By CA Surekha S Ahuja
Royalty or Right? Decoding When Brand Use Becomes a Business Expense or a Capital Investment — A 360° Analysis of the Madras High Court Ruling
Case: [2025] 473 ITR 278 (Mad) | (2025) 303 Taxman 24 | 2024 TaxPub(DT) 6205 (Mad-HC)
The Context: The Era of Borrowed Brands and Licensed Legacies
Modern businesses often build on borrowed identity — using established trademarks, logos, and brand names under licensing or franchise agreements.
But in tax law, the question is sharp and recurrent:
Does paying to use a brand create a capital asset, or is it merely a recurring business outlay?
The Madras High Court (2025) revisited this debate with doctrinal precision.
It held that royalty for using a trademark under a renewable, non-exclusive licence—without ownership transfer—is revenue expenditure allowable under section 37(1), not capitalized as an intangible asset.
This ruling not only clarifies judicial precedent but also serves as a decision framework for businesses to evaluate when brand or technology payments should be expensed or capitalized.
The Legal Pivot — The Case in Brief
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The assessee paid ₹87.99 lakh to its parent for using its trademark and logo.
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The licence was renewable, non-exclusive, non-transferable, and ownership remained with the parent.
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The Assessing Officer capitalized it as intangible asset under section 32(1)(ii), allowing only depreciation.
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The High Court ruled the expenditure as revenue, as no ownership or enduring structural benefit was acquired.
Judicial Ratio:
Right to use a brand is a commercial tool, not a capital acquisition, when ownership and control remain with the licensor.
Judicial Foundations — The Chain of Precedents
| Case | Core Principle |
|---|---|
| CIT v. Ciba of India Ltd. (1968) 69 ITR 692 (SC) | Technical know-how licence without ownership = revenue expenditure. |
| Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC) | Renewal or improvement of operational know-how = revenue. |
| CIT v. MRF Ltd. (2021 TaxPub(DT) 1092 SC) | Brand-use royalty under renewable licence = revenue. |
| Honda Siel Cars India Ltd. v. CIT (2017) 395 ITR 713 (SC) | Capital, where technical rights and control were permanently transferred. |
The Madras HC thus reaffirms that “enduring benefit” is not synonymous with “capital asset”. The real test is ownership and control, not duration or benefit.
The 360° Analytical Framework — When Royalty Becomes Capital or Revenue
| Test Parameter | Revenue Expenditure (Deductible u/s 37(1)) | Capital Expenditure (Depreciable u/s 32(1)(ii)) |
|---|---|---|
| Nature of Right | Right to use only | Ownership or permanent transfer |
| Duration | Time-bound / renewable | Perpetual / non-cancellable |
| Control | Licensor retains IP rights | Licensee gains proprietary control |
| Payment Structure | Periodic, linked to sales | Lump-sum or upfront consideration |
| Purpose | Facilitation of business operations | Expansion or creation of new source |
| Accounting Impact | Charged to P&L | Added to fixed assets |
| Judicial Reference | Ciba of India, MRF, Wavin India | Honda Siel, Techno Shares |
Cost–Benefit Analysis: Royalty Model vs. Outright Purchase
| Aspect | Royalty (Licence Model) | Outright Sale / Ownership Model |
|---|---|---|
| Initial Cost | Lower, recurring expense | High, one-time capital outlay |
| Cash Flow Impact | Spread over years | Immediate large investment |
| Tax Benefit (Payer) | Full deduction u/s 37(1) in year of payment | Limited to 25% depreciation u/s 32(1)(ii) |
| Flexibility | High — renewable and cancellable | Low — permanent acquisition |
| Control over IP | Limited | Complete |
| Payee’s Tax Treatment | Business income / royalty u/s 9(1)(vi) | Capital gains on transfer |
| Commercial Suitability | When brand support or short-term market presence needed | When brand forms permanent business identity |
| Risk Exposure | Renewal or dependency on licensor | Full IP risk and protection cost borne by buyer |
Inference:
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Royalty model suits operational expansion or brand leverage.
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Outright purchase suits strategic integration and long-term brand independence.
Decision-Making Scenarios — Illustrative Perspective
| Scenario | Best Tax Treatment | Reasoning / Judicial Analogy |
|---|---|---|
| Franchisee using franchisor’s logo (renewable yearly) | Revenue | Similar to Ciba of India; right to use only |
| Indian subsidiary using parent’s global brand under renewable licence | Revenue | MRF Ltd.; ownership remains abroad |
| Acquisition of entire brand portfolio through assignment | Capital | Honda Siel; transfer of control and IP |
| Technology licence for manufacturing process valid 5 years | Revenue | Alembic Chemical Works; operational enhancement |
| One-time lump-sum payment to acquire perpetual rights | Capital | Enduring source of profit; depreciable |
Interpretive Insight — Section 37(1) in Contemporary Light
The High Court’s reasoning aligns with evolving business reality:
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Licensing is the new ownership — global enterprises expand via intellectual partnerships.
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Section 37(1) ensures genuine business facilitation is not penalised by forced capitalization.
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The form of payment must yield to its substance — recurring operational expenditure cannot be treated as asset creation merely for revenue security.
Strategic Implications — For Payers and Payees
For Payers (Licensees):
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Draft agreements clearly defining “right to use” and “no ownership transfer”.
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Match royalty computation to business turnover, not asset acquisition.
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Ensure accounting alignment with Ind AS 38 (Intangibles) and tax disclosure consistency.
For Payees (Licensors):
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Structure royalty as recurring revenue income; maintain IP ownership documentation.
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For outright transfers, compute capital gains per section 45 and 55, supported by valuation.
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In cross-border cases, align withholding under section 195 and DTAA definitions of “royalty”.
Conclusive Analysis — The Doctrine of Balanced Ownership
The Madras High Court judgment offers more than a technical interpretation — it restores balance between business realism and tax principle:
“Commerce may borrow reputation, but the law must still measure ownership.”
By distinguishing user rights from ownership, it preserves the integrity of section 37(1) — enabling enterprises to claim rightful operational deductions while ensuring that capital acquisitions are appropriately capitalized.
Royalty payments, when used for brand access, know-how, or technical collaboration, are not mere tax claims — they are the costs of remaining relevant in a licensed economy.
This judicial stance empowers decision-makers to choose consciously:
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When flexibility and scalability matter, royalty is wiser.
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When control and permanence are strategic, ownership is stronger.
Either way, clarity in contract, consistency in accounting, and substance in purpose remain the ultimate safeguards.
