$~5.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NO. 310/2014
Date of decision: 1st August, 2014
THE COMMISSIONER OF INCOME TAX-II
..... Appellant
Through Mr. Sanjeev Sabharwal, Sr. Standing
Counsel & Mr. Ruchir Bhatia, Jr. Standing
Counsel.
versus
JUBILANT FOODWORK PVT. LTD.,
..... Respondent
Through Mr. Vikas Srivastava & Mr. Jatinder Pal
Singh, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (ORAL)
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
licensor,
(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
appellant-Revenue.
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
|
