2018 (7) TMI 63 - AT - Income Tax

Disallowance of trademark and license fee - Allowable revenue expenditure - capital expenditure or revenue expenditure - Held that - One-time consolidated amount paid can be considered as a payment for use of the trademark in the business of assessee. Since it has an enduring benefit and is applicable till assessee ceases to be a subsidiary of GRM Holding/GMR Group we are of the opinion that this amount is to be treated as capital asset and depreciation on that u/s. 32(1)(ii) is allowable. It is admitted that without acquiring the aforementioned trademark and license assessee would have had to commence business from scratch and through the gestation period and by acquiring aforesaid business rights/ license assessee could incidentally boost its revenues. Onetime consolidated payment is in the nature of intangible asset as specified in Section 32(1)(ii) and are accordingly eligible for depreciation on the cost at which they are acquired. Thus the amount of 3, 37, 50, 000/- is to be considered as capital asset u/s. 32(1)(ii) and necessary depreciation is to be allowed. There is no dispute with reference to commercial expediency or with reference to being capital in nature. AO and CIT(A) disallowed the entire amount as capital expenditure but they failed to consider whether the said amount is eligible for depreciation u/s. 32(1)(ii). AO to allow depreciation on the amount of 3, 37, 50, 000/- treating it as capital asset and allow the balance amount of 35, 90, 480/- paid towards annual recurring license fee as revenue expenditure in tune with the amounts allowed in later years. Assessee s grounds are accordingly considered allowed partly.

Summary

Issues:
- Disallowance of trademark and license fee of ?3.73 Crores as capital expenditure or revenue expenditure.

Analysis:
1. The appeal was against the disallowance of trademark and license fee of ?3.73 Crores by the Commissioner of Income Tax (Appeals)-2, Hyderabad. The Assessee contended that the amount should be considered as revenue expenditure, while the Assessing Officer (AO) treated it as capital in nature.

2. The Assessee entered into agreements with GMR Holdings Pvt. Ltd. for trademark and artistic work licenses. The Assessee paid a one-time consolidated fee and regular license fee based on turnover. The AO disallowed the entire amount as capital expenditure, considering it to be for acquiring a benefit of enduring nature. The Assessee argued that it was a non-exclusive agreement for the purpose of using the license, not ownership, and thus should be treated as revenue expenditure.

3. The Commissioner of Income Tax (Appeals) agreed with the AO, noting the contradictory stand taken by the Assessee. The Assessee contended that the amount should be allowed as revenue expenditure or considered an intangible asset eligible for depreciation under Section 32(1)(ii) of the Act.

4. The Tribunal considered the agreements and case law. It allowed the annual recurring license fee as revenue expenditure, citing previous assessment years. For the one-time license fee, the Tribunal referred to the nature of the right given, benefit derived, and payment nature. Relying on judicial pronouncements, it concluded that the one-time fee was a capital asset eligible for depreciation under Section 32(1)(ii).

5. The Tribunal differentiated the one-time fee from the annual fee, stating that the former provided enduring benefits and was akin to acquiring intangible assets. Therefore, it directed the AO to allow depreciation on the one-time fee and consider the annual fee as revenue expenditure, partially allowing the Assessee's appeal.

6. In conclusion, the Tribunal partially allowed the Assessee's appeal, allowing depreciation on the one-time license fee while treating the annual fee as revenue expenditure. The judgment was pronounced on 29th June 2018.