CHOICE HOSPITALITY (INDIA) P.LTD,NEW DELHI V. ACIT, CIRCLE-6(1), NEW DELHI

ITA 7651/DEL/2019

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The case involves Choice Hospitality (India) Pvt. Ltd., which appealed against the order of the Commissioner of Income Tax Appeals-13, New Delhi, which had confirmed the disallowance of a royalty payment of Rs. 19,94,078. The payment was made to 'Choice Hotels Licensing BV' for franchise rights and brand name usage, initially treated as capital expenditure by the tax authorities. The Tribunal's decision to allow the appeal was influenced by a similar case for the Assessment Year 2014-15, where it was established that such payments are to be considered as revenue expenditure. The Tribunal appreciated the assistance of Mr. Harpreet Singh, CA, who acted as Amicus Curie in the absence of a power of attorney from the Assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474864 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Other Referred Cases: CIT vs. Hero Honda Motors Ltd. (2015), 55 taxmann.com 230, Southern Switch Gear Ltd., Janas Wood head & Sons (India) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANISTA
• Assessee Lawyers: HARPREET SINGH; AMICUS CURIE
• Keywords: Capital asset; Revenue expenditure; Depreciation; Capital receipt; Capital expenditure; Wholly owned subsidiary; Royalty expenses
• Section: 143(3); 13

