TaxTMI 
TaxTMI 
2018 (4) TMI 1485
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....on for Developing Countries, Copenhagen (hereinafter 'IFU') formed the appellant as a joint venture in India. HRL owned 50% of the equity shares of the appellant, and RF and IFU held 26% and 24% respectively of the said joint venture. At the time when the joint venture was formed, the first license agreement dated 27th January 1993, was entered into, under which the appellant was granted by HRL license to use the Trade Mark HILTON in respect of Raw-Edge and Wrapped V-Belts. The relevant clauses of the said agreement are as under: "2(a). Subject to the terms of this Agreement the Proprietor hereby grants to the User for the term of this Agreement an exclusive right to use upon or in connection with Raw Edge, Wrapped V-Belts and other power transmissions belts excluding flat transmission belts (hereinafter referred to as "the Goods") the Trade Mark in India and in such other countries to which the Goods are exported. 3(a). In consideration of the said right, the User shall pay to the Proprietor a running royalty on the domestic sale (i.e. sales within the Republic of India) of RawEdge and Wrapped V-Belts at the rate of 1.8% of the net selling price from the date of commercial produ....
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....ndangered in any manner. 4. Though, the agreement was for a period of 10 years, a second license agreement was entered into on 9th November, 1995. The relevant clauses of the second license agreement 1995 read as under: "1. The Proprietor is registered as the Proprietor in India of the Trade Mark "Hilton" which the Registration No.325863 (hereinafter called the "Trade Mark") shown in the Schedule hereto and has exclusive rights in the Trade Mark. 2. By a Trade Mark License Agreement dt. January 27, 1993 (Hereinafter "First Agreement") entered into between the proprietor and the user, the user has right to use the Trade Mark "Hilton", either alone or as part of a trade name (including but not limited to "Hilton Optiflex". "Hilton Optiset" and "Hilton Optitex"). In India and in all other countries to which the user may intend to export Raw-Edge and Wrapped v. Belts, subject to the terms and conditions set forth in the said agreement. 3. By a Joint Venture Agreement dated 13, 1992 (hereinafter "JV Agreement) entered into between Proprietor, M/s Roulunds Fabriker, Denmark (hereinafter "RF) and the Industrialization for Developing countries, Copenhagen (hereinafter "IFU), the partie....
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....me royalty of Rs. 1 Crore was payable towards the Trade Mark license. c) Exclusive right to use the mark was given to the appellant. 5. The short question that has arisen is as to whether the payment of Rs. 1 Crore made under the second license agreement to HRL by the appellant was entitled to deduction under Section 37(1) of the Income Tax Act, 1961 (hereinafter 'the Act') as revenue expenditure? 6. The Reserve Bank of India gave no objection for the making of payment on 30th March, 1996. The appellant/assessee filed its return of income for assessment year (hereinafter 'AY') 1996-97 declaring a loss of Rs. 23,39,304/-. Deduction was claimed under Section 37(1) of the Act in respect of payment of Rs. 1 Crore made to HRL for use of Trade Mark under the second license agreement. Assessment was completed under Section 143(3) of the Act and the income of the appellant was determined at Rs. 84,95,035/-. The assessing Officer (hereinafter 'AO') came to the conclusion that since the payment of Rs. 1 Crore was absent in the earlier license agreement and it was for use of the brand, the expenditure of Rs. 1 Crore cannot be related to the business of the appellant. The AO further held th....
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.... the right to use was for an unlimited period, and there was no clause for renewal and/or any further consideration, the trademark, though termed as a license, was in effect, final sale of the mark. Thus, the ITAT held that the payment of Rs. 1 Crore is for an enduring benefit and hence is capital in nature. 10. On 13th September, 2005, the following question of law was framed in the present appeal: "Whether the Income Tax Appellate Tribunal was right in law in holding that the payment of Rs. 1 crore in terms of the agreement dated 09.11.1995 represented capital expenditure could not be allowed as deduction under the Income Tax Act, 1961?" Submissions of the appellant/assessee 11. Mr. Ajay Vohra, learned Senior counsel for appellant relied on the above mentioned judgments and also cited the recent judgment of a Division Bench of this Court in McDonalds India Pvt. Ltd. & Ors. v. Commissioner of Trade and Taxes (2017) 241 DLT 769 (DB) ('McDonalds', for short). In McDonalds (supra), the Court was concerned with the question as to whether the consideration revealed by the McDonalds was taxable under the Delhi Value Added Tax Act, 2004 ('DVAT Act', for short). This Court held that p....
