Commissioner of Income Tax-III vs Senior India Pvt. Ltd.

A.K. Sikri, J.—This appeal was admitted on the following question of law:-

Whether the ITAT erred in holding that amount paid by the Assessee for Trademark was revenue expenditure?

The events which led to the dispute can be summarized thus:-

The respondent herein (hereinafter referred to as the ''assessee'') is a limited company incorporated under the Indian Companies Act. It is engaged in the business of manufacturing of flexible metal hoses and assemblies. The company was incorporated on 1.10.1996 and within a year it took over the Flexitubes Division of M/s. Inalsa Limited. For the assessment year 1998-99 the assessee filed its return of Income on 30.11.1998 declaring nil income. This return was, however, revised on 31.4.1999 declaring net loss of Rs. 1,29,90,115/-. The Assessing Officer (in short the ''AO''), during the assessment proceedings, noted that the assessee company had made payment of Rs. 19,20,200/- for use of trademark ''Inalsa'' and claimed the same as revenue expenditure. This payment was made to M/s. Inalsa Flexonics Ltd. (hereinafter referred to as ''Inalsa'') on the basic of agreement entered into between the assessee and Inalsa dated 12.6.1997.

As per agreement M/s. Inalsa had agreed to allow the assessee to use trademark ''Inalsa'' @ Rs. 2 lacs per month for a period of 81 months. The agreement also provided that after expiry of 81 months the assessee should have the right to continue to use the trademark on non exclusive basis making any further payment. Amount of Rs. 1,68,00,000/-, which was to be paid under the said agreement (Rs. 2 lacs per month), was not to be refunded in the event the agreement was to be terminated under the provisions of Clause 14 of that agreement. Under this agreement year sum of Rs. 19,20,000/- was paid and claimed ass deduction on the ground that it was revenue expenditure. The AO, however, did not agree with the assessee and treated the aforesaid amount as capital expenditure. While doing so, following consideration weighed with the AO:-

i. The Agreement was for seven years and the Assessee was to continue to own the trademark even after expiry of seven years without making any further payment and the money for agreement was not to be refunded to the licensor in the case of termination of the agreement.

ii. The Assessee took over 100% share except one share as mentioned above in the subsequent assessment year.

iii. Therefore, the Assessee company became absolute owner and user of the trade mark for all practical purposes without having any condition from the applicable in the present case the facts and hence circumstances of the said case were not identical with the facts of the case of M/s. Ciba of India Ltd.

The AO also found that the assessee had claimed another amount, namely, Rs. 19,47,968/- paid by it as royalty to M/s. Senior Investment AG, Switzerland and claimed the same as revenue expenditure. The assessee company was the subsidiary company of the aforesaid company in Switzerland and amount of royalty was paid against technical know-how received from the parent company by the assessee company, under the agreement, for manufacture, quality control and testing of flexible metal hoses and other products. The AO was of the opinion that this expenditure is to be treated as expenditure of capital nature also because of the reason that the royalty was paid to use secret technical know-how and other information relating to design, manufacturing, distribution and sale of products, which was an advantage of enduring nature.

The assessee company dissatisfied with the order of the AO disallowing the aforesaid expenditure by treating it as capital expenditure, preferred appeal before the Commissioner of Income Tax-(Appeals) [in short the ''CIT (A)''], who confirmed the order on both counts. The assessee approached the Income Tax Appellate Tribunal (in short the ''ITAT'') by filing further appeal in which it has come out successfully, inasmuch as by impugned orders dated 24.7.2008 appeal of the assessee has been allowed by the ITAT and order of the CIT (A) is set aside. In regard to first question the ITAT set aside the order of CIT (A) by following the decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Ciba of India Ltd., and also relied upon the decision of this Court in Shree Ram Pistons and Rings Ltd. v. CIT, 8 DTR 242 and deleted the addition made by the Assessing Officer, In regard to second question of law the ITAT also set aside the order of CIT (A) by following the decision in Shriram Refrigeration Industries Ltd. Vs. Commissioner of Income Tax, Delhi-I, and deleted the addition made by the AO. This is how the CIT is in appeal before us filed u/s 260A of the income tax Act impugning the aforesaid order of the ITAT.

