Whether consideration paid for use of a trademark can be considered as a revenue expenditure?   





Whether consideration paid for use of a trademark can be considered as a revenue expenditure and allow as a deduction u/s 37?


The above factors are singularly not 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.

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. 

The second Agreement dated 9th November, 1995 was almost identically worded to the first license agreement, except for the fact that the royalty was now Rs. 1 crore as a lump-sum for a period of 10 years. 

Thus, 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 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. 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. In fact the appellant no longer uses the word “HILTON” either as a trade mark or trade name or as a part of its corporate name. 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.


A supplemental corporate license agreement was executed along with the first license and the second license agreement. Under these agreements also the right to use the corporate name “Hilton” was non-exclusive and royalty free. Though, it was to remain in full force and executed without any limit of time, a licensor had the right to terminate the said agreement with 30 days’ notice. Thus, even the corporate name license agreement was terminable and did not create ownership rights in the appellant for the word “HILTON”. The Court takes notice of the fact that the corporate name has in any event been changed by the appellant. Moreover, before the Income Tax Authorities, the appellant had filed to letters dated 16th March, 1997 and 24th September, 1997 signed by the Company Secretary of the Appellant and by HRL, respectively. Both these letters confirm that the right to use the mark “HILTON” was for a limited period of 10 years.


Consideration paid for permission to use the trademark and not for acquiring ownership rights in the mark is a revenue expenditure.


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