$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 325/2005
Reserved on : 14th December, 2017
Date of decision :20th April, 2018
M/S HILTON ROULUNDS LTD. . .... Appellant
Through: Mr. Ajay Vohra, Senior Advocate
with Mr. Prakash Kumar & Mr.
Aniket D. Aggarwal, Advocates.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through: Mr. Ruchir Bhatia, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MS. JUSTICE PRATHIBA M. SINGH
JUDGMENT
Prathiba M. Singh J.,
The short question arising in the present appeal is Whether the
payment of Rs.1 Crore for exclusive use of the trade mark "HILTON" is to
be treated as capital expenditure or revenue expenditure?
2. M/s. Hilton Roulands Ltd. (hereinafter ,,appellant) entered into Trade
Mark license agreement dated 27th January, 1993 (hereinafter ,,first license
agreement) which was later substituted with license agreement dated 9th
November, 1995 (hereinafter ,,second license agreement) with M/s. Hilton
Rubbers Limited (hereinafter ,,HRL). The questions that arise in this case
are to be adjudicated in the context of these agreements.
Brief Background
3. M/s Roulands Fabriker Denmark (hereinafter ,,RF) along with HRL
and Industrialisation for Developing Countries, Copenhagen (hereinafter
ITA 325 2005 Page 1 of 30
,,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 Raw-
Edge and Wrapped V-Belts at the rate of 1.8% of the
net selling price from the date of commercial
production thereof.
The expression Net Selling Price shall mean ex-factory
selling price of Raw-Edge and Wrapped V-Belts
excluding sales tax, excise duty and other
governmental taxes and levies, insurance, forwarding
and packaging expenses nad freight charges.
(b). Unless otherwise specified by the Proprietor, the
royality hereunder shall be paid to Hilton Rubbers
Limited, S-21, Green Park Extension, i_e "" Delhi
110016, in India Rupees at half yearly intervals, within
60 days at the end of each calendar half year.
7(a). The User recognizes the Proprietors title to the
Trade Mark and shall not at any time do or suffer to be
ITA 325 2005 Page 2 of 30
done any act or thing which will in any way impair the
rights of the Proprietor in and to the Trade Mark. In
particular but without prejudice to the generality of the
foregoing, the User undertakes not to use the Trade
Mark in any manner which may jeopardize the
distinctiveness or validity of the Trade Mark and shall
apply and use the Trade Mark only on or in connection
with such of the Goods and only in such form and
manner as the Proprietor or his representative may
from time to time direct or approve and the labels,
containers, packagings, pamphlets, advertisements and
the like used in connection with the Goods shall show
the Trade Mark in such a manner and with such
lettering and marking as may be so directed or
approved.
11. This Agreement shall come into force on the date
hereof and the User shall be entitled to use the Trade
mark as an exclusive User thereof for the Goods.
Subject to earlier termination in accordance with the
provisions of Clauses 12 & 13, this Agreement shall
run for an initial period of 10 years and shall continue
thereafter_ without limit of time until terminated by at
least 12 calender months_previous written_notice
given by either party to the other."
(emphasis supplied)
Thus, as per the First license agreement:
a) The appellant was granted an exclusive right to use the Trade Mark
"HILTON" in India in respect of Raw-Edge and Wrapped V-Belts;
b) Ownership of the mark vested in HRL;
c) Running royalty on domestic sale was payable to the HRL;
d) License was terminable by 12 months notice or by 30 days notice
in case of breach of the terms of the agreement;
ITA 325 2005 Page 3 of 30
e) License could also be terminated if the appellant did not adhere to
the conditions 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 Industrialization for
Developing countries, Copenhagen (hereinafter "IFU),
the parties hereto have formed and established the
User as a Joint Venture and have subscribed to the
share capital of the user on the trade and conditions
wet forth in the JV Agreement.
