Income Tax Appellate Tribunal - Delhi
Devyani International (P) Ltd, New ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'B' : NEW DELHI
BEFORE SHRI RAJPAL YADAV, JM AND SHRI R.C.SHARMA, AM
ITA No.4610/Del/2009
Assessment Year : 2005-06
Asstt.Commissioner of Vs. M/s Devyani International (P) Ltd.,
Income Tax, F-2/7, Okhla Industrial Area,
Circle-10(1), Phase-I,
New Delhi. New Delhi.
PAN No.AABCD5534A.
(Appellant) (Respondent)
Appellant by : Shri Stephen George, CIT-DR.
Respondent by : Shri Hari Mitter, FCA.
ORDER
PER R.C.SHARMA, AM :
This is an appeal filed by the Revenue against the order of CIT(A) dated 22.9.2009 for AY 2005-06, in the matter of order passed u/s 143(3) of the IT Act.
2. Following grounds have been taken by the Revenue :-
"1. On the facts and circumstances of the case and in law, the order of the CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside.
2. On the facts and circumstances of the case and in law, the ld.CIT(A) has erred in deleting the disallowance made of Rs.66,68,654/- on account of additional depreciation claimed by the assessee @ 15% u/s 32(1)(iia) inspite of the fact that no expansion had taken place as held by AO.
3. On the facts and circumstances of the case and in law, the ld.CIT(A) has erred in deleting the disallowance made of Rs.12,30,469/- on account of denial of normal depreciation being 25% of the WDV of the cost of Rs.1 crore, which was actually goodwill and no asset was formed.
2 ITA-4610/Del/2009
4. On the facts and circumstances of the case and in law, the ld.CIT(A) has erred in deleting the disallowance of Rs.4,06,55,391/- was made by the AO on account of royalty treating the same revenue expenditure."
3. Facts in brief are that the assessee company is engaged in restaurant business, ice cream parlors, trading in beverages and other items etc. During the year under consideration, the assessee has shown total sales of Rs.100,93,97,241/- as against sales of Rs.141,28,15,472/- in the immediate preceding year. During the year, it claimed additional depreciation of Rs.66.68 lakhs on account of new plant & machinery installed in Pizza Hut. The AO declined the assessee' claim of deduction of additional depreciation on the plea that assessee did not fulfill the eligibility criteria of a new industrial undertaking or an industrial undertaking existing prior to 1.4.2002 in which it achieves substantial expansion by way of increase in installed capacity which is not less than 10%. The AO also observed that assessee had 37 restaurants having stall capacity of four ovens as on 31.3.2004, there was no expansion in any of the existing restaurants during the year under consideration. The AO also stated that in the FY 2004-05, 13 new restaurants were set up having 24 ovens in all. Thus, there was no expansion in the existing industrial undertaking of the business.
4. By the impugned order, the CIT(A) deleted the disallowance by observing as under:-
"I have carefully considered the objections of the AO, appellant's submissions and facts of the case. The assessee's claim has been denied on the ground that the expansion of over 10% was not in the existing undertakings but were installed in new restaurants or undertakings. Admittedly these new restaurants commenced st business after 1 April, 2002 and new plant and machinery therein is also installed after 1st April, 2002. Even if the AO's objections were to be accepted, the appellant is in any case entitled to depreciation under Clause (A) of the proviso as on his own showing himself, the new restaurants were not in the nature of expansion of the old 3 ITA-4610/Del/2009 undertaking but constituted new undertaking. The appellant is entitled to additional depreciation either way. As such, this ground is decided in favour of the appellant."
5. We have considered the rival contentions. Claim of deduction of additional depreciation u/s 32(1)(iia) is eligible to an industrial undertaking which is engaged in production or manufacture of article or thing. Making of pizza in a restaurant whether amounts to manufacture or production of article or thing has not been examined by any of the authorities below. In the case laws cited by the learned AR before the lower authorities, the production of food in a restaurant merely amounts to processing. In the interest of justice and fair play, we restore this issue back to the file of the AO for deciding the same afresh keeping into view all the eligibility criteria for claim of additional depreciation u/s 32(1)(iia) of the IT Act. We direct accordingly.
6. Next grievance of the Revenue relates to deleting disallowance of Rs.12.30 lakhs on account of denial of normal depreciation being 25% of WDV of cost of Rs.1 crore which was alleged to be paid on account of goodwill and no asset was formed thereby.
7. We have considered the rival contentions and found from the record that during the AY 2002-03, the assessee has paid Rs.1 crore for acquisition of business and commercial rights under clause 1(B) of the agreement dated 25.9.2001 executed with Universal Restaurants Pvt.Ltd. for the purchase of two running restaurants operating under the trade name of Pizza Hut. Universal Restaurants Pvt.Ltd. were granted franchise for the use of Pizza Hut by the license granted to them by the franchise owner M/s Tricon Restaurants (India) Ltd., (formerly PepsiCo Restaurants International (India) Ltd.) - a Pepsi international concern. The assessee was granted claim of depreciation in AY 2002-03, 03-04 & 2004-05. We found that payment so made by the assessee was in respect of business and commercial rights and towards consideration for market development 4 ITA-4610/Del/2009 and creating product awareness among customers. Accordingly, the AO was not justified in declining the claim of depreciation by treating the same as mere goodwill without having any commercial or business rights. The CIT(A) allowed assessee's claim of depreciation on the amount so paid by observing that goodwill if at all is attached to the trademark "Pizza Hut" the use of which is available to the assessee company only for a period of seven years, and there was no goodwill attached to the name of the seller company which can be said to have been acquired by the assessee company. There is no infirmity in the order of CIT(A) for allowing claim of depreciation u/s 32(1)(ii) of the IT Act.
8. Next grievance of the Revenue relates to deleting disallowance of Rs.4,06,55,391/- made by the AO on account of royalty treating the same as revenue expenditure.
9. Rival contentions have been heard and record perused. From the record, we found that this amount was pertaining to the annual royalty paid by the assessee company as a percentage on monthly sales to the franchisee owner M/s Tricon Restaurants (India) Ltd. for use of their trademark Pizza Hut. Since the assessee was in the business of operating outlets in the brand name of Pizza Hut since 1996, it entered into development agreement with PepsiCo Restaurants International (P) Ltd., the owners of the brand name Pizza Hut. Under these agreements, PepsiCo Restaurants International (P) Ltd. granted to the assessee company the non-exclusive right to operate and use the technology and trademark for a period of ten years. The AO has disallowed the annual payment of royalty fee by observing the same as capital in nature. After considering all the clauses of the agreement so entered into since August, 1996, this annual payment had been duly allowed as a revenue expenditure in the last six years. There was no additional material brought by the AO to disregard the same. Under the license agreement, the consideration so payable was divided into two categories which lump sum initial payment of 30,000 US$ and continuing fee every year at the rate 5 ITA-4610/Del/2009 of 6.3% of the turnover of the products manufactured or sole by the licensee i.e. the assessee company. The initial payment has already been treated by the assessee itself as capital in nature and only the annual royalty payment calculated on the basis of sales has been claimed as revenue expenditure. There is no justification on the part of the AO for disallowing the same. Accordingly, we confirm the action of CIT(A) on this ground.
10. In the result, the appeal of the Revenue is allowed in part for statistical purposes.
Decision pronounced in the open Court on 12th February, 2010.
Sd/- Sd/-
(RAJPAL YADAV) (R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 12.02.2010.
VK.
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Deputy Registrar
6 ITA-4610/Del/2009