JUBILANT FOODWORKS LTD.,NOIDA vs. DCIT, CIRCLE-1, NOIDA

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI BEFORE SHRI SAKTIJIT DEY, VICE-PRESIDENT AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER

ITA No. 7937/Del/2018 Assessment Year: 2014-15 Jubilant Foodworks Ltd., Versus DCIT, Circle-1, Plot No. 1A, Sector-16A, Noida. Noida. PAN: AABCD1821C (Appellant) (Respondent) Assessee by : Sh. Ajay Vohra, Sr. Advocate Sh. K.M. Gupta, Advocate Sh. Shruti Khimta, A.R. Revenue by : Sh. Rajesh Kumar, CIT-DR

Date of hearing : 11.07.2023 Date of pronouncement: 06.10.2023 ORDER

Captioned appeal by the assessee arises out of the final assessment order dated 10.10.2018 passed under section 143(3)/92CA(3)/144C(5) of the Income-tax Act, 1961 pertaining to

assessment year 2014-15, in pursuance to directions of learned Dispute Resolution Panel (DRP).

2 ITA No. 7937/Del/2018

assessee has raised an additional ground, being ground No. 9, on the

issue of claim of deduction of education cess and secondary and

higher education cess. However, at the time of hearing, Shri Ajay

Vohra, learned Sr. Counsel appearing for the assessee, on

instructions, did not press the additional ground. Accordingly, the

additional ground is dismissed.

ground, hence, does not require adjudication.

Rs.26,15,651/- made on account of transfer pricing adjustment on

franchise fee paid by the assessee.

resident corporate entity and stated to be engaged in the business of

manufacturing and sale of Pizza and other food items through retail

outlets taken on lease across the country. The assessee had entered

into a franchise agreements with Dominos Pizza Overseas

Franchising BV/Dominos Pizza International Franchising Inc, under

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which, the assessee was granted exclusive right to develop and

operate Dominos Pizza delivery stores in India, Nepal, Sri Lanka and

Bangladesh using Dominos systems and marks. In exchange of such

exclusive right granted under the agreement, the assessee pays

franchise fee of 3% of net sales of its stores in India and store

opening fee of US Dollar 5000 per store.

Donuts Franchising LLC, wherein, the assessee has been granted

the right to develop and operate Dunkin Stores in India using the

name ‘Dunkin Donuts’. For grant of such right, the assessee pays

franchise fee of 3.5% of net sales of its stores in India and store

opening fee of USD 4500 per store.

dispute, the assessee paid franchise fee @3% of net sales to

Dominos Pizza and @ 3.5% to Dunkin Donuts. The assessee

benchmarked the payment of franchise fee to the aforesaid entities

by adopting Comparable Uncontrolled Price (CUP) method as the

most appropriate method and in the transfer pricing study report

claimed the transaction relating to franchise fee to be at arm’s length.

4 ITA No. 7937/Del/2018

On a reference made by the Assessing Officer, the Transfer Pricing

Officer (TPO) proceeded to examine the arm’s length nature of the

aforesaid transactions. While doing so, the TPO rejected assessee’s

benchmarking and concluded that the franchise fee paid at 3% and

3.5% are not at arm’s length. Accordingly, he reduced the rate of

franchise fee to 1.5% in respect of both the transactions and

proposed an adjustment of Rs.32,18,49,836/-. The adjustment so

proposed was added to the income of the assessee while framing

draft assessment order. Against the draft assessment order, the

assessee raised objections before learned DRP. While considering

the objections of the assessee, learned DRP observed that the

payment of franchise fee/royalty @ 3% of net sales to Domino’s

Pizza can be considered to be at arm’s length, as two other

comparables having similar business in Indian territory are paying

royalty @ 4%. However, in so far as payment of franchise fee/royalty

to Dunkin Donuts is concerned, learned DRP scaled it down to 3% by

stating that the usage name of the brand and its operation in India is

similar to Dominos Pizza. Hence, the same rate can be adopted. As a

5 ITA No. 7937/Del/2018

result of directions of learned DRP, the adjustment was scaled down

to Rs.26,15,651/-.

adjustment. Before TPO and learned DRP, the assessee had

challenged the adjustment on a preliminary issue that the transfer

pricing provisions are not attracted, as the disputed transactions are

with parties who do not qualify as Associated Enterprises (AEs) in

terms of section 92A of the Act. However, both the TPO and learned

DRP rejected the aforesaid contention of the assessee. In terms with

the directions of learned DRP, assessment order was finalized.

reiterated the stand taken before the departmental authorities that in

terms of section 92A of the Act, the assessee had no AE relationship

with Dominos Pizza and Dunkin Donuts. It was submitted that at the

time of entering into the franchise agreements, both the entities were

unrelated parties, hence, cannot be considered to be AEs of the

assessee. Drawing our attention to section 92A of the Act, learned Sr.

