2016 (6) TMI 685 - AT - Income Tax

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 revenue expenditure in nature. - Decided in favour of assessee. Disallowance of market development expenses - revenue v/s capital - depreciation claim - Held that - For the purposes of determining whether the expenditure incurred on services is capital expenditure or revenue one needs to look at the nature of services received by the assessee and not the other terms and conditions attached therein. Further looking to the tenure of the contract, right of termination with the parties and 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 AR submitted that copies of the Assessment orders passed u/s 143(3) of the Act where no such disallowance have been made. These facts are not controverted by revenue. Though the provisions of res judicata does not apply to income tax proceedings, however, rule of consistency provides that unless there is change in facts and circumstances of the case there has to be consistency in approach of the revenue as well as assessee. Hon ble Supreme Court in case of Excel Industries Vs. CIT 2013 (10) TMI 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 considering them as intangible asset is directed to be withdrawn.- Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance of ?68,17,444/- made by AO out of franchisee expenses.
2. Confirmation of disallowance of market development expenses of ?1,85,53,715/- as capital expenditure and allowing depreciation @25%.

Issue 1: Deletion of Disallowance of ?68,17,444/- Made by AO Out of Franchisee Expenses

The revenue appealed against the deletion of disallowance of ?68,17,444/- made by the Assessing Officer (AO) on account of total franchise fee expenditure of ?90,89,925/-. The CIT(A) had deleted this disallowance based on the order of ITAT in the assessee's own case for AY 2007-08, where it was held that franchise expenses are revenue in nature. The Tribunal noted that both parties agreed that the issue was covered by the previous decision, which detailed that expenses such as sales promotion, entertainment, gifts to customers, and others were revenue in nature. The Tribunal found no merit in the revenue's appeal as no contrary decision or change in facts was presented. Thus, the Tribunal confirmed the CIT(A)'s finding that franchise fees debited under "Market Development Expenses" amounting to ?90,89,925/- is a revenue expenditure. Consequently, the revenue's appeal on this ground was dismissed.

Issue 2: Confirmation of Disallowance of Market Development Expenses of ?1,85,53,715/- as Capital Expenditure and Allowing Depreciation @25%

The assessee appealed against the confirmation of disallowance of market development expenses of ?1,85,53,715/- as capital expenditure, on which depreciation @25% was allowed. The assessee argued that these expenses, paid to CRM International USA and Cyber Strategies Ltd. UK, were for normal marketing services and were not of enduring nature. The assessee contended that similar expenses were allowed in previous years and relied on several judicial precedents to support its claim that such expenses are revenue in nature.

The revenue argued that the exclusive arrangement with CRM International created an advantage of enduring nature, making it an intangible asset. The Tribunal examined the agreement and noted that the services provided were routine marketing and customer support services, which did not create any enduring benefit or intangible asset. The Tribunal referred to the Supreme Court's decision in Empire Jute Co Ltd. v. CIT, which held that if the advantage facilitates trading operations without touching the fixed capital, the expenditure is revenue in nature. The Tribunal also considered the rule of consistency, noting that similar expenses were allowed in previous years without disallowance.

The Tribunal concluded that the market development expenses were revenue in nature and reversed the CIT(A)'s finding. Consequently, the depreciation allowance granted by the lower authorities on franchise fees and market development expenditure, considering them as intangible assets, was directed to be withdrawn. Thus, the assessee's appeal was allowed, and the revenue's appeal was dismissed.

Conclusion:

The Tribunal dismissed the revenue's appeal regarding the deletion of disallowance of franchisee expenses and allowed the assessee's appeal regarding the disallowance of market development expenses, directing the withdrawal of depreciation allowance on these expenses. The judgment emphasized the nature of the expenses and the rule of consistency in tax assessments.