2014 (8) TMI 523 - AT - Income Tax

Franchise fees treated as revenue expenditure; double taxation issue remanded for verification.

The ITAT dismissed the revenue's appeal, affirming the treatment of franchise fees as revenue expenditure. The assessee's appeal was allowed for ... Nature of franchise fees paid - capital or revenue expenditure - Right to use the trademark, domino’s name and logo – Exclusive license – Held that:- The assessee rightly contended that the matter has been decided in assessee’s own case for the earlier assessment year – Following the decision in DCIT, Circle 4(1), New Delhi Versus Jubilant Foodworks Pvt. Ltd. [2014 (8) TMI 458 - ITAT DELHI] - the assessee had acquired only access to the technical information and there was no transfer of ownership with respect to the process and the know-how under the agreement in favour of the assessee - the payment could only be categorized as one made on revenue account – Decided against Revenue. Reduction of taxable income – Double taxation of same income – Held that:- CIT(A) has primarily denied the assessee’s claim because the assessee had not filed revised return of income - Mere non filing of revised return cannot override the substantial right of assessee against double taxation - pitted against the technical and substantial justice the substantial justice is to prevail and not the technicality – Relying upon Jute Corporation of India Limited Versus Commissioner of Income-Tax And Another [1990 (9) TMI 6 - SUPREME Court] – the matter is liable to remit back t the AO for verification of assessee’s claim regarding the whole amount having been taxed between AYs 2001-02 to 2005-06 as per the chart – Decided in favour of Assessee. Issues Involved:1. Deduction of franchise fees as revenue expenditure versus capital expenditure.2. Double taxation of income related to a joint promotional and marketing agreement with Coca Cola India Pvt. Ltd. (CCIPL).Detailed Analysis:Issue 1: Deduction of Franchise FeesFacts and Arguments:The assessee company, engaged in the manufacturing and sale of pizza, claimed a deduction of Rs. 3,21,51,264/- as franchise fees paid to M/s Domino's Pizza International, Inc., USA. The assessing officer (AO) disallowed 25% of this amount, treating it as capital expenditure based on the precedent set by CIT Vs. Southern Switchgear Ltd. The assessee argued that the franchise fees were for the recurring use of the Domino's name, logo, and related technical know-how, which should be considered revenue expenditure.CIT(A) Decision:The CIT(A) allowed the assessee's claim, relying on decisions such as CIT Vs. J.K. Synthetics Ltd., CIT Vs. Sharda Motor Industrial Ltd., and Climate Systems India Ltd. Vs. CIT. The CIT(A) concluded that the payment was for access to technical information without any transfer of ownership, thus qualifying as revenue expenditure.ITAT Decision:The ITAT upheld the CIT(A)'s decision, referencing its own earlier rulings for the assessee's previous assessment years (2003-04 to 2005-06). The ITAT reiterated that the payment was for access to technical information and did not involve any transfer of ownership, thereby categorizing it as revenue expenditure.Conclusion:The revenue's appeal on this issue was dismissed, affirming that the franchise fees were correctly treated as revenue expenditure.Issue 2: Double Taxation of Income from Joint Promotional Agreement with CCIPLFacts and Arguments:The assessee had entered into an agreement with CCIPL for joint promotional activities, recognizing Rs. 25,01,683/- as income in A.Y. 2001-02. The AO added Rs. 1,34,98,000/- to the taxable income, spreading the total amount of Rs. 1.60 crores over five years. This addition was upheld by the CIT(A), and the assessee did not contest it further. Consequently, the assessee adjusted the total amount across various assessment years (2001-02 to 2005-06), but mistakenly reduced advertisement expenses by Rs. 1,45,20,000/- in A.Y. 2006-07, leading to double taxation.CIT(A) Decision:The CIT(A) denied the assessee's claim for relief, citing the absence of a revised return and referencing the Supreme Court decision in Goetze India Ltd. The CIT(A) also noted that there was no supporting record for the assessee's claim of having informed the AO about the error.ITAT Decision:The ITAT acknowledged the assessee's right to avoid double taxation despite the technicality of not filing a revised return. It referenced the Supreme Court's clarification in Goetze India Ltd. and other judicial precedents, emphasizing that substantial justice should prevail over technicalities. The ITAT restored the matter to the AO for verification of the assessee's claim regarding the total amount taxed between A.Y. 2001-02 to 2005-06. If verified, the AO was directed to delete the Rs. 1,45,20,000/- from the advertisement expenses to prevent double taxation.Conclusion:The assessee's appeal was allowed for statistical purposes, with the matter remanded to the AO for verification and appropriate adjustment to prevent double taxation.Summary:The ITAT dismissed the revenue's appeal, affirming the treatment of franchise fees as revenue expenditure. The assessee's appeal was allowed for statistical purposes, with the matter remanded to the AO to verify and correct the double taxation issue related to the joint promotional agreement with CCIPL.