Franchise fee paid by KKR to BCCI-IPL is revenue expenditure

M/s Knight Riders Sports Private Limited Vs. ACIT (ITAT Mumbai)

We shall first take up the core issue involved in the present appeal as to whether the Franchise fee paid by the assessee to BCCI­-IPL was rightly claimed by it as a revenue expenditure, or the same being in the nature of a capital expenditure was rightly disallowed by the lower authorities. We find that the assessee had entered into a franchise agreement with BCCI- IPL in April, 2008. That pursuant to the aforesaid agreement the assessee was vested with the right to operate the franchise and to be a member of the league and operate a team in the city of Kolkata and participate in the IPL tournament, which was owned and operated by BCCI-IPL. The assessee in terms of Clause 7 of the franchise agreement remained under an obligation to pay to BCCI-IPL the annual Franchise fee of the following amount:

(a). in respect of the period 2008-17 (inclusive), as under:-

(i) a sum of USD 22,52,700/- equivalent to INR 9,01,08,000/- towards “League deposit” on or before 2^nd January in each such year, which thereafter was to be appropriated towards the annual Franchise consideration on the date of the First match of the League in the year in which the League Deposit was paid. The League deposit was refundable in any year if the league did not take place at all in such year, under which circumstance the amount was to be refunded without interest; AND

(ii) a sum of USD 52,56,300/- equivalent to INR 21,02,52,000/- was to be paid by the assessee every year on the date of the First match of the League in each such year.

(b). that from and including the year 2018 onwards, the franchisee remained under an obligation to pay an amount equal to 20% of the franchisee income received in respect of such year, which sum was to be paid in four instalments, i.e within 60 days of 31^st March, 30^th June, 30th September and 31st December in 2018 and each subsequent year of the term.

We further find that the term “Year” as defined in Clause 1 was to be construed as each 12 month period (or part thereof) from 1^St January to 31^st December during the term, except for the year under consideration, which being the first year of the league was to be reckoned from the date of signing of the agreement till 31 December, 2008. We further find that the “Franchisee rights” which again is defined in Clause 1 of the franchise agreement, provides that the same shall mean all rights in respect of the team, including those rights set out in Clause 4.3, viz. (i) the shirts sponsorship rights in respect of the team; (ii) official suppliership rights in respect of the team; (iii) corporate entertainment/premium seating rights at the stadium during home league matches; (iv) right to conduct franchisee licensing; (v) right to retain all of the gate receipts in respect of the franchisee home league matches; (vi) the right to sell merchandise at the stadium on the day of its home league matches; and (vii). such other rights in relation to the team which may be identified in the commercial guidelines provided by BCCI-IPL. However, the assessee was not vested with any right in respect of the Central Rights and all rights in respect of the licensing of replica uniforms for any team in the league.

We have perused the various clauses of the franchise agreement, as per which the franchise rights had been vested with the assessee. We have given a thoughtful consideration to the nature of the rights, and find that the payment of the Franchise fee by the assessee for a ^year, therein vested with him a right to participate in the tournament for the said year without guarantee that in the future years it would be  eligible to participate in the tournament. We find that the payment of the Franchise fee by the assessee as per the terms contemplated in the franchise agreement enabled it to participate in the tournament for the subject year and earn revenue from the same. We further find that the payment of the Franchise fee by the assessee was in the nature of recurring annual payment which was paid to facilitate participation in the league and operating the team only for the year for which the payment pertained, with neither vesting of any right of participation in the subsequent years, nor leading to creation/ownership of an asset or generation of a benefit of an enduring nature in the hands of the assessee. We further find that the year under consideration was the `first year’, and as such was to be construed from the date of signing of the agreement till 31^st December, 2008. We have deliberated at length on the rights and obligations contemplated in the franchise agreement. We find that in case of non-staging of the league by BCCI­IPL (in whole or part) the same was not to constitute a breach of the agreement, and the assessee was divested of his right to take any legal action against the other party, viz. BCCI or enforce the playing of the matches. We further find that as can fairly be gathered from perusing the details of the Central licensing/ Franchisee licensing as defined in the franchisee agreement per the terms of the agreement, all the broadcasting rights as regards the telecast of the matches remained with the BCCI, while for the assessee was only vested with the rights as that of a franchisee. We further find that the assessee as gathered from Clause 10 of the franchise agreement was not vested with any right to assign or delegate the performance of any right or obligation under the agreement. That still further as per Clause 22 of the agreement, in case of breach by the franchisee of the terms contemplating the payment obligation to BCCI, the same was to be construed as a material breach of the agreement. We further while deliberating on the terms of the franchise agreement had observed that as per Clause 16 of the agreement, the rights granted to the franchisee were personal to the franchisee and had no right to assign the agreement or to sub-contract or otherwise delegate the franchisees obligations under it without the BCCI-IPL written consent.

