AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (1) TMI 659
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....olding that the amounts received by it from the Indian Hotels under an agreement titled as "International Sales and Marketing Agreement" are not reimbursement of expenses, but they are income taxable under the Act in the category of "Royalty" and "Fee for included services" in terms of Indo-US tax treaty. 4. The facts in brief are that the assessee herein is a corporation organized and existing under the laws of the 'State of Dalware' with its principal place of business located at Maryland, United States of America (USA). Hence, it is stated that the assessee is tax resident of USA. The assessee belongs to "Marriott" group, which is engaged in the business of operating hotels worldwide under different brands, viz., "Marriott" and "Renaissance". Besides the above, it is also giving franchisee licence to other hotels so that they can also use the above said brand names. M/s Marriott Worldwide Corporation ('MWC') appears to be one of the affiliate companies belonging to "Marriott" group and it appears to have entered into a "license and Royalty Agreement" with owner of the brands viz., "Renaissance" and "Marriott", meaning thereby these two brands are owned by some other affiliated ....
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....rticle 2.01 (b) International Sales and Marketing Fee (ISMF) - Article 2.05 (c) Reimbursement of Expenses incurred on providing services on centralized basis to all the Marriott group of companies. These services have been described under the heads "Special Chain Services"(article 2.02), "Reservation Systems"(article 2.03) and "Special Advertising Costs"(article 2.04). 8. As stated earlier, the nature of services to be performed in each of the category are described under Artcile-II of the agreement. From the reading of the agreement dated 05-02-1998 entered between the assessee and M/s Palm Hotels (India) Ltd (presently known as M/s V.M. Salgaonkar and Brothers Pvt Ltd), we notice that the assessee is providing following kind of services to the Indian hotels:- (a) Article 2.01 is related to the International Sales and Marketing Services. According to this clause, the assessee shall provide and/or cause its Affiliates to provide to the Hotels the international services for advertising, marketing, promotion, public relations and sales provided on a central or other group basis for the benefit of Marriott Chain hotels. Such services may be provided in the form of purchasing of ad....
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....e) shall reimburse Marriott each calendar year for the Hotel's allocable share of all costs and expenses incurred by Marriott and its Affiliates in providing such special Services which shall be charged to all participating Marriott Chain Hotel hotels on a fair and reasonable basis.." (c) Article 2.05 is related to the Fees (As per AO, International Sales and Marketing Fees). As per this article, the Marriott shall be paid a fee for the Services to be provided under the agreement, which is in addition to the reimbursement for the costs and expenses incurred. 9. In respect of the services discussed above, the assessee is required to be compensated as under:- (As per the agreement placed at pages 57 -77 of paper book.) (a) For International Sales and Marketing Services as provided in article 2.01, the assessee shall be reimbursed up to one and one-half percent (1.5%) of Gross Revenue for such accounting period (clarified by Ld A.R as "calendar month") as the Hotel's allocable share of the actual costs and expenses of International Sales and Marketing Services. (b) The expenses incurred by Marriott and its Affiliates for provision of services described in Article 2.02 to 2.04 shal....
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.... not acceptable to the assessing officer. The AO held that the amount of Rs. 4,90,32,661/- received in respect of International Sales and Marketing Services is taxable as "Royalty". The relevant observations made by the AO are extracted below, for the sake of convenience:- "5.3....... The marketing activity under this agreement is in general for the Marriott branch and not for any specific hotel or resort. The assessee has itself admitted by way of a written submission dated 17.10.2008, that on account of this activity, the Marriott hotels are able to sell their rooms abroad and hence their demand and profitability increases. However in making this submission, the assessee has failed to understand that the marketing activity under this agreement has benefitted individual hotels inspect of the fact no marketing activity has been carried out in the name of the individual hotels. Thus what has been marketed and sold is the Brand Marriott in its entirety and not any particular hotel or resort & the payment is a consideration for using this trade mark, in the nature of the brand name of Marriott. 5.4 As per sec. 9(1)(vi) of the Income tax Act, 1961 payments made for the use of trade m....
