Income Tax Appellate Tribunal - Delhi
Joint Commissioner Of Income Tax vs Hiton Roulunds Ltd. on 22 December, 2004
Equivalent citations: (2005)97TTJ(DELHI)479
ORDER
S.K. Yadav, J.M.
1. This appeal by the Revenue is directed against the order of the CIT(A) on the following grounds :
"1. On the facts and in the circumstances of the case :
(i) the learned CIT(A) erred in allowing Rs. 1 crore paid to M/s Hilton Rubber Ltd., for the trade-mark 'Hilton' despite the fact that this is a payment towards the acquisition of a capital asset.
(ii) the learned CIT(A) erred in relying upon the decision of Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT (1997) 225 ITR 802 (SC) which was rendered in an entirely different context.
2. The learned CIT(A) erred in allowing deduction on account of belated payment of provident fund."
2. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.
3. With respect to ground No. 1, facts in nutshell borne out from the record are that the assessee-company claimed deduction of Rs. 1 crore under Section 37 of the IT Act in respect of the payment made to M/s Hilton Rubber Ltd. (hereinafter called as HRL) under an agreement for use of proprietary trade-mark "Hilton". The assessee-company entered into an agreement for trade-mark license with HRL on 9th Nov., 1995 and as per Clause 4 of the agreement, the assessee-company paid an amount of Rs. 1 crore to HRL who was the owner of trade-mark "Hilton" and claimed it to be a revenue expenditure for acquiring right to use of the above referred trade-mark. Doubting the claim of the assessee, the AO asked it as to why the expenditure incurred as per the said agreement should not be treated as capital expenditure or towards goodwill and why it should not be disallowed. The assessee has filed a copy of the agreement and a letter dt. 16th March, 1999 stating therein that the agreement gives a right to use the said trade-mark for a period of 10 years and fresh negotiation will take place thereafter. The AO examined the relationship between the parties and the earlier agreement dt. 27th Jan., 1993 whereby HRL has given right to use the trade-mark to the assessee-company, in India or any other part of the country as per the conditions set forth in the said agreement. The AO has also examined the agreement dt. 9th Nov., 1995 whereby the HRL have decided to sell its entire shareholding in user i.e., the assessee to Roulunds Fabriker (hereinafter called as RF) or as nominee and have also expressed its desire of signing a new trade-mark license agreement which overrides the first agreement i.e., dt. 27th Jan., 1993, in its entirety and arrived at conclusion that the payment of Rs. 1 crore made by the assessee-company to HRL is for procuring enduring benefit to the business and cannot be allowed as revenue expenditure. He further observed that even otherwise the payment so made being co-related to the sales of shares by HRL in assessee-company, no such expenditure can be deemed as expenditure as held and expenditure laid out or expended wholly and exclusively for the purpose of business, hence the same cannot be allowed as revenue expenditure.
4. Against the disallowance, the assessee preferred an appeal before CIT(A) and the CIT(A) was convinced with the explanation of the assessee and after relying upon the judgment of the apex Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT , treated the entire expenditure as revenue expenditure and allowed its deduction under Section 37 of the IT Act.
