TMI Blog2018 (4) TMI 1485X X X X Extracts X X X X X X X X Extracts X X X X ..... perpetual rights without any termination clause, could constitute an assignment. However, the present case is not one such case. The payment of ₹ 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 (2017 (6) TMI 524 - SUPREME COURT OF INDIA), 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. 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. Held as Revenue expenditure - Decided in favor of assessee. - ITA 325/2005 - - - Dated:- 20-4-2018 - MR. SANJIV KHANNA AND MS. PRATHIBA M. SINGH JJ. Appellant Through: Mr. Ajay Vohra, Senior Advocate with Mr. Prakash Kumar Mr. Aniket D. Aggarwal, Advocates. Respondent Through: Mr. Ruchir Bhatia, Advocate. JUDGMENT Prathiba M. Singh J., Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf yearly intervals, within 60 days at the end of each calendar half year. 7(a). The User recognizes the Proprietor s title to the Trade Mark and shall not at any time do or suffer to be 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 10,000,000/- (Rupees ten million only) within 3 weeks of time Effective Date. In the event that the payment is not made as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 ₹ 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 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court are under: McDonald s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing 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 wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole fact situation before concluding whether the expenditure is in the nature of capital or revenue. 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, ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered 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 assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i.e. it facilitated the appellant s 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 part of its corporate name. Thus, the payment of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 24 th 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 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
