2021 (9) TMI 1415 - AT - Income Tax

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

The ITAT dismissed the revenue's appeal against the deletion of the addition for trademark license utilization fees. The ITAT upheld the CIT(A)'s decision ... Nature of expenditure - Trademark License Utilization fees - AO has not agreed with the submission of the assessee and treated the trademark license utilization fees as payment made for acquisition of trademark and licneses within the meaning of capital asset as defined in section 32(1)(ii) and allowed 25% of depreciation - HELD THAT:- As decided in M/s. Vishnu Pouch Packaging Pvt. Ltd . [2019 (12) TMI 1613 - ITAT AHMEDABAD] 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. - Decided against revenue. 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.