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....any was set up on 13th August, 1992 and though initially it was a joint venture, the shareholding got completely transferred by means of the Share Purchase agreement in 1995. The second license agreement dated 9th November, 1995 was executed at the time of transfer of the shareholding. According to Mr. Bhatia, clause 12 of the second license agreement would show that the right to use the mark was granted in perpetuity. Thus, when the payment of Rs. 1 Crore was made, the benefit that was acquired was of an enduring nature. He places heavy reliance on a recent judgment of the Supreme Court in Honda Siel Cars Ltd. v. CIT, (2017) 395 ITR 713 (SC) (hereinafter, 'Honda Siel') wherein it has been held as under: "3. The dispute which has arisen is as to whether the said technical fee of 30.5 million US Dollar payable in five equal instalments on yearly basis is to be treated as revenue expenditure or capital expenditure. .............................. 22. When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and,....
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....t in question, i.e. establishment of plant, machinery and manufacture of product with the help of technical know-how, coextensive in our continuance of Agreement. The Agreement also has a clause of renewal which, in our view, in totality of terms and conditions, will make the unit continue so long as manufacture of product in plant and machinery, established with aid and assistance of foreign country will continue. Since, it is found that the Agreement in question was crucial for setting up of the plant project in question for manufacturing of the goods, the expenditure in the form of royalty paid would be in the nature of capital expenditure and not revenue expenditure. The Tribunal is conclusion that it is only the other three memoranda which were necessary for setting up the manufacturing payment of technical fees/royalty on the ground that this agreement was not in connection with the setting up of plant or manufacturing facilities, is not correct. It would be interesting to note that even the Tribunal had nurtured doubt on the nature of this expenditure as TCA was signed simultaneously with the other memoranda to facilitate setting up of a new factory and not improvising the e....
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....greement, to the patents and trade marks of the Swiss Company it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss Company commanded. The assessee was on that account a mere licencee for a limited period of the technical knowledge of the Swiss Company with the right to use the patents and trade marks of that Company....... ................... 15. The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss Company for a limited period by making that technical knowledge available the Swiss Company did not part with any asset of its business nor did the assessee acquired any asset or advantage of an enduring nature for the benefit of its business." 17. In Empire Jute Company Ltd. v. CIT, (1980)124 ITR 1 (SC), which was a case dealing with purchase of loomhours (number of working hours on the loom), the Supreme Court observed as under: "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test i....
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.... is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." Thus, in this case the Supreme Court held that test of enduring benefit is not an absolute or a conclusive test and depends on the facts and circumstances of each case. 18. In Alembic Chemical Works Co. Ltd. v. CIT, [1989] 177 ITR 377 (SC), the Supreme Court followed the decision in Empire Jute (supra) and held: "There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose, of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. In CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC) at p. 262, this court said: "As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), that there may be cases where expenditure, even if incurred for obtaining an ....
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.... Assessee. This Court held that the expenditure for the same should be held to be revenue expenditure. 21. In CIT v. J.K. Synthetics Ltd. (2009) 309 ITR 371 (Del) (hereinafter, 'JK Synthetics'), this Court, dealing with a case where an Indian Company had acquired a license from an Italian Company for use of technical knowledge and user of its patents and trade marks, held as under: "31. An overall view of the judgments of the Supreme Court, as well as of the High Courts would show that the following broad principles have been forged over the years which require to be applied to the facts of each case: (i) the expenditure incurred towards the initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while is the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it with a view to produce profits it would be in the nature of the revenue expenditure; (....