In so far as the payment of royalty to the parent company is concerned, when confronted with the decision of this Court in Shriram Refrigeration (supra) leaned counsel for the appellant could not dispute the position of law settled therein. We may only observe that the ITAT examined the terms and conditions of the agreement entered into between the assessee and its parent company and after reproducing the relevant clauses recorded the finding of fact that the payment was not made for acquiring an asset of enduring nature. Parent company is the owner of technical knowhow, which was provided against royalty paid for grant of non-exclusive non-transferable right to manufacture and sell the flexi hose pipes in India. The agreement would, at all times, remain the sole property of the parent company and the assessee company shall not acquire any ownership interest under the agreement. The agreement with the Swiss company, thus, was for obtaining licence to use technical know-how and related technical services. The assessee was required to maintain strict and confidentiality and was under obligation not to disclose any information obtained from the Swiss company to third party even after expiry of the agreement, The amount paid depended upon and had direct nexus with the quantity manufactured and value of goods sold, This payment of royalty had no connection whatsoever with the royalty paid under an agreement for licence to use trademark with M/s. Inalsa Limited. According to ITAT, the CIT (A) had decided the issue by confusing the two agreements and relying upon the agreement with Inalsa, which was not relevant while considering this issue. On these facts the Tribunal referred to the judgment of the Supreme Court in Commissioner of Income Tax, Madras-II Vs. I.A.E.C. (Pumps) Ltd., Madras, wherein the Supreme Court held as under:-

Under an agreement entered into by the assessee with a foreign company the assessee was granted a license to use its parents and designs exclusively in India. The agreement was for duration of 10 years with the parties having the option to extent or renew the agreement. The foreign company undertook not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements, modifications and additions to designs. It had also undertaken to enable the assessee to defend any counterfeit by others. The assessee was not to disclose to third parties any of the documents made available by the foreign company to the assessee without having received a written authorization from the foreign company. The Hon''ble High Court held that these features of the agreement clearly established that what was obtained by the assessee was only a license fee and not the price for acquisition of any capital asset,

The Tribunal also referred to the judgment of this Court in Shriram Refrigeration (supra) which had taken note of various other judgments. The discussion in this behalf, as contained in the order of the Tribunal, reads as under:-

Hon''ble Delhi High Court in the case of Shriram Refrigeration Industries Ltd. Vs. Commissioner of Income Tax, Delhi-I, held that if as a result of an agreement an assessee acquires a capital asset or an enduring advantage then a payment made to obtain that agreement would be capital in nature. On the other hand, if the agreement itself does not confer any permanent or lasting advantage and is merely an agreement which enables the assessee to more efficiently run its business, then it is difficult to see on what principles the nature of lump sum payment could not be said to be revenue in nature and it differs from that of the other payment. Similar view was taken by Hon''ble Bombay High Court in the case of Kirlosker Pneumatics Co. Ltd. (supra) which in it had been held that the payments made on percentage basis on manufacture of were allowable as business expenditure.

It will not be out of place to mention that the Ministry of Industry, Government''s sanction for payment of royalty @ 5% on the net ex-factory sale sales price by the assessee company on sale of flexi-hose pipes etc. manufactured and sold by it by using technical know-how supplied by the Swill company. The tax was deducted at source on payment of royalty amount and stands accepted by the department. The payment of royalty under agreement has been made only after the commencement of production using the said technical know-how determined on the basis of sales. Hence, the liability to pay royalty arose in the considered view both the Revenue authorities have erred in treating the payment in capital in nature. The assessee''s case is squarely covered by the decision of Hon''ble Delhi High Court in the case of Shriram Refrigeration (Supra). Respectfully following thee precedents we decide the issue in favour of assessee and direct the assessing officer to allow the claim of assessee as revenue expenditure.

When confronted with the aforesaid settled legal position, the learned counsel for the Revenue had no answer. No question of law was thus framed on this aspect as none arose for consideration. Hence, the only question of law framed was in respect of payment made to M/s. Inalsa Limited for use of trademark. Therefore, we proceed to discuss and answer the same.

