Simurg Appliances Pvt.Ltd.,, ... vs Department Of Income Tax

ी एन0एस0 सैनी, लेखा सद य एवं ी कुल भारत, या%यक सद य के सम& BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER आयकर अपील सं./ ITA No. 1881/Ahd/2011 %नधा)रण वष)/Assessment Year: 2008-09

ITO, Ward-8(2) Simurg Appliances P. Ltd. Ahmedabad. Vs B/6, Shree Krishana Centre Navrangpura, Ahmedabad.

PAN : AACCS 7857 A

अपीलाथ,/ (Appellant) -.यथ,/ (Respondent)

Revenue by : Shri M.K. Singh, Sr. DR. Assessee(s) by : Shri Kalpen Shah

सन ु वाई क तार ख/ Dateof Hearing : 12/02/2015 घोषणा क तार ख / Date of Pronouncement: 13/02/2015

आदे श/O R D E R

PER N.S. SAINI, ACCOUNTANT MEMBER: This is an appeal filed by

the Revenue against the order of the Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad dated 27.5.2011.

2. The sole ground raised by the Revenue in this appeal reads as under:

"1. The Ld. CIT(A) has erred in law and on the facts in deleting the disallowance of Rs.49,64,673/- made by the AO on account of recurring royalty/fee."

3. Brief facts of the case are that the AO on perusal of the profit & loss account noticed that the assessee has debited Rs.66,19,564/- under the head "Recurring Royalty/Fee". The AO observed that identical issue had come up during the course of assessment ITA No.1881/Ahd/2011 2

proceedings in Asstt.Year 2006-07 and 2007-08, and for the reasons elaborately discussed therein, the contention of the assessee that the expenditure debited in the profit & loss account was revenue in nature, was rejected, and the assessee's claim for revenue expenditure was disallowed. He observed that on perusal of the submission made by the assessee in the year under appeal shows that the assessee has made very same submissions, which were made during the course of assessment proceedings for the Asstt.Year 2006-07 and 2007-08, and as there is no change in the set of facts in the assessment year involved i.e. Asstt.Year 2008-09, the claim of the assessee for revenue expenditure at Rs.66,19,564/- debited in the profit & loss account under the head "Recurring Royalty/Fee" (franchisee fee) is rejected for the reasons that such expenditure is capital in nature, like patent, copyright, trademark etc. He observed that the assessee was eligible for depreciation at 25% on Rs.66,19,564/- which works out to Rs.16,54,891/-. He, therefore, disallowed the balance amount of Rs.49,64,673/-.

4. On appeal, the CIT(A) allowed the appeal of the assessee by following consolidated order of this Bench of the Tribunal in the case of the assessee itself in ITA No.998/Ahd/2010, 2056/Ahd/2009 and 2782/Ahd/2010 for A.Y.2005-06 to 2007-08 order dated 21.4.2011, wherein it was held as under:

6. Heard both the sides. Case records perused. Certain undisputed facts are that the assessee is carrying on the business under the brand-name "Crossword" at the designated place for resale of books, music-CD, stationery, toys & gifts, magazines, etc. under the said brand-name. The retail of all these goods were undisputedly under the emblem of "Crossword". As far as the impugned disallowance of "Franchise Fees" was concerned, facts of the case have revealed that the assessee is required to calculate the said fees at the rate of 2% on the net sales. Terms of the agreement have specifically revealed that on the expiry of every month, the "Franchisee" i.e. assessee shall compute the gross turnover for the said month and after reducing the sales ITA No.1881/Ahd/2011 3

returns, if any, compute the net sales for the calculation of the said fees. The sales were also to be accounted for on accrual basis. Once it was an accepted factual position that the payment of impugned fees was not a one-time payment, but it was a recurring payment depending upon the daily sales of the assessee, therefore, its nature cannot be termed as a one time expenditure of capital in nature. As per the terms of the Memorandum, which were duly placed before the authorities below, it was evident that the assessee has not acquired any patent right to be used on any of the assessee's product. On the other hand, facts of the case have revealed that the assessee was simply re-selling the product under the said brand name on retail basis. It has also been vehemently argued that the said trade-

name "Crossword" has not at all been acquired by the assessee on making the impugned payment. The monthly payment could not be said to be the cost for obtaining a "Franchise" to be used as an emblem "Crossword" either for sale or to distribute the product manufactured by the assessee. Therefore, facts of the case have thus established that though the term "Franchise" might have been used in the agreement but it was a misnomer, particularly in the context of the provisions of the section 32 of the Act are concerned.