We have deliberated at length as regards the nature of the rights as got vested with the assessee on the payment of the Franchise fee of Rs.30,03,60,000/- to BCCI. We have given a thoughtful consideration to the issue before us and are of the considered view that the payment of the Franchise fee by the assessee to BCCI-IPL only facilitated participation in the league and operating the team for the year for which the payment pertained, with no vested right to participate in the events for the subsequent year/years. We are of the considered view that as the aforesaid payment of Franchise fee which facilitated the participation in the league and operating the team was restricted only to the year to which the payment pertained, therefore, it can safely be concluded that by making such payment there was neither a creation of an asset or generation of a benefit of an enduring nature in the hands of the assessee. We find that a conjoint reading of Clause 7 of the agreement contemplating the payment of the Franchise fee and Clause 1 defining the term “year”, clearly reveals beyond any scope of doubt that the payment of the Franchise fee of Rs.30,03,60,000/- by the assessee for IPL Season-1 was only for the period 10.04.2008 (i.e the date of the signing of the agreement) till 31.12.2008. That as stands gathered from the franchise agreement, the making of the aforesaid payment of Franchise fee by the assessee to BCCI-IPL for IPL Season-1 only enabled the assessee to participate in the league tournaments for IPL Season-1 and operate its team for the aforesaid period for which the payment was made. We are unable to persuade ourselves to subscribe to the view of the lower authorities that any benefit of enduring nature was generated in the hands of the assessee by making the payment of the Franchise fee of Rs.30,03,60,000/-, which as observed by us was only for facilitating the assessee to participate in the league tournaments for IPL Season-1. We have deliberated on the nature of rights of the assessee franchisee on payment of the Franchise fee and find that while for the “Central Rights” were retained by BCCI, the “Franchisee rights” remained with the assessee. We further find that though by making the payment of the Franchise fee the assessee got a right to participate in the league and operate its home team for the year for which the payment was made, but however, the non-staging of the league by BCCI-IPL (in whole or part) would not constitute a breach of the agreement, and the assessee was neither vested with any right to enforce the playing of such matches by BCCI nor had any right to take any legal action for the said failure on the part of the BCCI to stage the matches. We have further observed that the aforesaid franchise rights as per Clause 16  of the franchise agreement were personal to the franchisee and it had no right to either assign the agreement or to sub-contract or otherwise delegate the franchisees obligations under it without the BCCI-IPLs written consent. We further find that the issue before us as to whether the Franchise fee paid to BCCI-IPL is a revenue expenditure or a capital expenditure had already been looked into and adjudicated upon by a coordinate bench of Tribunal, viz. ITAT “I” Bench, Mumbai

in the case of India Win Sports Pvt. Ltd. Vs. ACIT (ITA No. 5290 & 5291/Mum/2014, dated 22.07.2016, wherein the Tribunal had held as under:

“The expenditure of Rs.44,76,00,000/ – incurred by it for making payment of the first instalment to the BCCI-IPL in terms of  Clause 7 of the agreement was not for the purpose of acquisition of any asset but for an annual right to manage the franchise. The purpose of the expenditure to be incurred under the agreement by the assessee has been stated in Clause 6 of the agreement as consideration for the right to operate the Franchise and to be a member of the league. The total expenditure of Rs.44,76,00,000/ – payable in yearly instalments of Rs.44,76,00,000/ – for ten years was clearly for the purpose of securing franchise right from BCCI. Thus payments made by the assessee were for the annual benefits only not extending beyond one year. Its right to operate and manage the team is subject to prior payment of annual franchise fee; if the assessee fails to make the payment, then it would not be allowed to participate in IPL. Thus, the assessee has made the annual payments to earn the annual income. The nature of transaction/payment clearly demonstrates that the assessee is neither obtaining any enduring benefit by making payment of annual instalment these payments are giving rise to any assets. These payments are mere annual payments to BCCI-IPL to give a right to the assessee to participate in the matches with its team. Therefore, the annual franchise payment was a revenue expenditure.”

