TMI Blog2008 (5) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It is seen that the assessee was required to pay royalty every year. But for payment of royalty every year the assessee could 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. As rightly contended by the learned counsel for the assessee that granting of exclusive license to the assessee alone in India does not alter the character of payment from revenue to capital. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 license, right and privileges to the appellant. In support of its contentions, reference is made to paras 3, 13, 16 and 17 of the agreement, dt. 11th Jan., 1993. The reasons for claiming royalty paid as revenue expenditure has been that the appellant obtained (i) right to use technical know-how for erecting and commissioning of dyeing facility and (ii) right to use brand names/trade-marks as specified in the agreement. A lump sum consideration of US dollars 10 million was to be paid as fee for technical know-how for the dyeing facility while running royalty @ 5 per cent of the amount of net sales of all licensed products by the appellant is paid for the use of brand name and trade-mark etc. It was submitted that under the technology license agreement the assessee only acquired limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand 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 the exclusion of all others, the same has to be treated as capital expenditure. 6. The learned counsel for the assessee Shri Ajay Vohra reiterated the submissions made before the AO. He took us through the relevant clauses of the agreement to point out that the assessee has not acquired any know-how but has got only the license to use the know-how and the brand name. At all times, the proprietary right in the brand name and the know-how remains with the licensor namely Benetton International who is the holder of the license of the trade-mark and such right in the trade-mark has not been transferred in favour of the assessee for which payment has been made. The payment is only for the use of the licensed marks 012 Benetton , United Colors of Benetton , Zerotondo and Sisley . For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd/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 or associated companies and has requested that the Licensor grants the licensee an exclusive sub-licence to operate in India a dyeing, processing and manufacturing facility for the textile sector of the kind referred to under Recital C, and furthermore to manufacture in India, and market, distribute and sell in India, the Maldives, Nepal and Sri Lanka the Licensed Products (as hereinafter defined) under the trade-marks and trade-mark applications referred to under Recital B (and any registration issuing from any such application), and the licensor is prepared to grant such request on the terms hereinafter set forth. E. The Licensee and DCM hereby unconditionally acknowledge that the Proprietor is the sole owner inter alia of all the said trade-marks and trade-mark applications (and an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 company of the Benetton Group shall retain the right to itself use the expression 'Benetton' as its company name, or part of its company name, anywhere in the territory). 13. Consideration, Royalties, Payments, Interest (1) The Licensee shall, in consideration of the License (but subject always to the provisions of cl. 14). (a) pay a sum equal to Indian rupees 10,000,000 (ten milliion) as fee for the technical know-how and (b) pay the Licensor royalties ('the Royalties') calculated at a rate of five per cent (5 per cent) of the amount of net sales (as hereinafter defined) of all licensed products marketed, distributed, sold or manufactured by or for the account of the licensee at any time. (c) Invest in the advertising of the licensed products and the promotio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT vs. Ciba of India Ltd. (supra), the assessee, an Indian subsidiary of a foreign company agreed to pay percentages of its turnover by way of technical consultancy @ 5 per cent, cost of raw material @ 3 per cent and royalties on trade-marks @ 2 per cent of turnover in consideration of the foreign company delivering to the assessee for a period of 5 years all processes, formulae, scientific data, patents and trade-marks. The same was held to be revenue expenditure and hence deductible while computing total income. In the case of CIT vs. Indian Oxygen Ltd. (1978) 112 ITR 1025(Cal), the Hon'ble Calcutta High Court held that where under an agreement the assessee, an Indian company had a subsidiary of an English company was to pay to the English company 2.5 per cent of the total expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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, spent the amount for acquiring any asset. However, in the present case the facts are quite distinct as noted above and hence said decision cannot be applied. In the case of Saraf Chemicals Ltd. (supra) before the Mumbai Bench of the Tribunal the assessee acquired the proprietary concern as going concern and the respective proprietors of those concerns transferred the respective business rights, assets and liabilities which included trade-marks etc. in addition to the value of assets. The assessee also paid for eliminating competition in the same line of business for a period of 15 years. The use of trade-mark was an inseparable part of the entire agreement. Thus it was a case of acquiring trade-marks and payment for non-compete fee which was held to be capital expenditure. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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