Yum! Restaurants (India) Private ... vs Commissioner Of Income Tax
2009 Latest Caselaw 1095 Del

*           THE HIGH COURT OF DELHI AT NEW DELHI

%                               Judgment delivered on : 01.04.2009

                           ITA No. 192/2009

YUM! RESTAURANTS (INDIA) PRIVATE
LIMITED                                                    ..... Appellant

                                       versus

COMMISSIONER OF INCOME TAX                              ..... Respondent

Advocates who appeared in this case:

For the Appellant : Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash Kumar, Advocate For the Respondent : Ms Prem Lata Bansal, Mr Mohan Prasad Gupta & Mr Sanjeev Rajpal, Advocates

CORAM :-

HON'BLE MR JUSTICE VIKRAMAJIT SEN
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.     Whether the Reporters of local papers may
       be allowed to see the judgment ?                    Yes
2.     To be referred to Reporters or not ?                Yes
3.     Whether the judgment should be reported             Yes
       in the Digest ?

RAJIV SHAKDHER, J

1. This is an appeal preferred by the assessee-company under

Section 260A of the Income Tax Act, 1961 (hereinafter referred to as

the „Act‟) against the judgment dated 31.01.2008 passed by the

Income Tax Appellate Tribunal (hereinafter referred to as the

„Tribunal‟) in ITA No. 3234/Del/2005 pertaining to assessment year

2001-02.

2. The assessee-company is aggrieved by the disallowance of a

sum of Rs 27,61,882/- on account of accrued marketing expenditure,

which is in the nature of, incentive paid by the assessee-company to

its franchisee calculated at 2% of the sales made by the franchisee

for the period December, 2000 to March, 2001.

2.1 The other issue with which the assessee-company is aggrieved

is the disallowance of a sum of Rs 44,44,002/- by the Assessing

Officer. The claim of the assessee-company arose on account of the

contributions towards advertising, marketing and promotional

activities (hereinafter referred to as the „APM activities‟) made by the

assessee-company towards wholly owned subsidiary.

3. In order to deal with aforementioned issues of the appeal the

following facts require to be noted:

3.1 The assessee-company which is a private limited company was

incorporated on 17.03.1994 under the Companies Act, 1956. The

main business of the assessee-company was to develop and manage

franchisees for running restaurants. The assessee-company had

obtained licences from Kentucky Fried Chicken International

Holdings, Inc. (in short „KFC‟) and Pizza Hut International LLC (in

short „PHILLC‟). Thus the franchisees operate restaurants under a

sub-licence arrangement with the assessee-company.

3.2 On 05.10.1998, the assessee-company which was formerly

known as Tricon Restaurants (India) Pvt Ltd had filed an application

with the Government of India, Ministry of Industry, Department of

Industrial Policy and Promotion, Secretariat for Industrial Assistance

(SIA), Foreign Collaboration, to set up a wholly owned step-down

subsidiary to manage retail restaurants business, for development,

promotion at local store level, regional level and national level.

While granting approval the SIA noted the broad framework within

which the proposed subsidiary would manage and operate its

business in India. The SIA noted that the franchisees and the

assessee-company would make contributions of fixed percentage of

their respective revenues to the proposed new company on a regular

basis. The proposed new company would be a non-profit enterprise

governed by the principle of mutuality and no part of the contribution

or other income would enure to the benefit of the contributor. It was

envisaged that the contributions shall be optimally utilized by the

proposed new company to economise the cost of advertising and

promotion so as to cater to specific needs of the franchisees in order

to facilitate the franchisees to concentrate on restaurant operations

and management. The trade-marks, trade-names, service names and

service marks of KFC and PHILLC were to be made available to the

proposed new company for „nil‟ consideration. The SIA granted

approval subject to, as stated above, the new proposed company

being a non-profit enterprise which would not repatriate its

dividends.

