Tax Law and Intellectual Property: “Shell” Trade Mark Licensee Vivo Energy v. Kenya Revenue Authority

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The High Court recently delivered its judgment in the case of Vivo Energy Kenya Limited v Kenya Revenue Authority [2016] eKLR holding that the Commissioner of Domestic Taxes erred for concluding that a non-exclusive and non-transmissible license to use “Shell” trade marks was a sale of a property giving rise to royalty within the meaning of Section 2 of the Income Tax Act and hence chargeable to tax.

According to Vivo, it had only been granted non-exclusive and non-transmissible rights to use the trademarks, the manifestations and the right to include the word “SHELL? in its name in Kenya, without payment of royalty. Further Vivo contended that the amount of Kshs. 427,964,870/- it was paid by Shell was not taxable income but a contribution for Research and Development. However, Vivo was also of the view that even if the money in question was utilized for the acquisition of intangible assets, the said payment could not have amounted to a royalty, as defined in the Income Tax Act.

Vivo argued that it had not acquired the trademark but rather it was only given non-exclusive and non-transmissible rights to use “Shell” trade marks in Kenya.  Therefore, the Shell retained ownership of the trade marks and that Vivo was obliged to seek the consent or the concurrence of the owner, if Vivo wished to either transfer or to transmit any of the rights conferred upon it under the license.

The court reasoned that the significant part of section 2 of the Act is that a royalty is “a payment made as a consideration” Since in this case, money was paid the court stated that the question to be answered is whether or not such payment was consideration for the purposes of Vivo being permitted to use the “Shell” trade marks.

In finding for Vivo, the court stated as follows:

“Both parties acknowledge that the appellant did not own the trademarks.  Therefore, if the appellant was paid, it cannot have been for the trademarks. (…) The payment was specifically for Research and Development.  This is my understanding, that the appellant [Vivo], when putting to use the trademarks and manifestations, was expected to carry out research and development.  However, as the said trademarks did not belong to the appellant, the benefit, in the long run, would go to SBI [Shell]. (…) In that respect, the payment was of a capital nature.  It was not money which the appellant was to use for trading. (…) Accordingly, I set aside the decision of the Local Committee dated 19th September 2013, and hold that the payment was not a royalty, and it was not taxable. The payment was of a capital nature.”

In light of the above, the court concluded that the payment was not a gain derived from the sale of a property, giving rise to a royalty under the Act.


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