4. Proprietor, having decided to sell its entire
shareholding in user to RF or its nominee(s) is
desirous of signing a new Trade Mark License
ITA 325 2005 Page 4 of 30
Agreement (hereinabove ''Principle Agreement") which
overrides the first agreement, in the entirely.
......................
1. The User hereby acknowledges and confirms that
the Proprietor has at all material times been the lawful
sole and exclusive owner of the Trade Mark throughout
the world including the Union of India and of the
rights attaching to the said Trade Mark been used in
relation to business in the said goods advertisement or
promotional material or otherwise in connection
therewith.
2. 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 transmission belts excluding that·
transmission belts (hereinafter referred to as the
Goods) the Trade Mark in India and in such other
countries which the goods are exported.
3. This agreement shall come to effect from the day of
signing of this agreement (hereinafter referred to as
''Effective Date).
4. In consideration of the said right, the User shall pay
to the Proprietor a sum of Rs. 10,000,000/- (Rupees ten
million only) within 3 weeks of time Effective Date. In
the event that the payment is not made as aforesaid, the
said amount will carry interest w.e.f 22nd day of the
effective date till the date of actual payment as below:
..................
12. This agreement shall come into force from the
Effective Date, and the User shall be entitled to use the
Trade Mark as an exclusive user there of for the goods.
Subject to earlier termination in accordance with the
provisions of clause 13 & 14, this agreement shall run
for an initial period of 10 years and shall continue
thereafter without limit of the time until terminated by
ITA 325 2005 Page 5 of 30
at least 12 calender months previous written noticed
given by either party to the other."
(emphasis supplied)
Thus, in the second license agreement the terms were:
a) That HRL had decided to sell its 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 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. Relevant findings of the AO are as under:
ITA 325 2005 Page 6 of 30
a) Since the first license agreement was already in operation there was
no purpose in entering into the second license agreement.
b) The reason given in clause 4 of the second agreement clearly
showed that the transaction was one of sale of shareholding.
c) There were payments made to RF towards royalty and technical
know-how. The expenditure gives enduring benefit to the business
and was distinguishable from a recurring expenditure.
d) Even the clauses of termination were vague and based on
hypothetical conditions.
e) In effect, the Trade Mark license was perpetual as there was no
clause stipulating that the Trade Mark would revert to the owner after
a definite time period.
On these grounds, deduction as revenue expenditure was disallowed by the
AO.
7. The Commissioner of Income Tax (Appeals) [,,CIT(A), for short], on
24th March, 2000, after examining the matter and relying upon the decision
of the Supreme Court in Madras Industrial Investment Corporation v. CIT
(1997) 225 ITR 802 (SC) 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 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.
8. The Income Tax Appellate Tribunal (,,ITAT, for short) on 22nd
December, 2004 held that since two agreements were entered into on 9 th
ITA 325 2005 Page 7 of 30
November, 1995, one for use of the trademark and another for sale of
shareholding, the payment of Rs.1 Crore was not a pure trademark license.
ITAT specifically relied upon clause 12 of the second license agreement. On
this, the ITAT held as under:
"Since the HRL has sold the entire share holding in
assessee and the right to use the Trade Mark on one
day and the agreements suggest that it was not only a
license to use the Trade Mark but also a sale of Trade
Mark, by allowing the assessee to use for a unlimited
period, one inference can only be drawn that the
assessee has procured the enduring benefit for its
business by using this trade made through 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
ITA 325 2005 Page 8 of 30
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 proceedings were under the sale or purchase of goods while in a
trademark license arrangement, the franchise agreement, insofar as they
were related to the right to use the mark, were not subjected to DVAT levy.