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....rds marketing activities undertaken by the assessee and they do not fall within the definition of "royalties" as provided in Article 12 of Indo-US treaty. It was submitted that the assessee company has received contributions from the participant hotels to defray the expenses incurred for conducting and also for coordinating the international sales and marketing activities of the hotels within the Marriott chain. In case, the assessee is left with any surplus amount, the same will be carried forward for next year's marketing activities. Accordingly it was submitted that the assessee did not make any profit in undertaking these activities. The Ld CIT(A) did not agree with the contentions of the assessee. The Ld CIT(A) held that (a) the question whether a payment under an agreement is 'royalty' has to be decided on the facts and circumstances of the case and on the terms of the agreement. It is true nature of the consideration and not the nomenclature of an agreement that determines whether a particular receipt is 'royalty' or not. The substance of the transaction must be considered to arrive at a conclusion. (b) The assessee company has a vast knowledge and expertise in the field o....
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....the right and the information, for which a payment has already been made as 'royalty'. 15. With regard to the receipt of Rs. 5,25,26,446/- as per article 2.05 of the agreement, the Ld CIT(A) rejected the contentions of the assessee that they are in the nature of reimbursement of expenses and held that they are also in the nature of "royalty" only. We have already noticed that the AO had assessed this amount as "Fee for included services". However, the Ld CIT(A) directed the AO to assess this amount as "royalty". 16. With regard to the amount of Rs. 2,61,86,356/- received under Article 2.02 to 2.04, the Ld CIT(A) has expressed the view that the assessee company has received the same for enjoyment of the brand "Marriott" and hence it is directly related to the enjoyment of the same. Though the Ld CIT(A) expressed the view that this amount can also be assessed as "royalty", yet he chose to confirm the view taken by the AO that it is in the nature of "Fee for included services". 17. The Ld CIT(A) placed reliance on the following case laws in support of his view:- (a) Steffen, Robertson & Kristen Consulting Engineers and Scientists Vs. CIT (230 ITR 206)(AAR) (b) Wallace Pharmaceuti....
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....s "Fee for included services, the Ld CIT(A) has considered the receipts falling under Article 2.01 and 2.05 as "Royalty" and the remaining receipt as "Fee for included services". Ld A.R submitted that the assessee has been receiving these kind of receipts in pursuance of the agreements entered in the years 1997 and 1998 for a period of 20 years with the right to renew for further period of 10 years. Inviting our attention to pages 96 to 100 of the paper book filed for AY 2006-07, the Ld A.R submitted that the concerned hotels have obtained approval from Government of India for entering into foreign collaboration with the assessee company. He submitted that the approval dated 26-10-1998 was obtained by M/s K. Raheja Resorts & Hotels Ltd (presently known as M/s Chalet Hotels) for entering into a collaboration with M/s Marriott International Design and Con. Services Inc. and other affiliates. Inviting our attention to page 98 of the paper book, the Ld A.R submitted that the Government of India has approved the payments to be made by the Hotels towards Royalty as well as towards marketing/public support fee and the same includes approval for reimbursement of costs from EEFC account for....
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.... Indo-US DTAA. 23. The Ld A.R further submitted that the payments made to the assessee by M/s V.M.Salgaonkar Bros. Pvt Ltd (one of the hotels referred above) was subject matter of dispute between the said hotel and the revenue. The above said hotel contended that the payment made to the assessee herein does not fall in the category of either 'Royalty or 'Fee for included services'. The Panaji bench of Tribunal, vide its order dated 23.12.2013 passed in ITA Nos. 206, 207, 220 & 221/PNJ/2013, has held that the payments made to the assessee by the above said hotel will not fall in the category of either "Royalty" or "Fee for technical services". 24. The Ld A.R submitted that the Government of India has authorized the payment of Royalty to different affiliates of Marriott group. The Government did not authorise payment of "Royalty" to the assessee company. The Ld A.R submitted that there is no presumption about illegality in law. In this regard, he placed reliance on the following observations made by Hon'ble Kerala High Court in the case of Commissioner of Agricultural Income tax Vs. M.J.Cherian (117 ITR 371):-. "12. As justice Rajagopalan pointed out in A.S. Sivan Pillai Vs. CIT (....
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....T(A) in holding that the payments received as Fees (Article 3.1 equivalent to Article 2.05) is taxable as "royalty". However, in a subsequent assessment year, i.e., AY 2007-08, the assessee challenged the order of Ld CIT(A) in respect of all the three types of receipts. He submitted that the Tribunal, in its order dated 29.11.2003 in ITA No.2083/Mum/2011, has held that these payments are in the nature of business receipts and accordingly set aside the matter to the file of the AO to examine the same in terms of Article 7 of Indo- US DTAA. The department filed a Miscellaneous Application numbered as MA.No.444/Mum/2013 before the Tribunal, but the Tribunal, vide its order dated 02-04-2014, has dismissed the same. The Ld A.R further submitted that the AO, in the instant case, has accepted that the assessee herein does not have a Permanent Establishment in India. Accordingly, he submitted that the impugned receipts cannot be taxed as "business receipts" under Article 7 also. 26. In the alternative, the Ld A.R submitted that the payments received by the assessee from the Hotels are in the nature of "Advance payments" and hence do not have characteristics of income. Inviting our attenti....