3.3 Accordingly on 08.06.1999, a wholly owned subsidiary of the

assessee-company, namely Tricon Restaurant (Marketing) Private

Limited was incorporated. Its name was changed to Yum!

Restaurants (Marketing) Private Limited (in short „YRMPL‟).

3.4 In accordance with the purpose with which YRMPL was

incorporated a tripartite agreement between the assessee-company,

YRMPL and the franchisees were executed. One such agreement,

dated 01.09.2000, executed with a franchisee known as Pizzeria Pure

Foods Restaurants (India) Pvt Ltd is appended as Annexure 10 at

pages 287 to 299 of the paper book. The sum and substance of this

tripartite agreement is that the wholly owned step-down subsidiary,

that is, YRMPL would open a brand fund account in various banks for

the purpose of carrying out „APM activities‟ in order to further the

business operations of KFC and PHILLC restaurants run by the

franchisees by establishing and creating co-operative advertising

brand funds. The tripartite agreement, as per clause 3.1, mandates

that the franchisee shall pay 5% of its revenue for a particular month

as an advertising contribution into a bank account of the brand fund

established by YRMPL by the 10th day of the following month. Apart

from the above, the franchisee was also required to spend an

additional 1% of the revenue in the manner directed by the assessee-

company and/or YRMPL in writing from time to time on such local

store marketing, advertising, promotional and research expenditure

proposed by the franchisees and approved in advance by the

assessee-company and/or YRMPL during the relevant accounting

period. In the event the franchisees was unable to spend the entire

amount, the unspent amount was to be paid to YRMPL on a written

demand of YRMPL which, in turn, would spend it on regional or

national level advertising, promotional & research expenditure

conducted by at its own discretion.

3.5 Furthermore, under clause 4.1 of the tripartite agreement the

assessee-company at the request of YRMPL at its own sole and

absolute discretion would make contributions to YRMPL in respect of

the AMP activity during any accounting period which it may deem

appropriate to support. The said clause 4.1 made it clear that the

assessee-company had no obligation to pay any such amount if it

chose not to contribute. The clause being relevant, the same is

extracted below:-

"Tricon may at the request of TRIM, but subject to Tricon‟s sole and absolute discretion pay to TRIM any such amount(s) as it may deem appropriate to

support the AMP activities during any accounting period. For the avoidance of doubt, it is clarified and agreed between the parties that Tricon shall have no obligation to pay any such amount if it chooses not to do so."

3.6 Clauses 8.4 & 8.5 of the tripartite agreement are also relevant.

As per clause 8.4, YRMPL was entitled to retain any surplus amount

left in any of the brand fund accounts at the end of the accounting

year to be spent in the following accounting year. Alternatively,

YRMPL subject to the approval of its Board of Directors could refund

the surplus to its franchisees in the same proportion in which the

franchisees had initially contributed monies towards advertising. In

the event there was a deficit in any of the brand fund accounts the

deficit was to be carried over to the next accounting period which

was to be met out of advertising contributions made by the

franchisees including franchisees for that accounting period. Clause

8.5 provided that the object of the agreement was only to carry out

the marketing activities of the brands for the purposes of mutual

benefit of the franchisees. No profits were intended to be earned

and dividends were to be declared by YRMPL. The two clauses being

relevant are same are extracted below:-

"8.4 In the event there is any surplus left over in any of the Brand Funds at the end of an accounting period, TRIM shall be entitled to retain the surplus to be spent on AMP activities during the following accounting period. Alternatively, TRIM may, subject to the approval of its Board of Directors refund the surplus amounts to the franchisees including Franchisee in the same proportion as the actual advertising contribution made by each franchisee including franchisee in that accounting period. On the other hand, if there is a deficit in any of the brand funds at the end of an accounting period, the deficit will be carried forward to the next accounting period and be met out of the advertising contribution paid by the franchisees including franchisee for that accounting period. For the avoidance of doubt, it is

agreed between the parties that Tricon and/or TRIM shall not be obliged to fund the deficit. 8.5 It is clearly understood and agreed between the parties that the only objective of TRIM is to coordinate the marketing activities of the brand including the mutual benefit of the franchisees including the franchisee. It is envisaged that no profits will be earned and no dividends will be declared by TRIM."

3.7 The assessee-company in order to accelerate the growth of

PHILLC brand in India introduced an incentive scheme in April,

2001. Apart from the other terms and conditions of the scheme the

assessee-company offered that in the event the franchisees were to

commence construction or operation of business on or from three

additional outlets by 30.11.2001 the assessee-company would

reimburse advertising contributions made by them to the extent of

2% of sales of their outlets for a period 01.12.2000 to 30.11.2001.

This clause was incorporated in a letter dated 04.04.2001. The same

being relevant is extracted below:-

"April 4, 2001

Mr Rohit Amin Dodsal Corporation Limited Ram House, 4, Ghaiwadi Industrial Estate, Goregaon (W), Mumbai - 400 062.

AND

Dodsal Indmag Limited Ram House, 4, Ghaiwadi Industrial Estate Goregaon (W), Mumbai - 400 062.

Re: Development incentive for accelerated growth of Pizza Hut in India.

Dear Rohit, xxxx xxxx

1. xxxx

2. Marketing support

You shall at all times continue to spend 1% of gross sales (net of sales tax) of all your outlets of LSM and contribute 5% of such sales to Tricon Restaurants Marketing Private Limited. If you commence construction of or operations/ business at or from 3 additional outlets by November 30, 2001, we will reimburse you for your advertising contribution made to the extent of 2% of sales of all your outlets for the period December 1, 2000 to November 30, 2001."

3.8 It is in this background that the assessee-company filed a

return of income for the assessment year 2001-02 on 31.10.2001.

The assessee‟s case was picked up for scrutiny. Accordingly on

18.10.2002 a notice under Section 143(2) of the Act was issued to the

assessee-company. In response to the notice the representatives of

the assessee-company attended the office of the Assessing Officer

and submitted their explanations to the queries raised by the

Assessing Officer. In so far as disallowance of Rs 27,61,882/-

towards accrued marketing expenditure was concerned the

Assessing Officer was of the view that the scheme which accelerated

the growth of Pizza Hut in India was evolved and communicated only

on 01.04.2001 and hence it was not possible for the assessee-

company to predict as to which of the franchisees would be in a

position to meet the target set by the assessee-company as on

30.03.2001. In these circumstances the Assessing Officer came to

the conclusion that the expenses related not to the current period but

to the following period, that is, the next financial year.

4. As regards the second issue disallowance of a sum of

Rs 44,44,002/- out of the contribution made by the assessee-company

towards APM activities to its subsidiary YRMPL- the Assessing

Officer noted the following facts:

4.1 The assessee-company had contributed a sum of Rs 1.15 crores

to YRMPL. The assessee-company divided the expenses under two

heads, namely, advertising and sales promotion, in respect of which

it claimed Rs 27,48,394/-, and contribution towards APM Activities

under which it claimed Rs 87,86,318/-.

4.2 Since the amount of Rs 27,48,394/- shown under advertising

and sales promotion was related to payments made to advertising

agencies like O&M and HTA etc. the same was allowed by the

Assessing Officer. In so far as the balance sum, that is, the

contribution in the sum of Rs 87,86,318/- towards APM Activities was

concerned, the Assessing Officer relying upon clause 4.1 of the

tripartite agreement, referred to hereinabove, observed that the

assessee-company had no obligation to contribute the amounts to

YRMPL. His analysis in paragraph VI.7.4 and VI.7.5 would show that

even though the YRMPL had received Rs 2.64 crores as contribution

it had spent only Rs 2.19 crores and hence had shown the balance

Rs 44.44 lacs as unspent monies under the head „current liabilities‟.

