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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH, VICE- & SHRI MANOJ KUMAR AGGARWAL
This appeal by the assessee is arising out of order passed by the CIT(A)-18, Chennai, vide order No. dated 11.04.2019. The assessment was completed by the Assistant Commissioner of Income Tax, Central Circle- 2(1), Chennai, for the relevant assessment year 2014-15 u/s.143(3) r.w.s 153A of the Income Tax Act, 1961 (hereinafter ‘the Act’) vide order dated 30.12.2016.
The jurisdictional issue raised by the assessee in regard to issuance of notice u/s.143(2) i.e., before assigning jurisdiction in ground nos.2 & 3 is not pressed and hence, same is dismissed.
The only issue on merits raised by the assessee against the order of the CIT(A) is upholding levy of capital gain tax on interest free refundable deposit in license agreement. For this issue, the assessee raised grounds of appeal nos.4 to 7, which read as under:-
“4. The Commissioner of Income Tax (Appeals) failed to appreciate that in the absence of transfer of a capital asset, no capital gain tax can be confirmed on the Appellant.
5. The Commissioner of Income Tax (Appeals) erred in upholding the levy of Capital gain tax on the interest free refundable deposit in a license agreement without appreciating the fact that such refundable deposit is not an income/ gain in the hands of the Appellant.
6. The Commissioner of Income Tax (Appeals) erred in dismissing the appeal without giving any finding with reference to the license agreement which explains the nature of transaction and there is no capital asset.
The Commissioner of Income Tax (Appeals) failed to appreciate that the Appellant had rightly discharged tax on the receipt towards licensing the trademark usage. Therefore, the levy of capital gain on the interest free deposit is without application of mind and also lapse legal backing.”
Brief facts are that the assessee is an individual deriving income from beauty parlour, royalty and commission filed her return of income for the relevant assessment year 2014-15 admitting total income at Rs.17,80,370/-. A search u/s.132 of the Act was conducted at the premises of Mr. C.K.Kumaravel on 24.09.2014 being part of search in group of M/s. Groom India Saloon & Spa Pvt. Ltd. The assessee is director of M/s.
Groom India Saloon & Spa Pvt. Ltd. Consequently, notice u/s.153A was issued and the assessee filed her return of income in response to the notice on 31.08.2016.
The Assessing Officer, during the course of assessment proceedings noticed that the assessee had received a sum of Rs.6.5 crores from M/s.Groom India Saloon & Spa Pvt.Ltd. against transfer of rights to use trademark “Naturals” for carrying out business of beauty parlour / saloon. According to the Assessing Officer, consideration received against transfer of rights to use brand “Naturals” should be treated as capital gain on transfer of intangible property. Against this, the assessee contended that trademark “Naturals” is only license and not transfer as per industry practice regarding licensing of trademark and drew the Assessing Officer’s attention to various clauses of license agreement. The Assessing Officer rejected explanation of the assessee and added receipt of Rs.6.5 crores not only refundable deposit in the hands of individual and treated as capital receipt exigible to capital gains. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) also confirmed action of the Assessing Officer by observing in para 7.4 of his order as under:-
“7.4.1. The trade mark for Naturals' was issued by the competent authority in favour of the appellant as evidenced by the certificate issued by Registrar of Trade Marks, Mumbai on 18.1.2006. The appellant has entered into license agreement dated 01.08.2013 has given exclusive right to use the trademark to Groom India Salon & Spa Ltd the trademark to Groom India Saloon & Spa Ltd for its business purposes.
7.4.2. A perusal of the agreement, between the Appellant and M/s Grooms clearly shows that the payment was for exclusive license and right to use -of said trademark; that the grant of exclusive right in favor of Grooms by the appellant is to be construed as transfer as the appellant could not assign the rights to any other person. The bundle of rights, ernbedded in the property of trademark natural to the extent of usage[in fact exclusive use has been assigned / transferred in favor of M/s Grooms.
7.4.3. Explanation 3 appended to section 32(l)(ii) of the Income- tax Act. 1961 (hereinafter called as ‘the Act’) whereby a trade name/commercial right comes under the definition of ‘intangible assets’, Intangible assets include know how. patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature. Thus, TRADE MARK is qualified under the definition of capital asset as defined in section 2(14) of the Act. ln this regard, it is apposite to refer to a vintage of the Hon’ble Supreme Court in the case of S.C. Cambatta & Co. (P.) Ltd. v. Commissioner of Excess Profits Tax (1961) 41 ITR 500 according to which, the payment for goodwill/patent right. etc. is a capital receipt and the consideration so received is taxable as capital gains.
