Franchise Fee Reduction Validated by Tribunal, No Income Accrued

The Tribunal upheld the CIT(A)'s decision that no real income accrued to the assessee due to the reduction in the franchise fee from USD 45,000 to USD 22,500. The Tribunal found that the fee reduction was valid and properly documented through agreements and communications, dismissing the revenue's appeal. The order was pronounced on March 18, 2015.

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Issues Involved:
1. Validity of the reduction in initial franchise fee from USD 45,000 to USD 22,500.
2. Justification and proof for the reduced franchise fee.
3. Assessment of real income and notional income.

Detailed Analysis:

1. Validity of the reduction in initial franchise fee from USD 45,000 to USD 22,500:
The assessee had entered into a Master License Agreement and a Service Agreement with its parent company, McDonald's Corporation, USA (MDC USA). According to the Master License Agreement, the franchise fee to be charged from the franchisee was USD 45,000. However, the assessee reduced this fee to USD 22,500 through a management decision effective from July 1, 2002, to December 31, 2004, aiming to broaden the restaurant base and strengthen the company's position in India. The AO did not accept this reduction, citing that the assessee did not provide sufficient justification or proof for this change, and the Master License Agreement explicitly stated the fee as USD 45,000. The AO also noted that the assessee merely furnished a copy of a fax letter without any formal amendment to the original agreement.

2. Justification and proof for the reduced franchise fee:
The assessee contended that the reduction in the franchise fee was a strategic decision to increase the sale of McDonald's products and was supported by separate agreements with joint venture companies. The AO, however, observed that the assessee did not provide any substantial evidence or facts to justify the reduction. The AO argued that the reduction appeared to be an attempt to reduce taxable income since the joint venture companies were already showing losses. The AO, therefore, added the difference between the initial franchise fee returned by the assessee and that as per the Master License Agreement, amounting to Rs. 97,81,425/-, to the assessee's income.

3. Assessment of real income and notional income:
The CIT(A) allowed the assessee's appeal, stating that no real income arose to the assessee by the receipt and disbursement of the initial franchise fees, and notional income cannot be taxed. The CIT(A) agreed with the assessee's submission that even if the franchise fee should have been USD 45,000, it was payable to McDonald's Corporation US and would not have been the income of the assessee. The revenue appealed against this decision, arguing that the fee reduction was not valid without a proper resolution and formal amendment to the original agreement. The revenue also contended that the CIT(A) did not consider the true import of the agreement.

The Tribunal considered the rival submissions and the relevant agreements and correspondence. It noted that the assessee had received only USD 22,500, as per the Franchise Agreement dated March 5, 2003, and the communication dated December 8, 2002, confirming the reduced fee. The Tribunal found that the amendment to the fee was effective after discussions and did not constitute a unilateral amendment. The Tribunal also noted that the communication met the conditions for modification as per the Master License Agreement and Franchise Agreement. Therefore, the Tribunal upheld the CIT(A)'s decision that no real income accrued to the assessee, and no addition was called for.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming that the reduction in the franchise fee was valid and that no real income accrued to the assessee. The order was pronounced in open court on March 18, 2015.

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