Even while the assessee-company claimed as an expense the unspent

money shown in the account of YRMPL - it clearly did not pertain to

the assessee-company but to its franchisees. The Assessing Officer

was of the view that in the circumstances the YRMPL had excess

funds lying with it then where was the need of the assessee-company

to make a contribution to YRMPL. The Assessing Officer was of the

view that the amount of Rs 44,44,002/- was required to be disallowed

for the reason that the situation in the instant case is no different

than, when an assessee makes a provision for brand advertising in a

given year, no deduction is allowed for a provision made in that

regard unless the amount is spent. In the instant case the assessee-

company instead of making the provision itself had set up an

intermediary in the form of a wholly owned subsidiary, that is,

YRMPL and was claiming as an expense contributions towards

advertising made to YRMPL even though decidedly on facts YRMPL

had not spent the entire amount contributed to it. The Assessing

Officer resorted to the provisions of clause 4.1 to hold that there was

no obligation created in terms of the tripartite agreement on the

assessee-company to contribute. In these peculiar facts the

Assessing Officer disallowed the claim of the assessee-company.

5. Aggrieved by the same the assessee-company preferred an

appeal to the Commissioner of Income Tax (Appeals) [hereinafter

referred to as the „CIT(A)‟]. The CIT(A) rejected the assessee‟s

appeal. It sustained the order of the Assessing Officer.

6. In a further appeal to the Tribunal by the assessee-company the

Tribunal sustained the orders of the authorities below. In so far as

the first issue is concerned regarding claim of the assessee-company

with regard to accrued marketing expenditure in the sum of

Rs 27,61,882/- towards incentive payable to franchisees at the rate of

2% of the sale for the period December, 2000 to March, 2001, the

Tribunal held that since the provision made for expenses would be

utilized only when the contingency happens, and in this case, the

result, as to whether the provisions of the accelerated development

scheme of April, 2001 were adhered to, would be known only in the

subsequent financial year, the liability had not arisen during the year

under consideration.

6.1 In so far as the second issue is concerned the Tribunal came to

the conclusion, upon reading of the tripartite agreement, in

particular, clause 4.1, that the payment made under it to its wholly

owned subsidiary, that is, YRMPL was purely voluntary. It further

observed that there was no demonstrable expediency and nor was

the assessee-company able to show how the said contribution had

benefited its business. It also noted that the Assessing Officer had

found as a matter of fact that out of the total contribution of Rs 2.64

crores received by YRMPL Rs 2.19 crores had been spent which had

been allowed to the subsidiary. Thus keeping these facts in mind the

Tribunal came to the conclusion that the said excess amount had to

be disallowed in view of the assessee‟s failure to prove that

contribution had been paid by the assessee-company in the course of

carrying on its business or for reasons of commercial expediency.

7. Having heard the learned counsel for the parties we are of the

view that on both the issues the impugned judgment deserves to be

sustained. In the instant case, as is evident, from the facts as stated

above the assessee-company has created an intermediary in the form

of a wholly owned subsidiary, that is, YRMPL to carry on a „co-

operative advertising‟ on the behalf of its franchisees and franchisees

of the assessee-company, based on a contributions received from the

franchisees which is equivalent to 5% of the gross sale under the

tripartite agreement. This tripartite agreement was, as indicated

above, executed between the assessee-company, YRMPL and its

franchisees in September, 2000. Thereafter the assessee-company in

order to incentivise in development of Pizza Hut brand in India at an

accelerated pace formulated a scheme in April, 2001, whereby it

offered to reimburse contributions made towards advertisement to

the extent of 2% of the sales of the franchisees outlets for the period

01.12.2000 to 30.11.2001 provided they commenced construction or

operations/business at or from three additional outlets by

30.11.2001. In this background it is quite clear that the incentive

scheme came to the knowledge of the franchisees only in April, 2001,

therefore, the assessee‟s claim with respect to accrued marketing

expenditure amounting to Rs 27,61,882/- in our view, was not

sustainable in the financial year ending on 31.03.2001. The

assessee-company could not have in the assessment year under

consideration predicted the liability on this account when the scheme

came to be formulated only in April, 2001.

