TMI Blog2022 (12) TMI 1091X X X X Extracts X X X X X X X X Extracts X X X X ..... tion received by the assessee for permitting the right to use of brand name/trademark under TLA is nothing else but in the nature of royalties as defined under section 9(1)(vi) read with Article 12(3) of India Turkey tax treaty. Therefore, we concur with the view expressed by learned DRP. Grounds are dismissed. Taxation of royalty income at the rate of 15% as per the treaty provision instead of applying the lower rate of tax as per the provisions of the domestic law - HELD THAT:- We find, the claim of the assessee has neither been examined by learned DRP, nor by the AO. Therefore, we restore this issue to the Assessing Officer for examining assessee s claim with reference to the provisions of treaty and section 90(2) of the Act. Needless to mention, the assessee must be provided reasonable opportunity of being heard before deciding the issue. Set off of royalty income against the long term capital loss - HELD THAT:- Having heard the parties, we find, this issue also has not been addressed either by the DRP or by the Assessing Officer. Therefore, we restore this issue to the Assessing Officer for examining assessee s claim, keeping in view the provisions of section 71(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed sale consideration of Rs.4,81,21,126/- as capital gain in the return of income filed for the impugned assessment year. However, taking shelter under Article 13 of India Turkey DTAA, the assessee claimed exemption of the capital gain from taxation in India. In course of assessment proceeding, the Assessing Officer called upon the assessee to furnish various documentary evidences, including, the TLA. Alleging that the assessee did not furnish the requisite documents to support its claim of exemption on capital gain, the Assessing Officer proceeded to frame the draft assessment order by holding that the income derived from transfer of right to use of trademark/brand name is to be treated as income from other sources under Article 21 of the Tax Treaty. Accordingly, he completed the assessment. 5. Being aggrieved with the draft assessment order, the assessee raised objections before learned DRP. After considering the submissions of the assessee in the context of facts and materials on record, learned DRP accepted that the assessee has furnished the requisite documentary evidences, including, TLA before the Assessing Officer. Thus, to that extent learned DRP did not agree with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such rights, being towards transfer of capital assets, has to be considered as capital gain. Drawing our attention to Article 13(6) of the tax treaty, learned counsel submitted, capital gain has to be taxed in the country of residence of the alienator. Proceeding further, he submitted, as per explanation 2 section 9(1)(vi) of the Act, income chargeable under the head capital gains has been excluded from the definition of royalty. Distinguishing the decision of the Hon ble Delhi High Court in case of Hilton Roulunds Ltd. (supra), he submitted, the decision deals with the issue, whether a particular expenditure is capital or revenue, hence, not germane to the present appeal. Without prejudice, referring to the OECD Commentary on royalty payment, as reproduced in the decision of the Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence (P) Ltd. Vs. CIT, [2021] 125 taxmann.com 42 (SC), learned counsel submitted, as per the said convention, if the payment is in consideration for the transfer of right that constitute a distinct and specific property (which is more likely in the case of geographically limited rights), such payments are likely to be business profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusive, irrevocable and perpetual right of usage of trademark/brand-name in favour of the Indian subsidiary for a lumpsum consideration of USD 100,000/-. The assessee, on its own volition had made a suo motu adjustment of Rs.4,04,04,326/- to the sale consideration based upon a valuation report of the independent valuer. However, the adjusted consideration of Rs.4,81,21,126/- has been treated as capital gain and claimed exempt under Article 13(6) of Indian Turkey DTAA. Though, the Assessing Officer had treated the income as income from other sources, however, reversing the decision of the Assessing Officer, learned DRP has held it as royalty under section 9(1)(vi) as well as Article 12 of the tax treaty. Therefore, the issue arising for consideration is, whether the amount in dispute is to be treated as capital gain or royalty income. For this purpose, it is necessary to look into the TLA as a whole and the specific terms of the agreement. 9. On perusal of TLA, copy of which is placed at page 27 of the paper-book, it is observed that as per paragraph (C) of the Preamble, the licensor (assessee) has granted an exclusive, perpetual and irrevocable licence to licencee for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hatsoever. Clause 6 stipulates that licencee shall, on a best effort basis, maintain high quality standard of the products so that the brand-names and trademarks retain their goodwill and all efforts should be made by the licencee to ensure that the goodwill of the brand-names or trademarks is not jeopardized under any circumstances whatsoever. Clause (7) provides that the licensee shall use the brand-names/trademarks either in plain writing or only in the form and manner as provided under the brand booklet. Clause (8.2) again makes it clear that the licencee has not acquired, nor shall it acquire any right, title or interest in the brand-names or trademarks other than the right to use the same in accordance with the terms of the agreement. Clause (9.4) provides that neither the agreement, nor any of the rights or agreement of licencee arising under agreement may be assigned or transferred without licensor s prior written consent. Most importantly, clause (14) of the agreement empowers the licensor to terminate the TLA under certain circumstances, including, material breach of the brand booklet by giving prior notice of 30 days. 10. Thus, a reading of the TLA, as discussed above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight, title and interest and cannot exercise any control over the transferee with reference to usage of the asset. Even, Article 13 of the Tax Treaty, which provides for taxation of capital gains, speaks of alienation of any property. In the facts of the present appeal, the factual position emerging on record clearly indicates that the assessee has not alienated its ownership rights over the brand names and trademarks, either fully or partially but has simply permitted the licensee the right to use of brand name and trademark in a particular geographical territory. 13. Of course, explanation 2 to section 9(1)(vi) excludes any income chargeable under the head capital gains from being treated as royalty. However, such income, in the first place, must come within the purview of capital gains. On the contrary, clause (i) of Explanation 2 clearly says that the consideration received including any lumpsum consideration towards transfer of all or any rights, including, the granting of a licence in respect of patent, invention, model, design, secret formula or process or trademark or similar property shall be treated as royalty. Even, Article 12(3) of India Turkey DTAA defines the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 15. As could be seen from the parameters set out by the Hon ble Jurisdictional High Court to differentiate betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the licensor has transferred its rights over the trademark or has permitted to use the trademark. Ultimately, the court held that citus of the ownership of the intangible assets would be the closest proximate of the citus of the intangible assets. In other words, intangible asset by its very nature does not have physical form. Therefore, the citus of the owner would be citus of such asset. In our view, this decision would be of no help to the assessee. In case of CIT Vs. Finlay Mills Ltd. (supra), the issue was whether the expenditure incurred for registering trademark will be allowable as business expenditure. In our view this decision will also be of no help to the assessee. Even, the decision of the Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence (P) Ltd. (supra), though, was cited by learned counsel for the assessee, however, it has no application to assessee s case. 17. Thus, on overall consideration of facts and materials on record and applying the ratio laid down in various decisions cited before us, we have no hesitation in holding that the consideration received by the assessee for permitting the right to use of brand name/trademark under TLA ..... X X X X Extracts X X X X X X X X Extracts X X X X
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