Counsel submitted that the conditions enshrined in sub-sections (1)

and (2) have to be cumulatively satisfied. He submitted, neither the

6 ITA No. 7937/Del/2018

overseas entities participate directly or indirectly in the management,

control or capital of the assessee nor there are any persons or

intermediaries who participate directly or indirectly in the

management, or control or capital of both the assessee and other two

entities. He submitted, since, the conditions of sub-section (1) are not

fulfilled, neither Dominos Pizza nor Dunkin Donut can be considered

as AEs of the assessee. Thus, he submitted, in absence of any AE

relationship, transfer pricing provisions are not applicable. He

submitted, in case of one of the entities, i.e., Dominos Pizza, the

Tribunal after taking note of the franchise agreement has held that

the assessee cannot be treated as PE of Dominos Pizza. He further

relied upon a decision of Hon’ble Karnataka High Court in case of

PCIT vs. Page Industries Ltd. (ITA No. 285 of 2017). He submitted,

merely because the assessee has treated Dominos Pizza and Dunkin

Donuts as AEs in the transfer pricing study report, it cannot be

prevented in raising the issue relating to existence or otherwise of AE

relationship. In support, he relied upon the decision of ITAT, Special

Bench in case of DCIT vs. Quark Systems Ltd. (2010) 4 ITR (T) 606.

Thus, he submitted, there being no AE relationship between the

7 ITA No. 7937/Del/2018

assessee and the concerned entities at the time of entering into

franchise agreements, the transfer pricing provisions would not apply.

decision of learned DRP to determine arm’s length rate of franchise

fee paid to Dunkin Donuts @ 3% is without any rational basis, as it

was done in a purely adhoc manner without following any approved

method. He submitted, the assessee has benchmarked the payment

of franchise fee to Dunkin Donuts by applying CUP method and has

selected independent comparables having similar transactions, who

have paid royalty/franchise fee at higher rates of 4%, 5% and 7%.

Thus, assessee’s comparability analysis has substantial basis as

against adhocism adopted by the TPO and learned DRP. Finally, he

submitted, in assessee’s own case for assessment year 2012-13 and

2013-14, the first appellate authority has accepted payment of

franchise fee/royalty to Dunkin Donuts and the Revenue has not

preferred any appeal.

assessee itself has treated Dominos Pizza and Dunkin Donuts as its

AEs and reported the transactions in the TP study report, now the

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assessee cannot turn back and claim no AE relationship with these

two entities. He submitted, since assessee’s business is wholly

dependent on two foreign entities and they have management control

over the assessee, conditions of section 92A(1) are satisfied.

Proceeding further, he submitted, since the assessee is engaged in

the manufacture and processing of goods, which is wholly dependent

on the use of know-how, patents, copyrights, trade-marks, licences

etc. of the two entities, the conditions of section 92A(2) are also

satisfied. Therefore, the aforesaid two entities have to be considered as AEs.

submitted, since the roles and responsibilities under both the

agreements with Dominos Pizza and Dunkin Donuts are similar, the

rate of franchise fee/royalty should also be similar. Therefore, since

the assessee had paid franchise fee/royalty @ 3% to Dominos Pizza,

the same rate should also be applied to the transactions with Dunkin

Donuts.

relied upon and perused materials on record. At the outset, we deem

9 ITA No. 7937/Del/2018

it appropriate to address the issue on merits. Thereafter, if deemed

necessary, we will touch upon the issue relating to existence or

otherwise of AE relationship between the assessee on the one side

and Dominos Pizza and Dunkin Donuts on the other.