7.1 As regards the second issue it is clear that the assessee-

company had tried to claim as an expense towards APM activities an

amount which could not have been directly claimed, by setting up an

intermediary in the form of YRMPL. The learned counsel for the

assessee-company, Mr C.S. Aggarwal, Sr. Advocate has submitted

that it is for the assessee-company to decide what is in its best

business interest. There is, according to him, no dispute that the

assessee-company had contributed a sum of Rs 1.15 crores out of

which a sum of Rs. 27,48,394/- has been allowed being monies

actually spent towards advertising carried out by advertisers such as

O&M and HTA etc. whereas out of the remaining sum of

Rs 87,86,318/- a sum of Rs 44,44,002/- has been disallowed even

though there is no dispute that for the purpose of APM Activities the

said sum has been contributed under the tripartite agreement by the

assessee-company to its wholly owned subsidiary YRMPL. He further

submitted that the wholly owned subsidiary YRMPL has received

during the relevant period total contribution, which includes

contribution from franchisees, as well as, the assessee-company;

amounting to Rs 2.64 crores out of which YRMPL has spent Rs 2.19

crores leaving a sum of Rs 44,44,002/- as unspent which is shown in

its books as current liabilities by YRMPL. In these circumstances the

learned counsel submits that there was no reason for the authorities

below to disallow out of Rs 87.86 lacs a sum of Rs 44.44 lacs paid as

contribution to YRMPL. In order to buttress his submission the

learned counsel also cited the judgment of the Supreme Court in the

case of CIT vs Dhanrajgirji Raja Narasingirji; (1973) 91 ITR 544

at page 550 as well as the judgment of the Supreme Court in the

case of S.A. Builders vs CIT; (2007) 288 ITR 1 at page 14. The

learned counsel for the Revenue Ms Prem Lata Bansal, in opposition,

relied upon the orders of the authorities below.

8. As is evident from the facts detailed out by the authorities

below the assessee-company under the tripartite agreement, in

particular, clause 4.1 was under no obligation whatsoever to

contribute any money to its wholly owned subsidiary YRMPL. The

facts as found also show that whatever was spent by the assessee-

company by way of advertisements towards liability to advertisers

such as O&M and HTA etc. was allowed. Furthermore, the facts also

reveal that the total contributions received during the period by

YRMPL was Rs 2.64 crores out of which it had admittedly spent

Rs 2.19 crores and the balance Rs 44.44 lacs remained unspent. The

point to be noted is that what the assessee-company in law could not

have claimed directly, that is, by making a provision for advertising

expenditure could it then be allowed to claim an amount as an

expense merely on account of the fact that it had set up an

intermediary in the form of a wholly owned subsidiary. In our

opinion as rightly held by the authorities below, it cannot be so. For

any expenditure to be permitted as deduction under Section 37(1) of

the Act the twin conditions which are required to be fulfilled are that

the expenditure in issue should not be of a capital nature, and that, it

should have been expended wholly for the purposes of business. It is

well-settled that the expression „for the purposes of business‟ in

Section 37 of the Act has been held to mean an expenditure which is

voluntary in nature and commercially expedient. In the present case

the Tribunal has returned a finding of fact that the assessee-company

has not been able to prove that the contributions to the subsidiary

were made in the course of business or on account of commercial

expediency. The principle laid down by the two judgments of the

Supreme Court in our view would not apply to the facts obtaining in

the present case.

9. We find no fault with the impugned judgment. The findings

returned are pure findings of fact. No substantial question of law has

arisen for our consideration. Resultantly the appeal is dismissed.

                                              RAJIV SHAKDHER, J



April 01, 2009                                 VIKRAMAJIT SEN, J
kk