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TMI Blog2024 (5) TMI 1513X X X X Extracts X X X X X X X X Extracts X X X X ..... p inn, Cambria suits." It is a fact that payment of royalty to Choice B.V. was for the use of brand name or trademark. The Assessee accepted non-exclusive right and obligation to operate the franchise and to maintain the franchised hotel in the territory, subject to the terms & conditions mentioned in the agreement. The royalty paid was meant for the standardization of operations and utilization of brand name. The assessee is precluded from using the brand unless the royalty is paid. Simply by the virtue of provisions of some manuals and SOPs, the amount paid cannot be treated as capital expenditure in nature unless it results in acquiring of a capital receipt. CIT (A) though tried to be logical, erred in treating the SOPs provided as capital in nature and allowing depreciation when the SOPs themselves do not constitute or given rise any capital asset. Hence, the royalty payment made by the assessee which is recurring in nature is hereby directed to be treated as revenue expenditure. The appeal of the assessee on this ground is allowed. Disallowance of entertainment expenses - AO observed that payments were made to individuals and through credit cards - Exact nature of expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Choice B.V. and the Assessee entered into an agreement to franchise and to establish and operate hotels. Royalty Expenses - Rs. 13,43,087/-: 4. Out of the above expenditure of Rs. 26,86,175/- royalty was payable as per the following: • Fixed royalty of Rs. 3,46,294/- @ US $ 500 per quarter for each franchised hotel that enters the system on or before April 1, 2015. • Variable royalty of Rs. 23,39,880/- for each franchised hotel that entered the system after April 1, 2015. 5. Before the AO, it was claimed that the royalty expense did not provide any enduring benefit to the Assessee. It was submitted that the fixed / variable royalty paid was for separate hotels. It was not a case where fixed lump sum royalty is paid once and, thereafter, regular royalty payments are made. 6. The Assessing Officer held that royalty has been paid by the Assessee basically for the use of the brand name. The Assessing Officer referred to decisions of the Hon'ble Supreme Court in the cases of Southern Switch Gear Ltd. vs. CIT, 232 ITR 359 and Janas Woodhead & Sons (India) Ltd. vs. CIT, 224 ITR 342. The Assessing Officer has quoted the relevant part of the above decisions in the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, merchandising, advertising, research data and advice as may from time to time be developed by Choice and is considered by Choice to be helpful or necessary to the operation of the Business or as requested by the Master Franchisee. 5.5 Choice shall list the Franchised Hotels in such relevant directories of Choice hotels as it may publish from time to time, subject, however, to payment of a fee for each hotel so listed as the parties may agree from time to time. 5.6 Choice shall provide, to the extent and in such locations as Choice may determine to be reasonable and appropriate, international marketing and advertising of the Franchised Hotels located in the Territory and to spend for such purposes within or outside of the Territory, as Choice may determine in its sole discretion, the International Marketing Fee. 5.7 Choice shall include in the Reservation System each Franchised Hotel that is in good standing, such that the Franchised Hotels can be booked world-wide through the Reservation System (including CDS that are connected to the Reservation System). 5.8 Choice shall inspect each Franchised Hotel approximately once each year, and provide initial training and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the Assessee is running the hotel. Hence, the technical know-how, project planning etc. are related to the knowhow of the running the hotel business and building it. The ld. CIT (A) held that the technical know-how acquired by the Assessee cannot be limited to its use for one financial year only. The ld. CIT (A) held that the assessee has got enduring benefit to the recipient of the technical know-how. 12. The ld. CIT (A) held that where the transfer of technical know-how etc. is mixed with the brand name to be used by the franchisee, entire expenditure cannot be claimed either as a revenue expenditure or capital expenditure. 13. To conclude, the ld. CIT (A) held that "a fair proportion is to be assessed having regard to the facts of the case. Though there is no definite criterion available in the agreement to decide the nature of benefits, I assess that 50% of royalty expenses were towards enduring benefits and remaining 50% towards the running of the business during the year under consideration. In this way, I hold that expenses to the extent of Rs. 13,43,087/- were in the nature of capital expenditure and remaining 50% towards revenue expenses. The Assessee is entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the entire technical fees cannot be allowed as revenue expenditure. 16. The Hon'ble Delhi High Court in the case of CIT vs. Hero Honda Motors Ltd. (2015), 55 taxmann.com 230 wherein it was held that the payment of royalty for right to use or access to technical know-how and information is revenue expenditure. 17. The ld. CIT (A) has valiantly tried to bifurcate the annual royalty paid into "onetime benefit" as one part and "recurring benefit" on the other part as some manuals and SOPs are provided. The royalty paid was meant for the standardization of operations and utilization of brand name. The assessee is precluded from using the brand unless the royalty is paid. Simply by the virtue of provisions of some manuals and SOPs, the amount paid cannot be treated as capital expenditure in nature unless it results in acquiring of a capital receipt. The ld. CIT (A) though tried to be logical, erred in treating the SOPs provided as capital in nature and allowing depreciation when the SOPs themselves do not constitute or given rise any capital asset. Hence, the royalty payment made by the assessee which is recurring in nature is hereby directed to be treated as revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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