The observations of the Court are under:
"McDonalds and the petitioners (Sagar Ratna, and
Bikanerwala) are solely engaged in providing
franchise services to its franchisees and the same
would thus not be liable to VAT under the provisions of
the DVAT Act, as the franchise service is expressly a
taxable service and cannot be treated as goods. From
a perusal of the facts of the cases, as well as the
provisions of the franchise agreements, it can be
concluded that what was intended to be transferred
was not the trade mark, but an entire gamut of
services, which includes, inter alia, a guide that
educates the franchisees on various aspects of business
and conduct to market the business. To segregate the
terms of the agreement to levy VAT on only specific
aspects of it would be inexact. Moreover, the
Appellant and the Petitioners are already paying
service tax levied on the franchise agreements, and
there can be no overlapping of taxes. The subject
matters in List I and List II of the Seventh Schedule to
the Constitution are distinct and once a particular
service is subject to service tax, it cannot be treated as
a sale of goods and subject to VAT. Thus, the
definition of "intellectual property" and levy of sales
tax on transfer of right to use trade marks, patents and
copyrights etc. will not apply in the case of a franchise
ITA 325 2005 Page 9 of 30
agreement. This was highlighted in paragraphs 88 and
89 of BSNL (supra)."
12. This Court held that since franchise agreements were subjected to
service tax there cannot be any levy of sales tax. Thus, franchise agreement
was held to only grant the representational right and not right to sell or
manufacture the goods.
13. It was submitted by Mr. Vohra that under both the license agreements,
only the right to use was given. Right to ownership in the mark was not
transferred. The mere fact that instead of 1.8% net royalty, a lumpsum
royalty was fixed. This fact alone does not change the nature of the
transaction. He submits that the court cannot go behind the transaction and
an exclusive right 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 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
ITA 325 2005 Page 10 of 30
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, thus, question of
improving the existing technical know-how by
borrowing the technical know-how of the HMCL,
Japan did not arise. The Assessee was not in existence
at all and it was the result of joint venture of HMCL,
Japan and M/s. HSCIL, India. The very purpose of
Agreement between the two companies was to set up a
joint venture company with aim and objective to
establish a unit for manufacture of automobiles and
part thereof. As a result of this agreement, Assessee
company was incorporated which entered into TCA in
question for technical collaboration. This technical
collaboration included not only transfer of technical
information, but, complete assistance, actual, factual
and on the spot, for establishment of plant, machinery
etc. so as to bring in existence manufacturing unit for
the products. Thus, a new business was set up with the
technical know-how provided by HMCL, Japan and
lumpsum royalty, though in five instalments, was paid
therefor.
23. No doubt, this technical know-how is for the limited
period i.e. for the tenure of the agreement. However, it
is important to note that in case of termination of the
Agreement, joint venture itself would come to an end
and there may not be any further continuation of
manufacture of product with technical know-how of
foreign collaborator. The High Court has, thus, rightly
observed that virtually life of manufacture of product
in the plant and machinery, establishes with assistance
of foreign company, is co-extensive with the
agreement. The Agreement is framed in a manner so as
ITA 325 2005 Page 11 of 30
to given a colour of license for a limited period having
no enduring nature but when a close scrutiny into the
said Agreement is undertaken, it shows otherwise. It is
significant to note in this behalf that the Agreement
provides that in the event of expiration or otherwise
termination, whatsoever, licensee, i.e., joint venture
company/Assessee shall discontinue manufacture, sale
and other disposition of products, after the residuary
products. All these things then shall be at the option of
licensor. In other words, licensee in such contingency
would hand over unsold product and parts to licensor
for sale by him. In case licensor does not exercise
such an option and the product is 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, co-
extensive 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
ITA 325 2005 Page 12 of 30
not improvising the earlier set up. This doubt has
expressed by the ITAT itself in the following words:
Our doubt was why the payment, at least of the lump
sum technical know-how fees, cannot be considered as
being connected to the initial starting up of the
business and hence not allowable since the know-how
was bring obtained for the first time and was crucial to
the setting up of the business of the Assessee which
undisputedly was to manufacture Honda cars in India.
It may be recalled that was also the view taken by the
Assessing Officer. Further, the Assessee was not
already in the manufacture of cars and was
commencing such an activity for the first time. It was
not a case of a business already in existence. The
payment was an "once for all" payment, though
staggered over a period of years."
