Income Tax Appellate Tribunal - Hyderabad
M/S Deccan Charges Sporting Ventures ... vs Department Of Income Tax on 28 October, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 1043/HYD/2013
Assessment Year: 2009-10
Deputy Commissioner M/s. Deccan Chargers
of Income Tax, Vs Sporting Ventures Limited
Circle-16(2), (Amalgamated with Deccan
HYDERABAD Chronicle Holdings Ltd)
HYDERABAD
[PAN: AABCD6737D]
(Appellant) (Respondent)
For Revenue : Smt. K. Mythili Rani, CIT-DR
For Assessee : Shri S. Rama Rao, AR
Date of Hearing : 08-10-2015
Date of Pronouncement : 28-10-2015
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is Revenue's appeal against the order of the Commissioner of Income Tax (Appeals)-V, Hyderabad dated 12-03-2013.
2. We have heard Ld. DR and Ld. Counsel and perused the Paper Book placed on record.
I.T.A. No. 1043/Hyd/2013 :- 2 -: M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holdings Ltd)
3. The issue in this appeal is with reference to payments made by assessee franchise to BCCI towards right to operate IPL franchises of 'Deccan Chargers' (DC) for a period of ten years. The facts relating to this addition are that the assessee-company is wholly owned subsidiary of M/s. Deccan Chronicle Holdings Limited (DCHL). During the year, the DCHL was successful in its bid and acquired franchisee rights of DC of BCCI-IPIL-20 Cricket for the highest bid amount of Rs. 428.04 Crores. Assessee was awarded the right to operate the IPL franchise of DC for a period of ten years for which it was required to pay Rs. 42.08 Crores every year, starting from 2008 to 2017. After this bid was won by DCHL, a 100% wholly owned subsidiary company M/s. Deccan Chargers Sporting Ventures Limited (DCSVL) was incorporated on 10-04- 2008 for carrying the business of sport and M/s. DCHL vide assignment agreement dt. 29-08-2008 assigned all its rights, title and interest in the franchisee agreement to assessee i.e., M/s. DCSVL. Consequent to this assignment agreement, BCCI-IPL has agreed to continue the franchise agreement with assessee.
3.1. In the original return of income, assessee capitalized entire franchisee fee of Rs. 428.04 Crores and claimed depreciation @ 25%. Later, assessee filed revised return on 11-03-2011 claiming the payment of franchisee fee of 42.80 crores made during the year as revenue. The reasons for change in stance as submitted in a note are as follows:
"The Deccan Chargers Sporting Ventures Ltd., is the owner of the Hyderabad franchise of the Indian Premier League (IPL) "Deccan Chargers" right and the company can operate the franchise as along as the IPL tournament is conducted. The consideration for acquiring the franchise right of Rs. 428.04 Crores is payable to BCCI over a period of 10 years in equal installments commencing from the year 2008.
I.T.A. No. 1043/Hyd/2013 :- 3 -: M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holdings Ltd) The company capitalized the franchise rights as intangible asset and recognized as equal amount as liability payable to BCCI. The economic useful life of the asset was estimated at 25 years and amortized accordingly (Rs. 428.04/25 years = Rs. 17.12 Crores). As per Income Tax Act claimed 25% of Rs. 428.04 i.e., Rs. 107.01 Crores.
The company reviewed the aforesaid policy and decided to write off the fees paid to BCCI in the year of incurrence i.e. over a period of 10 year period itself. Accordingly Franchisee fees paid for the year is charged off in the year of incurrence itself. Hence, revised return filed".
3.2. Going by the enduring right over the franchisee assessee acquired, the AO proposed to treat the franchisee fee as capital and required assessee to furnish its objections. After going through the detailed reply of assessee, which substantiated its claim of revenue expenditure as claimed in the revised return, the AO relying on a plethora of judicial decisions held that :
i. What was set up by the franchisee was a new business and the payments for setting up of the business represent capital expenditure;
ii. Merely because the payments are required to be made in annual instalments, the same does not alter the character of these payments from a capital to revenue; and iii. If the expenditure is for the initial outlay or for acquiring or bringing into existence any asset or advantage of an enduring benefit to the business, it must be treated as capital expenditure and accordingly treated the franchisee fee as capital expenditure and I.T.A. No. 1043/Hyd/2013 :- 4 -: M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holdings Ltd) disallowed the amount of Rs. 42.80 Crores u/s. 37(1) of the Act.
