2019 (12) TMI 1613 - AT - Income Tax

Nature of expenditure - Disallowance of Trademark License Utilization fees - maintainability of expenditure incurred by way of license fees to the licensor of the trademark as revenue expenditure - HELD THAT - The claim of the assessee for payment of user license fees based on turnover is deductible as revenue expenditure. In our view, where the licensor continues to be owner of the capital asset i.e. trademark Vimal , the assessee cannot be said to have acquired any capital asset by making payment of user license fee. The interpretation of certain restrictive covenants by the AO is totally misplaced. The contractual obligations are ordinary in commercial parlance and does not grant any valuable right to the licensee. The advantage earned by the assessee by use of the license is neither permanent nor ephemeral but is linked to the use of the trademark owned by the licensor. The expense towards use of trademark was clearly laid out for the purpose of ongoing business carried on by the assessee and fee paid for use of such trademark is clearly deductible as revenue expenditure. The assessee herein has been merely granted a license to use trademark on payment of license fee determined on the basis of a formula laid down in the agreement. The right to use can neither be assigned at the wishes of licensee nor is the licensor prohibited to terminate the user license agreement executed with licensee. Thus, licensor retains the inherent control over the manner of use of trademark. Thus license fee paid for mere use of capital asset which continues to belong to someone else thus cannot be regarded to be in the capital field in the hands of licensee. We thus see no error in the conclusion drawn by the CIT(A) in favour of the assessee.

Summary

Issues:
Appeal by Revenue against CIT(A) orders for AYs 2012-2013 to 2014-15 regarding disallowance of trademark license utilization fees.

Detailed Analysis:

Issue 1: Disallowance of Trademark License Utilization Fees
The Revenue challenged the CIT(A)'s decision to delete the addition of Rs.2,44,82,272 made on account of disallowance of trademark license utilization fees. The AO observed the licensee obtained a trademark license for an unlimited period and concluded the expenditure was capital in nature, disallowing it. The CIT(A) allowed the appeal based on past decisions and deleted the disallowance, citing the licensee's ongoing use of the trademark. The Revenue contended the expenditure provided an enduring advantage and should be treated as capital, urging to reverse the CIT(A)'s decision.

Issue 2: Judicial Precedent
The assessee argued that the issue had been previously examined by a co-ordinate bench regarding the trademark license agreement in the hands of the erstwhile partnership firm. The Tribunal's past order highlighted the allowance of similar payments as revenue expenditure, emphasizing the ongoing nature of the advantage derived from the trademark use. The Tribunal found no reason to interfere with the CIT(A)'s decision, dismissing the Revenue's appeal.

Conclusion
The Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee regarding the deduction of trademark license fees as revenue expenditure. The ongoing use of the trademark did not result in the acquisition of a capital asset, and the licensee did not gain any valuable rights beyond the temporary use of the trademark. The Tribunal emphasized that the licensor retained control over the trademark, making the expense deductible as revenue expenditure. Consequently, the Revenue's appeal for AY 2012-13 and other related appeals for subsequent years were dismissed based on the identical issue involved.