15. He also submits that the Trade Mark license was infact was valid upto
only 3rd June, 2005. Clause 1 of the second license agreement, according to
Mr. Bhatia, showed that the Trade Mark was permitted to be used either
alone, or as a trade name, or as a combination mark. 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 shows that enormous
advantages had been gained under the second license agreement and without
any payment whatsoever, the word "HILTON" was used. Thus, he submits
that the ITAT and AO were right in holding that the expenditure is a capital
expenditure and the deduction is not liable to be allowed.
Analysis and Findings
Capital expenditure and Revenue expenditure - Tests
16. There is exhaustive case law on the various tests distinguishing capital
and revenue expenditure. In CIT, Bombay v. Ciba of India Ltd. AIR 1968
ITA 325 2005 Page 13 of 30
SC 1131, the Supreme Court, was dealing with a case whereby a Swiss
company had licensed its patents to its Indian subsidiary, in order to enable
it to make full use of and vend the inventions stated therein, as also its
trademark. However, under the agreement, the Swiss Company reserved the
right to terminate the license at any given point, and also precluded the
Indian Company from acquiring any proprietary right in its intellectual
property. The licencee was merely granted a ,,right to use to the Indian
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 loom), the Supreme Court observed as under:
ITA 325 2005 Page 14 of 30
"The decided cases have, from time to time, evolved
various tests for distinguishing between capital and
revenue expenditure but no test is paramount or
conclusive. There is no all embracing formula which
can provide a ready solution to the problem; no
touchstone has been devised. Every case has to be
decided on its own facts, keeping in mind the broad
picture of the whole operation in respect of which the
expenditure has been incurred. But a few tests
formulated by the courts may be referred to as they
might help to arrive at a correct decision of the
controversy between the parties. One celebrated test is
that laid down by Lord Cave L.C. in Atherton v.
British Insulated and Helsby Cables Ltd. [1925] 10
TC 155, 192 (HL), where the learned Law Lord stated:
".... when an expenditure is made, not only
once and for all, but with a view to bringing
into existence an asset or an advantage for
the enduring benefit of a trade, I think that
there is very good reason (in the absence of
special circumstances leading to an opposite
conclusion) for treating such an expenditure
as properly attributable not to revenue but to
capital."
This test, as the parenthetical clause shows, must
yield where there are special circumstances leading to
a contrary conclusion and, as pointed out by Lord
Radcliffe in Commissioner of Taxes v. Nchanga
Consolidated Copper Mines Ltd. [1965] 58 ITR 241
(PC), it would be misleading to suppose that in all
cases, securing a benefit for the business would be,
prima facie, capital expenditure "so long as the benefit
is not so transitory as to have no endurance at all."
There may be cases where expenditure, even if
incurred for obtaining advantage of enduring benefit,
may, none the less, be on revenue account and the test
of enduring benefit may break down. It is not every
advantage of enduring nature acquired by an assessee
ITA 325 2005 Page 15 of 30
that brings the case within the principle laid down in
this test. What is material to consider is the nature of
the advantage in a commercial sense and it is only
where the advantage is in the capital field that the
expenditure would be disallowable on an application
of this test. If the advantage consists merely in
facilitating the assessee's trading operations or
enabling the management and conduct of the assessee's
business to be carried on more efficiently or more
profitably 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 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
ITA 325 2005 Page 16 of 30
cases where expenditure, even if incurred for
obtaining an advantage of enduring benefit,
may, none the less, or be on revenue account
and the test of enduring benefit may break
down. It is not every advantage of enduring
nature acquired by an assessee that brings
the case within the principles laid down in
this test. What is material to consider is the
nature of the advantage in a commercial
sense and it is only where the advantage is in
the capital field that the expenditure would
be disallowable on an application of this
test."
