Expenses Incurred by the Assessee for Acquiring Trademark is Revenue Expenditure, Says Del HC.
In M/s Hilton Roulunds Ltd v. Commissioner of Income Tax (2018), the Delhi High Court held that the expenditure incurred by the Assessee for acquiring trademark was revenue expenditure and not capital expenditure. Accordingly, the expenditure is deductible under Section 37(1) of the Income Tax Act, 1961.
As per the first licensing agreement, the appellant had to pay running royalty at the rate of 1.8% of the net selling price from the date of commercial production of respective goods. The licence could be terminated by 12 months’ notice or by 30 days’ notice in case of breach of the terms of the agreement. The Agreement was for a period of 10 years. As per the second licensing agreement, which has overridden the first licensing agreement, a one-time royalty of Rs. 1 crore was payable towards the trademark licence. As per the terms, the Appellant enjoyed the exclusive right to use the mark for an indefinite time period.
The Assessing Officer, holding the expenditure to be of enduring nature, concluded that the expenditure was capital expenditure. The Commissioner of Income Tax (Appeals) reversed the finding of the Assessing Officer. The Department went in appeal and the ITAT concurred with the finding of AO.
The Delhi High Court turned around the ITAT’s finding and observed as follows: “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. 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. The question of law is answered in the negative, in favour of the Assessee and against the Revenue. It is directed that the payment of Rs. 1 crore be treated as revenue expenditure.”
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