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August, 16th 2014
+                  INCOME TAX APPEAL NO. 310/2014
                                               Date of decision: 1st August, 2014
                                                                   ..... Appellant
                                Through Mr. Sanjeev Sabharwal, Sr. Standing
                                Counsel & Mr. Ruchir Bhatia, Jr. Standing


                                                                 ..... Respondent
                                Through Mr. Vikas Srivastava & Mr. Jatinder Pal
                                Singh, Advocates.



          Revenue in this appeal, which pertains to Assessment Year 2003-04,

and arises out of order dated 24th October, 2013 in ITA No. 183/Del/2011,

has raised two issues.

    (i)            Whether entire franchise fee was revenue expenditure or the

                   Assessing Officer had rightly treated 25% of the franchise fee

                   as capital expenditure?

    (ii)            Whether entire expenditure incurred on advertisement was

                   revenue expenditure under Section 37 of the Income Tax Act,

ITA No. 310/2014                                                        Page 1 of 8
                   1961 (Act, for short) or the Assessing Officer was right in

                   holding that the 25% of the advertisement expenditure should

                   be capitalised?

2.      On the first aspect, the Assessing Officer had relied upon decision of

the Madras High Court in Commissioner of Income Tax, Tamil Nadu-II

versus Southern Switchgear Limited, (1984) 148 ITR 272 (Madras),

which we feel is clearly distinguishable. In the said case, the assessee had

entered into a collaboration agreement with a foreign company under

which later had provided technical aid and information for manufacture of

low tension and high tension switchgear etc. and the right to sell the said

products. The foreign company had also agreed to post the Indian assessee

with latest and modern developments in the said fields, including

transformers. As per the agreement, the Indian assessee had agreed to pay

lumpsum amount of 20000 Sterling in five equal instalments of 4000

Sterling each. In these circumstances, it was held that 25% of the payment

made was capital in nature, while balance 75% was revenue expenditure in

the hands of the Indian assessee. Aforesaid decision of the Madras High

Court was affirmed by the Supreme Court in Southern Switchgear Limited

versus Commissioner of Income Tax and Another, (1998) 232 ITR 359

(SC). The facts found by the Commissioner of Income Tax (Appeals) and

the Income Tax Appellate Tribunal in the present case after referring to the

agreement entered into between the respondent-assessee and the USA
ITA No. 310/2014                                                      Page 2 of 8
based party are entirely distinct and different. The respondent-assessee had

paid a lumpsum consideration of $200000, which was capitalised and was

not treated as revenue expenditure. We are not concerned and there is no

dispute raised by the Revenue on the said payment. We are only concerned

with the franchise fee fixed @ 3% of the entire sale, i.e., the turnover of the

assessee in India.     The said fee was payable in terms of franchise

agreement dated 27th March, 1995 as long as the respondent-assessee

continued to utilise and use the trademark ,,Dominos. It was payable

annually and was not a lumpsum payment, though the last factor alone may

not be determinative whether the payment was revenue and capital. When

we read the order of the tribunal and the factual findings recorded above, it

is apparent that the respondent-assessee did not acquire any right in the

trademark ,,Dominos, which it was using for the purpose of selling their

products/goods. The trademark was not owned and did not belong to the

respondent-assessee. Upon termination of the agreement or on failure to

pay franchise fee, the respondent-assessee would lose the right to use the

said trademark, which was/is owned by M/s Dominos Pizza International,

Inc. USA. It is, therefore, evident that the rights under the agreement

acquired by the respondent-assessee could be lost during the tenure of the

agreement itself and the respondent-assessee was utilising the goodwill and

the trademark, which was owned by a third party.            Commissioner of

Income Tax (Appeals) has rightly relied upon decision of the Delhi High
ITA No. 310/2014                                                      Page 3 of 8
Court in CIT versus J.K. Synthetics, (2009) 309 ITR 371 (Delhi) wherein

the following tests have been culled out after examining several decisions

of the Supreme Court and High Courts:-

                   "(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 on going, 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 instalment. 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
ITA No. 310/2014                                                          Page 4 of 8
                   expenditure which enables the profit making
                   structure to work more efficiently leaving the
                   source or 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 extent, 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 Licence.

                   (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 consent of the

                   (d) whether the Licence transfers the "fruits of
                   research" of the licensor, "once for all",

                   (e) whether on expiry of the Licence the licensee
                   is required to return back the plans and designs
                   obtained under the Licence to the licensor even
                   though the licensee may continue to manufacture
                   the product, in respect of, which access to
                   knowledge was obtained during the subsistence of
                   the Licence.
ITA No. 310/2014                                                          Page 5 of 8
                   (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."

3.      Similar view was also expressed by the Delhi High Court in
Commissioner of Income Tax versus Salora International Limited,
(2009) 308 ITR 199 (Delhi). The Commissioner of Income Tax (Appeals)
and the tribunal have rightly come to the conclusion that; (i) no new asset
came into existence on account of payment of franchise fee and (ii) the
rights under the agreement were only for the tenure of the agreement and
no enduring benefit was derived by the assessee. Further, it was not an
expenditure incurred for acquisition of source of profit, but enabled the
respondent-assessee to run the business profitably. The fixed assets of the
assessee remained untouched and no enduring asset came into existence.
ITA No. 310/2014                                                         Page 6 of 8
As already noted above, the brand or the trademark in question was not
owned by the respondent-assessee.
4.      We have also examined the order passed by the Assessing Officer.
Other than relying upon the decision of the Madras High Court in the case
of Southern Switchgear Limited (supra), there is no discussion relating to
the factual matrix to justify his conclusion that 25% of the franchise fee
should be treated as capital expenditure. No facts were highlighted and
stated to justify the conclusion. In view of the aforesaid reasoning, we are
not inclined to issue notice on the first question/issue raised by the
5. The second issue is also covered against the appellant-Revenue by decision of the Delhi High Court in Commissioner of Income Tax versus Salora International Limited, (2009) 308 ITR 199 (Delhi) in which it was held that the expenditure on advertising was of revenue nature. In another decision of this Court in Commissioner of Income Tax versus Monto Motors Limited (ITA No. 978/2011 decided on 12th December, 2011) it has been observed:- "3. The CIT (A) deleted the said addition as it was pointed out that the expenses on advertisement, sales promotion were incurred after the assessee had already started marketing the product. It was pointed out that as the sales were sluggish and not up to the expectations and as business of selling motor bikes was a competitive business the respondent had decided to advertise and undertake sales promotion. He accordingly held that the respondent was entitled to treat the aforesaid expense as a revenue expense. The aforesaid findings were upheld by the Income Tax Appellate Tribunal (Tribunal, for short). 4. In view of the factual matrix which is available on record and as the Assessing Officer has not dealt with the factual matrix in detail we are not ITA No. 310/2014 Page 7 of 8 inclined to admit the present appeal. The advertisement expenses as per the findings of both the CIT (Appeals) and the Tribunal were not of capital nature. Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits." 6. In view of the above, the appeal is dismissed. SANJIV KHANNA, J. V. KAMESWAR RAO, J. AUGUST 01, 2014 VKR ITA No. 310/2014 Page 8 of 8
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