In the result, for the foregoing reasons, the appeal
succeeds and is allowed and the question of law
referred to the High Court for its opinion in ITR No. 78
of 1970 is answered in the affirmative and against the
Revenue. The judgment under appeal is set aside."
Even a `once for all' or lumpsum payment was held to be inconclusive in
deciding whether the expenditure was capital or revenue in nature.
19. In CIT v. Madras Auto Services (P.) Ltd. [1998] 233 ITR 468 (SC),
while dealing the question as to whether money spent by the tenant for
construction in lieu of benefit of reduced rent for the additional space was
capital or revenue expenditure, the Supreme Court observed as under:
"All these cases have looked upon expenditure which
did bring about some kind of an enduring benefit to the
company as a revenue expenditure when the
expenditure did not bring into existence any capital
asset for the company. The asset which was created
belonged to somebody else and the company derived
an enduring business advantage by expending the
amount. In all these cases, the expense has been
looked upon as having been made for the purpose of
conducting the business of the assessee more profitably
or more successfully. In the present case also, since
ITA 325 2005 Page 17 of 30
the asset created by spending the said amounts did not
belong to the assessee but the assessee got the business
advantage of using modern premises at a low rent,
thus, saving considerable revenue expenditure for the
next 39 years, both the Tribunal as well as the High
Court have rightly come to the conclusion that the
expenditure should be looked upon as revenue
expenditure."
20. Even this Court has had occasion to deal with cases where it had to
determine 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, it will
be in the nature of capital expenditure. If the
expenditure, on the other hand, is for running the
ITA 325 2005 Page 18 of 30
business or working it with a view to produce profits it
would be in the nature of the revenue expenditure;
(ii) it is the aim and object of the expenditure, which
would determine its character and not the source and
manner of its payment;
(iii) the test of "once and for all" payment, i.e., a
lump sum payment made, in respect of, a transaction is
an inconclusive test. The character of payment can be
determined by looking at what is the true nature of the
asset which is acquired and not b the fact whether it is
a payment in "lump sum" or in an instalment. In
applying the test of an advantage of an enduring
nature, it would not be proper to look at the advantage
obtained, as lasting forever. The distinction which is
required to be drawn is, whether the expense has been
incurred to do away with, what is a recurring expense
for running a business as against an expense
undertaken for the benefit of the business as a whole;
(iv) an expense incurred for acquisition of a source
of profit or income would in the absence of any
contrary circumstance, be in the nature of capital
expenditure. As against this, an expenditure which
enables the profit making structure to work more
efficiently leaving the source or the profit making
structure untouched, would be in the nature of revenue
expenditure. In other words, expenditure incurred to
fine tune trading operations to enable the management
to run the business effectively, efficiently and profitably
leaving the fixed assets untouched would be an
expenditure of a revenue nature even though the
advantage obtained may last for an indefinite period.
To that extent, the test of enduring benefit or advantage
could be considered as having broken down;
(v) expenditure incurred for grant of License which
accords 'access' to technical knowledge, as against,
'absolute' transfer of technical knowledge and
information would ordinarily be treated as revenue
expenditure. In order to sift, in a manner of speaking,
ITA 325 2005 Page 19 of 30
the grain from the chaff, one would have to closely
look at the attendant circumstances, such as:
(a) the tenure of the Licence.
(b) the right, if any, in the licensee to create further
rights in favour of third parties,
(c) the prohibition, if any, 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 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 a business point of view and on a
fair appreciation of the whole fact situation before
concluding whether the expenditure is in the nature of
capital or revenue."
