TaxTMI 
TaxTMI 
2015 (1) TMI 659
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.... is aggrieved by the decision of Ld CIT(A) in holding 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 the....
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....s:- (a) International Sales and marketing Agreement (ISMA) - Article 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 Ch....
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.... Hotel in the Marriott Chain, Owner (here it means the Indian Hotels, referred above) 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 M....
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....ther stated that the Indian Hotels are paying Royalties to a different entity under a separate agreement and hence these reimbursements cannot be considered as Royalty. The above said explanations were 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....
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....he AO by filing appeal before Ld CIT(A). Before the first appellate authority, the assessee contended that the payments related to International Sales and Marketing Services (Article 2.01 - ISMA) are received towards 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 ....
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....) Hence the above said amount of Rs. 4.90 crores is royalty only. (j) Without prejudice to the above, it can also be considered as "Fee for included services", since these services are ancillary and subsidiary to the enjoyment of 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 ....
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....ed as business profits. 21. He further submitted that there was difference of opinion between the AO and CIT(A) with regard to the nature of receipts. While the AO has considered the receipts falling under Article 2.01 as "Royalty" and other two receipts as "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 t....
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....rovided by the assessee company do not fall in the category of "technical" or "consultancy" services also. He further submitted that the said services may fall in the category of "managerial" services and in that case, it will not be hit by Article 12(4) of the 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 i....
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.... of the Agreement cannot be held as "royalties" falling within the ambit of Article 12(4) of the DTAA. Thus the AO's action in treating this amount as royalties is set aside." The Ld A.R submitted that the assessee, in the above said case, accepted the decision of Ld CIT(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 ca....
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.... on the decision rendered by Hon'ble jurisdictional Bombay High Court in the case of DIT Vs. NGC Networks Asia LLC (313 ITR 187). 28. The Ld. D.R, on the contrary, submitted that the assessee has collected the payments covered by Article 2.01 as a fixed percentage of the Gross 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....
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....ed an identical issue in the case of International Hotel Licensing Company S.A.R.L., in RE (2007)(288 ITR 534) and has held that "Amount received by non-resident applicant from Indian Hotel in connection with marketing and business promotion activities conducted outside India cannot be 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....
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....ts in the case of M/s Marriott International Licensing Company BV in AY 2007-08 (supra) and has set aside the matter to the file of the AO to examine the same under Article 7 of Indo-US DTAA, the Ld D.R submitted that, in AY 2007-08, the Tribunal has simply followed the order passed by the coordinate 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 gr....
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.... He submitted that the services provided were in the nature of either sales services or sales support services. He submitted that the services provided by the assessee includes "Frequent Traveler Program", "Reservation systems" are specific services and they are nothing to do with the brand. He submitted that 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 partie....
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....", the direction to incur expenses shall always from the side of the person who reimburses the amount. However, in the instant case, the Hotels are not giving any kind of such direction, but are obliged to pay the amount as per the agreement. He further submitted that there is no evidence on record to show that the 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 ....
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....parate and different companies should be dismantled and the purpose or intention of the Marriott group should be taken as prime factor to decide the issue under consideration. 47. In reply, the Ld A.R submitted that the facts prevailing in the case of Reuters Transaction Services Ltd are totally different. In the above said 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 al....
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....f Ld D.R, has contended strongly that the revenue is not entitled to raise fresh contentions in the hearing fixed for seeking clarifications. However, we may notice that the assessee has also raised fresh contentions in this proceeding. Further, in the Tribunal proceedings, the technicalities are given least importance. The role of both 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 ....
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....ents to be executed and delivered pursuant to any of the foregoing agreements; and (iv) any other writings executed by the parties or their respective Affiliates, which writings are stated to be supplemental to or to amend any of the foregoing agreements." This clause apparently refers to all the agreements entered by all the affiliates of Marriot group 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, Bet....
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.... by popularizing the same amongst public. The value of a Brand would depend upon the acceptance level of the public. More the public admire a brand, more would be its value. Once the public at large start reposing confidence on the "Brand", the same becomes a marketable product in the business circles. Once it becomes a marketable product, the owner of the brand would be entitled to give 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 ....
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....t directly related to these hotels. 59. We may explain the view point of the revenue with an example. Suppose a company would like to collect royalty of say Rs. 100/-. As stated earlier, it is the responsibility of the brand owner to incur expenditure to maintain and promote the Brand Value. Hence, let us assume that the brand owner spends a sum of Rs. 70/- towards expenses. Under the tax laws, the 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 p....
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....imbursement of expenses on itemized basis. Accordingly the Tribunal held that such contributions are to be treated as a receipt in the nature of "Business Profits" covered by Article 7 of DTAA. Since the AO has not examined the receipts under Article 7, the matter was restored to the file of the assessing officer. 63. By placing reliance on the above said decision, the Ld A.R has contended that the amounts 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 p....
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....e are altogether different and hence the said decision rendered by Hon'ble Delhi High Court, in our view, cannot be taken support of. 67. The Ld A.R placed reliance on the decision rendered by Hon'ble Kerala High Court in the case of Commissioner of Agricultural..Vs. M.J.Cherian (supra) to submit that there is no presumption about illegality of a transaction. However, in our view, there is no question of any illegality 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....
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....ing the other party's activities. Even if the other person undertakes the responsibility, he would do it only for profit only and further the brand owner shall be required to incur the same. 71. In the instant case, the assessee has undertaken the job of marketing the "Marriott / Rennaisance" brands. There is no doubt that the assessee company belongs to Marriott group. Further the claim of the assessee that it was undertaking the marketing 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....