2021 (9) TMI 1415 - AT - Income Tax

Trademark license fees deemed revenue expenditure, not capital; licensee didn't acquire ownership.

The DCIT, Circle-4 (1) (2), Ahmedabad Versus Vishnu Pouch Packaging Pvt. Ltd.

The DCIT, Circle-4 (1) (2), Ahmedabad Versus Vishnu Pouch Packaging Pvt. Ltd. - TMI Issues:Appeal against deletion of addition for trademark license utilization fees.Analysis:1. The appeal pertains to the deletion of an addition of Rs. 10,64,08,971 made by the Assessing Officer on account of disallowance of trademark license utilization fees.2. The Assessing Officer treated the expenditure as capital in nature, considering it as payment for the acquisition of trademark and licenses, allowing only 25% depreciation during the year under consideration.3. The assessee contended that the fees were revenue expenditure, as it was paid as a percentage of sales under an agreement with the licensee, and the license could be terminated at will by the sub-licensee.4. The CIT(A) allowed the appeal of the assessee, citing precedents where similar disallowances were overturned for the appellant in previous assessment years, stating that the expenditure should be treated as revenue.5. During the appellate proceedings, the counsel argued that the issue was previously decided in favor of the assessee by the ITAT for earlier years, a fact not contested by the Departmental Representative.6. The ITAT analyzed a similar case involving license fees paid by the assessee to the licensor of a trademark, where the Revenue contended the expenditure was capital in nature, providing an enduring advantage to the assessee. However, the ITAT upheld the CIT(A)'s decision, stating that the fees were deductible as revenue expenditure based on turnover, as the licensor retained ownership of the trademark, and the licensee did not acquire any capital asset.7. The ITAT concluded that the license fee paid for the use of the trademark, which remained the property of the licensor, was revenue expenditure, not falling under the capital field. The decision was based on the fact that the licensee had been granted a license for use, subject to conditions, and did not acquire ownership or valuable rights in the trademark.8. Following the precedent set by the ITAT and considering the nature of the expenditure, the ITAT dismissed the appeal of the revenue, upholding the CIT(A)'s decision to treat the trademark license utilization fees as revenue expenditure.9. Consequently, the appeal of the revenue against the deletion of the addition for trademark license utilization fees was dismissed by the ITAT in its judgment delivered on 29-09-2021.