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Facts
The assessee, engaged in operating food and beverages outlets, filed its return of income. The AO disallowed 25% of royalty charges, relying on a High Court judgment. The assessee appealed, but the CIT(A) confirmed the disallowance.
Held
The Tribunal held that the disallowance was not sustainable as identical issues in preceding assessment years had been decided in favor of the assessee, with the CIT(A) finding the facts different from the relied-upon case and closer to another precedent. Consistency principle was applied.
Key Issues
Whether disallowance of royalty payment is justified when similar issues in preceding years were decided in favor of the assessee based on distinguishing facts and applying a different precedent.
Sections Cited
250, 143(3), 143(2)
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Income Tax Appellate Tribunal, DELHI “B” BENCH: NEW DELHI
Before: SHRI MAHAVIR SINGH & SHRI MANISH AGARWAL
ORDER
PER MANISH AGARWAL, AM :
1. The present appeal is filed by the assessee against the order dated 29.01.2024 of Ld. Commissioner of Income Tax (A)/ADDL/JCIT(A)-6, Kolkata [“Ld.CIT(A)”] in Appeal No.CIT(A), Delhi-9/10631/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 31.12.2019 passed u/s 143(3) of the Act pertaining to assessment year 2017-18.
Brief facts of the case are that the assessee company is engaged in the business of managing and operating food and beverages outlets at Terminal 3 (Indira Gandhi International Airport), Delhi. The return of income was filed on 07.11.2017, declaring total income of INR 93,65,220/-. The assessment of the assessee was selected for scrutiny in terms of notice u/s 143(2) of the Act dated 28.08.2018 and thereafter, various notices were issued from time to time wherein the AO has disallowed 25% of Royalty charges paid at INR 71,81,000/- and made the disallowance of INR 17,95,250/- by placing reliance on the judgement of Hon’ble Madras High Court in the case of Southern Switchgear Ltd. vs CIT (SC).
3. Against this order, the assessee preferred appeal before Ld.CIT(A) who vide impugned order dated 29.01.2024 has confirmed the disallowance and dismissed the appeal of the assessee therefore, the assessee is in appeal before the Tribunal by taking following grounds of appeal:-
“The order passed by the Learned Joint Commissioner of Income Tax (Appeals) - 6 is erroneous, contrary to law and facts of the case.
2. The learned authority is not justified by upholding the order of the learned AO on account of disallowance of royalty expense to the extent of Rs. 17,95,250/-.
The learned authority ought to have considered the submissions of the appellant that the case of the company is different from the case of M/s Southern Switchgear Ltd. The case of the company is similar to the case of M/s Hero Honda Motors Ltd, New Delhi. 4. The appellant craves to leave, add, amend, alter and or modify any of the grounds of appeal
before or at the time of hearing.
5. For these and other grounds that may be urged before the Honourable Income Tax Appellate Tribunal, it is prayed that the addition on account of royalty payment is not sustainable under law and be deleted.”
During the course of hearing, Ld.AR of the assessee submits that identical issues were involved in preceding AYs and in the year under appeal also, AO while making disallowance, has observed that under identical circumstances in preceding years, disallowances were made and since there was no change in legal position, disallowance was made in the year under appeal. However, in preceding AYs for AY 2012-13 to 2015-16, the disallowance made on account of Royalty payment stood deleted by Ld.CIT(A) by observing that the facts and circumstances of the Southern Switch Gear Ltd. (supra) as relied upon by the AO are different from the facts of the appellant and they are much closer to the facts of the case of CIT vs Sharda Motor Industrial Ltd. 189 Taxmann 211 of Jurisdictional High Court wherein the Hon’ble Jurisdictional High Court after considering the judgement of Hon’ble Supreme Court in the case of Southern Switch Gear Ltd. (supra) had held that facts of the judgement of that case are not applicable. Ld.AR placed the copies of the order of Ld.CIT(A) passed in all those years in the Paper Book at pages 151 to 213 wherein Ld.CIT(A) for various AYs after considering the Franchise Agreement has reached the conclusion that the facts of the Sharda Motor Industrial Ltd. (supra) are applicable and not the case of Southern Switch Gear Ltd. (supra) to the facts of present case. It is also brought to our notice that no appeal was preferred by the Revenue against those orders of Ld. CIT(A) and thus, they reached finality and thus, Ld.AR requested for the deletion of the disallowance being made on the identical facts as existed in preceding years.
On the other hand, Ld. Sr. DR for the Revenue vehemently supported the orders of the lower authorities sand submits that the AO as well as Ld.CIT(A) has rightly applied the judgement of Hon’ble Supreme Court in the case of Southern Switch Gear Ltd. (supra) and therefore, the disallowance made deserves to be uphold.
Heard the contentions of both the parties and perused the material available on record. We find that in AYs 2012-13 to 2015- 16, Ld.CIT(A) after considering the Franchise Agreement has reached to the conclusion that the judgement of Southern Switch Gear Ltd. (supra) are not applicable. The relevant observations contained in para 5.5 in the appeal order for AY 2013-14 are as under:-
5.5. “On careful consideration of facts of the case, clauses (terms and agreements) in the agreements between the Appellant and the franchisors, it is noted that the agreements were for a fixed period and upon the expiration of the agreement the franchisee would not be able to operate under the brand name or would not be able to drive any enduring benefit from the agreements. Thus, the question of such royalty being capital in nature does not arise. Also, the facts of the case Southern Switchgear Ltd are different from the case of appellant and appellant's facts are closer to case of CIT vs Sharda Motor Industrial Ltd wherein the aforesaid case has been distinguished and regular royalty payments have been held to be revenue expenditure. It is also noted that the claim of the appellant on similar facts and circumstances, has been allowed by my predecessor for the AYs 2014-15 and 2015-16 In view of above, I do not find justification in the action of AO and therefore, delete this addition of Rs. 14,32,610/-made to the income of the Appellant. Appellant succeeds in these grounds of appeal.”
Admittedly, there is no change in the facts and circumstances and legal position as has been observed by the AO himself while making the disallowance where he placed reliance on the orders of the assessee in preceding AYs where similar disallowances were made however, such disallowances were deleted by Ld.CIT(A) by making aforesaid observations. Thus, following the principle of consistency and also looking to the facts that there is no change in the circumstances, we hold that no disallowance could be made in the year under appeal out of the Royalty payment and accordingly, the same is hereby deleted. Grounds of appeal raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 06.08.2025.