5. Aggrieved, the Revenue preferred an appeal before the Tribunal. The learned CIT-Departmental Representative, Shri Amitab Mishra has invited our attention to the order of the CIT(A) with the submissions that the CIT(A) has not adjudicated the issue properly except reproducing the submissions of the assessee and after relying upon the judgment which is not relevant to the present controversy, has allowed relief to the assessee. The learned CIT-Departmental Representative further invited our attention to the trade-mark license agreement dt. 9th Nov., 1995, original trade-mark license agreement dt. 27th Jan., 1993 and the share purchase agreement dt. 9th Nov., 1995 with the submissions that if these three documents are read together one would find that a sum of Rs. 1 crore was not paid by the assessee for using the trade-mark but it was paid to procure enduring benefit by using the trade-mark as the trade-mark was purchased permanently by the assessee and renewal of the agreement was not required after the initial period of ten years. Besides, selling the entire shareholding in the assessee-company to RF, the HRL has also sold the trademark of "Hilton" to the assessee against Rs. 1 crore. The claim of the assessee that in the earlier years the payment on account of use of trade-mark was treated to be as revenue expenditure does not hold force because through the original agreement dt. 27th Jan., 1993, the assessee was required to pay a running royalty on the domestic sale of Raw-edge, V Belts @ 1.8 per cent of the net selling price from the date of commercial production thereof. Since the assessee was required to make a regular payment of running royalty on net sales, the payment was rightly treated to be a revenue expenditure but through this agreement dt. 9th Nov., 1995, the assessee was allowed to use trade-mark permanently against a lump sum payment of Rs. 1 crore. Though a specific clause for a duration of agreement was inserted but it was not specified whether this agreement was required to be renewed. The liberty was given to the assessee to continue to use of the trade-mark exclusively without limit of time. The learned CIT-Departmental Representative further invited our attention to the legal proposition that to decide the nature of document, the terms and conditions of the document should be read carefully to understand the intention of the parties. One should not go with the title of the document. If these documents are read together, one would certainly arrive (at) a conclusion that it was a sale of trade-mark against payment of Rs. 1 crore and the assessee has procured enduring benefit to its business by making a lump sum payment.
6. The learned Counsel for the assessee besides reiterating its earlier contention invited our attention to the fact that the assessee has obtained a permanent license and the Ministry of Industry have granted approval for transfer of shares. These documents are two independent documents executed for different purpose and they should not be mixed up to draw a different inference that trade-mark was sold to the assessee. It is quite evident from this agreement that the trade-mark was given to the assessee on license basis, as such the payment made for the use of license should only be treated as revenue expenses. The learned Counsel for the assessee further relied upon the decision of the following judgments :
(a) Empire Jute Co. Ltd. v. CIT
(b) Alembic Chemicals Works v. CIT
(c) CIT v. Ciba of India Ltd.
(d) CIT v. British India Corpn. Ltd.
(e) Madras Industrial Investment Corpn. Ltd. v. CIT (supra)
(f) CIT v. Avery India Ltd.
(g) CIT v. I.A.E.C. (Pumps) Ltd.
(h) Goodyear India Ltd. v. ITO (2000) 68 TTJ (Del)(TM) 300 : (2000) 73 ITD 189 (Del)(TM)
(i) Shriram Refrigeration Industries Ltd. v. CIT
(j) CIT v. Associated Electrical Industries (India)(P) Ltd.
(k) Triveni Engg. Works Ltd. v. CIT
(l) CIT Madurai District Co-operative Spinning Mills Ltd. (2003) 131 Taxman 513 (Mad)
(m) CIT v. Shri Ganapathy Mills Co. Ltd.
(n) Asstt. CIT v. Rotex Mfg. and Engg. (Guj) (P) Ltd. (2004) 90 TTJ (Ahd) 171 : (2004) 137 Taxman 37 (Ahd)(Mag)
7. We have carefully perused the order of the lower authorities and the documents placed before us, in the light of rival contentions. From the perusal of the order of the CIT(A), we find that the CIT(A) has reproduced the submissions of the assessee verbatim in its order and has given his findings in a small paragraph instead of adjudicating the issue independently. While adjudicating the appeal, the CIT(A) heavily relied upon the judgment of the Madras Industrial Corporation Ltd. v. CIT (supra) and after having a careful perusal of this judgment, we are of the view that this judgment was rendered on different facts and is not directly applicable to the facts of the present case and as such its reference to the present controversy by the CIT(A) is uncalled for. It is also a settled proposition of law that nature of documents should not only be examined on the basis of its title but the contents of the documents should be examined minutely in toto to draw an inference about the nature of document. One should not go with the title of the document as sometimes title of the document is illusory and deceptive and to understand the nature of the transaction, the document should be read in toto to know the intention of the parties. We therefore, are of the considered opinion that the documents should be read minutely to understand the real state of affairs. We, therefore, extract the relevant portion of the three impugned documents as under:
"Trade-mark license agreement dt. 27th Jan., 1993 This agreement is made (on) the 27th day of January, 1993 between Hilton Rubbers Ltd., a company incorporated under the Indian Companies Act, 1956, having its registered office at 'Hilton House', S 23 Green Park Extn., New Delhi-110016 (hereinafter referred to as 'the proprietor' which term shall unless repugnant to the subject or context be deemed to include the said corporation, its successors and assigns of the one part and Hilton Roulunds Ltd., a company incorporated under the Indian Companies Act, 1956, having its registered office at 'Hilton House' S 23 Green Park Extn., New Delhi-110016, India (hereinafter referred to as "the user") of the other part.
Whereas :
(a) The proprietor is registered as the proprietor in India of the trade-mark 'Hilton' with the registration No. 325863 (hereinafter called the 'trade-mark') shown in the schedule hereto and has exclusive rights in the trade-mark.
(b) Both parties are desirous that the user shall be permitted to use the trademark shown in schedule I hereto, either alone as 'Hilton' or as part of a trade name, in India and in all other countries to which the user may intend to export Raw-Edge and Wrapped V Belts.
(c) The parties hereto having accordingly agreed upon the terms and conditions under which the user shall have the right to use the trade-mark are desirous of selling out and recording hereunder the said terms and conditions.
(d) Apart from the contractual relationship between the proprietor and the user in terms hereof, the proprietor holds 50 per cent of the paid up equity capital of the user.
1. The user hereby acknowledges and confirms that the proprietor has at all material times been, the lawful, sole and exclusive owner of the trade-mark throughout the world including the Union of India and of the rights attaching to the said trade-mark when used in relation to business in the said goods, advertisement or promotional material or otherwise in connection therewith.
2. (a) Subject to the terms of this agreement, the proprietor hereby grants to the user for the term of this agreement an exclusive right to use upon or in connection with Raw Edge, Wrapped V Belts and other power transmission belts excluding flat transmission belts (hereinafter referred to as "the goods) the trade-mark in India and in such other countries to which the goods are exported.
3. (a) In consideration of the said right, the user shall pay to the proprietor a running royalty on the domestic sale (i.e. sales within the Republic of India) of Raw Edge and Wrapped V Belts at the rate of 1.8 per cent of the net selling price from the date of commercial production thereof.
The expression net selling price shall mean ex-factory selling price of Raw-Edge and Wrapped V Belts excluding sales-tax, excise duty and other Governmental taxes and levies, insurance, forwarding and packaging expenses and freight charges.
(b) Unless otherwise specified by the proprietor, the royalty hereunder shall be paid to Hilton Rubbers Ltd. S 23 Green Park Extension, New Delhi-110016, in India rupees at half-yearly intervals, within 60 days at the end of each calendar half-year."
Agreement dt. 9th Nov., 1995 This agreement is made this 9th day of November, 1995, between Hilton Rubbers Ltd., a company incorporated under the Indian Companies Act, 1956 and having its registered office at 'Hilton House' S 23 Green Park Extension, New Delhi-110016 (hereinafter referred to as 'proprietor') which terms shall unless repugnant to the subject or context be deemed to include its successors and assigns) of the one part and Hilton Roulunds Ltd., a company duly formed and registered in India, under the Companies Act, 1956, having its registered office at 'Hilton House, S 23 Green Park Extension, New Delhi-110016 (hereinafter referred to as 'user') which term shall unless repugnant to the subject or context be deemed to include its successors and assigns) of other part Whereas :
1. The proprietor is registered as the proprietor in India of the trade-mark 'Hilton' which the Registration No. 325863 (hereinafter called the 'trade-mark') shown in the schedule hereto and has exclusive rights in the trade-mark.
2. By a trade-mark license agreement dt. 27th Jan., 1993 (hereinafter 'first agreement') entered into between the proprietor and the user, the user has a right to use the trade-mark 'Hilton', either alone or as part of a trade name (including but not limited to 'Hilton Optiflex', 'Hilton Optiset' and 'Hilton Optitex'), in India and in all other countries to which the user may intend to export Raw-Edge and Wrapped V Belts, subject to the terms and conditions set forth in the said agreement.
3. By a joint venture agreement dt. 13th Aug., 1992 (hereinafter 'JV agreement') entered into between proprietor, M/s Roulunds Fabriker, Denmark (hereinafter 'RF') and the industrialization for developing countries, Copenhagen (hereinafter 'IFU'), the parties thereto have formed and established the user as a joint venture and have subscribed to the share capital of the user on the terms and conditions set forth in the JV agreement.
4. Proprietor, having decided to sell its entire shareholding in user to RF or its nominee(s) is desirous of signing a new trade-mark license agreement (hereinafter 'principle agreement') which overrides the first agreement, in its entirety.
5. The parties hereto wish to record the understanding and agreements reached between them.
Now, therefore, in consideration of the premises and mutual promises and covenants, the parties hereto agree as follows :
1. The user hereby acknowledges and confirms that the proprietor has at all material times been, the lawful, sole and exclusive owner of the trade-mark throughout the world including the Union of India and of the rights attaching to the said trade-mark when used in relation to business in the said goods advertisement or promotional material or otherwise in connection therewith.
2. Subject to the terms of this agreement, the proprietor hereby grants to the user for the term of this agreement an exclusive right to use upon or in connection with Raw Edge, Wrapped V Belts and other power transmission belts excluding flat transmission belts (hereinafter referred to as "the goods") the trade-mark in India and in such other countries to which the goods are exported.
3. This agreement shall come into effect from the day of signing of this agreement (hereinafter referred to as 'effective date').
4. In consideration of the said right, the user shall pay to the proprietor a sum of Rs. 1,00,00,000 (rupees ten million only) within 3 weeks of the effective date. In the event that the payment is not made as aforesaid, the said amount will carry interest w.e.f. 22nd day of the effective date till the date of actual payment, as below :
Interest will be payable @ 18 per cent per annum w.e.f. 22nd day of the effective date till the 82nd for the period the amount is outstanding.
And @ 20 per cent per annum or the rate being charged by the bankers of proprietor, whichever is lower, for the subsequent period till the date of actual payment.
5....
6....
12. This agreement shall come into force from the effective date, and the user shall be entitled to use the trade-mark as an exclusive user thereof for the goods. Subject to earlier termination in accordance with the provisions of Clause 13 and 14, this agreement shall run for an initial period of 10 years and shall continue thereafter without limit of the time until terminated by at least 12 calendar months previous written notice given by either party to the other.
Share purchase agreement dt. 9th Nov., 1995 This agreement is entered into this 9th day of November, 1995 between :
A/S Roulunds Fabriker, a company duly created, organized and existing under an (agreement) by virtue of the laws of the State of Odense, Denmark and having its office at Hestehaven, 51 OK 5260, Odense S Denmark, hereinafter referred to as 'RF' (which term shall unless repugnant to the subject or context be deemed to include the said company, its successors and assigns) of the one part :
and Hilton Rubbers Ltd., a company duly formed and registered in India, under the Companies Act, 1956, having its registered office at 'Hilton House' S 23 Green Park Extension, New Delhi 110 016, hereinafter referred to as 'HRL' (which term shall unless repugnant to the subject or context be deemed to include the said company, its successors and assigns) of the other party :
whereas
1. By joint venture agreement dt. 13th Aug., 1992 (hereinafter 'JV agreement') entered into between RF, HRL and the Industrialization Fund for Developing Countries, Copenhagen, (hereinafter 'IFU') the parties thereto have incorporated a joint venture company, namely Hilton Roulunds Ltd., (hereinafter the 'company') and have subscribed to the share capital of the company on the terms, conditions and covenants set forth in the JV agreement;
2. HRL (along with its nominees) is registered holder and owner of 25,00,000 fully paid equity shares of Rs. 10 each (the equity shares) in the capital of the company representing fifty per cent of the subscribed and paid up capital of the company.
