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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI I.C.SUDHIR & SHRI PRASHANT MAHARISHI
Assessee by : Sh. Pradeep Dinodia, CA Sh. P. K. Kapoor, CA Revenue by: Dr. Prabhakant, CIT DR Date of Hearing 28/04/2016 Date of pronouncement 16/06/2016 O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the cross appeals filed by the revenue and the assessee against the order of the ld CIT(A)-VIII, New Delhi dated 31.01.2013 for the Assessment Year 2004-05. 2. The revenue has raised the following grounds of appeal:- “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs.68,17,444/-, made by AO out of expenditure of Rs.90,89,925/- on account of franchisee expensed debited under the head market development expenses after allowing depreciation @ 25%, holding that these expenses are revenue in nature.”
3. The assessee has raised the following grounds of appeal:- “1) That the learned CIT(A) has erred in law and on facts in holding that the market development expenses of Rs.1,85,53,715/- are capital expenditure being in the nature of 'intangible asset' within the meaning 2 of section 32(l)(ii) of the Income-tax Act, entitled to depreciation @ 25% on wholly erroneous, illegal and untenable grounds. 2) On the facts and in the circumstances of the case, the learned CIT (A) has erred in law in equating the contractual services provided by human beings by using their skill, as business or commercial rights within the meaning of intangible asset u/s.32(l)(ii) of the Income-tax Act. 3) On the facts and in the circumstances of the case, it may be held that the learned CIT(A) has erred in misinterpreting the ratio of decision of the Delhi High Court in the case of CIT vs. Hindustan Coco Cola Beverages Pvt. Ltd., 311 ITR 192, to hold that the assessee had obtained exclusive right to services from the service providers and such exclusive right was a business or commercial right within the meaning of 'intangible asset' u/s.32(l)(ii) of the Income-tax Act. 4) On the facts and in the circumstances of the case, it may be held that the services provided by CRM International LLC, Cyber Strategies Ltd. (UK), ASA & Co. and Shri Sampath are wholly and exclusively for the purpose of business; and as such are allowable as a legitimate revenue expense u/s.37 of the Income-tax Act. 5) On the facts and in the circumstances of the case, the net disallowance of Rs.1,39,15,286/- sustained by the learned CIT(A) may be deleted.”
4. The brief facts of the case are assessee is a company who filed its return of income on 31.10.2004 declaring NIL income. The assessment u/s 143(3) was framed on 20.12.2006 at a loss of Rs. 26920660/-. Subsequently, ld CIT (A) passed an order u/s 263 of the Income Tax Act setting aside an issue to the file of Assessing Officer to determine allowability of deduction of Rs.18553715/- on account of market development expenses and Rs.9089925/- of franchise expenses as revenue expenditure. In pursuant to that order the ld Assessing Officer passed an order u/s 143(3) read with section 263 of the Act on 06.11.2009 disallowing the market development expenses of Rs. 18553715/- holding that these expenditure, in view of the CRMI agreement which provides exclusive rights to Hero over the customers of CRMI, gives an edge to the company over other companies in some overseas territory and according to him this kind of exclusive rights amounts to intangible assets and therefore expenditure is capital in nature. Consequently, he allowed depreciation @25% on Rs. 18553715/- and making net disallowance of Rs. 139615286/-. Further, on franchise expenses ld. Assessing Officer disallowed Rs. 9089925/- also held as capital expenditure because no proof of expenditure was submitted which was reimbursed by the company. Further the ld. Assessing Officer allowed 25% depreciation on these franchise fees expenses and disallowed net sum of Del/2013 & ITA No 1472 Del /2013 A Y 2004-05 ACIT V Hero Corporate Services Limited 3 Rs.6817444/- . Aggrieved by the order of the Ld. Assessing Officer assessee preferred an appeal before the ld CIT (A). On the issue of market development expenses ld CIT(A) concurring with the views of ld. Assessing Officer has held that the appellant has obtained exclusive rights from CRMI and therefore it has got enduring benefit and therefore same is capital expenditure. On the issue of franchise expenses he allowed the claim of the assessee based on the decision of ITAT in appellant’s own case for AY 2007- 08 in and 5180/Del/2011 dated 29.02.2012 wherein it has been held that franchise expenses are in the nature of revenue expenses. Aggrieved by the order of the ld CIT (A) the parties are in appeal before us.