7. The decision of Hon'ble High Court of Madras in the case of India Manufacturers (P) Ltd. vs. CIT(supra) as cited by the ld.DR is in the context of "Franchise" which was obtained to sell the product of the company. Facts of that case have revealed that the consideration was paid for acquiring the distribution rights by the assessee. The assessee has not only obtained the distributorship right in respect of the articles manufactured but acquired the Franchise of the product. On those facts, the Hon'ble Madras High Court has held that the acquisition of right was enduring in nature hence capital in nature. Facts of that case being not identical with the case in hand, therefore, wrongly cited. Likewise, the decision of Hon'ble Bombay High Court in the case of CIT vs. Techno Shares & Stocks Ltd. & Ors. (supra) was in respect of license granted to obtain Stock Exchange membership card. While dealing with the said issue Hon'ble Bombay High Court has clarified that the expression "Licenses" has to be construed restrictively only to apply in relation to acquisition of intellectual rights and section 32 restricts the categories of intangible assets as specifically enumerated therein and not to be applied to all intangible assets. The case laws cited by the ld.DR, thus, do not apply in the present context. 8. As held in the case of Ram Bahadur Thakur Ltd. vs. CIT reported at (2003) 261 ITR 390 (Ker.)[FB] an expenditure is allowable if it is incurred during the accounting period and it is in respect of business carried on by the ITA No.1881/Ahd/2011 4

assessee. It should not be a personal expenditure and it should be laid out wholly and exclusively for the purpose of business. The expenditure must not be incurred to acquire any capital asset. In the present case, the assessee has not acquired the "Franchise" of the trade-mark "Cross word" to be used as a hallmark for its own products. But the assessee is selling the designated products of the said owner of the hallmark and using that very trade name and giving commission on fixed percentage on monthly sale basis. In the case of Empire Jute Co. vs. CIT reported at (1980) 124 ITR 01(SC), the Hon'ble Supreme Court has opined that what is material to consider is the nature of the advantage in a commercial sense. If the advantage is in the capital field, then such an expenditure would be disallowable. If the advantage consists merely in facilitating the assessee's trading operations, then the expenditure is on Revenue account. Even if it results into more profitability but leaving the fixed capital untouched, then though the advantage may be for an indefinite future the same is on Revenue account. An interesting fact has also been brought on record that under the Maharashtra State law the said "Franchise Fees" is treated as payment towards lease and a lease-tax at the rate of 4% is levied by the State Government. In the said context, it was mentioned that though the lease is paid in perpetuity but it was Revenue payment as held in the case of Singareni Collieries Co.Ltd. vs. CIT reported at (1967) 66 ITR 553 (A.P.). Two decisions of Hon'ble Gujarat High Court; namely CIT vs. Ashoka Mills Ltd. (218 ITR 526) and of CIT vs. Gujarat Carbon Ltd. (254 ITR 294) has also been cited for the proposition that the payment of royalty to the collaborators being based upon the amount of sales, therefore, it was a recurring expenditure and the agreement merely unable the assessee to market the product and not acquisition of any right of permanent character. Under the totality of the discussion made hereinabove as also respectfully following the decisions cited above, we are of the view that the expenditure in question was Revenue in nature, hence, rightly allowed by the ld.CIT(A). Grounds raised by the Revenue have no force, hence dismissed.

5. DR relied on the order of the AO.

6. We find that the CIT(A) has allowed the deduction for expenditure incurred on account of Recurring Royalty/Fee (Franchisee) by following the order of the Tribunal in the case of the assessee in the Asstt.Year 2005-06 to 2007-08. DR could not point out any distinguishing features in the order under appeal. He also could not bring any material on ITA No.1881/Ahd/2011 5

record to show that the order of the Tribunal in the case of the assessee passed in Asstt.Year 2005-06 to 2007-08 was varied in appeal by any higher authority. Hence, facts being identical, we find no good reason to interfere with the order of the CIT(A), which is confirmed and the ground of the appeal of the Revenue is dismissed.

7. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Court on Friday the 13th February, 2015 at Ahmedabad.

Sd/- Sd/- (KUL BHARAT) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 13/02/2015