Restricted trademark licence rights amount to royalty, not capital gains, where ownership is retained and use remains conditional.

Retention of ownership in trademarks and brand names, coupled with only restricted, conditional and revocable user rights, means the consideration is royalty and not capital gains. The agreement preserved the proprietor's title; the licensee received use rights subject to brand-book conditions, territorial limits, non-assignment restrictions and termination on breach, so there was no sale, exchange, relinquishment or extinguishment of ownership rights. The payment therefore fell within royalty under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-Turkey tax treaty. Separate claims on treaty rate and set-off of royalty income against long-term capital loss were not examined and were remitted for fresh consideration.

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Issues: (i) Whether the consideration received for granting exclusive, irrevocable and perpetual rights to use trademarks and brand names under the trademark licence agreement was royalty or capital gains; (ii) Whether the issues relating to treaty rate of taxation and set off of royalty income against long-term capital loss required restoration to the Assessing Officer.

Issue (i): Whether the consideration received for granting exclusive, irrevocable and perpetual rights to use trademarks and brand names under the trademark licence agreement was royalty or capital gains.

Analysis: The agreement preserved the assessee's ownership of the trademarks and brand names. The licensee was only permitted to use them in accordance with specified conditions, brand-book guidelines, territorial limits, restrictions on assignment, and a termination clause in case of breach. The rights granted were therefore circumscribed and did not amount to sale, exchange, relinquishment, extinguishment, or alienation of the underlying ownership rights. On that basis, the payment fell within the meaning of royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-Turkey tax treaty, and not within the capital gains article.

Conclusion: The consideration was held to be royalty and not capital gains, and this issue was decided against the assessee.

Issue (ii): Whether the issues relating to treaty rate of taxation and set off of royalty income against long-term capital loss required restoration to the Assessing Officer.

Analysis: These claims had not been examined by the lower tax authorities, and the matter therefore required fresh consideration after giving the assessee an opportunity of being heard. The claim concerning the applicable treaty rate was to be examined with reference to the treaty and section 90(2) of the Income-tax Act, 1961, and the set-off claim was to be examined with reference to section 71(3) of the Income-tax Act, 1961.

Conclusion: These issues were restored to the Assessing Officer for fresh adjudication.

Final Conclusion: The royalty characterization was upheld, while the remaining monetary claims were sent back for reconsideration, resulting in a partial allowance of the appeal.

Ratio Decidendi: Where ownership in a trademark or brand name is retained and the transferee receives only a restricted, conditional right to use it, the consideration is royalty rather than capital gains.

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