Nature of expenditure for use of trademark depends on facts of case, Delhi HC

The Delhi High Court, while deciding a 13-year-old appeal, has held that the nature of the expenditure made for the exclusive use of trademark would depend on the facts of each case..The appellant in the case, Hilton Roulands Limited, had entered into two trademark license agreements with Hilton Rubbers Limited (HRL) to use the trademark ‘HILTON’ in respect of raw-edge and wrapped v-belts..The question before the Court was whether or not the lump sum payment of Rs. 1 crore, made under the second license agreement to HRL, was entitled to deduction under Section 37(1) of the Income Tax Act, 1961 as revenue expenditure..The assessing officer came to the conclusion that since the payment of Rs.1 crore was absent in the first license agreement, and it was for use of the brand, the expenditure cannot be related to the business of the appellant. Therefore, it was held that the said expenditure was of capital nature..The Commissioner of Income Tax (Appeals) 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, and held it to be revenue expenditure..The Income Tax Appellate Tribunal held that since the right to use the trademark 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. It held that the payment was for an enduring benefit and hence is capital in nature..The Division Bench of Justices Sanjiv Khanna and Pratibha M Singh, while examining various landmark judgments, enlisted three factors to loosely decide whether an expenditure with regard to trademark was of capital or revenue nature:.The nature of the right being given – exclusive, non-exclusive, permanent or term basedThe benefit being derived – whether enduring, long term, short termThe nature of payment being made – periodic, lump sum, revenue linked payments etc..The Court further observed that the transfer of a trademark can either be by means of a license or an assignment..“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.”.The Court held that the agreement in question 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..It was held that in the present 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 inured to HRL..Finally, the Bench observed,.“The appellant had not acquired any permanent ownership or title in the said mark. The said payment though in lump sum was made to use the said mark….All the above facts point to the clear conclusion that the payment of Rs.1 crore ought to be treated as revenue expenditure.”.Read Judgment: