Fee for non-exclusive, time-bound trademark licence held to be revenue expenditure – Mumbai bench of the Income-tax Appellate Tribunal

In brief

The Mumbai bench of the Income-tax Appellate Tribunal (Tribunal) examined whether the trademark licence fees paid by an Indian company to its foreign group entity for use of a trademark constituted capital or revenue expenditure under section 37(1) of the Income-tax Act, 1961 (the Act)¹ . The Revenue contended that the payment conferred an enduring benefit through long-term brand-building and commercial exploitation of the trademark, resulting in the creation of an intangible capital asset. However, the taxpayer contended that it was revenue expenditure as no ownership or proprietary rights were acquired in the trademark. Under the trademark licence agreement, ownership continued to remain with the foreign licensor, while the taxpayer was granted a non-exclusive right to use the trademark in consideration for an annual fee equal to 5% of its gross profits. 

The Tribunal upheld the Commissioner of Income-tax (Appeals) order, stating that the trademark licence fee was allowable as revenue expenditure. It observed that the taxpayer was granted only a limited, non-exclusive and time-bound right to use the trademark, without acquiring any ownership or proprietary interest therein. The Tribunal also emphasised that the enduring benefit test cannot be applied mechanically, particularly in the context of rapidly evolving technology, where what is current today may soon become obsolete. Accordingly, the state-of-the-art technology of modern times cannot necessarily be regarded as permanent or enduring.