discussed the facts in detail in the earlier part of the order. However,

to reiterate briefly, the assessee has entered into two franchise

agreements with Dominos Pizza and Dunkin Donuts for using brand

names, trademarks etc. For availing such rights, the assessee pays

franchise fee/royalty @ 3% of net sales to Dominos Pizza and 3.5%

of net sales to Dunkin Donuts. Though, the Assessing Officer

determined the ALP of franchise fee/royalty paid to both the entities

at 1.5%, however, learned DRP reversed the decision of the TPO and

determined the ALP of franchise fee/royalty at 3% of net sales in

respect of both Dominos Pizza and Dunkin Donuts. Meaning thereby,

the dispute with regard to ALP of franchise fee/royalty payment to

Dominos Pizza stands resolved. Whereas, the issue survives in

respect of franchise fee/royalty paid to Dunkin Donuts, as in place of

3.5% of net sales paid by the assessee, learned DRP has reduced it

10 ITA No. 7937/Del/2018

to 3% of net sales. The reason ascribed by learned DRP while doing

so is, since the agreements with Dominos Pizza and Dunkin Donuts

are similar and the transactions are of similar nature, there should be

parity in payment of franchise fee/royalty as well.

has stated that the determination of arm’s length price (ALP) of

franchise fee/royalty at 1.5% is by applying CUP method, however,

such claim remains unsubstantiated, as no details or basis for arriving

at such a CUP has been provided by the TPO. Identical is also the

case with learned DRP determining the ALP of franchise fee/royalty

at 3%. Neither of the departmental authorities has provided any basis

how they have arrived at the CUP of 1.5% or 3% respectively. On the

contrary, on a perusal of the TP study report of the assessee, it is

very much clear that the assessee has undertaken an analysis under

CUP method and brought valid comparables including a comparable

dealing in donuts, paying royalty at 4% of net sales. Both the TPO

and learned DRP have determined the ALP of franchise fee/royalty

paid to Dunkin Donuts on a purely adhoc basis without bringing on

record any comparability analysis under CUP. Merely because the

11 ITA No. 7937/Del/2018

assessee has paid franchise fee/royalty at 3% to Dominos Pizza,

cannot be the singular reason to determine ALP of franchise

fee/royalty paid to Dunkin Donuts, as there are various factors, which

differentiate the rate of franchise fee/royalty between Dominos Pizza

and Dunkin Donuts - one of the crucial factors being while Dominos

Pizza entered into agreement in 2009, the agreement with Dunkin

Donuts was entered in 2011. Thus, by the time, the agreement with

Dunkin Donuts was entered, Dominos Pizza had already established

itself as a brand name in India. It is further relevant to observe, in

assessee’s own case in assessment years 2012-13 and 2013-14, the

franchise fee/royalty paid at identical rates have been accepted by

the first appellate authority. Learned Sr. Counsel appearing for the

assessee has made a statement at Bar that the orders passed by the

first appellate authority have attained finality, as the Revenue has not

preferred any further appeals.

available on record, we are of the considered opinion that the

assessee has clearly established the arm’s length nature of franchise

fee/royalty paid to Dunkin Donuts at 3.5% of the net sales under CUP

12 ITA No. 7937/Del/2018

method. Whereas, there is absolutely no basis provided either by

TPO or learned DRP while reducing the rate of franchise fee/royalty

to 1.5% and 3% respectively. In view of the aforesaid, we direct the

Assessing Officer to delete the addition of Rs.26,15,651/-.

the issue whether Dominos Pizza and Dunkin Donuts have AE

relationship with the assessee, as in the present appeal it will be a

purely academic exercise. However, the issue is kept open. This

ground is partly allowed.

of Employee Stock Option Plan (ESOP) expenses amounting to

Rs.16,36,94,868/-.

Schemes during the year under consideration. In the return of income

filed for the assessment year under dispute, though, the assessee did

not claim any deduction on account of ESOP expenditure, however,

in course of assessment proceedings, the assessee claimed the

deduction on account of ESOP expenditure, since the employees

13 ITA No. 7937/Del/2018

exercised their option. The Assessing Officer disallowed assessee’s

claim of deduction firstly, on the ground that it is not an admissible

expenditure and secondly, the assessee had not claimed it in the

return of income. In this context, the Assessing Officer relied upon the

decision of Hon’ble Supreme Court in the case of Goetz India Ltd. vs.

