Recently High Court of Delhi in Commissioner of Income-tax-II v Jubilant Foodwork (P.) Ltd held that annual franchise fees paid at a fixed percentage for using trademark belonging to payee company shall be allowed as revenue expenditure and the expense incurred on advertisement shall also be allowed as revenue expenditure.  

Facts of the case:

The assessee is carrying on business of manufacturing and sale of pizza from its retail outlet. The assessee had entered into an agreement with M/s Dominos Pizza International, Inc. USA for using trademark ‘Dominos’ for which assessee paid fees at a rate of 3 percent of turnover of assessee in India. It was paid annually and not a lump sum consideration. Assessee treated the expense as a revenue expenditure. The Assessing Officer treated 25 per cent of the franchise fee as capital expenditure. The Commissioner (Appeals) as well as the Tribunal allowed assessee’s claim in full against which the Revenue went for an appeal.

It was held that:

It is apparent that the trademark was not owned by the respondent-assessee. He did not acquire any right in the trademark ‘Dominos’, which it was using for the purpose of selling their products/goods. If any conditions of agreement are not fulfilled by the assessee then he would be denied for using the said trademark. Tribunal was rightly of the view that no new asset came into existence on account of payment of franchise fee and the rights under the agreement were only for the tenure of the agreement and no enduring benefit was derived by the assessee.

Also to be noted that it was not an expenditure incurred for acquisition of source of profit, but enabled the assessee to run the business profitably. The fixed assets of the assessee remained untouched and no enduring asset came into existence.

Hence, judgment was in favour of the assessee considering franchise fees as revenue expenditure and Court also held that advertisement expense incurred by the assessee shall also be allowed as revenue expenditure.

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