ASSISTANT COMMISSIONER OF INCOME TAX, 14(1)(2) MUMBAI, MUMBAI vs. DEUGRO PROJECTS (INDIA) PRIVATE LIMITED, MUMBAI

Ground Nos. 1 to 3 raised by the Revenue are interrelated and interconnected and relates to challenging the order of the Ld. CIT(A) deleting the addition of Rs.2,44,83,000. Therefore, we have decided to adjudicate these grounds through the present consolidated order.

We have heard the learned counsels for both the parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we noticed that the facts of the case are that the assessee company is engaged in the business of clearing, forwarding, transport, etc. While framing the assessment order, an addition to the tune of Rs.2,44,83,000 was made by the AO on account of disallowance of trademark fees.

The said order of the AO was challenged before the Ld. CIT(A), who, after detailed discussions and relying upon the decisions of judicial

After hearing the learned counsels for both the parties and perusing the decisions relied upon by the parties and the orders passed by the Revenue Authorities, we find that the AO had disallowed trademark fees of Rs.2,44,83,000 paid by the assessee to Dehoco License AG for the usage of the trademark "Deugro", on the conclusion that the payment relates to enduring benefits and thus constitutes capital expenditure and cannot be claimed as business expenditure in the statement of profit and loss for the year under consideration.

Whereas, on the contrary, in this regard, the assessee submitted that it had entered into an agreement with Dehoco License AG, which is effective from 1st July 2015, for the usage of the trademark "Deugro". Since Dehoco License AG is the sole owner of the trademark and, as per the agreement for the use of the trademark, the assessee is liable to pay 5% of the gross profit annually to Dehoco License AG. In this regard, the assessee placed on record a copy of the trademark agreement.

It is also pertinent to mention here that the assessee does not own the trademark and only holds a limited right to use it under the licensing agreement. Thus, according to the assessee, the subject trademark fee is recurring in nature, paid on a year-on-year basis, and does not result in any benefit of an enduring nature, as it is only a payment made for use of the trademark for selling the products of the assessee. In this regard, the assessee's invoices for trademark fees have also been placed on record.

Even in this regard, we have considered the decision of the Hon'ble Supreme Court in the landmark ruling in the case of CIT v. Ciba of India Ltd., wherein it was held that payments made for use of trademarks and technical know-how without transfer of ownership or exclusive rights are revenue in nature. The Court emphasised that since the foreign parent retained all proprietary rights, and the Indian company only received a limited right to use, no capital asset was acquired.

Moreover, the general principle that we can derive from the judicial decisions and the facts of the present case is as to whether, under the terms of the agreement, the assessee acquires a benefit of an enduring nature, which will constitute acquisition of an asset, and, therefore, the amount paid for the same is a capital expenditure.

After having regard to the clauses of the agreement, we find that the assessee has only been allowed to use the trademark for the period authorised by Dehoco License AG and, on termination of the agreement, the assessee is bound to immediately abstain from any further use of the trademark.

Thus, in these set of facts, we cannot lose sight of the observations of the Hon'ble Supreme Court made in Ciba of India Ltd. and Alembic Chemical Works Co. Ltd., that in these days of fast-changing technology,

Since the facts of the present case are also fully and squarely covered by the above decisions, therefore, as the assessee also merely enjoys a non- exclusive, time-bound right to use the trademark "Deugro" without acquiring any proprietary interest, the payment made by the assessee is recurring in nature and linked to gross profit, which is indicative of a revenue expenditure as per the established legal principles.

Even otherwise, the conclusion drawn by the learned CIT(A), after evaluating the facts of the case, is in accordance with the legal position discussed by us above. The relevant portion of the order of the learned CIT(A) is reproduced as under:

Thereby, the assessee wishes to humbly reiterate the fact that since it is not the owner of the trademark, the same cannot be capitalised in the books of accounts of the assessee. Hence, the said expenditure is allowable under section 37(1) of the Act.

No new facts, circumstances, or documents have been placed on record by the learned DR in order to controvert or rebut the lawful findings so recorded by the learned CIT(A). Therefore, we see no reason to interfere with or deviate from the findings so recorded by the learned CIT(A). Hence, we dismiss the grounds raised by the Revenue and uphold the order of the learned CIT(A).

In the result appeal filed by the Revenue stands dismissed.