June 06, 2018
Case name: M/S Hilton Roulunds Ltd.v. Commissioner of Income Tax
In this recent case decided by Division Bench of Delhi High Court, the Court held that payment for exclusive use of a trademark under license agreement is a revenue expenditure and cannot be claimed as deduction under the Income Tax Act.
In the case, the Appellant (M/s. Hilton Roulands Ltd.) entered into Trade Mark license agreement dated which was later substituted with license agreement with the Respondent (M/s. Hilton Rubbers Limited or “HRL”). By way of license agreement the appellant was granted by HRL license to use the Trade Mark HILTON in respect of Raw-Edge and Wrapped V-Belts. Under the license agreement payment of Rs.1 Crore was made to HRL by the appellant for use of Trade Mark.
Later on the Appellant claimed deduction Section 37(1) of Income Tax Act in respect of payment of Rs.1 Crore made to HRL for use of Trade Mark. However, the Assessing Officer (AO) disallowed the deduction of the amount as revenue expenditure. The AO stated that as 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 could not 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.
In view of the aforesaid facts and circumstances, the seminal issue that fell for consideration before the Delhi High Court was whether the payment for exclusive use of the trade mark is to be treated as capital expenditure or revenue expenditure?
In order to render decision on the issue, the Division Bench of the Delhi High Court delved into the following legal propositions:
- Distinction between Capital expenditure and Revenue expenditure – Tests
In view of the precedents, the Delhi High Court was of the view that in order to determine whether a particular expenditure is capital or revenue in nature, the factors that are relevant are:-
- the nature of the right being given – exclusive, non-exclusive, permanent or term based;
- the benefit being derived – whether enduring, long term, short term;
- the nature of payment being made – periodic, lump sum, revenue linked payments etc.
The High Court also observed that the aforesaid factors were not singularly 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.
- With reference to the facts of the instant case, the Court stated that 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.
- That the mark “HILTON” did not belong to the appellant. The use of the mark “HILTON”, 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.
- That 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. 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.
In view of the aforesaid factors, the Delhi High Court directed that the payment of Rs. 1 crore should be treated as revenue expenditure for the AY 1996-97.
The entire case can be accessed here.