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Income Tax Appellate Tribunal, “I”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
per the contractual obligation of the assessee to exploit the franchisee.
This was an annual payment spread over the period of right granted and directly related to the earning of income each year. This annual franchisee fees was payable in 2 parts i.e. Rs.13,42,80,000/- as League deposit on or before 2nd [an and Rs.31,33,20,000/- on the date of the first match in the League in each year. The League deposit was refundable, if League did not take place and in that event the franchisee is not required to pay the franchisee fee. The payment was an annual charge and hence the franchisee fee was claimed as business expenditure. Referring to clauses 1, 2 and 11 of the said agreement, the assessee has right to operate the Franchise of the IFL and has right to terminate the agreement, if the matches do not take place for two consecutive years. The agreement between the parties can be terminated by them with immediate effect by giving notice to other party on breach of any clause in the agreement.
Thus, the assessee, in the light of above termination clause, has not received any enduring benefit by paying annual franchise fees. Though it was granted some rights, but "Central Rights" which are crucial for managing and operating the team, are retained by the BCCI as stipulated assessee are subject to prior decision and acknowledgement of BCCI as categorically stipulated in clause 4.3 of the agreement. Hence, the assessee was not granted any absolute right but only a limited one.
From the record we found that during F.Y. 2007-08 (Le. A.Y. 2008- 09), the assessee has paid Rs.20,00,00,000/- on 20.01.2008 as deposit (which was in terms of clause 7.1 of franchise agreement) for the matches to be held in April, 2008 and the same has been shown as "advances recoverable in cash or kind of for value to be received" in the audited financial statement of F.Y. 2007-08. During the AY. under consideration, the assessee has paid Rs.24,76,OO,000 (net of service tax) on 05.05.2008 (in terms of clause 7.2 of franchise agreement) and debited the aggregate amount of Rs.44,76,00,000/- (i.e. Rs. 20,00,00,000 + Rs. 24,76,00,000/-) under the head "Franchise Fees" in its Profit & Loss account. For the matches to be held in April, 2009, the assessee is said to have paid Rs.13,37,82,643/- as deposit and grouped the same under the head "Prepaid Expenses" in the Balance Sheet for the year ended 31.03.2009. The expenditure of Rs.44,76,Oo.,000/- incurred by it for making payment of the first instalment to the BCCI-1PL in terms of clause 7 of the agreement was not for the purpose of acquisition of any asset but for an annual right to manage the franchise. The purpose of the expenditure to be incurred under the agreement by the assessee has been stated in clause 6 of the agreement as consideration for the right to operate the Franchise and to be a member of the League. The total RsA4,76,00,000/, for ten years was clearly for the purpose of securing franchise right from BCCI. Thus payments made by the assessee - were for the annual benefits only not extending beyond one year. Its right to operate and manage the team is subject to prior payment of annual franchise fees; if the assessee fails to make the payment, then it would not be allowed to participate in IPL Thus, the assessee has made the annual payments to earn the annual income. The nature of transaction/payment clearly demonstrates that the assessee is neither obtaining any enduring benefit by making payment of annual instalment these payments are giving rise to any assets. These payments are mere annual payments to BCCI-IPL to give a right to the assessee to participate in the matches with its team. Therefore, the annual franchise payment was a revenue expenditure.
7. Ld. AR placed on record order of ITAT Hyderabad bench in order dated 28-10-2015, passed in the case of Deccan Chargers Sporting Ventures Limited, wherein under similar facts and circumstances it was held that annual franchise fees so paid was revenue in nature.
As an alternate it was contended by ld. AR that assessee be allowed depreciation on the cost of intangible assets as contemplated u/s.32(1)(ii) of Rs.447.60 crores. In support of its claim of depreciation on the entire value of intangible assets, ld. AR placed on record order of the coordinate bench in the case of Indian Cements Ltd., ITA u/s.32(1)(ii) was allowed on the entire cost of intangible assets.
We had carefully gone through orders of the co-ordinate bench in case of M/s. Deccan Charges (supra) wherein exactly similar issue decided by Tribunal in assessee’s favour after observing as under: “Before considering the claim of allowability of deduction, it is necessary to decide whether the aforesaid franchise right is a capital asset eligible for depreciation or it is a revenue expenditure. As per clause 3 of the FA, the impugned agreement shall come into effect upon signature and shall continue for so long as the League continues subject to termination, suspension or renewal as provided (the ‘Term’). As per clause 4 of the FA, the franchisee (appellant) has acknowledged and agreed that BCCI-IPL owns the Central Rights and the BCCI has all pervasive rights to exploit present as well as future Central Rights. The Central Rights includes media rights, umpire sponsorship rights, tile sponsorship rights, official sponsorship rights, stadium advertising right, games rights etc. The franchisee would be allowed to enjoy only those rights which BCCI-IPL would acknowledge. Another very important clause laid down in the FA [clause 7.1 (b)] is that from and including 2018 onwards, for indefinite period, an amount equal to 20 per cent of the franchisee income received in respect of such year shall be paid to BCCI-IPL by the franchisee appellant. Further, franchisee shall have no right to assign or to sub-contract or otherwise delegate the performance of any right or Obligation under the agreement without prior written permission from the BCCI-IPL. Powers to terminate the agreement is mostly tilted in favour of the BCCI-IPL (clause 16 of FA). Franchisee shall also not sub-let or sub-contract the franchisee rights without prior written permission of the BCCI-IPL. Further, as per clause 10.1 of FA, the appellant does not have any right to assign or delegate the performance of any right or obligations under this agreement. The same vests with BCCI-IPLonly. Perusal of the above clauses reveal that under the terms of the agreement, appellant company never enjoys the proprietary rights. The proprietary rights continue to vest in the BCCI-IPL. Therefore, appellant cannot be regarded as having acquired either wholly or any part of proprietary rights by or under the agreement. Therefore, in view of the above facts and circumstances, franchise right cannot be treated as capital asset”.