5. We first take up the appeal of revenue which has challenged the deletion of disallowance of Rs. 6817444/- made by ld Assessing Officer on account of total franchise fee expenditure of Rs. 9089925/-. Ld CIT (A) has deleted this disallowance based on the order of ITAT in case of assessee in ITA No. 5179, 5180/Del/2011.
6. Both the parties submitted that the issue is squarely covered by the decision of that order which is as under :- “17. Qua this issue, it is seen that none of the expenses is capital expenditure, as available from the Table contained in para 15 at page 16 of the ld. CIT(A)’s order. These expenses include sales promotion expenses, entertainment expenses, gifts to customers, expenses on participation of Hannover Fair in Germany of the Hero Group of Companies, Franchisee expenses, concerning the Hero Mindmine Retail Centre, Art Works and Designs, i.e., Advertising Expenses to the Mindmine business and outdoor expenses of the said advertisement expenses, inserts in news paper, etc., outdoor promotional activities including roadshows etc., News Paper advertising relating to current business of Mindmine, Co-Sponsorship charges for ACMA Summit held at New Delhi, Promotional Material related to advertising and Service Charges paid to service providers in Insurance business. As per the undisputed details filed by the assessee before the AO vide letter dated 21.10.09 (supra), an amount of ` 32,26,356/- was incurred on Trade Fair expenses at Hannover Fair in Germany against which expenditure, an amount of ` 60,00,000/- had been received by the assessee Company from its group Companies. The said amount of ` 60,00,000/- was included in the figure of ` 6,40,54,924/-, which appeared in Schedule 9 of the Accounts, under sub-head “Strategic Advisory Services” under the head 15 ITA 5179 & 5180(Del)2011 “Revenue”. Then, there were franchisee expenses of ` 2,69,24,903/-. There against, the assessee company had shown receipts from franchisee centres in ITA No 2050 Del/2013 & ITA No 1472 Del /2013 A Y 2004-05 ACIT V Hero Corporate Services Limited 4 Schedule 9 to the Accounts, under the sub-head, “Education and Trading Receipt”, under the head “Revenue”, forming part of ` 13,96,76,553/-. It had been explained by virtue of a Note on the franchisee expenses, that “Hero Mindmine”, which was a business unit of the assessee company was mainly engaged in imparting education, training and consultancy and had been conducting its business both through its own Training Centres and also through franchisees; and that Hero Mindmine was entered into a Franchisee Agreement with different parties for grant of licence for delivering various services under the Franchisee Agreement, a copy whereof had been filed before the AO, the assessee Company earned income from Technical Know- how fee, Licence Fee and Course Fee received from customers. 80% of the amount collected as Course Fee was disbursed to the franchisees for various services rendered and expenses incurred as per the terms of clause 10.3 of the Agreement. Such payment of 80% of the Course Fee received were booked as Franchise Expenses, depicted in the Schedule under Market Development expenses. The amount of ` 3,35,16,410/- represented service charges of NSure Plus. This represented payment by the assessee to service providers for Insurance 16 ITA 5179 & 5180(Del)2011 Business. ` 7,16,86,888/- had been received by the assessee as commission income there against and online database retrieval services revenue of ` 3,25,00,000/- under the sub-head “Insurance Commission” under the head “Revenue”.
18. These details remain undisputed. None of these payments was made by the assessee to CRMI. Moreover, a similar claim of Market Development expenses amounting to ` 4,27,85,775/- had been made for the assessment year 2006-07. The same had been allowed. It has not been shown that there has been any change in the facts for the year under consideration. The ld. CIT(A) has duly taken into consideration all these facts while rightly deleting the addition made. Accordingly, finding no merit therein, ground No.2 is rejected.”
