ITAT Mumbai Special Bench on IPL Franchise Fee: Depreciation on Entire Rs. 268 Crore Allowed

Background of the Dispute

Royal Multisport Private Limited, earlier known as Jaipur IPL Cricket Private Limited, owned the IPL team “Rajasthan Royals”. The assessee secured the franchise for this team through the auction conducted by the Board of Control for Cricket in India (BCCI) for the Indian Premier League (IPL).

The arrangement with BCCI-IPL granted the assessee:

  • The right to operate the “Rajasthan Royals” franchise as a member of the IPL
  • A share in central revenues and merchandising rights
  • The right to exploit its own franchise-related commercial opportunities
  • The right to transfer/sell the franchise or controlling interest (subject to contractual conditions)

The total franchise consideration was fixed at Rs. 268 crore, payable in 10 equal annual instalments. In addition, the agreement contemplated:

  • Annual “League deposit” of Rs. 8.04 crore for 10 years (aggregating to Rs. 80.40 crore), to be adjusted against franchise consideration in the relevant year
  • Payment of 20% of franchise income from the 11th year onwards, for the remaining term of the League

For Assessment Year (AY) 2009-10, the assessee capitalised:

  • Franchise fee – Rs. 268 crore
  • League deposit – Rs. 80.40 crore

in its books of account as intangible assets, and claimed depreciation @ 25% on the entire capitalised amount, even though only the first year’s instalment and deposit had actually been paid.

Issues Referred to the Special Bench

A Division Bench of ITAT Mumbai, faced with conflicting Tribunal precedents, referred the matter to a Special Bench vide order dated 15‑09‑2020. Two core questions were framed:

  1. “Whether the franchise payment made by the assessee is capital or revenue in nature?”
  2. “In case, such payment is held as capital, whether the assessee is entitled to claim depreciation on the entire franchise fee and league deposit or the depreciation is allowable only on the annual installment of franchise payment and league deposit actually paid by the assessee?”

Appeals covering AYs 2009‑10, 2010‑11 and 2011‑12 were clubbed before the Special Bench.

Note: The Division Bench recorded that for the purpose of those appeals, both assessee and Revenue proceeded on the basis that the franchise payment was capital in nature and eligible for depreciation, even though the assessee also argued, in the alternative, that the payment should be treated as revenue expenditure.

Franchise Agreement – Key Commercial Features

The franchise agreement between the assessee and BCCI‑IPL had, broadly, the following terms (as noted in the assessment and appellate proceedings):

  • BCCI‑IPL undertook to stage the IPL each year, initially with eight teams, with the number potentially rising thereafter.
  • The assessee, having won the bid, acquired franchise rights in respect of “Rajasthan Royals”.
  • As consideration for the right to operate the franchise and be a member of the League:
    • Franchise fee – bid amount of Rs. 268 crore, payable in 10 equal yearly instalments
    • 20% of franchise income from the 11th year onwards
    • Separate League deposit of Rs. 8.04 crore per year for 10 years, to be adjusted towards franchise consideration in the event the League actually took place in that year
  • If in any year no IPL season was held, the League deposit for that year would be refunded and no corresponding franchise instalment would be payable.
  • The assessee could transfer or sell the franchise/controlling interest (subject to specified conditions and BCCI‑IPL’s rights).
  • On termination, franchise rights would revert to BCCI‑IPL, which could then re‑allot them to another party.

Assessment Proceedings: AO’s View

In the scrutiny assessment for AY 2009‑10, the Assessing Officer (AO) examined the franchise agreement and related documents.

AO’s Findings on Nature of Expenditure

After analysing the contractual terms, the AO concluded:

  • The assessee had acquired a bundle of rights enabling it to operate a team in IPL and earn revenues linked to central rights, merchandising and its own franchise.
  • These rights were in the nature of business or commercial rights akin to a licence or franchise, squarely falling within Section 32(1)(ii) as “intangible assets”.
  • Consequently, the payment for acquiring the franchise constituted capital expenditure, not revenue expenditure.

AO’s Approach to “Actual Cost” and Depreciation

The AO then focused on how depreciation should be computed on such intangible rights. He noted: