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Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
PER SMT.BEENA PILLAI, JUDICIAL MEMBER : Present appeal has been filed by assessee against order dated 15.03.2019 passed by Ld.CIT(A)-7, Bangalore on following grounds of appeal: “1. General Ground 1.1 The learned Deputy Commissioner of Income Tax-Circle 7(1)(1) (`AO’), Bangalore has erred in passing the order under section 143(3) of the Income Tax Act, 1961 (`the Act’) in the manner passed by him and the Commissioner of Income Tax (Appeals)-7 (`CIT(A)’) has erred in confirming the said order. The said order to the extent prejudicial to the appellant is bad in law and liable to be quashed.
2. Ground relating to allowance of celebrity payouts under section 37 2.1 The learned CIT(A) has erred in concurring with the learned AO and concluding that payments of Rs.1,64,45,668/- made to various sportsmen / celebrities being a capital expenditure has to be added back to the income of the appellant. 2.2 The learned CIT(A) and AO have erred in ignoring and not appreciating that the impugned transactions do not (a) bring any benefit of enduring nature (b) bring any asset into existence on making payments to sportsmen / celebrities. 2.3 The learned CIT(A) and AO have erred in ignoring and not appreciating that the payments to sportsmen / celebrities were made in order to promote the sale of products and to carry on business profitably and advantageously. 2.4 On facts and circumstances of the case, there is direct nexus between the payments made to sportsmen / celebrities of Rs.1,64,45,668/- and carrying out of business. Payments were made wholly and exclusively for the purpose of business and should be allowed under section 37 of the Income Tax Act, 1961.
3. Prayer 3.1 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT(A) be quashed or in the alternative, the deduction under section 37 prayed for thereunder be allowed. The appellant prays accordingly.” Brief facts of the case are as under: 2. Assessee is a company engaged in the business of wholesale trading to business establishments. During the year under consideration assessee filed its return of income on 30/11/2015 declaring total income of nil and current year loss of Rs.3,70,93,738/-. The case was selected for scrutiny and notice under section 143 (2) along with 142 (1) of the Act was issued. In response to statutory notices, representative of assessee appeared before Ld.AO on various dates and furnished relevant details, particulars and clarifications as called for.
Ld.AO during assessment proceedings noted that assessee debited sum of Rs.1,64,45,668/- as payment made to celebrities for endorsing products of assessee. Ld.AO called for breakup of expenditure. Assessee submitted following details in view of query raised: S.No. Particular Amount (in Rs.) 1 Coca Cola 1,43,312 2 Cornerstone Sports & 39,963 Entertainment 3 CSE Consulting LLP 6,67,497 4 KKR 5062 5 Muthiah Muralitharan 16,452 6 RCB 8435 7 Sachin R Tendulkar 26,98,852 8. Shraddha Kapoor 26,54,500 9 Vijay Amritraj 30,00,000 10 Virat Kohli 4,77,821 11 Virat Kohli (WROGN) 66,74,973 12 Yuvraj Singh 58,335 TOTAL 1,64,45,668/- 4. Assessee was called to justify payments made to sports persons and celebrities vide order sheet entry dated 21/12/2017 and to explain services rendered by sports person to assessee. Ld.AO called upon assessee to establish why the said expenditure should not be considered as expended towards brand building, thereby constituting capital expenditure in the hands of assessee.
Assessee filed submissions before Ld.AO. Ld.AO was of the opinion that sports persons celebrities were promoting products of assessee and therefore payments made to them were towards brand building and towards development of an intangible assets. Ld.AO noted that assessee has 3 brands namely, Collectabillia, Wrogn and Imara. Ld.AO thus treated said expenditure as capital in nature and disallowed the same in the hands of assessee.
Aggrieved by addition made by Ld.AO, assessee preferred appeal before Ld.CIT (A).
