By TIOL News Service

MUMBAI, JAN 04, 2018: THE ISSUE is - Whether in absence of enduring benefit, the payment of the franchise fee to the BCCI for IPL Season-1 facilitating the participation in the league, to be considered as capital expenditure. NO is the verdict.

Facts of the case

The Assessee-company, a 100% subsidiary of Red Chillies Entertainment Pvt. Limited had filed its return for the relevant AY declaring the loss. In the course of the assessment proceeding, the AO noted that the Assessee had entered into an IPL Franchise Agreement with BCCI–IPL for Franchise rights of IPL team with home ground at Eden Garden, Kolkata named as Kolkata Knight Riders (KKR). It was also observed that as per the said agreement, the Assessee was to pay an annual Franchise fee of Rs. 30,03,60,000/- and the same was claimed as a revenue expenditure. The AO believed that the Franchise fee was a part of the consideration which was paid by the Assessee for owning the IPL team and not for playing the IPL matches vested an enduring benefit with the Assessee, therefore, the same was a capital expenditure. The Assessee was asked to submit with an explanation for such claim. Accordingly, the Assessee submitted its contentions before the AO. The AO after perusing the agreement and the various rights and obligations emerging there from, observed that the revenue arising in the hands of the Assessee was from exploitation of Central Rights, Licensing & Merchandising Rights and Franchisee Rights. The AO further observed that each respective franchisee was responsible for all the costs relating to the operation of its franchise, including the fees and salaries of all persons providing services for its team, as well as all the costs involved in staging matches at the home grounds, including hiring of stadium & security and staff cost at stadium. It was further observed by the AO that for a franchisee to operate a franchise and to be a member of the league, it was required to pay to the IPL certain amounts.

The AO, then observed that the Assessee by making payment of the Franchise fee had bought a right to set up its business of operating the team in the league, which was a completely new business with no restriction to run the business even after the expiry of the period of the league. Thus, the AO concluded that as the Franchise fees paid by the Assessee for setting up its business was capital expenditure, therefore, merely for the reason that the amount was to be paid in annual instalments or at a certain percentage, the same would in no way alter the character of the payment. The AO observed that the Assessee's claim that the proportionate fees for the first three months of the IPL Season-2 pertained to the year under consideration, as the liability for the 3 months period (January, 2009 to March, 2009) for the IPL Season-2 was relatable to the year under consideration, did not satisfy the 'Matching Principle of Accounting', which was one of the basic principle of accounting. It was also observed that the Assessee had not offered any income corresponding to its claim and hence, the AO concluded that the amount of Rs.7,50,90,000/- was wrongly claimed by the Assessee. Finally, the AO concluded that every subsequent years franchisee payment were to treated as additions to the block of asset and depreciation on such adjusted W.D.V was to be allowed at the prescribed rate. Accordingly, the AO made an addition of Rs. 22,52,70,000/- to the Assessee's total income.

On appeal, the CIT(A) held that as the Franchise fee was paid for the right to participate in the tournament, without any guarantee that in the future year it would be eligible to participate in the tournament, therefore, the same could not be characterised as a capital expenditure.

On appeal, the Tribunal held 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 31st December, 2008. In case of non-staging of the league by BCCI-IPL (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. It was also observed 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;

++ the 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. 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;

++ 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 in the case of India Win Sports Pvt. Ltd. wherein it was held that "...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...";

++ as no enduring benefit by making the payment of the Franchise fee got vested with the Assessee. Thus,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. Thus the order of the CIT(A) is set aside and direct the AO to delete the addition of Rs.30,03,60,000/-. 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.

(See 2018-TIOL-26-ITAT-MUM)