7. We have carefully considered the decision of the coordinate bench wherein similar issue regarding allowability of franchise expenses is decided in the assessee’s own case for AY 2007-08, it has been held that these franchise expenses is held to be revenue in nature. Revenue did not cite any other decision contrary to the above or did not point out any change in the facts and circumstances of the case. In view of this respectfully following the order of coordinate bench in assessee’s own case we hold that franchise fees debited under the head “Market Development Expenses” amounting to Rs. 9089925/- is a revenue expenditure in nature. In view of this, we confirm the finding of the ld CIT(A) in deleting the above disallowance. Therefore, ground No.1 of the appeal of the revenue is dismissed. Del/2013 & ITA No 1472 Del /2013 A Y 2004-05 ACIT V Hero Corporate Services Limited 5 8. In the result filed by revenue is dismissed.
Now we come to the appeal of the assessee in ITA No.1472/Del/2013.
The Ground No. 1 to 5 of the appeal are against confirmation of disallowance of market development expenses of Rs. 18553715/- as capital expenditure and allowing depreciation thereon @25%.
Ld AR submitted that assessee has incurred the market development expenses of Rs. 18553715/- being payment made to M/s. CRM International USA and Cyber Strategies Ltd. UK and other entities. He stated that this expenditure are incurred by the assessee since AY 2003-04 and it is allowed to the assessee on examination u/s 143(3) of the Act. He submitted that according to the agreement the CRM was to render normal marketing services for the overseas customers. The services rendered by that party are on the periodic basis and are not of enduring nature. He submitted that merely there being an exclusivity clause it does not become capital expenditure. He relied on decision of Hon’ble Supreme Court in case of Empire Youth Company Ltd. 124 ITR 1 (SC). He further relied on several other decisions wherein brand promotion expenses, market development expenses are held to be revenue in nature. He further submitted that according to the rule of consistency also ld Assessing Officer has wrongly disallowed this expenditure. He referred to copy of the agreement as well as break up of such expenditure. He also submitted that as per letter dated 22.10.2009 the assessee has explained the nature of expenditure showing that it is revenue in nature.
Against this ld DR submitted that the agreement of CRM International provides for exclusive arrangement, which creates the advantage of enduring nature in favor of the assessee, and therefore it becomes an intangible asset. He also relied on the decision of Hon’ble Madras High Court in case of Chelpark Co. Ltd. Vs. CIT 191 ITR 249 (Mad) and also other decisions of 73 ITR 778 and 120 ITR 35. Therefore his argument was that exclusive rights given by the agreement results into a capital assets in the hands of the assessee.
Ld AR in rejoinder submitted that exclusive arrangement does not create intangible assets and it cannot make capital expenditure. He further referred to the provision of section 32 wherein intangible asset is defined. He Del/2013 & ITA No 1472 Del /2013 A Y 2004-05 ACIT V Hero Corporate Services Limited 6 further referred to the provision of the agreement and submitted that it is just for 3 to 4 years and such a short time cannot give rise to any capital expenditure.
We have carefully considered the rival contentions. The assessee has entered into Support Service agreement with CRM International LLC on 01.10.2002. According to that agreement the assessee wanted to avail the services of CRMI for marketing of its software products, inter active customer support service, telemarketing, call centre services and other related CRM services, and back office processing in USA and Canada. The CRMI has agreed to exclusively extend these services to assessee to promote its business in those territories. For this services the assessee is supposed to pay 45000$ per month for first six months and later on 40000$ per month to CRMI. Over the above this certain fixed percentage of commission was also to be paid by the appellant. The contract of provision of these services can be terminated by either party by giving a notice of not less than 60 days, however, after one year of the execution of the agreement the assessee may terminate this agreement without assigning any reason by giving a three months notice. Even in case of termination certain clauses of the agreement which safeguards both the parties survive and one of them exclusive arrangement and non compete as per article XVI of the agreement. According to the article XVI the CRMI shall have exclusive arrangement with Hero wherein CRMI shall not provide similar services to other parties. However, the assessee shall be free to avail such services from any party other than CRMI. On this agreement and precisely on this clause the ld Assessing Officer and ld CIT(A) have held that assessee has obtained benefit of enduring nature. The nature of services are precisely described as per schedule 1 of the agreement which are as under:- “1. CRMI shall market and promote in the territory, the business, including IT enabled services being rendered by HERO or any other product/ services as may be added by HERO during the term of Agreement.