7.4.4 It is not disputed in the appellant's case that “Naturals"' is a trade mark owned and endowed on her; the said trade mark has significant commercial importance; that customers would identify with the trade mark Naturals the trade mark is treated as capital asset as defined in section 2(14) of the Act; the trademark is a self-generated asset of the appellant. ln fact, the words used in section 55(2)(a) were ''the cost of acquisition in relation to a capital asset, being goodwill of a business or a trade mark or a brand name associated with a. business. The law had been amended by the amendment to section 55(2)(a) of the Act with effect from 1-4- 2002 to deem the cost of acquittion of self generated asset, such as trademarks or designs as 'nil'.
7.4.5. The appellant's attempt to disguise the consideration in lieu of the exclusive grant of use of trade mark as deposit has been clearly highlighted by the AO by referring to the exchange of e mail as per which the intention/attempt of the appellant to structure the deal in such a manner that the route of deposit [ a self;. serving and convenient argument of the appellant] was deployed with a view to evading tax. The appellants argument that the contents of the mail and the AOs valid inference are clear mistakes of facts does not hold good. The Appellant has just advanced a bald, generic and academic argument. ln the light of the aforementioned clauses and the relevant correspondence relating there to, it is clear that this is a case of 'substance over form' whereby the consideration received against the grant of exclusive use of trade mark in favour of Grooms has been sought to be projected as deposit. Thus, no interference is called fur in the AO's conclusion that the appellant deployed a colourable device to evade capita1 gains tax on the consideration [disguised as deposit] received in lieu of grant of exclusive use of trade mark Naturals' in favor of Grooms for its business purposes. Even if the appellant continues to possessess the right of trade mark, her permission to allow use of the said trade mark by Grooms as per the license agreement between them, is transfer of partial right that is exigible to capita1 gains. Hence; the appellant’s argument that there is no transfer of right to use trademark by arguing that Section 48 of Trade Marks Act, 1999 provides that permitted use of the trademark is deemed to be used by the proprietor of the trademark. The appellant's argument that depreciation was not considered by the Assessing Officer in the hands of M/s.Grooms is not materially relevant in this case before the undersigned.”
Aggrieved, the assessee is in appeal before the Tribunal.
Before us, learned counsel for the assessee argued that the assessee is owner of registered trademark “naturals” and the assessee vide agreement dated 01.08.2013 i.e. license agreement granted only limited excusive non-transferrable license to use trademark to M/s.Groom India Saloon & Spa Pvt.Ltd. According to the assessee, as per terms of agreement, the assessee is entitled to fee for a consideration of Rs.5.00 lakhs per annum as license fee. Further, the assessee also received refundable interest free deposit of Rs.6.5 crores, which is refundable on termination of agreement. The learned counsel for the assessee drew our attention to license agreement entered between the assessee and M/s.Groom India Saloon & Spa Pvt.Ltd., which is enclose in assessee’s paper book at page 1 to 7. The assessee also drew our attention to certificate of registration of trademark, which is enclosed in assessee’s paper book at page 8. The learned counsel also took us through certificate issued by Director of M/s.Groom India Saloon & Spa Pvt.Ltd. regarding confirmation of ownership of trademark “naturals”, which is enclosed in assessee’s paper book at page 9. The learned counsel for the assessee heavily relied on the decision of the Hon’ble Delhi High Court in the case of M/s.Hilton Roulunds Ltd.Vs. CIT (2019) 412 ITR 436 and made parallels by laying down some questions that help to determine whether an arrangement is a license or assignment. The questions laid down by the Court and reference to the relevant clauses of license agreement are given by the assessee in her written submissions. In view of the above, learned counsel for the assessee argued that the Assessing Officer and the CIT(A) disregarded the agreement entered between the assessee and M/s.Groom India Saloon & Spa Pvt.Ltd. He stated that by treating license to trademark as assignment of trademark and treating refundable deposit as consideration for transfer of trademark, the Department has rewritten the agreement between the parties and doing so, they have ignored legal character of transaction, which is source of receipt. The learned counsel fully relied on decision of the Hon’ble Delhi High Court in the case of M/s.Hilton Roulunds Ltd.Vs. CIT (supra) and stated that reading of license agreement there is no transfer or assignment of trademark and it is a case of uses of license for which the assessee has charged fee of Rs.5.00 lakhs per month.
7. On the other hand, the learned CIT DR heavily relied on assessment order and order of the CIT(A).
We have heard rival contentions and gone through facts and circumstances of the case. As pointed out by the learned counsel, first we have gone through definition mentioned in regard to uses of trademark is license and relevant clauses 2.1 and 2.2 read as under:-
“2.1 On the terms and subject to the conditions set forth herein, the Licensor hereby grants a limited exclusive non-transferable license to use the license marks for carrying out the business of running beauty parlours directly or through franchises in India and abroad.
2.2 Except as expressly provided for herein, nothing contained in this Agreement will be deemed to grant to licensee any right, title or interest in or to the Licensed Marks. Subject to to the license, the Licensor shall own all right, title and interest in and to the Licensed Marks, including all Intellectual Property Rights and goodwill there in and thereto, licensee shall not use the Licensed Marks with any activity that (i) disparages, or may be reasonably expected to have a disparaging effect on, the Licensor or any of its affiliates, or any products or services of the Licensor or its affiliates; or (ii) violates or infringes any intellectual Property Rights of the Licensor or any third party.”