ITA 325 2005 Page 20 of 30
22. Relying upon JK Synthetics (supra), this Court in CIT v. V.R.V.
Breweries & Bottling Industries Ltd. (2012) 347 ITR 249 (Del) held as
under:
"22.2 The observation made in paragraph 58 at page
414 of the aforementioned judgment, on which reliance
has been placed by the learned counsel for revenue
seeks only to emphasise that the assessee in that case,
had only acquired access to technology which was not
related to any secret process or patent rights and thus
in continuum it is mentioned that not even a right to
use the trademark or brand name had inhered in the
assessee. From this, it cannot be concluded, as is
sought to be done by the learned counsel for the
revenue that any payment made for use of trademark
or trade name ipso facto will give colour to the
payment as if it is made on capital account. This is in
our view is a complete mis-reading of the judgment. It
is well settled that a judgment is an authority for what
it decides and not what is construed as logically
flowing from it. Judgments cannot be read as statutes.
A stray sentence picked out of context, cannot be used
to turn its ratio around.
22.3 We have already referred to the provisions of the
agreement. A perusal of the provisions of the
agreement would show all that the assessee acquired
was the use of the brand names and the trade marks of
SWCL, which find a mention in Appendix-C annexed to
the said agreement. The assessee acquired no right to
any secret process or formulae or even any right title
and interest in the trade marks and brands under
which the IMFL products were sold. As a matter of fact
assessee's rights were co-terminus with the subsistence
of the said agreement. Therefore, we have no hesitation
in rejecting the contention of the revenue in this
regard.......It is quite evident that the Revenue took the
stand, though erroneously, that royalty paid on use of
ITA 325 2005 Page 21 of 30
brand names and trade marks would classify the
expenditure as one 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 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:
ITA 325 2005 Page 22 of 30
a) A simple license agreement which is in the nature of a permissive
use;
b) A Registered User, wherein the license agreement is registered
with the Registrar of Trade Marks and certain rights accrue to the
licensee as per statute.
26. An assignment is however a complete transfer of the right and title in
a mark. Assignments can also be of various kinds. For eg., Assignment
could be product specific, territory specific, but they will vest complete and
absolute ownership in the assignee. Assignment of a registered trade mark
can be with or without the goodwill of the business concerned. Such an
assignment can be in respect of all the goods or services or part of the goods
or services for which the mark is registered. However, an unregistered
trademark is assignable with the goodwill of a business and if the same is
assigned without the goodwill of the business, the nature of the transfer
would have to be determined on the facts of a particular case.
27. The fundamental test to determine as to whether a particular mark has
been licensed or assigned is to see if the licensor/assignor has retained any
rights in the mark. If rights are retained with the owner, usually it is a license
and if no rights are retained by the owner, then it would usually be an
assignment. A license is, therefore, nothing but a permissive use of the
mark, which permission, is revocable. A `right to use' is usually a license
and not an assignment, except in certain circumstances. Some of the
questions that determine whether an arrangement is a license or an
assignment include:
ITA 325 2005 Page 23 of 30
i) Whether the user acknowledges the licensors right and title
over the mark?
ii) Whether it is a mere right to use the mark or it was a
transfer/assignment of a permanent nature?
iii) Whether the manner of use is specified and restricted and the
effect thereof on the rights of the user?
iv) Whether the payment made by the User is one-time, fixed
running royalty or a percentage of sales, with or without
investment made by the Licensor on marketing and advertising?
v) Whether the licensor has right of supervision and control over
the use of the mark?
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?
ITA 325 2005 Page 24 of 30
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 HRLs permission apply for registration of the mark on its own or
dispute the ownership of HRL. If any infringement came to the knowledge
of the appellant, it had to seek the prior written consent of HRL, which had
the right to decide as to what action it would take whether with or without
the appellant, in respect of such infringer. An application could have been
filed to register the appellant as a registered user and such application could
have been made jointly only. The termination clause was clear. Though the
initial period was 10 years, the agreement could have been terminated with
12 months written notice by either party. The termination was automatic
under some circumstances as detailed in the agreement. One of the reasons
for termination could be the termination of the joint venture agreement.
Upon termination of the license agreement, the appellant would not have
any rights to use or seek registration of the mark "HILTON". This
agreement was in the nature of a license agreement and had all the trappings
ITA 325 2005 Page 25 of 30
of a license. The rights of HRL were completely preserved and only a right
to use was being given to the appellant. No long term benefit accrued to the
appellant. The royalty payable by the appellant was 1.8% of the net selling
price from the date of commercial production.