3.3. Along with the above amount of Rs. 42.80 Crores treated as 'Capital Expenditure', AO also disallowed the corresponding service charges paid of Rs. 5,29,05,744/- after capitalizing the same along with the franchise fee paid of Rs. 42.80 Crores. AO however, allowed depreciation on the above two amounts.
4. Assessee was aggrieved and carried the matter to CIT(A) and made detailed submissions. After considering the submissions, Ld. CIT(A) allowed assessee's contentions in his detailed order running from para 5.3 to 5.3.8 and para 6 for service tax. Revenue is aggrieved and raised the grounds as under:
"2. The CIT(A) ought to consider payments made for enduring benefits as capital expenditure.
3. The CIT(A) ought to consider service tax on Franchisee fee paid is also a capital expenditure.
4. The CIT(A)'s order is silent on the difference between cash deposits and gross receipts".
5. After considering the rival contentions and perusing the Paper Book placed on record, we are in agreement with the order of Ld. CIT(A). As rightly pointed by the Ld. CIT(A), assessee in the original return has shown the total franchise fee at Rs. 428.40 Crores as 'capital' and claimed depreciation of Rs. 107.01 Crores at 25%. Later on, assessee realized that the amount paid on I.T.A. No. 1043/Hyd/2013 :- 5 -: M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holdings Ltd) yearly basis is revenue expenditure and there is no need to capitalize the future payments also. Consequently, the return filed originally at Rs. 87,08,88,716/- was modified and revised return was filed claiming loss of Rs. 22,88,28,716/-. Ld. CIT(A) analysed whether the franchise right is a capital asset or not, vide para 5.3.2 as under:
"Before considering the claim of allowability of deduction, it is necessary to decide whether the aforesaid franchise right is a capital asset eligible for depreciation or it is a revenue expenditure. As per clause 3 of the FA, the impugned agreement shall come into effect upon signature and shall continue for so long as the League continues subject to termination, suspension or renewal as provided (the 'Term'). As per clause 4 of the FA, the franchisee (appellant) has acknowledged and agreed that BCCI-IPL owns the Central Rights and the BCCI has all pervasive rights to exploit present as well as future Central Rights. The Central Rights includes media rights, umpire sponsorship rights, tile sponsorship rights, official sponsorship rights, stadium advertising right, games rights etc. The franchisee would be allowed to enjoy only those rights which BCCI-IPL would acknowledge. Another very important clause laid down in the FA [clause 7.1 (b)] is that from and including 2018 onwards, for indefinite period, an amount equal to 20 per cent of the franchisee income received in respect of such year shall be paid to BCCI-IPL by the franchisee appellant. Further, franchisee shall have no right to assign or to sub-contract or otherwise delegate the performance of any right or Obligation under the agreement without prior written permission from the BCCI-IPL. Powers to terminate the agreement is mostly tilted in favour of the BCCI-IPL (clause 16 of FA). Franchisee shall also not sub-let or sub-contract the franchisee rights without prior written permission of the BCCI-IPL. Further, as per clause 10.1 of FA, the appellant does not have any right to assign or delegate the performance of any right or obligations under this agreement. The same vests with BCCI-IPLonly. Perusal of the above clauses reveal that under the terms of the agreement, appellant company never enjoys the proprietary rights. The proprietary rights continue to vest in the BCCI-IPL. Therefore, appellant cannot be regarded as having acquired either wholly or any part of proprietary rights by or under the agreement. Therefore, in view of the above facts and circumstances, franchise right cannot be treated as capital asset".
I.T.A. No. 1043/Hyd/2013 :- 6 -: M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holdings Ltd)
6. We agree with the above order of the Ld. CIT(A) as the amount was not for acquiring capital rights. It is for conducting the matches on yearly basis. If assessee has not paid the amount, it loses the right to conduct the matches. Accordingly, Ld. CIT(A) has come to correct conclusion that the right acquired by assessee is not a perpetual right and the expenditure paid on yearly basis is revenue expenditure.
