Indian Kanoon - Search engine for Indian Law

6. From a perusal of the order, the pertinent facts are that as per the audit report in Form 3CD, furnished by the assessee, it was noticed by the AO that sum of Rs.6,17,289/- had not been recognized as income by the assessee. On the basis of the said audit report, the AO came to the conclusion that income has actually accrued to the assessee, but has not been routed through the profit and loss account. Therefore he added the said amount to the income of the assessee. Before the ld CIT(A), the assessee submitted that it had set up a wholly owned subsidiary DP BVI in the BVI. The said subsidiary of assessee, DP BVI, had executed MFA with the Franchisor on the basis of which it had the exclusive right to use the brand and knowhow and other related intellectual property rights to sell pizzas and related products in Sri Lanka. DP BVI subsequently incorporated a wholly owned subsidiary DPLPL (Dominos Pizza Lanka Pvt. Ltd) to establish, run and operate the business at Sri Lanka. The appellant provided a corporate guarantee of an amount of SLR 45 Million to DPLPL on the basis of which DPLPL obtained loans from the bank to meet its funding requirements. DPLPL could not perform up to expectations and hence, had huge loans outstanding from the bank and was not in a position to service/ repay such loans. The appellant decided to exit DPLPL and thus, wanted to get the corporate guarantee released. The bank agreed to restructure the loan and outstanding interest by waiving off a part of its outstanding provided an upfront payment of SLR 15 million was made and further royalty accruals up to an amount of SLR 3.5 Million is assigned in its favour. Originally, as per terms of the agreement DP BVI and DPLPL, DPLPL was required to pay net royalty of 3% on its sales. However, as the right to receive royalty had to be assigned to the bank and DP BVI was getting dissolved, it was decided to have the right transferred to the appellant. As per the agreement with the bank, the appellant assigned the said rights to the bank. Thus, the right to receive royalty accruing in favour of the appellant in the future years came with an obligation to assign those rights in favour of the bank and hence, the appellant never had a clean right to receive royalty.

23. Before ld. CIT(A) it was submitted that the assessee had entered into an agreement with the franchisor on 27-3-1995 for development of Domino's Pizza Stores in India (hereinafter referred to as the "agreement"). In terms of the agreement, the assessee had the right to use the trademark, domino's name and logo and exclusive license to develop and operate a commissary and to prepare, process, produce and distribute the products throughout the exclusive territory for which a recurring payment on the basis of sales was to be made. It was further clarified that franchisor had in no way transferred any absolute right in marks, domino's name and logo to the assessee for exclusive use within the territory. The agreement was executed for 15 years and could be renewed for a subsequent period of 0 years. The assessee was required to make two types of payments to franchisor as per clause 4 of the agreement -

(i) technical and consultancy fees - one time lump sum of US$ 200000 for granting exclusive license to use the Domino's name, mark, system and logo, related know how and technical 4 knowledge. This amount was already capitalized in the books of a/c of the assessee.

(ii) Franchisee/ Marketing fee for continuing use of Domino's name, logo etc. was payable @ 3% on assessee's store and 3% on sub- franchise store on the basis of quantum of monthly sales. The Franchisor had the right to inspect the pizzas and other foods products prepared by the assessee during the tenure of the agreement. The Franchisor had to provide the requisite advertisement material that it had developed in the US and required the assessee to adhere to the global standards and operating procedures adopted by the Franchisor during the tenure of the agreement.

24. Ld. CIT(A) after considering the entire agreement in detail allowed the assessee's claim, and held as under the following the order of his predecessor for Assessment Year 2003-04 and 2005-06.

"1 have carefully gone through the assessment order the AO and the submission made by the appellant. I have also gone through the agreement dated 27.03.1995 entered between the appellant and M/s. Dominos International Inc. On going through various clauses of the agreement entered into by the appellant, it is found the appellant has the right to use the trade marks, Domino's name and logo and exclusive license to develop and operate a commissary and to prepare, process, produce and distribute the products throughout the exclusive territory for which a recurring payment, dependent upon the quantum of sales, was to be paid. As per clause 4 of the agreement the appellant is required make two types of payment to the franchisor, (i) technical and consultancy fee of US$ 20,00 which is an one time lump sum payment and (it) Franchisee/marketing fee @3% on appellant s store and 3% on sub- franchisee sore on the basis of quantum of monthly sales. The appellant‟s accordingly capitalized the technical and consultancy fee and is claiming the franchisee fees revenue expenditure. It is clear from the terms of the agreement that the franchisee to be paid by the appellant is based on the sales and is recurring in nature. The appellant was also asked to submit the detailed workings of the franchisee fee and was also asked to reconcile with the turnover of the appellant. As per the working submitted by the appellant the franchisee fee was found to be paid as per the terms of the agreement i.e. 3% of the sales.