Before Ld.CIT (A) assessee explained that, it designs various merchandise, products and services, and gets produced through vendors and then distributes it through various channels. It was submitted that it has tied up with different sports persons/celebrities for this purpose. It has been submitted by assessee that a percentage of sale of merchandise goes to the celebrity/sports person. It was submitted that, percentage of share paid is based on gross revenues generated from the sale of merchandise, and therefore, it is revenue in nature. It was submitted that corresponding revenues are credited to the profit and loss account by assessee. It was also submitted that ,there was no brand building carried out by assessee and the consideration is in the nature of a percentage of revenue shared with celebrity/sports persons. Assessee filed following agreements with celebrities before Ld.CIT(A): 1 Shri Sachin Tendulkar Memorabilia Rights Agreement dated 02.05.2012 2 Shri Virat Kohli and Corner Stone Sports Memorabilia Rights Agreement dated & entertainment Pvt. Ltd. 01.03.2013 3 Shri Virat Kohli and Corner Stone Sports Licensing and merchandising rights & entertainment Pvt. Ltd. agreement dated 1.3.2013 4 Ms Shraddha Kapoor and CAA KWAN Endorsement Agreement, dated Talent Management Agency Pvt. Ltd. 4.9.2013 5 Shri Vijay Amrith Raj Agreement dated 23.5.2013 5 Shri Virat Kohli and Corner Stone Sports Agreement dated 13.3.2014 & entertainment Pvt. Ltd.
Based upon above agreements, Ld. CIT (A) observed as under: “4.3 These agreements have been perused. It is found that these celebrities have granted exclusive rights and licensing rights to the assessee company where the company will have the right to apply, use. reproduce, publish and/or otherwise exploit the celebrity's name, likeness, image, get-ups. voice, slogan and signature graphical representation, jersey number, electronic animated or computer generated representation and any other representation (in any medium), right of association, bio graphical information and other indicia for the purposes of design, manufacture, sourcing, marketing, sale and/or distribution of the products. The agreement also provides that the company may, on its own or in collabration with or engaging third parties, or by sub licensing the licensing rights (a) Create a line of products (hi Market the products through all mediums (c)Create a brand and/orlogos for the products (Brands)
4.4 The agreement provides that the celebrities will make themselves available for certain period of time throughout the term of the agreement for creating the content which will be used by the assessee company for the purposes of advertising, marketing. brand promotion and for sale of the product. The agreement also provides that the company will own all intellectual property rights (IPR) in the brands during the terms of the agreement and also thereafter. The company has signed multiple agreements with some celebrities like Shri Virat Kohli with specific agreement for the brand like WROGN which is Positioned as a high-street fashion menswear brand and separate agreement for other brands and for licensing and merchandising rights and for memorabilia. Ms Shraddha Kapoor. the bollywood actress promotes brands for womens clothline such as Imara. The agreement with the famous Tennis star of yester years and Hollywood Producer Shri Vijay Amritraj has been entered to promote the business and brands and websites of the company. The agreement provides that:
"6.3 Vijay hereby assigns to the company. with full title guarantee, by way of a present assignment of existing and future (entire) copy right, performer right, related rights and all other intellectual property rights of any kind whatsoever throughout the world used and/or created during the performance of his obligations under this agreement". 4.5 In view of above, the conclusion of the AO that the payment of Rs 164,45.668/- to eminent sports persons and celebrities and other concerns for promoting the products of the company and for brand building and development of intangible asset is correct. Consequently, the payment of this amount is in the nature of capital expenditure which cannot be allowed. The argument of the appellant that any payment which is.in the nature of share of revenue is a revenue expenditure, is not correct. What is important is the purpose for which the payment is made. It is evident in the case of the assessee company that the payment to the celebrities is nothing but for promotion of the brand and brand building. Besides, it is found that there is provision in the agreement for payment of minimum guarantee amount (MG) which is not in addition to the payment as a percentage of the revenue generated. Therefore, the contention of the appellant is not correct and hence not acceptable. It is also found that the appellant company has incurred substantial expenditures for marketing and selling activities which are debited under the head ‘business promotion and advertisements’ and ‘selling and distribution expenses’. Hence, the argument of the appellant that the payment to celebrities is expenditure for marketing is not correct.”
Ld.CIT(A) confirmed addition made by Ld.AO as capital expenditure.
Aggrieved by order of Ld.CIT(A), assessee is in appeal before us now.
Ld.AR submitted that, only issue raised by assessee is in respect of concluding payments made to various sportsmen/celebrities as capital expenditure. He submitted that, these are basically celebrity share payout expenditure. Ld.AR drew our attention to page 481 of paper book, wherein total revenue generated from sale of products and the share of sale proceeds with the celebrities/sportsperson have been tabulated as under: Name of the Product/ Total revenue Celebrity Service tax Total TDS Net payout celebrity Service Generated Expenses Partner Credited Virat Kohli Apparels 6,60,87,111 66,74,973 8,25,027 75,00,000 7,50,000 67,50,000 (Wrogn) CSE Consulting Apparels 6,67,497 82,503 7,50,000 75,000 6,75,000 LLP Shraddha Apparels 3,98,09,264 26,54,500 1,54,500 28,09,000 2,80,900 25,28,100 Kapoor Virat Kohli Memorabillia 23,81,074 4,77,821 59,059 5,36,880 53,688 4,83,192 Corner Stone Memorabillia 39,963 4,939 44,902 4,490 40,412 KKR Memorabillia 7,109 5,062 626 5,688 569 5,119 MUTHIAH Memorabillia 31,673 16,452 466 16,918 1,692 15,226 MURALITHARAN RCB Memorabillia 11,848 8,435 1,043 9,478 948 8,530 Yuvraj Singh Memorabillia 1,62,811 58,335 7,210 65,545 6,555 58,991 Sachin R Memorabillia 47,53,670 26,98,852 3,33,578 30,32,430 3,03,243 27,29,187 Tendulkar Cococola Memorabillia 2,46,571 1,43,312 - 1,43,312 - 1,43,312 12. He also submitted that TDS have been deducted on such payments referring to page 377 of paper book.
Ld.AR before us made an application for admission of additional evidence under Rule 29 of the Income Tax Rules, 1963, wherein agreements which were not filed before Ld.CIT(A) have been placed. He submitted that, all these agreements are based on percentage of the sale being shared with the celebrity/sportsperson which does not amount to any brand building.
On the contrary Ld.Sr.DR submitted that, all these agreements were not filed before authorities below and therefore needs to be remanded for reconsideration in the light of the agreements.
We have perused submissions advanced by both sides in light of records placed before us.
In order to understand the nature of payment made by assessee to various celebrities/sportsperson, he drew our attention to page 376 of paper book. At page 376 we note that WROGN, Collectabilla, IMARA. Assessee is engaged in the business of selling of merchandise and ready-made apparel, mainly through Myntra, Shoppers Stop, Exclusive Business Outlet(EBO) and other channel. Assessee also sells memorabilia which are personally signed by celebrities, merchandise which is digitally signed by celebrities under the brand Collectabilla, and ready-made garments under WROGN and IMARA which are celebrity endorsed. The celebrities are managed through various agencies.
It has been submitted that, assessee pays to celebrity and agency, partner fee for endorsement of brand and signing the memorabilia. Such free payable can either be fixed fee, or a fee based on revenues generated from the respective brand or a combination of minimum guarantee fee plus a revenue share. It was submitted that during the year assessee paid following amount: Particular Amount Collectabilia 32,51,926 WROGN 66,74,973 IMARA 26,54,500 Agency 38,64,269 Total 1,64,45,668 18. We also note from page 377 that assessee has deducted TDS in respect of certain payments made to certain parties details of which are as under: Particular Brand/Agency Amount Basis of fee paid TDS Coca Cola Agency 1,43,312 Purchases NA Cornerstone Sport Agency 39,963 Consultancy 4,490 & Entertainment Pvt. Ltd. CSE Consulting Agency 6,67,497 Consultancy 75,000 LLP KKR Agency 5,062 Consultancy 569 MUTHIAH Collectabilia 16,452 Profession 1,692 MURALITHARAN RCB Agency 8,435 Consultancy 948 Sachin R Tendulkar Collectabilia 26,98,852 Profession 3,06,068 Shraddha Kapoor IMARA 26,54,500 Profession 1,543,500 Vijay Amritraj Agency 30,00,000 Profession NA Virat Kohli Collectabilia 4,77,821 Profession 53,688 Virat Kohli WROGN 66,74,973 Profession 7,50,000 (Wrogn) Yuvraj Singh Collectabilia 58,335 Profession 6,555 19. Assessee also drew our attention to an agreement placed at page 397. On perusal of the said agreement we note that assessee entered into triparte agreement with the sportsperson mentioned therein and Cornerstones Sport and Entertainment Pvt.Ltd., for sale of memorabilia either by itself to end customer or to third-party vendors who shall have the right to sell the Memorabilia to end customer through auction and/or by way of direct sale to end customer or by other means of sale, including but not limited to retail stores and e- commerce websites. It also agreed in the said agreement that the memorabilia belonging to the said sportsperson would be sold at a price from which 70% of the profit shall be payable to the sportsperson and 5% of balance shall be paid to Cornerstone memorabilia amount. It is also agreed that assessee shall only retain 25% of the profits.
Ld.AR thus submitted that assessee has entered into such memorabilia rights agreement with other sportspersons. Assessee has also entered into licensing and merchandising rights agreement with sportspersons and endorsement agreement with celebrity and agencies, more particularly mentioned in the table referred to herein above which forms part of order of Ld.CIT(A).
We also note that assessee entered into agreement with Sh. Vijay Amritraj in respect of services rendered by him. The agreement referred to by Ld.CIT(A) dated 25/05/2013 is placed at page 442 of paper book. We note that this agreement has been entered into with Shri Vijay Amritraj, former tennis player, for using certain attributes in the form of nickname, initial, ought to graph, photographs, portrait, caricatures etc. more particularly referred to at page 443, against which, consideration would be a minimum guarantee fee of Rs. 30 lakhs per agreement year’s and 5% of annual profits earned by assessee from the agreement during the year. We also note that at page 450 assessee has agreed to pay Shri Vijay Amritraj, former tennis player issuance of options which shall vest and may be exercised in 4 equal annual installments, as per the terms of the ESOP, whereby each option may be exercised to be converted into an equity share in the share capital of the company at an excise price for each such equity share.
We note that in respect of memorabilia rights agreement entered into with the sportspersons, referred to by Ld. CIT (A) in para 4.2 of impugned order, the payment is for sale of various items used by the sportsperson during practice sessions, tournaments etc., in lieu of which assessee would be paying a percentage of sale proceeds. In our opinion such payment would not come within the ambit of capital expenditure. We also note that such payment cannot be considered towards brand building as these are the used branded products by these sportspersons which are sold by assessee in the open market.
In respect of the other agreements being endorsment agreement, agency agreement etc., with celebrities/Shri Vijay Amritraj, we note that more details needs to be verified in order to appreciate the arguments advanced by Ld.AR. Most of the agreements/evidences were not placed before the authorities below which has been filed before us in the form of additional evidences.
Ld.AR placed reliance on various decisions, wherein distinction has been drawn between revenue and capital expenditure. Ld.AR also emphasised on accounting standards A-S 26 on intangible assets, that needs to be considered. An expenditure incurred being capital or revenue in nature needs to be analysed on the facts of each case. At the outset we note that authorities below without seeking further clarification/verification on various aspects arrived at the conclusion that expenditure incurred by assessee is capital in nature. In our opinion the issue needs to be revisited denovo by Ld. AO in the light of various agreements that was never called by Ld. AO for verification and those which have been filed before this Tribunal as additional evidences. Assessee is directed to file all relevant details/information/evidences in support of its contention. Ld. AO is directed to pass a detailed order on merits after carrying out investigations/verifications of evidences filed by assessee on the issues. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Accordingly grounds raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands allowed statistical purposes. Order pronounced on this 19th day of November, 2020.