TaxTMI 
TaxTMI 
2018 (4) TMI 1485
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....reinafter 'RF') along with HRL and Industrialisation 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 t....
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....itions of use under the agreement, or if the rights in the mark were endangered 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 Industr....
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....s entire shareholding in the appellant to RF. b) Instead of a royalty payable periodically, a onetime 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 bran....
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....ough this agreement against lump sum payment and the expenditure incurred in capital expenditure." 9. The ITAT held that since 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 cons....
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....ght to use has to be construed as such. Submissions of the Respondent 14. Mr. Ruchir Bhatia, on the other hand, submits that the appellant company 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 9^th 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 co....
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.... allowed to be sold by the licensee, it would continue to pay royalty as per rates agreed under the agreement. Clauses 19 & 21, in our view, make the Agreement 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 o....
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....ian Company. The Supreme Court, on these facts, held as under: "13. The assessee did not, under the agreement, become entitled exclusively even for the period of the agreement, 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 loo....
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....ably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit 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....
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....rmine the nature of expenditure i.e., capital or revenue. In CIT v. Saw Pipes Ltd. [2008] 300 ITR 35 (Del), the State Electricity Board had set up electricity lines for which service charges were paid by the 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, i....
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...., in parting with a confidential information received under the License to third parties without the consent of the licensor, (d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all', (e) whether on expiry of the Licence 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 ....
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....e made on capital account." 23. Thus, extrapolating from the judgments referred to above, in the context of trademark licensing, in order to determine whether a particular expenditure is capital or revenue in nature, some of the factors that are relevant are - i. the nature of the right being 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 Ma....
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.... vi) Whether sole and exclusive right was conferred on the user and the effect thereof? vii) Whether the user can further transfer his rights to third party, with and without consent of the licensor and the effect thereof? viii) Whether the licensor had the right to terminate the license and if so, under what circumstances? 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....
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....d the user claimed for the said mark was form 1st December, 1972. When the joint venture was entered into, the mark was licensed to the joint venture company i.e. the appellant which, thereafter, became a subsidiary of RF. HRL did not have any stake in the appellant after 9th November 1995. The appellant company which was known as Hilton Roulunds 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 I....
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....be conclusive and determinative of the fact whether the mark "HILTON", was acquired by the appellant as a capital asset or the payment made was to use the mark "HILTON", which belonged to and was owned by a third party, namely, HRL. Subsequent facts would only confirm our opinion and ratio that the right conferred on the appellant under the second 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 ....