Judgement Text

" 1 ITA No. 7651/Del/2019 Choice Hospitality (India) Pvt. Ltd. Vs. ACIT IN THE INCOME TAX APPELLATE TRIBUNAL DELHI (DELHI BENCH ‘B’ NEW DELHI) BEFORE SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER AND SHRI AVDHESH KUMAR MISHRA, ACCOUNTANT MEMBER ITA No. 7651/Del/2019 (A.Y. 2013-14) Choice Hospitality (India) P. Ltd. F-24, Green Park Extension, New Delhi PAN: AABCC4755C Vs. ACIT Circle-6(1) Room No. 390, C. R. Building, New Delhi Appellant Respondent Assessee by Sh. Harpreet Singh, CA (Amicus Curie) Revenue by Sh. Rajesh Kumar Dhanista, Sr. DR Date of Hearing 29/01/2025 Date of Pronouncement 31/01/2025 ORDER PER YOGESH KUMAR, U.S. JM: The present appeal is filed by the Assessee against the order of the Commissioner of Income Tax Appeals-13, New Delhi [‘Ld. CIT(A)’ for short] dated 03/07/2019for the Assessment Year 2013-14. 2. The Grounds of Appeal are as under: - “1. That the order of Hon'ble CIT(A) is bad, both in law and on facts. 2. That the Hon'ble CIT(A) had erred in upholding royalty payment of Rs. 19,94,078 paid by the appellant to 'Choice Hotels Licensing BV' for grant of franchisee rights and use of 2 ITA No. 7651/Del/2019 Choice Hospitality (India) Pvt. Ltd. Vs. ACIT brand name as capital expenditure without properly appreciating the facts of the case, cases as relied upon & provisions of the Act. All the above grounds of appeal are without prejudice and notwithstanding each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. Any consequent relief, to which the Appellant may be entitled under the law in pursuance of the aforesaid grounds of appeal, or otherwise, thus may be granted.” 3. Brief facts of the case are that, an assessment order came to be passed on 15/03/2016 u/s 143(3) of the Income Tax Act, 1961 (‘Act’ for short) by disallowing the royalty expenses to Rs. 19,94,078/- and also disallowed Entertainment expenses of Rs. 27,29,377/-. Aggrieved by the assessment order dated 15/03/2016, the Assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) vide order dated 03/07/2019, confirmed the disallowance made as on account of royalty payment of Rs. 19,94,078/- and deleted the rest of the addition. Aggrieved by the order of the Ld. CIT(A) dated 03/07/2019, the Assessee preferred the present Appeal on the grounds mentioned above. 4. Mr. Harpreet Singh, CA appeared and submitted that the Assessee company has closed its business sand the Company has not given power of attorney to him, however, submitted that since he has 3 ITA No. 7651/Del/2019 Choice Hospitality (India) Pvt. Ltd. Vs. ACIT appeared for the Company in earlier years based on the information provided by the registry regarding posting of the matter, appeared and further submitted that the similar addition has been deleted by the Tribunal for the Assessment Year 2014-15 in assessee’s own case in ITA No. 7575/Del/2018. Mr. Harpreet Singh, CA has been considered as Amicus Curie in the present appeal and Bench extends token of appreciation to him for assisting the Bench. 5. Per contra, the Ld. Departmental Representative relying on the orders of the Lower Authorities, sought for dismissal of the Appeal. 6. Heard and perused the material. The only ground urged by the Assessee in the present Appeal is regarding disallowance of royalty payment of Rs. 19,94,078 paid by the Assessee to Choice Hotels BV licensing for grant of franchisee rights and use of brand name. The similar disallowance has been made for the Assessment Year 2014-15 as well and the Co-ordinate Bench of the Tribunal in Assessee’s own case for Assessment Year 2014-15 in ITA No. 7575/Del/2018 held as under:- “9. From the above clauses, the ld. CIT(A) held that it can be seen that Choice B.V., under the agreement, had to provide the operation manual and rules. The operation manuals and rules are, in fact, technical knowhow for running the business of the hotel . It is obvious that the knowledge acquired by the franchisee can be used not only for one year but also after the expiry o f the agreement. The ld. CIT(A) held that the technical knowhow is secured by the franchisee, that can be applied to the business process, even without using the brand name o f Choice . Such transfer of 4 ITA No. 7651/Del/2019 Choice Hospitality (India) Pvt. Ltd. Vs. ACIT knowledge can no doubt be treated in the nature of enduring benefit. It is also relevant to note that the Assessee has been stated to have been providing the franchisees a complete spectrum of hotel operating and technical services like hotel development, project planning, technical & pre opening service s, reservation systems, sales & marking support, human resources support, quality assurance inspections and financial planning. In so far as, the project planning, hotel development, technical & pre operating services are concerned, being 100% subsidiary of Choice B.V. , the knowledge is acquired by the Assessee from Choice B.V. There is no proof that such technical knowhow or expertise is developed by the Assessee Company. 10. The ld. CIT(A) relied on the submission of the assessee is as under: “The Appellant provides the Franchisee to individual hotel properties for use o f the above said brands It also provides a complete spectrum of Hotel operating and technical services like Hotel Development , Project Planning , Technical and Pre-opening Service s, Reservations System , Sales and Marketing Support , Human Resources Support, Quality Assurance Inspections , Financial Planning . The Appellant receives fees from Hotel properties in the name of franchisee fees, marketing fees, management operation fees etc.” 11. Based on the above, the ld. CIT(A) held that the Assessee is no t engaged in manufacturing business, the business of the Assessee is running the hotel. Hence , the technical know-how , project planning etc. are related to the knowhow o f 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 o f 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% o f royalty expense s were toward s enduring benefit s and remaining 50% toward s the running o f the 5 ITA No. 7651/Del/2019 Choice Hospitality (India) Pvt. Ltd. Vs. ACIT business du ring the yea r under consideration . In this way , I hold that expenses to the extent o f R s . 13 ,43 ,087/- were in the nature of capital expenditure and remaining 50% toward s revenue expenses. The Assessee is en titled to depreciation @ 25% on the capitalized expenditure . Thu s the Assessee is allowed depreciation a t Rs .3,35 ,771/- . Consequently, the addition o f Rs. 10,07 ,316/- is confirmed .” 14. We have gone through the entire record. The assessee paid royalty at fixed cost and at variable cost . The royalty is paid for use of brand name and also for technical know-how. The assessee has been provided complete spectrum of Hotel opera ting and technical services like Hotel Development, Project Planning, Technical and Pre- opening Services, Reservations System, Sales and Marketing Support, Human Resources Support, Quality Assurance Inspections, Financial Planning . The payment of royalty is on annual basis and it is paid for the purpose of “franchise to operate and maintain hotels in an assigned territory and use its brands such as Quality, Com fort, Sleep 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. 15. In the case o f Janas Wood head& Sons (India) Ltd ., the High Court had come to the conclusion that the business setup by the Assessee was a new business and the foreign firm had ITA No. 7575/Del/2018 Choice Hospitality (India) Pvt. Ltd. 8 not only furnished information and the technical knowhow but also rendered valuable services in setting up of the factory itself . Even after the expiry o f the agreement, there was no embargo on the Assessee to continue to manufacture the product in question. However , the Hon'ble High Court observed that the entire payment could not be held as to be revenue expenditure merely because the same was to be made at a certain percentages o f the rate of the gross turnover . The Hon'ble Supreme Court held the decision of the Hon'ble High Court justified . In the case of Southern Switch Gear Ltd ., the Hon'ble Supreme Court held that technical knowledge obtained from the foreign company provided enduring advantage . Benefits in that were available to the Assessee for its manufacturing and industrial processes even after the termination o f the agreement. The transfer of designs, procedures, experience and technical knowhow , which can be used even after the expiry o f the agreement provides benefits of enduring nature. The court held that the entire technical fees cannot be allowed as revenue expenditure . 6 ITA No. 7651/Del/2019 Choice Hospitality (India) Pvt. Ltd. Vs. ACIT 16. The Hon'ble Delhi High Court in the case o f CIT vs. Hero Honda Motors Ltd. (2015), 55 taxmann.com 230 wherein it was held that the payment o f 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 o f provisions of some manuals and SOPs, the amount paid cannot be treated as capital expenditure in nature unless it results in acquiring o f 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. The appeal of the assessee on this ground is allowed.” 7. By Respectfully following the order of the Co-ordinate Bench of the Tribunal for Assessment Year 2014-15 in Assessee’s own case (supra) we hold that the royalty payment made by the Assessee which is recurring in nature, therefore, we direct the A.O. to treat the same as revenue expenditure, accordingly, we allow Grounds of appeal of the Assessee. 8. In the result, Appeal of the Assessee is allowed. Order pronounced in the open court on 31st January, 2025 Sd/- Sd/- (AVDHESH KUMAR MISHRA) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Date:- 31.01.2025 R.N, Sr.P.S* 7 ITA No. 7651/Del/2019 Choice Hospitality (India) Pvt. Ltd. Vs. ACIT Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "