Trade mark licence fee treated as revenue expenditure, and moulds qualified for enhanced depreciation on functional use.

A payment for a limited right to use another party's trade mark for ten years was treated as revenue in character because it did not transfer ownership or create an enduring asset, and the arrangement was not shown to be a sham or to exceed arm's length value. The analysis also supports higher depreciation on moulds at 40% where the decisive factor is their use in manufacturing rubber and plastic goods, not the existence of a separate factory for that activity. The commentary therefore centres on revenue-versus-capital characterisation and the functional test for enhanced depreciation.

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Issues: (i) Whether the payment of Rs. 6 crores made for permission to use the trade mark for a limited period was a sham transaction or capital expenditure, and whether it was allowable as revenue expenditure; (ii) Whether the assessee was entitled to higher depreciation at 40% on the relevant moulds under the prescribed item in Appendix I to the Income Tax Rules, 1962.

Issue (i): Whether the payment of Rs. 6 crores made for permission to use the trade mark for a limited period was a sham transaction or capital expenditure, and whether it was allowable as revenue expenditure.

Analysis: The payment did not bring about an outright acquisition of the trade mark or any enduring advantage of a permanent nature. It secured only a limited right to use the trade mark for ten years. A transaction is sham only when it pretends to be one thing but in substance effects something different, or where no real purpose is shown. Here, the payment and the contractual right obtained corresponded to each other. The existence of a licence arrangement between separate legal entities, and the absence of proof that the fair market value of the right was nil or that the payment exceeded an arm's length value, negatived the charge of sham. The payment was for business use of an asset owned by another company and was therefore revenue in character.

Conclusion: The payment was not sham and was allowable as a revenue deduction in favour of the assessee.

Issue (ii): Whether the assessee was entitled to higher depreciation at 40% on the relevant moulds under the prescribed item in Appendix I to the Income Tax Rules, 1962.

Analysis: The moulds were used in the manufacture of rubber and plastic goods, and the fact that the manufacturing activity was carried on in a composite factory did not take the case outside the relevant depreciation entry. The decisive consideration was the use of the moulds for manufacture of rubber and plastic goods, not the existence of a separate and exclusive factory for those goods. The reasoning followed the approach applied in the connected group matter and supported the claim for the enhanced rate of depreciation.

Conclusion: The assessee was entitled to higher depreciation at 40% in favour of the assessee.

Final Conclusion: The appeal succeeded on the trademark licence fee and depreciation issues, while the remaining ground was not pursued, resulting in partial relief to the assessee.

Ratio Decidendi: A payment made for a limited right to use another's trade mark, without acquiring ownership or any enduring asset, is revenue expenditure unless it is shown to be a sham or to exceed arm's length value; and higher depreciation depends on the actual use of the asset in the specified manufacturing activity, not on the existence of a separate factory.

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