Eimco K.C.P. Ltd. vs. CIT (2000) 242 ITR 659 (SC) They argued that the exclusive license granted to the assessee to use the trade-marks in India indicated a capital expenditure. Tribunal's Findings: The Tribunal reviewed the relevant clauses of the license agreement and noted that: - The assessee was granted a non-assignable license to use the licensed marks for manufacturing and selling products in India. - The proprietary rights in the licensed marks remained with the licensor. - The license was initially granted for a specific period, with royalty payments required to continue using the licensed marks. The Tribunal concluded that the assessee did not acquire any capital asset but merely paid for the use of the trade-marks. The royalty payment was a recurring expenditure necessary for using the licensed marks, not a one-time payment for acquiring an asset. The Tribunal distinguished the facts of the present case from the cases cited by the Revenue. They emphasized that the nature of the expenditure (revenue or capital) depends on whether the assessee acquired an asset or merely obtained a license to use the trade-marks. Conclusion: The Tribunal upheld the CIT(A)'s decision, treating the royalty payment as revenue expenditure. They dismissed the Revenue's appeals, concluding that the expenditure did not bring into existence any capital asset or provide an enduring advantage to the assessee. Result: Both appeals by the Revenue were dismissed.
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