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....s revenue. The receipts covered by Article 2.02 to 2.04 are only allocated to the hotels on a fair and reasonable basis. Further the assessee has collected fees for services also as a percentage of Gross revenue. However, the assessee is not promoting any individual hotel, instead it has indulged in promoting the brand "Marriott" only. The assessee has admitted this fact in his letter dated 17.10.2008 filed before the AO, wherein, in paragraph (c), it is stated that all the marketing activities are performed to promote their hotels in general and they are not geared towards specific hotels. 29. The Ld D.R further submitted that the assessee could not identify the expenses relating to any particular Indian Hotel out of the alleged marketing expenses incurred by it. The assessee has conceded that it is allocating the said expenses on a fair and reasonable basis. The Ld D.R further submitted that the Chennai bench of Tribunal has considered an identical issue in the case of M/s Van Oord ACZ Marine in ITA No. 1733/Mds/2011 (23 Taxmann.com 146) and has held as under:- "Apart from arguing that the payments were in the nature of reimbursement of expenses, the assessee has not explained ....
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.... treated as mere reimbursement of costs and expenses; there being real and intimate relation between the business activities carried on by the applicant outside India and the activities of the hotel owner in India a business connection exists within the meaning of s. 9(1)(i) and, therefore, the amount received by the applicant from the Indian Hotel would be taxable in India; such payments would constitute "fee for technical services" as defined in s. 9(1)(vii)." The Ld D.R submitted that the principles discussed in the above said case shall apply equally to the facts prevailing in the instant case. 31. With regard to the reliance placed on the approval given by the Government of India to the Indian Hotels for entering collaboration agreements with the companies belonging to the assessee's group, the Ld D.R submitted that the said approval was given in the year 1998 for two years only. Further the Ld D.R submitted that the said approval does not override the Income tax Act. The Ld D.R submitted that the conditions attached in that approval specifically provide that the agreement shall be subject to Indian Laws. 32. With regard to the decision rendered by the Panaji bench of Tribu....
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....te bench in AY 2004-05 in ITA No.416/Mum/2008 (supra) and applied the principles of the same to all the three issues, without realizing that the Tribunal has decided the matters relating to two types of receipts of only. The Ld D.R further submitted that the department, in fact, filed a Miscellaneous petition, but the same was also rejected by the Tribunal without realizing that the order passed for AY 2004-05 does not cover the "Fees" receipts. 35. The Ld. D.R submitted that the Ld CIT(A) has given a clear finding that the assessee has trifurcated the royalty amounts into different types of payments and accordingly held that the two types of receipts covered by Article 2.01 and 2.05 are "royalty" only. Accordingly the Ld D.R submitted that the assessee's group has bifurcated the royalty amount into different types of receipts only to suit its convenience. In reality, the assessee's group is using the funds so collected in different names only to promote the brand name. Accordingly, the Ld D.R submitted that the form should be ignored and the substance should be looked at. 36. With regard to the issue relating to charging of interest u/s 234B, the Ld D.R submitted that it is cons....
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....t the parties to the agreement have understood the terms and conditions of agreement in a particular manner and have also acted in that manner. In that case, it was not open to the AO to give another interpretation and accordingly tax the assessee. He submitted that the identical proposition was laid down by Hon'ble High Court of Calcutta in the case of CIT Vs. Arun Dua (1989)(45 Taxman 246). He further submitted that the Hon'ble Kerala High Court has held in the case of M.J. Cherian (supra) that there is no presumption in favour of illegality of a transaction. 40. The Ld A.R submitted that assessee has provided services to the hotels and they were independent of the "royalty" payment. The case of the revenue is that there is no one to one correlation between the expenditure and reimbursement. In that regard, he submitted that it was a matter of convenience between the parties and the manner of incurring expenses would depend upon the business model followed by the parties. One of such business model was putting the receipts in a common pool for incurring the expenses on behalf of all. Such kind of business model cannot change the character of reimbursement of expenses into "royal....
