Facts of the Case

  • The assessee, M/s Hilton Roulunds Ltd., entered into a Trademark License Agreement (1993) with Hilton Rubbers Ltd. granting exclusive use of the trademark “HILTON” in India for manufacturing V-belts.
  • Initially, payment was made through running royalty (1.8% of sales).
  • A second agreement dated 09.11.1995 replaced the earlier agreement, requiring a lump sum payment of ₹1 crore for trademark usage.
  • The assessee claimed deduction of ₹1 crore as revenue expenditure under Section 37(1).
  • The Assessing Officer disallowed the claim, treating it as capital expenditure providing enduring benefit.

Issues Involved

  1. Whether ₹1 crore paid for trademark license is capital expenditure or revenue expenditure?
  2. Whether such payment qualifies for deduction under Section 37(1) of the Income Tax Act, 1961?

Petitioner’s (Assessee’s) Arguments

  • The agreement only granted right to use the trademark, not ownership.
  • Change from royalty to lump sum does not alter the nature of expenditure.
  • The payment was made for business operations and profitability, hence revenue in nature.
  • Reliance placed on judicial precedents stating license payments without transfer of ownership are revenue expenditure.

Respondent’s (Revenue’s) Arguments

  • The payment resulted in enduring benefit to the assessee.
  • The agreement effectively granted perpetual and exclusive rights, akin to transfer of asset.
  • The transaction was linked with transfer of shareholding, indicating capital nature.
  • Relied on precedents like Honda Siel Cars Ltd. v. CIT to argue capital characterization.

Court’s Findings / Order

  • The Court emphasized that no single test (like enduring benefit or lump sum payment) is conclusive.
  • Key factors considered:
    • Nature of rights granted
    • Ownership retention
    • Duration and termination clauses
    • Business purpose of expenditure
  • Held:
    • The agreement did not transfer ownership of trademark.
    • The payment was for use of trademark in business operations.
    • Even lump sum payments can be revenue expenditure depending on facts.

 Final Decision:
The payment of ₹1 crore was held to be revenue expenditure, allowable as deduction under Section 37(1).

Important Clarifications by Court

  • Enduring benefit test is not decisive; must consider commercial reality.
  • Lump sum payment ≠ capital expenditure automatically.
  • License vs Assignment distinction is crucial:
    • License → Revenue
    • Assignment → Capital
  • Key determinants:
    • Ownership retention
    • Control over trademark
    • Termination rights
    • Nature of business advantage

Sections Involved

  • Section 37(1), Income Tax Act, 1961 – General deduction provision
  • Section 143(3), Income Tax Act, 1961 – Assessment procedure

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:2624-DB/PMS20042018ITA3252005.pdf

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