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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI D. MANMOHAN & SHRI B. RAMAKOTAIAH
PER B. RAMAKOTAIAH, A.M. :
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-2, Hyderabad, dated 28-02-2017, on the issue of disallowance of trademark and license fee of Rs. 3.73 Crores.
Briefly stated facts are that assessee in terms of trademark and license agreement entered with M/s. GMR Holdings Pvt. Ltd., on 28-03-2009, paid an amount of
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Rs. 3,73,40,480/- comprising of Rs. 3,37,50,000/- towards one time initial consolidated fees for use of trademark and artistic works ever since its incorporation on 13-06-2008 and an amount of Rs. 35,90,480/- towards regular license fee payable on the basis of the turnover achieved. AO disallowed the entire amount holding that the same was ‘capital in nature’ incurred to acquire a benefit of enduring nature. It was the contention of assessee that there was no ownership on the trademark and it was the non-exclusive agreement and it was entered only for the purpose of use of the license without ownership and therefore, the amount is allowable as ‘revenue expenditure’.
Ld.CIT(A) after recording the submissions of assessee in detail, however, agreed with the AO on the reason that assessee is taking contradictory stand. Assessee has raised mainly the grounds contesting that the amount above is allowable as ‘revenue expenditure’ and in the alternate, should be considered as an intangible asset and appropriate depreciation should be granted on the above amount.
Before adverting to the merits of the issue, it is necessary to consider the following facts as well. The GMR group, which is a major infrastructure player has entered into the business of airport construction and management in the year 2001. After it entered into agreement with Airports Authority of India, it has developed Hyderabad International Airport and Delhi International Airport under the PPP model. It was submitted
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that GMR is a recognized brand and assessee has been using the said brand since its incorporation and derived significant benefits. The logo of GMR and artistic work are owned by GMR Holdings Pvt. Ltd. Assessee has entered into agreements on 28-03-2009. The first agreement ‘Trademark License agreement’ by which assessee has to pay one time consolidated fees of Rs. 84,37,000/- for using the trademark ever since its incorporation and for having secured many financial assistance and projects. In addition, assessee has to pay a regular license fee @ 0.20% of net annual revenue, where the trademark is used as part of corporate name and in normal course of business or at 0.10% of the net annual revenue, where the trademark is not used as part of its corporate name and is used in normal course of business/letter heads/correspondence etc. Accordingly, assessee has paid an amount of Rs. 84,37,000/- as one time initial consolidated payment of Rs. 87,74,480/- and an amount of Rs. 7,46,827/- as regular fees calculated as above.
4.1. Assessee also entered into another agreement for using ‘artistic work license’ by which it was to pay one-time consolidated fees of Rs. 2,53,13,000/- since assessee has been using the artistic work, ever since its incorporation. In addition, assessee has to pay a regular license fee @ 0.40% of net annual revenue where the artistic work was used as part of corporate name and 0.30% of net annual revenue where the artistic work is used in normal course of business/letter heads/correspondence etc. Assessee has paid the consolidated
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payment of Rs. 2,53,13,000 and an amount of Rs. 14,93,653/- towards annual license fee. Thus, assessee has paid an amount of Rs. 3,51,00,000/- towards one-time lumpsum amount and an amount of Rs. 22,40,480/- as regular license fee towards two agreements entered. It was the contention that these above amounts are to be allowed as ‘revenue expenditure’.
Ld. Counsel referring to the license agreements, submitted that it is evident from the various clauses of the agreements that assessee was given only license to use the trademark as part of its corporate name and in conducting its business. The ownership rights of the trademark and artistic work are vested with licensor and not with assessee. It was submitted that assessee did not have any right, title or interest of any kind or ownership what-so-ever in the trademark or artistic work other than the right to use the same as part of its corporate name and in conduct of its business and on the expiration or termination of the agreement, assessee was to return of trademark and artistic work obtained by it under the agreement. It was also submitted that assessee was also not permitted to assign the license to anybody else and the right given was on a non-exclusive basis and licensor has retained the rights to grant similar rights to other group entities. It was submitted that payment of license fees was also made on regular basis on the net annual revenue and these payments have been allowed by the AO in the later assessment years. Ld. Counsel relied on the judicial pronouncements in the case
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of Bhaktimala Beedi Factory Vs. CIT [219 ITR 6] (AP) and in the case of CIT Vs. Ashoka Mills Ltd., [218 ITR 526] (Gujarat) and in the decision of the Hon'ble Delhi High Court in the case of Hilton Roulunds Ltd., Vs. CIT [92 taxmann.com 368] (Delhi). It was the submission that the amount is allowable as revenue expenditure.
5.1. Without prejudice to the above, it was also submitted that in the event the said amount paid is treated as capital asset, assessee should be eligible for depreciation as per Section 32(1)(ii) of the Act. It was submitted that Section 32(1)(ii) of the Act provides for certain intangible assets, which comprises know-how, patents, copy rights, trademarks license franchise or any other business or commercial rights of similar nature, which are eligible for depreciation. It was submitted that assessee acquired trademark and artistic work license to sell products under the trade name ‘GMR’ and paid consideration for the same as required by the terms of agreement. Under the agreement, it became entitled to use the trademark and artistic work and therefore, these are ‘intangible assets’ exploited by assessee and used for the purpose of business and hence following the principles laid down by the Hon'ble Supreme Court in the case of Techno Shares & Stocks Ltd., Vs. CIT [327 ITR 323] (SC) the amount of license fee to be paid is eligible for depreciation in terms of Section 32(1)(ii). Assessee also placed reliance on the decisions of the Hon'ble Delhi High Court in the case of Areva T&D India Ltd., Vs. DCIT [345 ITR 421] (Delhi) and ITAT, Bangalore
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Decision in the case of Bosch Ltd., Vs. ACIT [183 TTJ 215] (Bangalore-Trib).