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....market value of services received by the Hotels were equivalent to the payments made. On the contrary, the assessee is charging from the Hotels as a percentage of the gross revenues of the Hotels. The Ld. D.R further submitted that the reimbursement on cost to cost basis or absence of element of profit are not deciding factors and it has been so held in the case of Centrica India Offshore P Ltd (364 ITR 336) by Hon'ble Delhi High Court. Accordingly he submitted that the tax authorities are required to see the objective for which the amounts were received by the assessee. 44. He submitted that the hotels have made the impugned payments at the instance of "Marriot" group only. He submitted that the Hotels are constrained to enter into both "Franchisee Agreement" and "International Sales and Marketing Agreement" simultaneously. In fact the survival of the ISMA agreement would depend on the validity of the Franchisee agreement and this fact is evident, if one compares both the agreements. The Ld D.R invited our attention to Clause 3.01(B) dated 11-02-1997 entered between the assessee and Juhu Beach Resorts Ltd, i.e., the above said clause says that if the ISMA agreement is coterminus ....
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....aid case, one company provided license and assessee therein provided computer and software systems. The Tribunal noticed that there was a link between the license and services. Accordingly, the Tribunal held that it was not a case of simplicitor payment for access to portal only by use of computer facility, but the access fee is given only by use of computer system and software system provided by the assessee under license. With regard to the contentions that the identity as separate and different companies should be dismantled, the Ld A.R submitted that even if the claim of the revenue is accepted, still the question as to which company should be assessed, i.e., the question of finding out the right person for assessing all the income shall remain to be answered and whether the assessee can be subjected to tax in respect of brand owned by another person would also remain as critical question to be answered. 48. At the time of hearing, the Ld D.R gave write up containing his contentions. When it was given to Ld A.R, he agreed to furnish a written submission addressing the various contentions within three weeks time. The assessee filed the reply on 12.12.2004. In that letter, it wa....
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....the parties is to assist the bench and hence, viewed from this angle, this contention of the assessee is required to be rejected. The assessee had submitted that the decision rendered by the Tribunal in the case of Hindalco Industries Ltd (94 ITD 242) was not relied upon at the time of hearing. However, we notice that the Ld CIT(A) has cited this. 51. Another contention of the assessee is that the Government of India has accorded necessary permission to remit the payment on specific heads and hence the tax authorities are not entitled to take a different view. We are unable to agree with this contention. As submitted by the Ld D.R, the conditions attached to the permission given by Government of India specifically provide that the approval shall be subject to Indian Laws. 52. Now let us recapitulate the facts prevailing in the instant case in brief. The brands "Marriott" and "Renaissance" is owned by a Company (hereinafter "Owner of brand"). The name of the said company is not available on record. The said company has given license to M/s Marriott Worldwide Corporation ('MWC') or M/s Rennaissance International Inc. to permit the use of brands cited above to other hotels on receip....
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....with the Hotels. Further as submitted by Ld D.R, the survival of the ISMA agreement entered by the assessee herein would also be dependent upon the survival of other agreements titled as 'Operating agreement and Advisory services Agreement". This is evident from Clause 3.01(B) of the agreement. From the 'Recital' part of the agreement, it is seen that the Operating Agreement has been entered by M/s Marriott Hotels Private Limited. The Hotels are required to obtain approval from Government of India for entering into Collaboration agreement. One such approval obtained from Government of India is placed at pages 96 to 100 of the paper book. A perusal of the same would show that the Name and address of the foreign Collaborator is given as under:- 1. M/s Marriott International Design and Con. Services Inc., 10400 Fernwood Road, Bethesda, Maryland 20817. 2. Marriott Hotel Services Inc. 3. Renaissance Services B.V 4. Marriott International Inc. 5. Marriott Worldwide Corporation 6. Rennaissance International Inc. 7. Marriott International Hotels Inc. Thus, it is seen that all the above said companies appear to have same address. The details of payments proposed to be made is given ....
