Income Tax Deduction allowable to Expenses incurred for Acquiring Trade Mark: Delhi HC [Read Judgment]

Trade Mark

In M/s. Hilton Roulunds Ltd. vs. Commissioner of Income Tax, the Delhi High Court, held that the expenditure incurred by the assessee for acquiring Trade Mark was a revenue expenditure and was therefore deductible under Section 37(1) of the Income Tax Act, 1961.

The appellant, M/s. Hilton Roulunds Ltd, was formed as a part of a joint venture agreement among M/s Roulands Fabriker Denmark (RF), M/s/ Hilton Rubbers Limited (HRL) and Industrialization for Developing Countries, Copenhagen (IFU). The appellant was granted the license to use the Trade Mark HILTON in respect of Raw-Edge and Wrapped V-Belts. As per the first license agreement, the ownership of the mark vested in HRL and the appellant has to pay a running royalty on the sale in India of Raw-Edge and Wrapped V-Belts at a rate of 1.8 % of the net selling price from the date of commercial production. The licence would be terminated by 12 months’ notice or by 30 days’ notice in case of breach of the term of the agreement. The agreement was for a period of 10 years. As per the second agreement HRL had decided to sell its entire shareholding in the appellant to RF and instead of a royalty payable periodically, a one-time royalty of Rs.1 Crore was payable towards the Trade Mark license. Exclusive right to use the mark was given to the appellant.

The Assessing Officer (A.O.) 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 that the said expenditure was of capital nature and was of an enduring nature. The A.O. also noted that the Second licence agreement was entered during which the first license agreement was in operation.

Thus, deduction as revenue expenditure was disallowed. The Commissioner of Income Tax Appeals (CIT(A)) relying on the decision of Supreme Court in Madras Industrial Investment Corporation v. CIT, held that the payment of Rs.1 Crore was revenue expenditure and the appellant was entitled to the deduction. CIT(A) concluded that the expenditure incurred in connection with the right to use the trademark was important in the operations of the business of the assessee as also for its efficiency and profitability. Accordingly, the deduction was allowed. The Income Tax Appellate Tribunal (ITAT) observed 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, the 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.

The appeal was preferred before the High Court, by the appellant. The Counsel for the appellant submitted that under both the license agreements, only the right to use was given. Right to ownership in the mark was not transferred. He further argued that the mere fact that instead of 1.8% net royalty, a lumpsum royalty was fixed., does not change the nature of the transaction. He submitted that the court cannot go behind the transaction and an exclusive right to use has to be construed as such. The Counsel for the respondent argued that the right conferred on the appellant was the right to use the mark in perpetuity.  He contended that even after the Trade Mark was abandoned by HRL, the fact that the appellant continued to use the word “HILTON” as part of its trade name showed that enormous advantages had been gained under the second license agreement and without any payment.

The Court comprising of Justice Prathiba M. Singh and Justice Sanjiv Khanna observed “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. It also did not belong to either of its current promoters i.e. RF or IFU. It belonged to HRL which was one of the joint venture partners when the appellant was initially formed. The use of the mark “HILTON” thus, merely facilitated the appellant’s business in India. The question of law is answered in the negative, in favour of the Assessee and against the Revenue. It is directed that the payment of Rs. 1 crore be treated as revenue expenditure.”

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