CIT (2006) 284 ITR 323 (SC). Against the aforesaid decision of the

Assessing Officer, the assessee raised objections before learned

DRP. However, learned DRP upheld the decision of the Assessing

Officer.

submitted that though in the return of income the assessee had not

claimed the deduction on account of ESOP expenditure, however, in

course of assessment proceedings, the assessee did make the claim

of deduction and furnished all requisite details relating to ESOP

expenses. He submitted, without examining the issue on merits,

assessee’s claim has been rejected merely because it was not made

in the return of income. He submitted, the issue is no more res

integra, as the admissibility of the expenditure has been decided in

favour of the assessee by the decision of the ITAT Special Bench, in

14 ITA No. 7937/Del/2018

case of Biocon Ltd. vs. DCIT (LTU) 35 taxmann.com 335(SB). He

submitted, following the aforesaid decision of the Special Bench, in

assessee’s own case in assessment years 2012-13 and 2013-14, the

Tribunal has held that the deduction claimed on account of ESOP

expenditure is admissible. However, since the issue was raised for

the first time before the Tribunal, it was restored back to the

Assessing Officer for factual verification. He submitted, since in the

impugned assessment year, the assessee had made the claim before

the departmental authorities and furnished all relevant details, the deduction claimed has to be allowed.

observations of the Assessing Officer and learned DRP.

relied upon and perused materials on record. Undisputedly, in the

return of income filed for the impugned assessment year, the

assessee did not claim deduction on account of ESOP expenses.

However, in course of assessment proceedings, the assessee

claimed the deduction. The Assessing Officer has disallowed the

deduction on two grounds, firstly, it is inadmissible expenditure and

15 ITA No. 7937/Del/2018

secondly, it was not claimed in the return of income. In our view,

neither of the reasonings of the Assessing Officer are acceptable.

Though ESOP expenses were used to be treated as capital

expenditure earlier, however, in case of Biocon Ltd. (supra), Special

Bench of the Tribunal has held that it is an admissible expenditure.

Following the aforesaid decision of learned Special Bench, the

coordinate Bench in assessee’s own case for the assessment year

2012-13 and 2013-14 has accepted assessee’s claim that ESOP

expenses are allowable. However, since the issue was raised for the

first time before the Tribunal, the claim of the assessee was restored

back to the Assessing Officer for factual verification. In the facts of

the present appeal also, though learned Sr. Counsel appearing for

the assessee has submitted before us that all relevant and necessary

details relating to ESOP expenses have already been furnished

before the Assessing Officer and learned DRP, therefore, assessee’s

claim can be allowed at this stage, however, we find that neither the

Assessing Officer nor learned DRP have examined assessee’s claim

factually with reference to the documentary evidences brought on

record by the assessee, as, they have simply rejected assessee’s

16 ITA No. 7937/Del/2018

claim primarily on the ground that the claim was not made in the

return of income.

claim deduction of ESOP expenses under section 37(1) of the Act,

however, assessee’s claim has to be factually verified not only with

reference to the ratio laid down in the decision rendered by Special

Bench of Tribunal in the case of Biocon Ltd. (supra), but various other

details such as date of vesting of stock, exercise of option by the

concerned employees etc., which are crucial factors to determine the

issue. Accordingly, we direct the Assessing Officer to allow

assessee’s claim of deduction, subject to factual verification. This

ground is allowed.

lease hold improvement expenditure of Rs.50,09,22,082/-.

impugned assessment year, the assessee had claimed deduction of

Rs.58,93,20,096/- on account of lease hold improvement

expenditure. In course of assessment proceedings, the Assessing

17 ITA No. 7937/Del/2018

Officer called upon the assessee to justify the claim. In response, the

assessee furnished a detailed reply supporting its claim. After

examining the submissions of the assessee and the details furnished,

the Assessing Officer was of the view that entire expenditure claimed

by the assessee is of capital nature, hence, cannot be allowed as

deduction. While disallowing the claim of the assessee, he allowed

depreciation @ 15%. In other words, he allowed deduction for an

amount of Rs.8,93,98,014/- and disallowed balance amount of

Rs.50,09,22,082/-. The assessee contested the aforesaid

disallowance before learned DRP. After examining the issue in the

context of facts and materials on record, learned DRP held that out of

total expenditure of Rs.58,93,20,096/- claimed in the return of

income, Rs.31,57,81,593/- are to be treated as Revenue expenditure

and the balance amount may be treated as capital expenditure and

depreciation to be allowed thereon. However, while framing the final

assessment order, the Assessing Officer without implementing the

direction of learned DRP, again disallowed the amount of

Rs.50,09,22,082/- as was done in the draft assessment order.