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....e licenses to others on payment of "Royalty" in return. 57. It is a well known fact that the human memory is having short span of life and hence there is every possibility that the public would forget the "Brand name", if they are not continuously reminded about the brand. Hence it becomes necessary for the Brand owner to ensure that the public at large do not forget the brand. Hence, in order to maintain the "Brand Value", the brand owner has to take all kind of steps to ensure that the value of the brand remain intact. Hence the responsibility to maintain and/or enhance the "Brand value" always remains with the brand owner. Normally the "Brand value" is maintained by continuous and sustained advertisement/marketing activity, as can be noticed from the repeated advertisements made in the various types of media. 58. In the instant case, it appears that the brands "Marriott" and "Renaissance" are owned by one company, whose name and the activities are not available on record. However, the case of the revenue is that the International Sales and Marketing Agreement (ISMA) entered by the assessee shows that the responsibility to promote the "Brand Value" has been entrusted with the a....
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....recipient of royalty is required to pay tax @ 15% on gross amount of royalty. Hence the company would be paying a sum of Rs. 15/- as tax. Thus, the net profit that would remain with the company would be Rs. 15/- (Rs.100/- (-) (Rs.70/-+Rs.15/-)). According to the revenue, the above said methodology would be the fair method of declaring income and the revenue would have collected tax amount of Rs. 15/- under this methodology. 60. The contention of the revenue is that the Marriott group has not adopted the above said method. The royalty was collected by one of the companies of the Marriott group and the responsibility for undertaking International marketing program has been placed upon another company, i.e., the assessee herein. The "Brand users", i.e., the hotels, have been made to pay the cost of international marketing program to the assessee company. In the above said example, the company which has granted license to use the brand shall be receiving royalty amount of Rs. 30/- and the expenses of Rs. 70/- would be collected by the company which took the responsibility of undertaking International marketing program. In this process, the brand owner shall be paying tax @ 15% on Rs. ....
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....of identical nature specified under Article 2.01 to 2.04 has been held to be "Business Profits" by the co-ordinate bench of Tribunal. The ld A.R also referred to the decision rendered by the Co-ordinate bench in the above said assessee's case passed for AY 2007-08 in ITA No.2083/Mum/2011, wherein the Tribunal has held that all the receipts,i.e., the receipts covered by Article 2.01 to 2.04 and also Article 2.05 are in the nature of "Business Profits". Accordingly the matter was restored to the file of the Assessing officer for examining the receipts under Article 7 of the Indo US treaty. He also submitted that the Miscellaneous Application filed by the revenue has been dismissed by the Tribunal. 64. The Ld A.R submitted that these receipts are taxable in India as Business profits, only if the assessee has got Permanent Establishment in India. He submitted that there is no dispute with regard to the fact that the assessee did not have "Permanent Establishment" in India. Accordingly he submitted that these receipts are not taxable in Indo-US DTAA. He further submitted that the concession given by the above said assessee in AY 2004-05 is not binding on the assessee and in any case th....
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....lity of transaction in the present dispute. The dispute is with regard to the nature of receipt only. 68. The Ld A.R also placed reliance on the decision rendered by Hon'ble Calcutta High Court rendered in the case of CIT Vs. Arun Dua (supra) to contend that the agreement should not be understood in any other manner, when the same was understood in a certain way by the parties to the agreement. In our view, this case also does not support the case of the assessee. In the instant case, the question is not about interpretation of the agreement, but the dispute is about the "nature of receipts" received by the assessee in the context of tax laws. It is well settled principle that the "Substance shall prevail over Form", when considering the transactions from tax angles. The Ld A.R also placed reliance on the decision rendered by Panaji bench of Tribunal in the case of M/s V.M.Salgaocar & Brs. Pvt Ltd (supra). In this case, the assessee therein is one of the Indian Hotels and the Tribunal has examined the matter from the point of view of the hotel, i.e., the payer of the royalty and other amounts. The Ld D.R has rightly pointed out that all the relevant details concerning the payment ....
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....keting work on cost to cost basis without any mark up defies the business logic or prudence. A commercial company shall never work without profit. The very fact that it was functioning on cost to cost basis or without profit motive itself proves that the assessee company is only an extended arm of "Marriott group company" owning the Brand name. 72. Hence, we are of the view that the assessee company, being only an extended arm of "Marriott group company" owning the Brand name, can be considered as a facade of that company. We have already noticed that one of the group companies of Marriott has received royalty payment @ 0.5% of gross revenue and the assessee company has received about 3% gross revenue towards marketing program. In our view, it is clear tax planning by adopting colourable device. Accordingly, we are of the view that the separate legal identity of the assessee company gets blurred and corporate veil should be lifted. Hence, the amount received by the present assessee company should be examined from the point of view of the original owner of the brand. We have already noticed that all the advertisement/marketing program are carried out in the name of "Marriot" and/or....