Ld.DR, however, relied on the orders of AO and CIT(A) to submit that expenditure is capital in nature.
We have considered the rival contentions and perused the facts on record, agreements and case law relied upon. As seen from the agreements, there are two types of payments made by assessee. An amount of Rs. 3,37,50,000/- has been paid as one-time license fee and an amount of Rs. 35,90,450/- towards annual recurring license fee. The amount of annual recurring license fee payable on the basis of certain percentage on the net annual turnover is in the nature of revenue expenditure, which the AO has allowed in later two assessment years. To that extent, the case law relied upon by assessee about allowing trademark and license fee as revenue expenditure, including the judgment of the jurisdictional High Court in the case of Bhaktimala Beedi Factory Vs. CIT [219 ITR 6] (AP) is applicable. Therefore, the amount of Rs. 35,90,480/- is allowed as revenue expenditure and to that extent, the orders of AO and CIT(A) stand modified and they are directed to allow the above amount as revenue expenditure.
7.1. Then we have to consider the issue of one-time license fee of Rs. 3,37,50,000/-. This amount was also contended as revenue expenditure by the assessee. It relied on mostly the
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principles laid down by the Hon'ble Delhi High Court in the case of Hilton Roulunds Ltd., Vs. CIT [92 taxmann.com 368] (Delhi). In the said case, the Hon'ble Delhi High Court has analysed the nature of capital expenditure and revenue expenditure and also assignment of trademark and license to use trademark. The decision of the Hon'ble Delhi High Court dated 20-04-2018 considered most of the case law on the subject. It was held that:
“23. Thus, extrapolating from the judgments referred to above, in the context of trademark licensing, in order to determine whether a particular expenditure is capital or revenue in nature, some of the factors that are relevant are -
i. the nature of the right being given - exclusive, non- exclusive, permanent or term based; ii. the benefit being derived - whether enduring, long term, short term; iii. the nature of payment being made - periodic, lump sum, revenue linked payments etc.
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”.
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7.2. In the present case, it can be seen that the expenditure is not for assigning the license but use of the trademark in assessee’s business. It is to be noted that there are two types of payments as per the agreement, one is onetime consolidated payment and other is regular license fee on the basis of the turnover. In the above referred case of Hilton Roulunds Ltd., Vs. CIT [92 taxmann.com 368] (Delhi), the Hon'ble Court has considered two types of agreements entered by assessee, wherein on certain use of trademarks, assessee paid annual license fee on the basis of turnover and also by way of supplementary agreement paid a lumpsum amount for use of the trademark for a ten year period without any annual fee. In that context, the issue was about Rs. 1 Crore lumpsum amount paid for a period of ten years. Analyzing that agreement and the case law, the Hon'ble High Court has held that the amount of Rs. 1 Crore lumpsum payment, without any further charges, is a revenue expenditure. However, in this case, the facts are slightly different. Assessee has paid a lumpsum amount at the beginning for the use of its trade license and also further payment of annual fee for continuous use of license. The principles laid down by the Hon'ble Supreme Court in the case of Techno Shares & Stocks Ltd., Vs. CIT [327 ITR 323] (SC) are applicable to the facts of this case, wherein the Hon'ble Supreme Court has held as under:
“19. Moreover, by virtue of Explanation 3 to section 32(1)(ii) the commercial or business right which is similar to a "licence" or "franchise" is declared to be an intangible asset. Moreover, under rule 5, membership is a personal permission from the Exchange which is
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nothing but a "licence" which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of nomination, is a "licence" or "akin to a licence" which is one of the items which falls in section 32(1)(ii) of the 1961 Act. The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a "licence" or "any other business or commercial right of similar nature" in terms of section 32(1)(ii)”.
7.3. Therefore, one-time consolidated amount paid can be considered as a payment for use of the trademark in the business of assessee. Since it has an enduring benefit and is applicable till assessee ceases to be a subsidiary of GRM Holding/GMR Group, we are of the opinion that this amount is to be treated as ‘capital asset’ and depreciation on that u/s. 32(1)(ii) is allowable. It is admitted that without acquiring the aforementioned trademark and license, assessee would have had to commence business from scratch and through the gestation period and by acquiring aforesaid business rights/ license, assessee could incidentally boost its revenues. We are of the opinion that the onetime consolidated payment is in the nature of ‘intangible asset’ as specified in Section 32(1)(ii) of the Act and are accordingly eligible for depreciation on the cost at which they are acquired. Thus, the amount of Rs. 3,37,50,000/- is to be considered as capital asset u/s. 32(1)(ii) and necessary depreciation is to be allowed. There is no dispute with reference to commercial expediency or with reference to being capital in nature. AO and CIT(A) disallowed the entire amount as capital expenditure, but they failed to
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consider whether the said amount is eligible for depreciation u/s. 32(1)(ii). We direct the AO to allow depreciation on the amount of Rs. 3,37,50,000/- treating it as capital asset and allow the balance amount of Rs. 35,90,480/- paid towards annual recurring license fee as revenue expenditure, in tune with the amounts allowed in later years. Assessee’s grounds are accordingly considered allowed partly.
In the result, the appeal of assessee is partly allowed.
Order pronounced in the open court on 29th June, 2018
Sd/- Sd/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER Hyderabad, Dated 29th June, 2018 TNMM
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Copy to : 1. GMR Airport Developers Limited, GMR HIAL Office, Rajiv Gandhi International Airport, Shamshabad, Hyderabad. 2. The Income Tax Officer, Ward-2(2), Hyderabad.
CIT(Appeals)-2, Hyderabad.
Pr.CIT-2,Hyderabad.
D.R. ITAT, Hyderabad.
Guard File.