The learned counsel for the assessee also drew our attention to conditions for uses of license for the licensee and the relevant clause 3.1 was specifically read out by the learned counsel, which reads as under:-
“3.1 Licensee will not challenge or consent the licensor's ownership in, or the validity or scope of, any of the Licensed Marks in any jurisdiction, nor the validity of any licenses to any of the licensed Marks granted by the Licensor to any third party in any jurisdiction, and will not do anything inconsistent with the Licensor's title, right and interest in and to the Licensed Marks, including any attempted registration of any of the Licensed Marks, or any confusingly deceptively similar to any of the Licensed Marks.”
Further, the learned counsel for the assessee took us through amount fixed i.e. license fee vide clause 5 for uses of license and for which the assessee charged Rs.5.00 lakhs as license fee from the licensee, which reads as under:-
“5. License Fee. 5.1 Licensee hereby agrees to pay an amount of Rs.5 lakhs as License fee per annum for a period of two years and the license fee would be fixed from the third year onwards for such period and for such amounts as may be agreed between the parties.”
The learned counsel for the assessee has pointed out that even for the termination agreement, it clearly depicts that on termination, the licence will revert back to the assessee and it will continue till 31.07.2019 and the relevant clauses given under 8.1 & 8.2 read as under:-
“8.1 Term: This Agreement and licenses granted hereunder will be effective as of the Effective Date and will continue in full force till 31st July 2019 unless terminated as set forth in this Section. 8.2 Termination: In the event that either party defaults in the performance of a material obligation under this Agreement, then the non-defaulting party may provide written notice to the defaulting party indicating; (i) the nature and basis· of such default with reference to the applicable provisions of this Agreement; and (ii) the non- defaulting party's intention to terminate this Agreement. In the event that such material default is not cured within thirty (30) days after such notice (or such longer cure period as the parties may agree upon), the non-defaulting party may terminate this Agreement upon written notice effective immediately to the breaching party.”
The learned CIT DR subsequently drew our attention to one e- mail received from M/s. Groom India Saloon & Spa Pvt. Ltd., by virtue of which entire terms & conditions / clauses were changed by the user i.e., M/s. Groom India Saloon & Spa Pvt.Ltd. The relevant text of the mail reads as under:-
“We collect the upfront Start up (non-refundable) fee of Rs. 5 lacks from all franchisees at the time of giving them the franchise rights. This is the consideration for “Naturals”. The franchisee for the given territory, which is only to the extent of franchisee’s saloon. In a similar vein, Groom India has been licensed the brand “Natural” to Mrs.Veena Kumaravel. This is for the entire territory of India. License Deposit is the refundable lumpsum deposit logded with the trademark owner for licensing.
We were paying license fee every year to Mrs. Veena Kuamravel, which is not tax efficient as it attracts TDS and ST. After thorough consideration and taking opinion that license deposit wit be the most efficient structure. Further, it is a common business practice when a well-known brand is fanchised to a Master Franchisee for MacD). We are in the process of preparation of the new license agreement along with lawyers. It may take some time, as it requires several deliberations from the compliances. Meanwhile, this email can be considered as the clarification in this regard.
Under the license agreement, Groom India Salon & Spa P Ltd will hold exclusivity for usage of the brand in India. The agreement will be renewable after 6 years very nominal amount going forward.”
The license deposit includes Rs. 3.58 crores of debit balance standing the name of Mrs. Veena Kumaravel as on March 31st 2013. The debit balance of Rs. 3.58 crores Veena as on March 31 2013 (in loans and advances) has been considered as license deposit to the extent of the amount. You may please recollect that the debit balance arose on account of journal entry . when the Fullerton loan was taken over by Axis Bank. Earlier, Fullerton loan was in the name of Mrs. Veena. When Axis for additional loan amount, the balance outstanding with Fullerton was debited to the account of Mrs. Veena. Overall, this is the most robust financial structure.”
The above e-mail clearly depicts when there is change in terms & conditions / clauses of agreement and it is clear that entire structure of license deposit was changed and whether new license agreement was need or not it is not clear. In case, if this agreement is changed from which date, because e-mail is dated 27.07.2014, which will reveal actual nature of transaction. Hence, we remit this issue back to the file of the Assessing Officer to examine this e-mail and also examine the assessee along with related financial transactions to bring out true colour of transaction. The Assessing Officer will allow opportunity of being heard to the assessee and to present evidences so that the Assessing Officer can reach to correct conclusion whether transaction is merely transaction of users of license or it is sale of license. In term of above directions, the matter is remitted back to the file of the Assessing Officer and appeal of the assessee is allowed for statistical purposes.