Learned counsel for the Revenue submitted that in cases of payment for use of trademarks, for ascertaining the character of such payment, "functional test" was to be applied as held in Commissioner of Income Tax Vs. J.K. Synthetics Limited, . His submission was that the consideration bestowed by the AO was in right perspective and his opinion was approved by the CIT (A) as well. His submission was that the Tribunal ignored the vital aspect, namely, in the instant case the assessee had entered into agreement for seven years and it was to continue to own and use the said trademark even after the expiry of seven year''s period without making any further payment. So much so the money paid under the agreement was not to be refunded to the assessee in case of termination of agreement between the two. Further, the assessee took over 100% share except one share M/s. Inalsa Limited in the subsequent year and therefore, it had become absolute owner and user of the trademark for all practical purposes. The benefit was, therefore, of enduring nature.

Learned counsel for the respondent/assessee rebutted the aforesaid arguments and justified the reasoning adopted by the Tribunal. He highlighted the terms of the agreement on the basis of which he argued that the Tribunal rightly held the aforesaid payment to be admissible as revenue expenditure inasmuch as:-

(a) no new asset had been acquired by the assessee.

(b) no enduring benefit in capital field accrued to the assessee.

(c) length of advantage was not material in determining the nature of the expenditure as to revenue or capital.

(d) Even the depreciation was not admissible to the assessee on the said trademark as it was not ''owned'' by the assessee.

Mr. Vohra also referred to various judgments in support of his submissions which would be taken note of while discussing the issue at hand.

After considering the respective arguments, we are of the view that the decision of the Tribunal is valid and justified and answer to the question of law is to be answered in the negative, namely, in favour of the assessee and against the Revenue holding that the amount paid by the assessee for use of said trademark was revenue expenditure. The principles, which are to be followed for determining the character of such payments, have come up before the courts umpteen number of times. In Commissioner of Income Tax, Tamil Nadu II, Madras Vs. Madras Auto Service (P) Ltd., , the Court held that the general principles applicable in determining whether a particular expenditure is capital or revenue expenditure are as follows:-

(1) Quality is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment;

(2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit.

The Court also opined that in order decide wither a particular expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from commercial point of view. In the case before the Supreme Court, the assessee had spent the amounts for constructing a new building after demolishing the old building. This building, however, did not belong to the assessee but was taken on rent, i.e., on long lease. Since the assessee had spent the amount on construction of a new building, long term lease was agreed upon, that too at a lower rent. The argument before the Supreme Court was that by getting long lease for a period of 39 years at a paltry rent of Rs. 2,000/- per month as against normal rent of Rs. 12,000/-, the assessee had got benefit of enduring nature and therefore, money spent on the construction. Observing that the expenditure was to be looked into from commercial point of view, it was of the opinion that the said expenditure was made for securing long term lease at less rent meaning thereby that the assessee had made substantial saving in monthly rent. Since the saving in expenditure was saving in revenue expenditure in the form of rent, whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee had not got any capital asset by spending the amount and he could not claim any deprecation thereupon. The Court also brushed aside the argument that it was an advantage of enduring benefit as the assessee had obtained a new building for a period of 39 years. Rejection of this argument was premised on the consideration that this building was never to belong to the assessee and by spending the money the assessee did not require any capital asset. From business point of view the assesses got the benefit of only of reduced rent.