We further find that a similar view was also taken by the ITAT, Hyderabad “B”, Hyderabad in the case of DCIT Vs. M/s Deccan Chargers Sporting Ventures Ltd. (ITA No. 1043/Hyd/2013, dated 28.10.2015, wherein too the Tribunal had concluded that the Franchise fee paid by the franchisee assessee to BCCI-IPL was in the nature of a revenue expenditure. We find that the judgments of the Hon’ble Supreme Court in the case of Techno Shares & Stocks Ltd. & Ors. vs. Commissioner Of Income Tax (2010) 327 ITR 323( SC) and Jonas Woodhead And Sons (India) Ltd. Vs. Commissioner of Income-Tax (1997) 224 ITR 342 (SC) relied upon by the A.0 are distinguishable on facts. We find that in the case of Techno Shares & Stocks Ltd. & Ors (supra) the issue before the Hon’ble Apex Court was as to whether the right of membership conferred upon the members under the BSE membership card is a “business or commercial right” which gives a non-defaulting continuing member a right to access the exchange and to participate therein, and in that sense a license or akin to licence in terms of Sec. 32(1)(ii) of the Act. We find that as the aforesaid right of membership conferred upon the members under the BSE membership card an enduring benefit, which would vest with the stock exchange only on the default/ demise in terms of Rules and bye-laws of BSE, therefore, it was in the backdrop of the aforesaid material facts that the Hon’ble Apex Court had concluded that the same was an intangible right which was entitled for claim of depreciation. We may herein observe that the Hon’ble Apex Court in the aforesaid case had as a word of caution observed that the said judgment may not be understood to mean that every business or commercial right would constitute a “licence” or a “franchise” in terms of Sec. 32(1)(ii) of the Act, by holding as under:

  confined to the right of membership conferred upon the member under the BSE Membership Card during the relevant assessment years. We hold that the said right of membership is a “business or commercial right” which gives a non-defaulting continuing member a right to access the Exchange and to participate therein and in that sense it is a licence or akin to licence in terms of s. 32(1)(ii) of the 1961 Act. That, such a right vests in the Exchange only on default/ demise in terms of the rules and bye-laws of BSE, as they stood at the relevant time. Our judgment should not be understood to mean that every business or commercial right would constitute a “licence” or a ‘franchise” in terms of s. 32(1)(ii) of the 1961 Act. “

Similarly, in the case of Jonas Woodhead And Sons (India) Ltd. (supra) the Hon’ble Apex Court in the backdrop of the facts involved in the case before it, observed, that as the foreign company pursuant to an agreement with the assessee had provided technical know how and services for setting up of the plant and manufacturing of products, with no embargo on the assessee to continue with the manufacturing of the products even after the expiry of the agreement, therefore, an enduring benefit got vested with the assessee, and thus the payment made by the assessee for the same was a capital expenditure. We are of the considered view that unlike the facts involved in the aforesaid case laws relied upon by the A.O, in the case before us, as no enduring benefit by making the payment of the Franchise fee got vested with the assessee, therefore, the said judicial pronouncements being distinguishable on facts would not assist the case of the revenue. We thus in the backdrop of our aforesaid observations and finding ourselves to be in agreement with the view taken by the coordinate benches of the Tribunal, therefore, are of the considered view that the payment of the Franchise fee for IPL Season-1 of Rs.30,03,60,000/- by the assessee can safely be held to be in the nature of a revenue expenditure, which was rightly claimed by the assessee as such while computing its income for the year under consideration. We thus set aside the order of the CIT(A) and direct the A.O to delete the addition of Rs.30,03,60,000/-. We may herein observe that as we have held that the Franchise fee of Rs.30,03,60,000/- paid by the assessee to BCCI is a revenue expenditure, therefore, the contentions of the assessee as regards quantification of the W.D.V for computing the depreciation in respect of the franchise rights is rendered as redundant and is not being adjudicated by us.