CRMI shall act as a representative of HERO in the Territory and shall respond to all the business territory and shall response to all the business inquiries of the prospective customers in the territory and co-ordinate between HERO and the prospective customers.
ITA No 2050 Del/2013 & Del /2013 A Y 2004-05 ACIT V Hero Corporate Services Limited 7 3. CRMI shall recruit and employ at its own cost, competent and experienced person to market and promote the business of HERO in the territory.
CRMI shall co-ordinate and follow up with the HERO customers in the territory with the respect to the payment due to HERO from such HERO customer. CRMI shall recover and guarantee all payment that are due or may be due to HERO from CRMI customers in the territory.
CRMI shall provide on regular basis the customer relation management and customer support services to the HERO and CRMI customers in USA and shall co-ordinate and advice in rendering efficient service to the customers.
On the perusal of these services it is apparent that these services are routine in nature for promotion of the sales. On receipt of these services the assessee will not get any benefit of enduring nature or it does not create any asset of intangible nature. These are in fact plain vanilla customer relation management and customer support services. On reading of the clause XVI.1 of the agreement it provides that during the term of this agreement CRMI shall have exclusive arrangement with HERO and shall not enter into any arrangement with any other person to provide any services that are similar to the CRMI services being offered herein by CRMI to HERO. However, Hero is free to avail the similar services from any person to promote its business in the territory. It is further provided that there are non- compete condition imposed on CRMI. These are normal contractual terms and conditions in any commercial agreement but existence of such arrangement cannot create and benefit of enduring nature in favour of either of the parties because they do not create any asset but merely safeguards the interest of the parties. For the purposes of determining whether the expenditure incurred on services is capital expenditure or revenue one needs to look at the nature of services received by the assessee and not the other terms and conditions attached therein. Further looking to the tenure of the contract, right of termination with the parties and conditions attached on termination of the contract , it does not suggest in any manner that assessee has acquired any benefit which is of enduing nature except the services. Hon Supreme court in case of Empire Jute Co Ltd V CIT 124 ITR 21 has held that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is ITA No 2050 Del/2013 & ITA No 1472 Del /2013 A Y 2004-05 ACIT V Hero Corporate Services Limited 8 in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. However, even if this test were applied in the present case, it does not yield a conclusion in favour of the Revenue. In the present case the expenditure are merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched. Therefore on this count the expenditure incurred by the assessee are revenue in nature. The question whether a particular item of expenditure incurred by an assessee is of a capital or revenue nature is a vexed question invariably presenting difficulties. Though courts have laid down tests for making a distinction between capital expenditure and revenue expenditure, a caution has also been administered that the tests laid down are not exhaustive and that it is not easy to reconcile the reasoning given therein. Further, it has been uniformly held and emphasized that the character of expenditure will have to be decided on the facts and circumstances of each case not by the application of rigid tests but deriving support from many aspects of the circumstances and the ultimate answer could depend upon a commonsense appreciation of the guiding features. The decision relied up on by the a ld DR of Chelpark Park limited V CIT 191 ITR 249 was on non compete expenditure paid to managing director r and therefore nature of expenditure is distinguishable and further non compete fees in order to ward off damaging competition from a potential competitor, resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole for so long as the assessee carried on such business. Further, the provisions of section 32 defines intangible assets. We do not find any support on reading of that definition that market support Del/2013 & ITA No 1472 Del /2013 A Y 2004-05 ACIT V Hero Corporate Services Limited