TaxTMI 
TaxTMI 
2008 (5) TMI 659
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....treated the aforesaid amount of royalty as capital expenditure for the following reasons : (a) It allows the assessee company to manufacture and sell products by using technology and patents of the Italian company. (b) The right to manufacture allowed under this agreement is connected and has nexus with receipt of technical information. Without right to manufacture and sale of products, technical information and know-how are of no use and hence the payment of "royalty" is of capital nature. (c) By acquiring technical know-how assessee has acquired benefit of enduring nature for which the "royalty" is being paid. 4. Before the learned CIT(A) it was contended that the assessee claimed deduction for sum of Rs. 4,21,57,670 being the running royalty paid to Benetton Group SpA, a company incorporated in Italy, as per the trade-mark dyeing facility in know-how and product know-how and sub-license collaboration (the agreement dt. 11th Jan., 1993). The payment for royalty was for the purpose of using the brand names and trade-marks as provided in the said agreement. The agreement between the assessee and Benetton Group SpA provides for grant for non-transferable, non-assignable ....
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.... (6) Triveni Engineering Works Ltd. vs. CIT (1982) 29 CTR (Del) 234 : (1982) 136 ITR 340 (Del); (7) Addl. CIT vs. Shama Engine Valves Ltd. (1983) 32 CTR (Del) 351 : (1982) 138 ITR 216 (Del); (8) CIT vs. Bhai Sunder Dass & Sons (P) Ltd. (1986) 158 ITR 195(Del). The learned CIT(A) after considering the submissions and various case law held that the assessee has an access to the technical knowledge and know-how than to its exclusive acquisition. The trade-marks and brand names cannot be used after the termination of the agreement. Hence, the expenditure is revenue in nature and not for the purpose of bringing into existence any asset of enduring nature. The Revenue is now in further appeal before us. 5. The learned Departmental Representative Shri Sanjay Kumar relied upon the stand taken by the AO. He also relied upon the following decisions : (1) Dy. CIT vs. Saraf Chemicals Ltd. (2007) 106 TTJ (Mumbai) 352 : (2006) 287 ITR 124 (Mumbai)(AT); and (2) Eimco K.C.P. Ltd. vs. CIT (2000) 159 CTR (SC) 137: (2000) 242 ITR 659(SC). He further submitted that the assessee was granted exclusive licence to use the trade-marks in India. Since the assessee was granted licence to....
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....t clauses of the license agreement which are as under : "A. The Licensor is the holder of a license of the trade-marks registered and the trade-mark applications pending or in the process of being filed in India, the Maldives, Nepal and Sri Lanka for products of international class No. 25 which are owned by Benetton Group SpA, of Via Villa Minelli 1, 31050 Ponzano Veneto (Treviso), Italy ("the Proprietor") and are listed in the Third Schedule. B. The Licensor holds under the terms of the license referred to under Recital A. the right to grant third parties in India and the other countries therein referred to sub-licenses inter alia of the said trade-marks, trade-mark applications and any registration issuing from any such application. C. The Licensor has furthermore developed and/or has acquired or acquired the right to use certain otherwise unavailable innovative technology, confidential know-how and proprietary information of value concerning the planning, design, erection and operation of state-of-the-art dyeing facilities for the textile sector. D. The Licensee is a company whose stock is owned 50 per cent by the Licensor and 50 per cent by DCM and/or its nominees o....
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....parties. (2) with reference to the Licensed Mark '012 Benetton' and to the relevant Licensed Products starting from the Winter 1992 season, and thus from 20th Oct., 1992; (a) to manufacture or cause to be manufactured for its account solely by agreed sub-contractors (as hereinafter defined) licensed product in India. (b) to market, distribute and sell in the territory under the Licensed Marks licensed products manufactured by or for the account of the Licensee through the permissible outlets solely. (c) to utilize in the territory and cause to be utilized by an agreed sub-contractor in India the product know-how in connection with and for the purpose of the exercise on its part of the licenses, rights and privileges which are specified under cl. 3(2)(a) and (b) (d) to use the expression 'Benetton' (a Benetoon mark) as its company name, or part of its company name, in India, if and to the extent that the Licensor has previously consented thereto, in writing. (3) The license specified under cl. 3(1)(a) shall be non-exclusive, the licenses specified under cl. 3(2)(a) through (d) shall be exclusive (except that the Proprietor, the Licensor and any comp....
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....ny person (or in any way attempt to do so)." From the above it is clear that the assessee was only granted non-assignable licence, right and privilege with reference to the licensed marks to manufacture on the mark and distribute the licensed product in India and to use the expression "Benetton". The assessee did not become the owner of the licensed marks or the holder of the trade-marks. Such license marks at all times remain the property of the licensor. The license was initially granted for a period from October, 1992 till fall/winter season of 1999-2000. However, to continue to use the license mark for manufacturing of the licensed products, the assessee was to pay royalty @ 5 per cent of the amount of net sales. By paying the royalty the assessee did not acquire any right in the licensed trade-marks. Only the products manufactured by the assessee i.e. garments will bear the licensed marks for which the license has been granted. Accordingly it can be said that the assessee has not acquired any capital asset but has merely paid to the licensor for use of such trade-marks. Therefore, expenses are to be treated as revenue expenditure and not capital expenditure. In the case of ....
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....d not continue receiving the license to use the licensed marks on the products manufactured by it. Thus making payment every year, it cannot be said that the assessee received advantage of enduring nature primarily to bring it as capital expenditure. Royalty payment is not a one time but rather recurring expenditure merely to use licensed marks. 9. As regards decisions relied upon by the learned Departmental Representative, it is seen that the facts are quite distinguishable. In the case of Eimco K.C.P. Ltd. (supra) the assessee was promoted jointly by Eimco, an American company and K.C.P. Ltd., an Indian company. Both were to subscribe shares worth Rs. 4,70,000 each. For its share, Eimco contributed technical know-how and for which shares were allotted. The Hon'ble Supreme Court held that what in effect was done by the assessee in allotting equity shares to Eimco was to reimburse the contribution by Eimco by way of know-how, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the assessee. It was not a case where after the incorporation, the assessee in the course of carrying on its business, ....