2020 (9) TMI 1190 - AT - Income Tax

Tribunal Upholds CIT(Appeals) Decision on Franchisee Expenses

The Tribunal upheld the CIT(Appeals)' decision to treat franchisee expenses as revenue expenditure, dismissing the revenue's appeal. The Tribunal ... Nature of expenditure - Expenditure on payment of franchisee fees - assessee company has acquired the rights for the sale of products belonging to the specific brands - revenue or capital expenditure - HELD THAT:- In this case, the assessee entered into various Agreements with various parties as discussed earlier which is the payment of franchisee fees - The above payments based on certain percentage of sales by the assessee. The parties with whom the assessee has entered into Agreement has not transferred any business or commercial rights with enduring benefits to the assessee. The assessee cannot be said to have any enduring benefit by entering into these agreements. These are in the nature of day to day operations of the assessee's business. Being so, the CIT(Appeals) justified in allowing the expenditure as revenue expenditure. This position is fortified with the decision in the case of Jonas Woodhead & Sons Ltd. Vs.CIT [1978 (11) TMI 44 - MADRAS HIGH COURT]. Hon'ble Madras High Court in the case of CIT Vs. TVS Ltd [1976 (11) TMI 40 - MADRAS HIGH COURT] held that when the payment made by the assessee to a company was in the nature of license fees which constitute an item of allowable expenditure in the computation of profit and gains and it cannot be a capital expenditure. In our opinion, the findings and reasons given by the CIT(Appeals) to allow the claim of the expenses in regard to franchisee on the Agreement entered by the assessee is a revenue expenditure and it cannot be construed as a capital expenditure. Hence the appeal of revenue is dismissed. Issues:Interpretation of nature of expenditure - Revenue vs. CapitalAnalysis:The appeal involved a dispute regarding the nature of expenditure claimed by the assessee under Section 37 of the Income Tax Act, 1961, as payment of franchisee fees for the Assessment Year 2008-09. The Assessing Officer disallowed the claim, stating that the assessee acquired rights for sale of products but did not obtain ownership or transferable rights. On appeal, the CIT(Appeals) allowed the claim, emphasizing that the assessee did not acquire any new asset or freely transferable rights, and the enduring benefit test failed as the rights were restricted to the agreement period and for selling the franchiser's products. The payment was recurring and directly related to sales, not for setting up a new business with technical know-how. The Tribunal examined various agreements with parties where the assessee made payments based on sales percentages, concluding that the agreements did not confer enduring benefits but were part of day-to-day operations, justifying the allowance of the expenditure as revenue expenditure.The Tribunal referred to the decision in the case of Jonas Woodhead & Sons Ltd. Vs. CIT, emphasizing that no single criterion determines capital expenditure, and various agreement clauses must be analyzed. It highlighted that if the payment leads to an accretion to a capital asset, it is considered capital expenditure. The Tribunal also cited the case of DCIT Vs. TTK Health Care Limited, where ownership rights of trademarks were not transferred, leading to the expenses being treated as revenue expenditure. Additionally, the Tribunal mentioned the case of CIT Vs. TVS Ltd, where payments for license fees were considered allowable expenditure, not capital expenditure. Based on these precedents and the specific details of the agreements, the Tribunal upheld the CIT(Appeals)' decision to treat the franchisee expenses as revenue expenditure, dismissing the revenue's appeal.Consequently, as the revenue's appeal was dismissed, the assessee's C.O. became infructuous and was also dismissed. The Tribunal pronounced the decision in open court, upholding the allowance of the franchisee fees as revenue expenditure and rejecting the revenue's appeal.