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Deputy Commissioner of Income Tax Versus M/s Deccan Chargers Sporting Ventures Ltd. (Amalgamated With Deccan Chronicle Holdings Ltd)

Nature of payments made by assessee franchise to BCCI towards right to operate IPL franchises of 'Deccan Chargers' (DC) for a period of ten years - Held 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 .....

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revenue - ITA No. 1043/Hyd/2013 - Dated:- 28-10-2015 - P. Madhavi Devi, JM And B. Ramakotaiah, AM For the Appellant : Smt K Mythili Rani, CIT-DR For the Respondent : Shri S Rama Rao, AR ORDER Per B Ramakotaiah, AM This is Revenue's appeal against the order of the Commissioner of Income Tax (Appeals)-V, Hyderabad dated 12-03-2013. 2. We have heard Ld. DR and Ld. Counsel and perused the Paper Book placed on record. 3. The issue in this appeal is with reference to payments made by assessee fra .....

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iod of ten years for which it was required to pay ₹ 42.08 Crores every year, starting from 2008 to 2017. After this bid was won by DCHL, a 100% wholly owned subsidiary company M/s. Deccan Chargers Sporting Ventures Limited (DCSVL) was incorporated on 10-04-2008 for carrying the business of sport and M/s. DCHL vide assignment agreement dt. 29-08-2008 assigned all its rights, title and interest in the franchisee agreement to assessee i.e., M/s. DCSVL. Consequent to this assignment agreement, .....

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d franchise of the Indian Premier League (IPL) "Deccan Chargers" right and the company can operate the franchise as along as the IPL tournament is conducted. The consideration for acquiring the franchise right of ₹ 428.04 Crores is payable to BCCI over a period of 10 years in equal installments commencing from the year 2008. The company capitalized the franchise rights as intangible asset and recognized as equal amount as liability payable to BCCI. The economic useful life of the .....

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ng right over the franchisee assessee acquired, the AO proposed to treat the franchisee fee as capital and required assessee to furnish its objections. After going through the detailed reply of assessee, which substantiated its claim of revenue expenditure as claimed in the revised return, the AO relying on a plethora of judicial decisions held that : i. What was set up by the franchisee was a new business and the payments for setting up of the business represent capital expenditure; ii. Merely .....

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ong with the above amount of ₹ 42.80 Crores treated as 'Capital Expenditure', AO also disallowed the corresponding service charges paid of ₹ 5,29,05,744/- after capitalizing the same along with the franchise fee paid of ₹ 42.80 Crores. AO however, allowed depreciation on the above two amounts. 4. Assessee was aggrieved and carried the matter to CIT(A) and made detailed submissions. After considering the submissions, Ld. CIT(A) allowed assessee's contentions in his d .....

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ed on record, we are in agreement with the order of Ld. CIT(A). As rightly pointed by the Ld. CIT(A), assessee in the original return has shown the total franchise fee at ₹ 428.40 Crores as 'capital' and claimed depreciation of ₹ 107.01 Crores at 25%. Later on, assessee realized that the amount paid on yearly basis is revenue expenditure and there is no need to capitalize the future payments also. Consequently, the return filed originally at ₹ 87,08,88,716/- was modifie .....

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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 woul .....

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nt 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 rev .....

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ights. 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 conclusion that the right acquired by assessee is not a perpetual right and the expenditure paid on yearly basis is revenue expenditure. 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 con .....

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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 ce .....

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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 .....

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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 .....

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