Feedback   New User   Login      
Tax Management India. Com TMI - Tax Management India. Com
Acts / Rules Notifications Circulars Tariff/ ITC HSN Forms Case Laws Manuals Short Notes Articles SMS News Highlights
        Home        
Extracts
Home List
← Previous Next →

ACIT, Circle-12 (1) , New Delhi Versus M/s. Hero Corporate Services Ltd. And M/s. Hero Corporate Services Ltd. Versus DCIT, Circle-12 (1) , New Delhi

2016 (6) TMI 685 - ITAT DELHI

Allowability of franchise expenses - Held that:- As 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” is a r .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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.

We do not find any support on reading of that definition that market support services and customer support services creates any right in favour of the assessee. Further, in assessee’s own case for AY 2003-04 as well as in AY 2005-06 and AY 2006-07 the similar expenditure are allowed as deduction. To prove this ld .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

I 324 - SUPREME COURT] has once again reiterated the above principles, therefore even on that principal the disallowance of market development expenditure of customer relation management services cannot survive. In view of above we reverse the finding of the ld CIT(A) confirming disallowance holding that payment made for services rendered by CRMI are capital expenditure.However, the depreciation allowance granted by the lower authorities on franchise fees and market development expenditure consi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or 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 ₹ 68,17,444/-, made by AO out of expenditure of ₹ 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 exclu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the case, the net disallowance of ₹ 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 ₹ 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 ₹ 18553715/- .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

erritory 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 ₹ 18553715/- and making net disallowance of ₹ 139615286/-. Further, on franchise expenses ld. Assessing Officer disallowed ₹ 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% de .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e claim of the assessee based on the decision of ITAT in appellant s own case for AY 2007-08 in ITA No. 5179 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 ₹ 6817444/- made by ld Assessing Officer on account of total franchise fee expenditure of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ts 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 Ne .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

re of Rs. 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 Rs. 2,69,24,903/-. There against, the assessee company had shown receipts from franchisee centres in Schedule 9 to the Accounts, under the sub-head, Education and Trading Receipt , under the head Revenue , forming part of Rs. 13,96,76,553/-. It had been explained by virtue of a Note on th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

any 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 Rs. 3,35,16,410/- represented service charges of NSure Plus. This re .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

,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 dec .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

re. 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. 8. In the result ITA No.2050/Del/2013 filed by revenue is dismissed. 9. Now we come to the appeal of the assessee in ITA No.1472/Del/2013. 10. The Ground No. 1 to 5 of the appeal are against confirmation of disallowance of market development expenses of ₹ 18553715/- as capital expenditure and allowing depreciation thereon @25%. 1 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

arty 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 wron .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n 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. 13. 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 d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, 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 terminate .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 ser .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

HERO in the territory. 4. 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. 5. 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ment 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 bene .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nation 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 in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assess .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 par .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 damag .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

Discussion Forum
what is new what is new
 


Share:            

|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version