Income Tax Case No 11454
24 August 2005
Posted by: TaxFind™
Before the Honourable Mr. Justice B. Waglay: President
Mr. B. Nduna: Accoutant member
Mr. J. Kevitt: Commercial member
(Heard in Cape Town on 24 August 2005)
The appellant had as its controlling shareholder, a company incorporated in the UK.The holding company was the worldwide owner of the trade mark and get-up used by the appellant. In 1997, the holding company concluded a written trademark license agreement with the appellant.In terms thereof, the appellant was granted a personal non-exclusive and non-assignable authorisation to use the licensed marks.In consideration thereof, the appellant was required to pay the holding company an annual royalty fee.For the next three years of assessment, the appellant claimed a deduction of the royalties in calculating its taxable income in its income tax returns.The respondent however, disallowed the deductions.
Held that the issue for determination was whether the expenditure incurred in terms of the agreement between the appellant and the holding company was deductible in terms of section 11(a) of the Income Tax Act 58 of 1962 or, more specifically whether the deduction sought by the appellant was prohibited because the expenditure constituted an expenditure of a capital nature.
The appellant had sought an international brand name because its competitors made use of international brand names.The licensed marks and licensed marketing indicia were well-established and carried significant goodwill which was built up by the appellant over the years, and which gave the appellant a distinct identity and reputation. Without the brand name appellant would be unknown and therefore without market share and goodwill.The expenditure thus incurred by the appellant was expenditure directed to retain market share, name and reputation, old customers and competition on a footing equal to the other major players within the industry in South Africa.As such, the expenditure related to an income earning structure rather than to income earning operations. In paying for marks and indicia that carried market share, the appellant secured for itself the competitive advantage of participating in a market as an established business enterprise.The payments made therefore, irrespective of the mode of calculation, were of a capital nature.
The appeal was dismissed.
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