6.1. He also analysed various case law vide para 5.3.4 and 5.3.5 as under:
"Against the above factual ground, the issue for adjudication is whether the above franchise right constitutes capital asset entitled to depreciation. No doubt, section 32(1) includes franchise right as part of the intangible assets entitled to depreciation. The main requirement for considering whether the franchise rights constitute a depreciable asset is that such franchise right should be owned wholly or partly by the appellant. Merely because franchise rights are treated as intangible assets, it does not mean that any or all payments made towards franchise rights would become capital payment and such rights constitute a depreciable asset. It has to be determined on the basis of actual rights conferred on the assessee. Is it a rig lit of ownership or merely a right to use. The former will be capital, while the latter will be in the revenue field. Analogy can be drawn from the following instances:
(i) Technical know-how is an intangible asset and entitled to depreciation u/s 32. However, if an annual fee is paid for the use of technical know how and right to use technical know how ceases on the termination of such agreement, then the annual payments made are revenue in character and are allowable as deductible expenditure. The Hon'ble Supreme Court in the case of CIT v. LA.E.C. (Pumps) Ltd, 232 ITR 316 (sq held that use of patents and designs for ten years with option to extend or renew the same was held to be a revenue expenditure. The ratio is fully applicable to the facts of the present case.
(ii) Similarly, in case of other assets also which are normally treated as fixed assets entitled to depreciation, if an assessee takes these assets on lease or hire, the I.T.A. No. 1043/Hyd/2013 :- 7 -: M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holdings Ltd) payments made annually for the right to use these assets are revenue expenditure. They would not be treated as capital assets entitled to depreciation on the annual lease payments. Rental payment in respect of buildings, which are fixed assets, taken on lease would constitute revenue expenditure. Whatever may be the period of lease, the annual payment will be only revenue in nature. In fact the Madras High Court in the case of CIT v. Gemini Arts (P) Ltd, 254 ITR 201, following the Apex Court in CIT v. Madras Auto Services Pvt. Ltd, 233 ITR 468 (sq, has held that upfront payment of future rent for 47 years would still be revenue expenditure.
(iii) In the case of lease of immovable property, the Supreme Court has held that any premium paid for acquisition of the right to lease would constitute capital payment but not a periodic payment for the actual use of the property [CIT v. Panbari Tea Co. Ltd, 57 ITR 422 (SC)].
While tenancy right per se is considered as a capital asset [5.5 (2)], payment for the usage of such tenancy right is always revenue expenditure.
(iv) The Karnataka High Court in the case of CIT v. HMT Ltd. 203 ITR 820 has held that even though lump sum amount paid as premium in connection with lease of property as long as it is towards rent for the use of the property, it is allowable as revenue expenditure.
(v) The Supreme Court in the case of Empire Jute Manufacturing Co, [124 ITR 1 (SC)] has held that even if the payment gives benefits for a period of time it will be in the revenue field only, if it is incurred in connection with day to day operation and does not affect the capital structure of the assessee.
(vi) Expenditure on technical know-how, even if of enduring character is revenue expenditure if its impact is on the running of business [CIT V MRF Ltd, 144 ITR 678 (Mad)).
(vii) Acquisition of goodwill of business is acquisition of capital asset and therefore, its purchase price would be capital expenditure. Where, however, the transaction is not one for acquisition of goodwill, but for the right to use it, the expenditure would be revenue expenditure [Devidas Vithaldas & Co v. CIT, 84 ITR 277 (SC)].
I.T.A. No. 1043/Hyd/2013 :- 8 -: M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holdings Ltd) 5.3.5 From the above legal pronouncements, it is clear that the character of the payment would depend on nature of rights acquired and the period for which such rights was acquired by the appellant. Any payment made for obtaining a commercial right would be a capital expenditure. But payment made periodically for exploiting such rights is revenue in nature. Therefore, in the instant case, payment made at the first instance for grant of right to be franchisee can be considered as capital payment. However, the subsequent annual payments made by the assessee are clearly for exploiting the rights as a franchisee, which are for a year and which can be terminated for non-payment of the franchise fees in the subsequent year. Therefore, the franchise fee paid is revenue in nature because by making such annual payment the appellant does not acquire any rights of permanent nature".
7. In view of these judicial principles which clearly apply to the facts of the case, we do not find any reason to interfere with the order of CIT(A) who analysed the issue on the given facts. There is no merit in Revenue's grounds and accordingly, Revenue's appeal is dismissed.
Order pronounced in the open Court on 28th October, 2015
Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 28th October, 2015
TNMM
I.T.A. No. 1043/Hyd/2013
:- 9 -: M/s. Deccan Chargers Sporting Ventures Limited
(Amalgamated with Deccan Chronicle Holdings Ltd) Copy to :
1. Deputy Commissioner of Income Tax, Circle-16(2) Room No. 611, 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad.
2 M/s. Deccan Chargers Sporting Ventures Limited (Amalgamated with Deccan Chronicle Holding Ltd.,) 36, Sarojini Devi Road, Secunderabad.
3. CIT (Appeals)-V, Hyderabad.
4. CIT-IV, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.