Whether franchise fee remitted to non-resident for simply using trademark 'Dominos' is required to be partly treated as capital expenditure - NO: HC

THE issue before the Bench is - Whether franchise fee remitted to non-resident for using trademark 'Dominos' is required to be partly treated as capital expenditure. And the HC says NO.

Facts of the case

The assessee is carrying on business of manufacturing and sale of pizza from its retail outlet. The

assessee had entered into an agreement with M/s Dominos Pizza International, Inc. USA which was paid a lumpsum consideration of 0000, which was capitalised and was not treated as revenue expenditure. The AO treated 25% of the franchise fee as capital expenditure. On apperal, the Tribunal held that 25% of the payment made was capital in nature, while balance 75% was revenue expenditure in the hands of the Indian assessee.

On appeal before the HC, the Revenue contented that it was only concerned with the franchise fee fixed @ 3% of the entire sale, i.e., the turnover of the assessee in India. The said fee was payable in terms of franchise agreement as long as the assessee continued to utilise and use the trademark "Dominos". It was payable annually and was not a lumpsum payment, though the last factor alone may not be determinative whether the payment was revenue or capital in nature.

Held that,

++ the Assessing Officer had relied upon decision of the Madras High Court in Commissioner of Income Tax, Tamil Nadu-II versus Southern Switchgear Limited, which we feel is clearly distinguishable. In the said case, the assessee had entered into a collaboration agreement with a foreign company under which later had provided technical aid and information for manufacture of low tension and high tension switchgear etc. and the right to sell the said products. The foreign company had also agreed to post the Indian assessee with latest and modern developments in the said fields, including transformers. As per the agreement, the Indian assessee had agreed to pay lumpsum amount of 20000 Sterling in five equal instalments of 4000 Sterling each. In these circumstances, it was held that 25% of the payment made was capital in nature, while balance 75% was revenue expenditure in the hands of the Indian assessee. Aforesaid decision of the Madras High Court was affirmed by the Supreme Court in Southern Switchgear Limited versus Commissioner of Income Tax and Another;

++ the CIT(A) and the Tribunal have rightly come to the conclusion that; (i) no new asset came into existence on account of payment of franchise fee and (ii) the rights under the agreement were only for the tenure of the agreement and no enduring benefit was derived by the assessee. Further, it was not an expenditure incurred for acquisition of source of profit, but enabled the assessee to run the business profitably. The fixed assets of the assessee remained untouched and no enduring asset came into existence; Other than relying upon the decision of the Madras High Court in the case of Southern Switchgear Limited, there is no discussion relating to the factual matrix to justify his conclusion that 25% of the franchise fee should be treated as capital expenditure. No facts were highlighted and stated to justify the conclusion. In view of the aforesaid reasoning, we are not inclined to issue notice on the first question/issue raised by the Revenue;

++ the second issue is also covered against the appellant-Revenue by decision of the Delhi High Court in Commissioner of Income Tax Vs Salora International Limited, in which it was held that the expenditure on advertising was of revenue nature.