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2018 (4) TMI 1485 - HC - Income TaxDeduction of expenditure u/s 37(1) - revenue expenditure or capital expenditure - Instead of a royalty payable periodically, a onetime royalty of ₹ 1 Crore was payable towards the Trade Mark license - Right to use the Mark HILTON - Held that - The fundamental test to determine as to whether a particular mark has been licensed or assigned is to see if the licensor/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. A license agreement usually has some or all of the above stipulations. Thus, the nature of the agreement can be easily deduced from the existence of all or any of the above conditions/characteristics. In some circumstances however, an exclusive licence which excludes the owner from using the mark and vests perpetual rights without any termination clause, could constitute an assignment. However, the present case is not one such case. The payment of ₹ 1 crore ought to be treated as revenue expenditure. There is no doubt in the proposition relied upon by the revenue, as held in Honda Siel (2017 (6) TMI 524 - SUPREME COURT OF INDIA), the Court has to look at the real nature of the agreement. On an analysis of the agreement on record, there is no doubt that it was merely a trademark license agreement, which conferred no enduring benefit or long term benefit to the appellant. Even the corporate name license agreement was terminable and did not create ownership rights in the appellant for the word HILTON . The Court takes notice of the fact that the corporate name has in any event been changed by the appellant. Held as Revenue expenditure - Decided in favor of assessee.
Issues Involved:
1. Whether the payment of ?1 Crore for the exclusive use of the trademark "HILTON" is to be treated as capital expenditure or revenue expenditure? Issue-wise Detailed Analysis: 1. Background and Agreements: The appellant entered into a Trade Mark license agreement dated 27th January 1993 (first license agreement) and later substituted with an agreement dated 9th November 1995 (second license agreement) with HRL. The first agreement granted an exclusive right to use the trademark "HILTON" in India for Raw-Edge and Wrapped V-Belts, with a running royalty of 1.8% of the net selling price. The second agreement, following HRL's decision to sell its shareholding, replaced the running royalty with a one-time payment of ?1 Crore for the exclusive right to use the trademark. 2. Assessment and Dispute: The appellant claimed the ?1 Crore payment as a deduction under Section 37(1) of the Income Tax Act, 1961, as revenue expenditure. The AO disallowed the deduction, treating the expenditure as capital in nature, citing the enduring benefit and the perpetual nature of the license. The CIT(A) reversed the AO's decision, treating the expenditure as revenue, emphasizing its importance in the appellant's business operations. The ITAT upheld the AO's view, treating the payment as capital expenditure due to the enduring benefit and lack of a reversion clause for the trademark. 3. Legal Precedents and Tests: The court examined various precedents to distinguish between capital and revenue expenditure. In CIT v. Ciba of India Ltd., the Supreme Court held that a mere license to use technical knowledge and trademarks without acquiring proprietary rights is revenue expenditure. In Empire Jute Company Ltd. v. CIT, the Supreme Court emphasized that the test of enduring benefit is not absolute and must consider the nature of the advantage in a commercial sense. In Alembic Chemical Works Co. Ltd. v. CIT, the Supreme Court reiterated that even a 'once for all' payment could be revenue expenditure based on the purpose and effect of the outlay. 4. Analysis of the Trademark License: The court analyzed the nature of the trademark license agreements. The first agreement clearly indicated a license with HRL retaining ownership and the appellant having a right to use. The second agreement, despite changing the payment structure to a lump-sum, did not alter the fundamental nature of the license. The appellant did not acquire ownership of the trademark, and the use of the mark was contingent on HRL's permission, with termination clauses preserving HRL's rights. 5. Determination of Expenditure Nature: The court considered the factors relevant to determining the nature of the expenditure: - The nature of the right given was exclusive but term-based. - The benefit derived was facilitating business operations, not acquiring a capital asset. - The payment structure, though lump-sum, was for a limited period and did not confer ownership. 6. Conclusion: The court concluded that the payment of ?1 Crore was for obtaining an advantage in carrying on the business and did not confer any enduring benefit or long-term ownership rights. Therefore, the expenditure was in the revenue field. The court directed that the payment be treated as revenue expenditure for the AY 1996-97, favoring the appellant and against the Revenue. Judgment: The court held that the payment of ?1 Crore for the exclusive use of the trademark "HILTON" is to be treated as revenue expenditure and allowed the deduction under Section 37(1) of the Income Tax Act, 1961. The question of law was answered in favor of the appellant.
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