The aforesaid judgment of the Supreme Court in Madras Auto Services (supra) was followed by this Court in Commissioner of Income Tax Vs. Saw Pipes Ltd., . In that case the assessee was engaged in the business of manufacturing pipes and had three running units. The assessee was engaged in the business of manufacturing pipes and had three running units, The assessee paid service charges of Rs. 52 lakhs to the Electricity Board for laying the service line for the purposes of a fourth unit. The assessee claimed this amount as a revenue expenditure. The Assessing Officer held that the benefit derived by the assessee was of an enduring nature and therefore was a capital expenditure. The appeal filed by the assessee was rejected by the Commissioner (Appeals) while the Tribunal held in favour of the assessee. This Court dismissed the appeal holding that the service lines did not belong to the assessee but to the Electricity Board and were laid so as to enable the assessee to conduct its business more efficiently which might be an enduring advantage but was intended to enable the assessee got was of a commercial nature and a business advantage. Therefore, the expenditure incurred by the assessee should be treated as a revenue expenditure. This Court further held that the assessee was one entity for the purposes of taxation though it had more than one unit. Hence the fourth unit established by the assessee was merely an extension of its business. We may also refer to another judgment of this Court in Shriram Pistons and Rings Ltd. Vs. Commissioner of Income Tax, . After referring to plethora of case law the Court enumerated the legal principles, as decided by the Supreme Court in the following words:-

.........The Supreme Court interpreted this to mean that the right pertained more to the use of the know-how than to its exclusive acquisition by the assessee. The Supreme Court also noted that there is no single definitive criterion which by itself is determinative of the question whether a particular outlay was revenue in nature, What is relevant is to see the parties, considered in a common sense manner having regard to business realities. The Supreme Court in Commissioner of Income Tax, Bombay City-I, Bombay Vs. Associated Cement Companies Ltd., Bombay, . Applying the various principles that have been laid down, we find that there was in fact no absolute transfer of any right in the documentation given by Riken to the assessee. The assessee was entitled to use the technical know-how for a period of five years or for a lesser period, in case the agreement was terminated before that. The assessee did not have a free hand to sub-license the technical know-how and that was possible only with the prior written permission from Riken. For all other matters, the assessee was liable to treat as confidential in inventions, drawings, documents, specification etc. furnished by Riken to the assessee. Even though the assessee was entitled to use the name of Riken in the marketing of its products but that right would cease upon the expiry or terminated of the agreement. As already noted, the Agreement was valid only for period of five years but could be terminated earlier. There is no magic in the word "sold" used in clause 5.0 of the agreement because on a reading of the agreement as a whole, it appears to us that what was transferred to the assessee was only a right to use the technical know-how of Riken and there was no sale of the technical know-how which the assessee could exploit. The assessee''s right were hedged in with all sorts of conditions, clearly making it a case of right to use the technology and not sale of the technical know-how.....

In a recent judgment given by this Court in CIT v. J.K. Synthetics Ltd. (supra) all important judgments on the subject have been re-visited. Various decisions of the Supreme Court and other Courts have been analysed and discussed with erudition and the principles laid down in those judgments are culled out with remarkable clarity. Our purpose would be served by reproducing those principles distilled after examining plethora of case law:-

BROAD PRINCIPLES WHICH EMERGE ON READING OF VARIOUS AUTHORITIES

An overall view of the judgment of the Supreme Court, as well as, of the High Courts would show that the following broad principles have been forged over the years, which require, to be applied to the facts of each case:-

(i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is ongoing, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure;

(ii) it is the aim and object of expenditure, which would, determine its character and not the source and manner of its payment;

(iii) the test of "once and for all" payment i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact whether it is a payment in "lump sum" or in an installment. In applying the test of an advantage of an enduring nature, it would not be proper, to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business, as against, an expense undertaken for the benefit of the business as a whole;

(iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit making structure untouched, would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extant, the test of enduring benefit or advantage could be considered as having broken down;

(v) expenditure incurred for grant of License which accords "access" to technical knowledge, as against, "absolute" transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as:-

(a) the tenure of the License.

(b) the right, if any, in the licensee to create further rights in favour of third parties,

(c) the prohibition, if any in parting with a confidential information received under the License to third parties without the consonant of the licensor,

(d) whether the License transfer the "fruits of research" of the licensor, "once for all",

(e) whether on expiry of the License the licensee is required to return back the plans and designs obtained under the License to the licensor even though the licensee may continue to manufacture the product, in respect of, which "access" the knowledge was obtained during the subsistence of the License,

(f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature;

(vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete;

(vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue.