3. RF, has at the request of HRL, agreed to purchase from HRL and HRL has agreed to sell to RF the equity shares representing HRL's entire shareholding in the company on the terms, conditions and covenants appearing hereinafter.
Now, therefore, in consideration of the premises and mutual promises and covenants, the parties hereto agree as follows :
1. Sales and purchase of the equity shares 1.1 Subject to requisite regulatory approvals being obtained under the laws of India and provisions of this agreement, HRL agrees to sell to RF and RF agrees to purchase from HRL the equity shares, representing fifty (50) per cent of the subscribed and paid up capital of the company, being HRL's shareholding in the company.
1.2 RF may acquire the equity shares by itself and/or cause the equity shares to be acquired by other parties, whether residents of India or not, selected by RF [hereinafter the 'nominee(s)']. If the whole or a part of the equity shares are acquired by nominee(s), RF shall be entitled to assign its rights and obligations in respect of such shares under this agreement and subsequent agreements flowing therefrom to such nominee(s).
1.3 Stamp duties and other cost for transfer of the equity shares shall be borne by RF and/or its nominee(s).
2. Purchase consideration :
In consideration of HRL selling and transferring all its rights, title and interest in the equity shares pursuant to the provisions of this agreement, RF shall pay or cause to be paid an all inclusive lump sum consideration of DDK 10,250,000 (ten million two hundred fifty thousand Danish Kroner) (hereinafter 'purchase consideration') for the entire block of the equity shares."
8. From a careful perusal of these agreements, we find that through the agreement dt. 27th Jan., 1993, the trade-mark was allowed to be used by the assessee and in lieu thereof the assessee was required to pay a running royalty to the proprietor i.e., HRL on the domestic sale of Raw-Edge and Wrapped V Belts @ 1.8 per cent of the net selling price, from the date of commercial production. It was also clarified that net selling price means ex-factory selling price of Raw-Edge and Wrapped V Belts excluding sales-tax, excise duty, etc. and the royalty be paid to HRL in Indian rupees at half-yearly intervals within 60 days at the end of the each calendar half-year. Since the trade-mark was allowed to be used by the assessee against a regular payment, the expenditure was claimed to be revenue expenditure and the Revenue rightly treated it to be so. But on 9th Nov., 1995, two agreements were executed i.e., one for transfer of trade-mark and other for sale of entire shareholding in the user i.e., the assessee-company by HRL. Before dealing with the main issue, it is worthwhile to mention few facts that joint venture agreement dt. 13th Aug., 1992 was entered into between HRL, RF and the Industrialization Fund Developing Countries, Copenhagen (hereinafter 'IFU') and the parties thereto have formed and established the user i.e., the assessee as joint venture and they have subscribed to the share capital of the user and the terms, conditions and covenants set forth in the JV agreement. In the agreement dt. 9th Nov., 1995 executed between the HRL and the assessee, it was made clear through its Clause 4 of preamble that the HRL having decided to sell its entire shareholding in assessee to RF or its nominee is desirous of signing a new agreement which overrides its first agreement in its entirety. Admittedly, the trade-mark was being used by the assessee from its first agreement dt. 27th Jan., 1993 against a regular half-yearly payment of royalty and on 9th Nov., 1995, the HRL i.e., the proprietor has sold its entire shareholding in the assessee to RF and trade-mark to the assessee against a lump sum consideration of Rs. 1 crore which was to be paid within three weeks of effective date and if the assessee failed to pay, interest would be charged @ 18 per cent per annum w.e.f. 22nd day of the effective date till the 82nd (sic-day) for the period the amount is outstanding and thereafter @ 20 per cent per annum of the rate being charged by the bankers of proprietor, whichever is lower, for the subsequent period till the date of actual payment. From its Clause 12, it is also made clear that this agreement shall run for an initial period of 10 years and continue thereafter without any limit of time until terminated by at least 12 calendar months previous written notice given by either party to the other. In Clause 13 and 14, though HRL was given a right to terminate this agreement and the license granted thereunder but these conditions are quite different and the onus is placed upon the proprietor to demonstrate certain conditions. In this entire agreement, there was no clause how the agreement can be renewed after the lapse of initial period of 10 years and what would be the consideration for the use of trade-mark for further period, meaning thereby this agreement was executed to give right to the assessee to use the trade-mark for a unlimited period against a lump sum payment of Rs. 1 crore.
