2015 (1) TMI 659 - AT - Income Tax

Indo-US DTAA - amounts received from the Indian Hotels under an agreement titled as International Sales and Marketing Agreement - whether are not reimbursement of expenses - taxability as Royalty or Fee for included services - Held that - 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. 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. Thus it is clear tax planning by adopting colourable device. Accordingly,as 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 Rennaissance . Hence all of them go to swell the existing Brand names referred above. Hence they become taxable as royalty in terms of Article 12 of the Indo US DTAA. However as argued by ld. AR, the assessee in whose hands these amounts are to be assessed is the question that needs to be answered. In our view this question requires examination at the end of the AO. Accordingly, we restore this matter to the file of AO with the direction to consider the question of taxation of receipts as royalty in the hands of the assessee as representative assessee or in the hands of any other group company. The assessee should be given adequate opportunity in this regard. Decided partly in favour of assessee. Levy of interest u/s 234B for non-payment of advance tax - CIT(A) dismissed issue by holding that the assessee did not put forth any argument on that issue - Held that - As A.R placed reliance on the decision rendered in the case of DIT Vs. NGC Network Asia LLC ( 2009 (1) TMI 174 - BOMBAY HIGH COURT), where in the High Court has held that the amount of tax deductible at source is to be taken into account to determine the liability to pay advance tax. Since the assessee is not liable to pay advance tax and accordingly the assessing officer was not justified in levying interest u/s 234B of the Act, said contentions are in accordance with the decision rendered by the jurisdictional High Court, we agree with his contentions. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the assessing officer to follow the decision of Hon ble jurisdictional High Court referred above. Decided in favour of assessee.

Summary

Issues Involved:
1. Nature of amounts received by the assessee under the "International Sales and Marketing Agreement" (ISMA) and their taxability as "Royalty" or "Fee for included services" under the Indo-US tax treaty.
2. Whether the amounts received by the assessee are reimbursements of expenses or income taxable under the Act.
3. Levy of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Nature of Amounts Received Under ISMA:
The primary issue is whether the amounts received by the assessee from Indian Hotels under the ISMA are taxable as "Royalty" or "Fee for included services" under the Indo-US tax treaty. The assessee, a tax resident of the USA and part of the Marriott group, provides international sales and marketing services to Indian Hotels. The revenue contends that the amounts received should be treated as "Royalty" because they are for the use of the brand names "Marriott" and "Renaissance." The assessee argues that these amounts are reimbursements for marketing expenses incurred on a cost-to-cost basis without any profit markup.

The Tribunal noted that the marketing activities under ISMA benefit the Marriott brand as a whole and not any specific hotel. The revenue's position is that these payments are for the use of the trademark and thus qualify as "Royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the Indo-US DTAA. The Tribunal also observed that the agreements between the assessee and the Indian Hotels are interlinked with other agreements within the Marriott group, suggesting a bifurcation of royalty payments into different components.

2. Reimbursement of Expenses vs. Taxable Income:
The assessee claims that the amounts received are reimbursements for expenses incurred on behalf of the Indian Hotels. The Tribunal examined the nature of these payments and found that they are collected as a percentage of the gross revenue of the hotels, which indicates a lack of direct nexus between the expenses incurred and the payments received. The Tribunal concluded that the amounts received for international sales and marketing services, special services, and fees are not mere reimbursements but are part of a structured tax planning strategy by the Marriott group.

The Tribunal held that the amounts received under ISMA should be considered as "Royalty" because they are for the promotion and maintenance of the Marriott brand, which benefits the brand owner. The Tribunal also noted that the assessee's claim of operating on a cost-to-cost basis without profit defies business logic, indicating that the assessee is an extended arm of the brand owner.

3. Levy of Interest Under Section 234B:
The assessee argued that since the amounts received are subject to tax deduction at source (TDS), it is not liable to pay advance tax, and hence, interest under Section 234B should not be levied. The Tribunal agreed with the assessee's contention, relying on the jurisdictional High Court's decision in DIT vs. NGC Network Asia LLC, which held that the amount of tax deductible at source should be considered for determining the liability to pay advance tax. Consequently, the Tribunal directed the assessing officer to follow this decision and not levy interest under Section 234B.

Conclusion:
The Tribunal upheld the revenue's position that the amounts received by the assessee under ISMA are taxable as "Royalty" and not mere reimbursements of expenses. The Tribunal also directed the assessing officer to examine the taxation of these receipts as "Royalty" in the hands of the appropriate entity within the Marriott group. The Tribunal set aside the levy of interest under Section 234B, following the jurisdictional High Court's decision. The appeals filed by the assessee for some assessment years were partly allowed, while others, including the revenue's appeal, were dismissed.