In that case the agreement was entered into between the assessee with one M/s. Tecnimont, Italy for manufacturing of acrylic fiber. Under the agreement M/s. Tecnimont, Italy had to allow use of know-how, basic design, engineering and technical assistance to the assessee for manufacture of acrylic fiber for which the assessee was required to pay a total sum of 623 million Italian Liras which at the relevant time amounted to Rs. 54,54,794/- M/s. Tecnimont had obtained his know-how from another company known as M/s. Montefiber which owned the patent rights and had licensed the same to M/s. Tecnimont with right to sub-licence to other parties. After delineating the aforesaid broad principle the Court discussed those principles in the context of the case before it and opined that the amount paid would be categorized only as one made on revenue account and the discussion on this aspect goes as under:-

39.1 The important finding returned by the authorities below, on consideration of the facts obtaining in the case and on interpretation of the terms of the agreement, was that; First of all, what the assessee acquired was "access" to the technical information; Secondly, there was no transfer of ownership with respect to the process and the know-how under the agreement, in favour of the assessee; Lastly, the "access" to technical know-how did not relate to any secret process or patent rights or use of trade mark or trade name. As recorded by the authorities below the technical know-how was owned by one M/s. Montefiber, the successor to another concern known as, M/s. Chatillon. M/s. Monte fiber granted to M/s. Tecnimont a non-exclusive, and an irrevocable and permanent License in favour of M/s. Tecnimont. This was, as found by the authorities below, done to enable M/s. Tecnimont to exercise its rights under the License by granting sub-License to third parties, in this case the assessee. The submission of the learned counsel for the Revenue, based on Article 2.12 of the Agreement, to the effect that, what the assessee had obtained was a permanent right by virtue of the Agreement is incorrect; in view of the fact that, M/s. Tecnimont could not have granted that, which it did not itself does not result in transfer of property, in a limited sense as, in the case of, patent rights. It is not the case of the Revenue that any patent right were transferred in favour of the assessee.

39.2 In our opinion, in view of the aforementioned findings, in particular, that under the Agreement the assessee had only acquired "access" to technical information, that is, know-how which related to the process of manufacture, which was not; related to any secret process or patent rights or even the right to use a trademark or trade name under the Agreement, the payments in issue, made for such a purpose, can only be categorized as one made on revenue account.

We may observe at the outset that before us there was no dispute about the aforesaid general principles which are to be kept in mind while determining the character of a payment made by the assessee as revenue or capital. It is the application of these principles, on the facts of this case, on which the parties are at issue. Whereas as per the Revenue the assessee acquired the benefit of enduring nature, the assessee contends otherwise. As already observed by us, the contention of the Revenue is unacceptable, being misconceived. We may note that the important terms of the agreement entered into between the assessee and M/s. Inalsa are as under:-

(i) Respondent-assessee was granted exclusive right on use the trade marks for a period of seven years in relation to manufacture of hoses and assemblies. The use thereafter was on non-exclusive basic.

(ii) The consideration for use of trademarks was fixed at Rs. 1.68 crores which was payable at the rate of Rs. 2,00,000/- per month over a period of 84 months (seven years). It was agreed that after the expiry of 84 months, the respondent-assessee shall have the right to use the trade mark on non-exclusive basis without any further payment.

(iii) In terms of clauses 7-12 of the agreement, the ownership of the trade marks was acknowledge as belonging to licensor only.

(iv) In terms of clauses 14 and 15, the agreement was subject to termination forthwith in the event of certain conditions specified therein. In that eventuality, viz., termination of the agreement, the respondent-assessee was to promptly discontinue use of trademarks and return all the material relating to trade marks. The licensor was, however, not liable to refund the sum of Rs. 1,68 crores.

It is clear from the above that the assessee had not acquired any asset or ownership of the said trademark. M/s. Inalsa remained the registered proprietor of the trademarks. In the agreement it was specifically agreed to by the assessee as follows:

(i) Acknowledgement by the respondent that trademark is the sole property of licensor. All goodwill arising as a result of the trade mark by the respondent assessee shall enure to the benefit of Licensor.

(ii) No right of registration of trademarks with the respondent before or after the termination of agreement.

(iii) Use of trade mark by the respondent-assessee would clearly indicate licensor as owner of the trademark.

(iv) Respondent-assessee shall not by use of the trade mark acquire any ownership interest in the trademark or registration thereof.

Thus, the assessee was only granted right to use the trademark to facilitate its existing business of manufacture; ownership remained with M/s. Inalsa; the assessee did not acquire any title therein by way of dominion or control over the trademark; it had no right of disposition which remained with M/s. Inalsa who even continued to use the aid trademark for its other businesses. The facts of this case in Shri Ram Refrigeration (supra). We may also, at this stage, refer to the case of The Triveni Engineering Works Ltd. Vs. The Commissioner of Income Tax, New Delhi, , where the assessee had entered into an agreement with a foreign company which provided that the foreign company had agreed to ''sell outright'' technical know-how to the assessee. The agreement, however, was hedged in by several restrictive conditions, such as (i) assessee had to observe complete confidentially with regard to know-now; (ii) the copyright in the drawings and designs remained vested with foreign company only and assessee only had the right to use the same. This Court observed that despite use of words ''sell outright'', there was, in substance, no absolute parting of know-how by the foreign company in favour of the assessee. It was accordingly held that no asset was acquired and therefore, the expenditure towards payment for use of know-how was allowed as revenue expenditure. The relevant observations of this Court at page 351 of the judgment are as under:-

.....Therefore the study and scrutiny of the agreement indicates that despite the use of the words "agreed to sell outright to Triveni", what the assessee got in substance was a limited right of user for the maximum period of ten years. There was no renewal clauses in the agreement; on the contrary the agreement could in certain eventualities be determined forthwith". Further, though the manufacturing data, drawings, dies and jigs, etc., became "the absolute property" of the assessee, the copyright remained vested in Brotherhoods, the assessee having limited "license to use the same for the purpose of the agreement only." It was also prevented from disclosing or assigning the data, to any one without the written consent of Brotherhoods.

One can hardly equate this situation with the position of a seller who has sold his goods outright to a buyer. It would, therefore, appear to us that what the assessee has got is precious little in the way of acquisition of an asset or an enduring advantage.

It is true that in the present case there is no provision for return of the drawings, documents, etc., the copies of which are "deemed" to become the property of the assessee on transmission; but it is to be noticed that in this age of fast technological development and scientific research, drawings, designs, etc., become obsolete and mere scraps of paper very soon unless updated.

One a totality of the terms of the contract, we are convince that there is no absolute parting of the secret processes and technical knowledge by the collaborators to the assessee. As such no asset or enduring advantage has been acquired by the assessee or parted with by the collaborators. The use of the words "sell outright" cannot enslave the decision which is clear once the substance of the agreement is looked at, that the assessee has only got a license for a limited use of the knowledge and information possessed by Brotherhoods.

Test of getting advantage of enduring benefit has also not been satisfied in the present case. No doubt, the assessee was given an exclusive right to use the trade mark for a period of seven years, which was to continue even after said period of seven years. However, after seven years the right was to use the same on non-exclusive basis. Furthermore, assessee was obliged to discontinue the use in the event of termination of agreement. Therefore, everlasting advantage did not accrue to the assessee. In Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, the Supreme Court has laid down the test as to when an advantage of enduring nature would constitute expenditure of capital nature in the following terms:-

It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage fa in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consist merely in facilitating the assessee''s trading operations or enabling the management and conduct of the assessee''s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future....

In the present case the expenditure incurred merely facilitated carrying on of business more profitably and efficiently without addition to the capital apparatus,

We have also to keep in mind the focus as suggested by the Supreme Court in Madras Auto Services (supra), namely, one has to look at the expenditure from a commercial point of view. In that case even the benefit which accrued was for 39 years, but the Court was of the opinion that the nature of right to use the building remained the same, namely, as tenant. Further as pointed out in that very case, since the assessee had not become the owner of the building, he was not entitled to any depreciation in terms of Section 32(1)(ii). Same is the case here. Thus, answering the question in favour of the assessee and finding no merit in this appeal, we dismiss the same with costs.