18 ITA No. 7937/Del/2018

issue is squarely covered by the decision of the Tribunal in

assessee’s own case in assessment year 2012-13 and 2013-14.

observations of learned DRP.

on record. At the outset, we must observe, though out of the total

expenditure claimed of Rs.58,93,20,096/-, the Assessing Officer had

disallowed an amount of Rs.50,09,22,082/-, however, while disposing

of the objections of the assessee, learned DRP has granted

substantial relief by allowing deduction of Rs.31,57,81,593/- as

revenue expenditure. Though, in the final assessment order, the

Assessing Officer had failed to implement the directions of learned

DRP by reducing the disallowance, however, subsequently, the

Assessing Officer has passed rectification order implementing the

directions of learned DRP. Thus, the disallowance stands reduced to

Rs.27,35,38,503/-, on which depreciation has been allowed.

19 ITA No. 7937/Del/2018

with the expenditure claimed by the assessee. As discussed earlier in

the order, the assessee is engaged in the business of manufacturing

and sale of Pizza, Donuts and other food items from its retail outlets

across the country. To run its business operations smoothly, the

assessee takes rental spaces on operating lease in various cities.

After taking on lease such rented spaces, the assessee has to

provide specific ambience and outlook as per guidelines and

yardstick fixed by the franchise and as regulated under the franchise

agreement. Therefore, the assessee has to incur these expenses in

relation to the retail outlets-whether existing or newly operated. Out of

the total expenses incurred during the year amounting to

Rs.80,57,47,488/-, the assessee itself has capitalized an amount of

Rs.21,64,27,392/- and the balance amount of Rs.58,93,20,096/- was

claimed as revenue expenditure. Though, the Assessing Officer has

disallowed the entire amount, however, learned DRP has granted

partial relief by reducing the disallowance to Rs.27,35,38,503/-. The

expenses considered to be capital in nature by learned DRP are

expenses on civil work, wood work, aluminium work, false ceiling

20 ITA No. 7937/Del/2018

work, mild steel work, electrical work, sanitary fixtures, CI soil, waste

water and vent pipes and fittings, external sewage etc. On detailed

analysis of nature of expenditure, it is observed that these expenses

are not of enduring nature so as to treat them as capital expenditure.

The civil work are such as thick plaster on walls, cement concrete

flooring providing vitrified ceramic tiles on walls, tiles on floors,

polishing etc. Wood work includes door frames, lamination work,

fixing ply etc. Aluminium work includes fixing aluminium sections,

aluminium door shutters, aluminium door frame, fixing of toughened

glass door shutter etc. False ceiling work includes application of POP,

gypsum board false ceiling etc. Thus, on overall consideration of facts

and materials available on record, it is evident that these expenses

cannot be termed as capital expenditure, as they do not give any

enduring benefit to the assessee. In fact, identical nature of

expenditure incurred by the assessee towards lease hold

improvement have been allowed by learned first appellate authority in

assessment year 2012-13 and 2013-14 and the decision of learned

first appellate authority has been confirmed by the coordinate Bench

while deciding Revenue’s appeals in ITA No. 6558/Del/2018 and

21 ITA No. 7937/Del/2018

612/Del/2019 in order dated 08.12.2021. Due to parity of facts

between the assessment years 2012-13 and 2013-14 and the

impugned assessment year, we are inclined to allow assessee’s

claim of deduction in its entirety. Therefore, we direct the Assessing

Officer to delete the disallowance sustained by learned DRP. This

ground is allowed.

being a general ground, are dismissed.

Order pronounced in the open court on 06/10/2023.

Sd/- Sd/- (M. BALAGANESH) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT

Dated: 06.10.2023 *aks/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT Assistant Registrar ITAT New Delhi