9. Since the HRL has sold the entire shareholding in assessee and the right to use the trade-mark on one day and the agreements suggest that it was not only a license to use the trade-mark but also a sale of trade-mark, by allowing the assessee to use for a unlimited period, one inference can only be drawn that the assessee has procured the enduring benefit for its business by using this trademark through this agreement against lump sum payment and the expenditure incurred is capital expenditure.
10. We have also carefully perused the various judgments. But the judgments are not applicable to the present case as they are distinguishable on facts. In the case of CIT v. British India Corporation Ltd. (supra), the apex Court has held that a fixed amount to be paid to the distributor for establishing the distributorship and for obtaining know-how of specific bading process is a revenue expenditure. According to this agreement, the assessee had agreed to pay the distributor 5 per cent of the selling price of its products produced by the process disclosed to it. But the instant case, the facts are different as lump sum amount was paid for acquiring to use the trade-mark for unlimited period. In case of CIT v. I.A.E.C. (Pumps). Ltd. (supra) the apex Court has held that if the license obtained and design granted for a period of 10 years and the parties have the option to extend or renew the agreement with certain conditions, the payment made by the assessee be a revenue expenditure. From the perusal of the facts of the case, we find that the assessee was required not to disclose to third parties any documents made available by the foreign company to the assessee without having received a written authorization from the foreign company. This license was granted for a specific period with a condition of renewal. But in the instant case, trade-mark was given to the assessee for its use for unlimited period against a lump sum payment of Rs. 1 crore, as such this case is also not applicable to the assessee's case.
11. We have also carefully perused the other judgments and we find that in all cases the license to use a particular facility was given for a particular period either against a regular payment or a lump sum payment but after lapse of the period of license it was required to be renewed or be terminated by the act of the parties. But in the instant case, the assessee was allowed to use the trademark for an unlimited period and no clause was inserted as to how the agreement can be renewed after the period of 10 years and what would be the further consideration for the use of trade-mark. Meaning thereby the trade-mark was finally sold or transferred to the assessee through this agreement permanently and the assessee was not required to get renewal of the license. For this reason, we have no hesitation to hold that this expenditure incurred for the use of the trade-mark is of a capital nature as the assessee procured enduring benefit for his business. We, therefore, set aside the order of the CIT(A) and restore the assessment order on this count.
12. Ground No. 2 relates to the delayed payment of provident fund. During the course of hearing, it was admitted by both the parties that the assessee has made payment of PF/EPF and ESI within the grace period which was disallowed by the AO. The CIT(A) following the decision of different Benches of the Tribunal and the decision of the Madras High Court in case of CIT v. Shri Ganapathy Mills Co. Ltd. (supra) allowed the payment. Now the Revenue is before us. On perusal, we find that CIT(A) has rightly allowed payment which was made in grace period. We, therefore, uphold the order of CIT(A).
13. In the result, the appeal filed by the Revenue is partly allowed.