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....icence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the Licence. (f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; (vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete; (vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from ....
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....ing given - exclusive, non-exclusive, permanent or term based; ii. the benefit being derived - whether enduring, long term, short term; iii. the nature of payment being made - periodic, lump sum, revenue linked payments etc. 24. The above factors are singularly not determinative of the nature of the expenditure. It depends on the facts of each case. In a given case, a lump sum payment may still be revenue expenditure. A long term licence, without ownership vesting in the licensee could also be revenue expenditure. An exclusive right to use, to the exclusion of the owner, though termed as a licence, could be a transfer of title in the mark, and could constitute capital expenditure. Thus, the Court has to see not merely the terms of the agreement but also the facts and circumstances surrounding the agreement in order to determine the nature of the expenditure. Licensing of Trade Marks 25. Trade Marks which are both registered and unregistered can be transferred. The transfer of a Trade Mark can either be by means of a license or an assignment. A license to a registered Trade Mark in India can be of two kinds: a) A simple license agreement which is in the nature of a permissiv....
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....mstances? ix) Whether upon termination by the licensor, the user has to stop use of the mark? x) Whether or not the right to sue is given and conferred on the user? xi) Whether there is a transfer of goodwill of the business and/or goodwill in the mark? xii) Whether there are multiple users of the same mark? 28. A license agreement usually has some or all of the above stipulations. Thus, the nature of the agreement can be easily deduced from the existence of all or any of the above conditions/characteristics. In some circumstances however, an exclusive licence which excludes the owner from using the mark and vests perpetual rights without any termination clause, could constitute an assignment. However, the present case is not one such case. 29. The question in the present case is as to whether the right in the mark "HILTON" was transferred in a manner that was to give a long term benefit to the appellant. The first agreement contains an acknowledgment that HRL was the owner of the mark. The agreement grants an exclusive right to use "HILTON" owned by HRL to the appellant. The appellant could not, without HRL's permission apply for registration of the mark on its own or d....
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....unds Ltd. is now known as Contitech India Private Limited. Thus even the corporate name of the company has changed, though subsequently. The settled position in law is that use by a licensee would also inure to the benefit of a licensor, for it would continue to remain the owner, unless there was also part transfer of title. In this case, title and ownership of the mark was not transferred. The appellant only had permission and approval to use the mark. Thus, the benefit of the use of the mark "HILTON" during the period when it stood licensed to the appellant inures to HRL. In Fedders Lloyd Corporation Ltd. v. Fedders Corporation ILR (2005) I Delhi 478, it was held use of the trademark by a licensee inures to the benefit of the licensor. This position was again reiterated by this Court in Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation -3 (2017) 390 ITR 199 (Del). 33. Thus, when the benefit of the use of the mark has inured to the licensor i.e. HRL, the amount, that has been paid to HRL was a consideration for permission to use the mark, and not for acquiring ownership rights in the mark. The mark "HILTON" did not belong to the appellant. ....
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....d license agreement entered into 9th November, 1995 had only authorized the appellant to use the mark for ten years. The appellant had not acquired any permanent ownership or title in the said mark. The said payment though in lump sum was made to use the said mark and could well have been made with reference to the total sales as was the position in the first agreement dated 27th January, 1993. Certain terms and conditions for using the mark "HILTON" were changed and altered vide agreement dated 9th November, 1995, but in substance with reference to the rights acquired there was no difference between this agreement and earlier license agreement dated 27th January, 1993. 35. All the above facts point to the clear conclusion that the payment of Rs. 1 crore ought to be treated as revenue expenditure. There is no doubt in the proposition relied upon by the revenue, as held in Honda Siel (supra), the Court has to look at the real nature of the agreement. On an analysis of the agreement on record, there is no doubt that it was merely a trademark license agreement, which conferred no enduring benefit or long term benefit to the appellant. 36. A supplemental corporate license agreement ....