30. The second Agreement dated 9th November, 1995 was almost
identically worded to the first license agreement, except for the fact that the
royalty was now Rs.1 crore as a lump-sum for a period of 10 years.
31. The question as is relevant to the present case is, therefore, whether
any long term benefit was acquired by the appellant under the agreement
dated 9th November, 1995, so as to categorize the payment of Rs.1 crore as a
capital expenditure.
32. It is relevant to record some important facts at this stage. The mark
"HILTON" in respect of Raw Edge, Wrapped V Belts, was a mark which
was known in India in the relevant industry. It was being used by HRL
which was the original owner for many years prior to the joint venture
agreement. The registration of the mark Hilton dates back to 3 rd June, 1977
and 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
ITA 325 2005 Page 26 of 30
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. 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 appellants business in India i.e. it facilitated the
appellants entry into India under the brand name and the trade name which
was familiar to the industry and market. The advantage of having used the
mark "HILTON" between 1992 and 2005 could endure and benefit the
appellant as a permitted and authorized user, but it cannot be called an
acquisition and benefit of capital nature so as to constitute capital
expenditure. The appellant did not purchase and acquire title in the
trademark. It did not retain any rights in the mark. In fact the appellant no
longer uses the word "HILTON" either as a trade mark or trade name or as a
ITA 325 2005 Page 27 of 30
part of its corporate name. Thus, the payment of Rs.1 crore was for the
purpose of obtaining an advantage in carrying on its business and is
therefore in the revenue field.
34. In order to ascertain whether there was permanent transfer of the
trademark "HILTON" in favour of the appellant, we had asked and called
upon the counsel for the appellant to state the present position. The appellant
has filed additional documents stating that the name of the appellant was
changed to ,,Roulands Codan India Limited on 29th November, 2006.
Subsequently, there was another change as of 11th December, 2006. The
appellant is now known as ,,Contitech India Private Limited. Appellant
states that they had applied for transfer and registration of the trademark
"Hilton Euroflex" on 13th January, 1994, but on 28th April, 1999 they had
deleted the word "Hilton" from the said application. Appellant has also
placed on record pamphlet/price list that they had not used the mark
"HILTON" and are marketing their goods on the mark "Roflex", which is
their registered trademark since 10th July, 1996. We would accept and not
proceed on the basis that the subsequent change in trademark would not 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
ITA 325 2005 Page 28 of 30
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 27 th 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 was executed along with
the first license and the second license agreement. Under these agreements
also the right to use the corporate name "Hilton" was non-exclusive and
royalty free. Though, it was to remain in full force and executed without any
limit of time, a licensor had the right to terminate the said agreement with 30
days notice. Thus, even the corporate name license agreement was
terminable and did not create ownership rights in the appellant for the word
"HILTON". The Court takes notice of the fact that the corporate name has in
any event been changed by the appellant. Moreover, before the Income Tax
Authorities, the appellant had filed to letters dated 16th March, 1997 and 24th
September, 1997 signed by the Company Secretary of the Appellant and by
HRL, respectively. Both these letters confirm that the right to use the mark
ITA 325 2005 Page 29 of 30
"HILTON" was for a limited period of 10 years. The Revenue submits that
under clause 12, there was no limitation of time in the license. This position
when considered in isolation would be correct, however, when read with the
letters submitted to the Income Tax Authorities, as also the stoppage by the
appellant of the use of the mark "HILTON" both as a trade mark and as a
trade name, it is clear that the appellant was merely a licensee of the mark.
37. Under these circumstances, 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 for the AY
1996-97. In the facts of the present case, there shall be no order as to costs.
PRATHIBA M. SINGH, J
SANJIV KHANNA, J
APRIL 20, 2018/dk
ITA 325 2005 Page 30 of 30
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