6. We agree with the above order of the Ld. CIT(A) as the amount was not for acquiring capital rights. It is for conducting the matches on yearly basis. If assessee has not paid the amount, it loses the right to conduct the matches. Accordingly, Ld. CIT(A) has come to correct
6.1. He also analysed various case law vide para 5.3.4 and 5.3.5 as under: “Against the above factual ground, the issue for adjudication is whether the above franchise right constitutes capital asset entitled to depreciation. No doubt, section 32(1) includes franchise right as part of the intangible assets entitled to depreciation. The main requirement for considering whether the franchise rights constitute a depreciable asset is that such franchise right should be owned wholly or partly by the appellant. Merely because franchise rights are treated as intangible assets, it does not mean that any or all payments made towards franchise rights would become capital payment and such rights constitute a depreciable asset. It has to be determined on the basis of actual rights conferred on the assessee. Is it a rig lit of ownership or merely a right to use. The former will be capital, while the latter will be in the revenue field. Analogy can be drawn from the following instances: (i) Technical know-how is an intangible asset and entitled to depreciation u/s 32. However, if an annual fee is paid for the use of technical know how and right to use technical know how ceases on the termination of such agreement, then the annual payments made are revenue in character and are allowable as deductible expenditure. The Hon'ble Supreme Court in the case of CIT v. LA.E.C. (Pumps) Ltd, 232 ITR 316 (sq held that use of patents and designs for ten years with option to extend or renew the same was held to be a revenue expenditure. The ratio is fully applicable to the facts of the present case. (ii) Similarly, in case of other assets also which are normally treated as fixed assets entitled to depreciation, if an assessee takes these assets on lease or hire, the payments made annually for the right to use these assets are revenue expenditure. They would not be treated as capital assets entitled to depreciation on the annual lease payments. Rental payment in respect of buildings, which are fixed assets, taken on lease would constitute revenue expenditure. Whatever may be the period of lease, the annual payment will be only revenue in nature. In fact the Madras High Court in the case of CIT v. Gemini Arts (P) Ltd, 254 ITR 201, following the Apex Court in CIT v. Madras Auto Services Pvt. Ltd, 233 ITR 468 (sq, has held that upfront payment of future rent for 47 years would still be revenue expenditure. (iii) In the case of lease of immovable property, the Supreme Court has held that any premium paid for acquisition of the right to lease would constitute capital payment but not a periodic payment for the actual use of the property [CIT v.
8 Panbari Tea Co. Ltd, 57 ITR 422 (SC)]. While tenancy right per se is considered as a capital asset [5.5 (2)], payment for the usage of such tenancy right is always revenue expenditure. (iv) The Karnataka High Court in the case of CIT v. HMT Ltd. 203 ITR 820 has held that even though lump sum amount paid as premium in connection with lease of property as long as it is towards rent for the use of the property, it is allowable as revenue expenditure. (v) The Supreme Court in the case of Empire Jute Manufacturing Co, [124 ITR 1 (SC)] has held that even if the payment gives benefits for a period of time it will be in the revenue field only, if it is incurred in connection with day to day operation and does not affect the capital structure of the assessee. (vi) Expenditure on technical know-how, even if of enduring character is revenue expenditure if its impact is on the running of business [CIT V MRF Ltd, 144 ITR 678 (Mad)). (vii) Acquisition of goodwill of business is acquisition of capital asset and therefore, its purchase price would be capital expenditure. Where, however, the transaction is not one for acquisition of goodwill, but for the right to use it, the expenditure would be revenue expenditure [Devidas Vithaldas & Co v. CIT, 84 ITR 277 (SC)]. 5.3.5 From the above legal pronouncements, it is clear that the character of the payment would depend on nature of rights acquired and the period for which such rights was acquired by the appellant. Any payment made for obtaining a commercial right would be a capital expenditure. But payment made periodically for exploiting such rights is revenue in nature. Therefore, in the instant case, payment made at the first instance for grant of right to be franchisee can be considered as capital payment. However, the subsequent annual payments made by the assessee are clearly for exploiting the rights as a franchisee, which are for a year and which can be terminated for non-payment of the franchise fees in the subsequent year. Therefore, the franchise fee paid is revenue in nature because by making such annual payment the appellant does not acquire any rights of permanent nature”.
In view of these judicial principles which clearly apply to the facts of the case, we do not find any reason to interfere with the order of CIT(A) who analysed the issue on the given facts. There is no merit in Revenue’s grounds and accordingly, Revenue’s appeal is dismissed.”