TaxTMI 
TaxTMI 
2015 (4) TMI 710
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....he assessee had entered into a Master License Agreement, a Service agreement with its parent company - McDonald's Corporation, USA ("MDC USA" in short). The assessee had different sources, which included initial franchise fee of USD 45,000, whenever a new restaurant was franchised. The AO required the assessee to justify and furnish proof in support of its claim that it had reduced the initial franchise fee from USD 45,000 to USD 22,500, particularly when in the Master License Agreement with the parent company, the franchise fee to be charged from the franchisee had to be USD 45,000. The assessee replied as under: "3.1 The assessee replied vide its letter dated 7/2/06 stating that: "The opening franchise fee was reduced from USD 45,000 to USD 22,500 with effect from July 1, 2002 through December 31,2004 by means of a management decision with a view to broaden' the restaurant base and strengthen the position of the company in India by increasing the sale of McDonald's products." 3.2 The assessee further replied vide its letter dated 6/3/06 stating that: "the assessee has not been operating any restaurant on its own, and has however, franchised the restaurants through....
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....axable income as the joint venture companies were already showing losses and payment of initial franchise fee at a lower rate by the joint venture companies to the assessee will not have the effect of increasing their taxable income. He, accordingly, took the amount of initial franchise fee @ USD 45000 and made an addition of Rs. 97,81,425/- being the difference between the initial franchise fee returned by assessee and that as per Master License Agreement. 3.3. Ld. CIT(A) allowed the assessee's appeal after considering the detailed submissions as reproduced in para 16.3 of his order for the following reasons: "16.4 . I have gone through the above submission of the appellant and I agree with the appellant's submission that when as per the agreement between the JV company and the New Franchisee the initial franchise fee chargeable on opening of new restaurant is USD 22,500, then there cannot be any question of charging and showing of USD 45,000 as income by the appellant as no real income arose to the appellant by the receipt and disbursement of initial franchise fees and also the notional income cannot be taxed. Further I agree that even if the appellant should have colle....
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....irm the actual opening date ("Opening Date") in writing signed by Franchisee." 4.3. He further referred the general services of Franchisor contained at third covenant and pointed out that entire system of USA was to be given to the Franchisee. 4.4. Ld. Standing Counsel further referred to covenant 9 which deals with Franchise fee which reads as under: 9. FRANCHISE FEE: Franchisee shall pay to Franchisor fee for the right to operate the Restaurant in accordance with this Agreement in the amount of the Indian Rupee equivalent of forty-five thousand United Sales Dollars (US.S 45,000.00). Franchisor reserves the right, in case construction of the Restaurant should be abandoned the lease assigned or other interest in the premises be relinquished to terminate this Agreement upon reimbursement to Franchisee of the Franchise Fee." 4.5. With reference to these two agreements, the ld. Standing Counsel submitted that the fee could not be reduced by management's decision unless proper resolution was passed. He referred letter dated 8-12-2012, from Senior Finance Manager, McDonald's MEDC, addressed to Vikram Bakshi/ Amit Jatia, by which it was intimated to them that franchise fee wou....
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....ere was change in the substance of agreement and the same was required to be duly executed by the parties. No unilateral execution of the same is permissible. 5.2. Ld. Standing counsel submitted that no supporting evidence in proof of claim of USD 45,000 to USD 22,500 was furnished before AO. 5.3. Ld. CIT(A) decided the issue on the ground that no real income accrued to assessee but he did not consider the true import of agreement. 6. Ld. counsel for the assessee referred to page 75 of PB, wherein the Franchise agreement dated 5-3-2003 between assessee and Vikram Bakshi is contained in which Franchise fee, as per covenant 9 was USD 22,500. Ld. counsel further referred to page 309 of the PB, wherein the grounds of appeal, raised before ld. CIT(A) are contained, in which it was, inter alia, submitted that in any case even if the asessee should have collected the Franchise fee @ USD 45,000, the same was payable to McDonald's Corporation and was not the income of the asessee. 7. We have considered rival submissions and perused the record of the case. At the outset we may clarify that we are deciding the issue to the extent of entitlement of Franchisee fee as per the Master Lice....