26 June, 2018
This is pertaining to an income tax appeal filed in the Delhi High Court by Hilton Roulunds Limited, (the “Appellant”) against the Commissioner of Income Tax (the “Respondent”) to determine whether the payment of Rs. 1 crore to the licensor for exclusive use of the trade mark “Hilton” is to be treated as capital expenditure or revenue expenditure.
The Appellant is a joint venture between Hilton Rubbers Limited (“HRL”) Roulands Fabriker Denmark (“RF”) and Industrialisation for Developing Countries, Copenhagen (“IFU”).
The Appellant entered into a trade mark license agreement dated 27th January, 1993 (the “License Agreement-I”) with HRL for the purpose of using the trade mark “Hilton” in respect of Raw-Edge and Wrapped V-Belts and other power transmissions belts excluding flat transmission belts in India and in other countries. As per the License Agreement-I, the Appellant was required to pay 1.8% royalty to HRL at half yearly intervals. The License Agreement-I also stated that the term of the license was for a period of 10 years, and to be continued thereafter without limit of time unless terminated by either party by giving the other party at least 12 calendar months’ prior written notice, or 30 days’ notice in case of breach.
Subsequently, HRL decided to exit from the Appellant by selling its shareholding to RF and entered into a new License Agreement dated 9th November, 1995 with the Appellant (the “License Agreement-II”) overriding the License Agreement-I. The License Agreement-II contains similar provisions as stated in the License Agreement-I except the payment clause for the use of the trade mark which states that the Appellant would now have to pay a lump sum fee of Rs.1 crore to HRL which replaces the earlier royalty payment clause.
While filing the returns by the Appellant with the Income Tax Office for the year 1996-97, the Income Tax Assessing Officer (“AO”) observed and concluded that since the payment of Rs.1 crore was absent in License Agreement-I and was for use of the trade mark, the expenditure of Rs.1 crore cannot be related to the business of the Appellant and held that the said expenditure was of capital and enduring nature. The Commissioner of Income Tax (Appeals) upheld the AO’s conclusion.
Further, the Income Tax Appellate Tribunal (“ITAT”) after examining the matter vide its order dated 22nd December, 2004, held that “Since HRL has sold the entire shareholding in assessee and the right to use the trade mark on one day and the agreements suggest that this was not only a license to use the trade mark but also a sale of the trade mark by allowing the assessee to use the trade mark for an unlimited period, one inference can only be drawn that the assessee has procured the enduring benefits for its business by using the trade mark through this agreement against lump sum payment and expense incurred is capital expenditure”.
The ITAT held that the right to use was for unlimited period and there was no renewal and further consideration clause in the license arrangement. Therefore, ITAT was of the view that payment of Rs. 1 crore was for an enduring benefit and hence is a capital expenditure which could not be allowed as deduction under the Income Tax Act, 1961.
This Appeal filed in the Delhi High Court against the order of the ITAT framed the aforesaid question on the nature of the expenditure made by the Appellant for paying to HRL under the License Agreement–II. The High Court relied on and examined relevant case laws where various tests were discussed to distinguish capital expenditure and revenue expenditure.
The Court stated that a license is nothing but a permissive use of the mark, which is revocable. A ‘right to use’ is usually a license and not an assignment, except in certain circumstances. The Delhi High Court penned down the following questions to determine whether an arrangement is a license or an assignment:
(i) Whether the user acknowledges the licensor’s right and title over the mark?;
(ii) Whether it is a mere right to use the mark or it was a transfer/assignment of a permanent nature?;
(iii) Whether the manner of use is specified and restricted and the effect thereof on the rights of the user?;
(iv) Whether the payment made by the user is one-time, fixed running royalty or a percentage of sales, with or without investment made by the Licensor on marketing and advertising?;
(v) Whether the licensor has right of supervision and control over the use of the mark?;
(vi) Whether sole 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?; and
(xii) Whether there are multiple users of the same mark?
The Court stated that a license agreement may contain some or all of the above stipulations and therefore nature of a license agreement can be inferred from the existence of any of the above conditions. The Court stated that sometimes the owner excludes it from using the mark and vests the trademark perpetually to the licensee without any termination clause and then those arrangements could be construed as assignment, however, this present license arrangement could not be construed as assignment due to the existence of restrictive clauses in the License Agreement-II. The question thus is whether the right in the mark “Hilton” was transferred in a manner that was to give a long-term benefit to the Appellant. According to the License Agreement-I, HRL was the owner of the mark and the Appellant was just granted the exclusive right to use the mark “Hilton”.
The Appellant was not given any right to initiate any legal proceedings without the permission of HRL. The termination provisions were clearly stated in the License Agreement-I. The License Agreement-II was almost identically worded to the first, except replacing the periodic royalty with a lump sum payment.
The Court stated that the settled position in law is that use by a licensee would also inure to the benefit of a licensor, for the trade mark would continue to remain with the owner, unless there was also part transfer of title. The benefit of use of the mark “Hilton” during the license period by the Appellant inures to the benefit of HRL as the Appellant only had the permission to use the mark, and the title of the mark was never transferred to the Appellant.
The Court observed that the use of the mark “Hilton” merely facilitated the Appellant’s business in the Indian market and the use of the mark by the Appellant during 1992-2005 benefited the Appellant as permitted user.
The amount of Rs. 1 crore paid to HRL was thus, consideration for permission to use the mark, and not for acquiring ownership rights in the mark.
The Court requested the Appellant to state the present position with regards to the mark “Hilton”, pursuant to which the Appellant submitted additional documents stating that the name of the Appellant was changed to ‘Roulands Codan India Limited’ and with subsequent change the Appellant is now known as ‘Contitech India Pvt Ltd’. The Appellant has also submitted documents to prove that they had not used the mark “Hilton” and are marketing their goods under the mark “Roflex”, which is their registered trademark since 10th July, 1996.
In these circumstances, the Court vide its order dated 20th April, 2018 held that the payment of Rs. 1 crore under the License Agreement-II shall be considered as revenue expenditure in view of the stipulations stated in the License Agreement-II which are not enduring in nature in relation to use of the mark “Hilton” by the Appellant.
For further information, please contact:
Vineet Aneja, Partner, Clasis Law
vineet.aneja@clasislaw.com
