2023 (2) TMI 354 - AT - Income Tax

Nature of expenses - disallowance of payment made towards co branding fees treating the same as capital expenditure - HELD THAT - As perused the co branding agreement entered into by the assessee with AMW, wherein the assessee acquired non transferable limited right and license to use the brand name and logo of AMW on the packaging of licensed products manufactured by the assessee and the co-branded license produced products were meant for use as service fills and by way of retail sale for use in AMW vehicles only, which is evident from the preamble and Section 2 Section 5 Agreement. The co- branded Licensed Products could not be used by the Assessee to service its other clients. The sole and exclusive customer of the Assessee in respect of the co-branded Licensed Products was AMW itself for use as service fills or retail use. The agreement did not confer/vest in the Assessee s proprietary rights in the trademark/ license/ brand name, the Assessee was only granted an exclusive, non-transferable right and license to use the brand name of AMW on products manufactured by it. Assessee did not have absolute ownership of brand name of AMW and merely obtain right and license to use the said brand name on the products manufactured by the assessee. The use of the co brand license product was also only for one customer i.e. AMW itself. The Jurisdictional High Court in the case of Hilton Roulnds Ltd. 2018 (4) TMI 1485 - DELHI HIGH COURT held that 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, therefore, in the opinion of the Hon ble High Court, is nothing but a permissive use of the mark, whose permission, is revocable. A right to use is usually a license and not an assignment, except in certain circumstances. Thus Lower Authorities have committed an error in disallowing the expenditure claimed in respect of payment made by the assessee to AMW, accordingly the addition made by the Revenue Authorities is deleted and the Grounds of Appeal are allowed.

Summary

Issues Involved:
1. Assessment of income discrepancy.
2. Disallowance of expenditure claimed as revenue expenditure.
3. Classification of expenditure as capital expenditure.

Issue-wise Detailed Analysis:

1. Assessment of Income Discrepancy:
The appellant contested the CIT(A)'s decision to uphold the assessment of income at Rs. 144,44,45,110 against the returned income of Rs. 139,56,95,110. The Tribunal did not specifically adjudicate on this ground as it was deemed general in nature and required no separate adjudication.

2. Disallowance of Expenditure Claimed as Revenue Expenditure:
The appellant claimed a deduction of Rs. 6,50,00,000 paid to AMW for securing a non-transferable right and license to use AMW's name, trademark, and logo. The Assessing Officer (A.O.) disallowed this deduction, treating it as capital expenditure, and allowed depreciation at 25% on the amount. The CIT(A) upheld this view, stating that the payment resulted in an acquisition of an intangible asset, thus enhancing the profit-earning apparatus of the appellant.

3. Classification of Expenditure as Capital Expenditure:
The Tribunal examined the nature of the co-branding agreement between the appellant and AMW. The agreement granted a non-transferable right and license to use AMW's brand name and logo for a period of 60 months. The Tribunal noted that the co-branded products were exclusively for AMW vehicles, and the marketing was to be done through AMW's network. The agreement did not confer proprietary rights in the trademark to the appellant but only a limited, non-transferable right to use it.

The Tribunal relied on the judgment of the Jurisdictional High Court in the case of Hilton Roulunds Ltd. v. CIT, where it was held that a license agreement, which retains rights with the owner and grants only a right to use, is not an assignment but a license. The Court outlined several factors to determine whether an arrangement is a license or an assignment, including the retention of rights by the owner, the nature of the payment, and the right of supervision and control by the licensor.

Applying these principles, the Tribunal concluded that the payment made by the appellant to AMW was for a license to use the trademark and did not result in the acquisition of an intangible asset. Therefore, the expenditure was of a revenue nature and should not have been disallowed.

Conclusion:
The Tribunal found that the lower authorities erred in treating the expenditure as capital in nature and disallowing it. The addition made by the Revenue Authorities was deleted, and the appeal filed by the appellant was allowed. The order was pronounced in the Open Court on 9th February 2023.