2018 (5) TMI 1263 - AT - Income Tax

Income from franchise fee and consultancy services - Nature of Royalty - whether taxable @ 10% as per India-USA Double Taxation Avoidance Agreement (DTAA) - P.E. in India - physical control on the business of franchise and sub-franchise - taxability as royalty income or income u/s 44DA - Held that - the Jubilant or sub-franchise are not storing any goods on behalf of assessee. From the sub-franchise, the assessee is entitled only royalty and store opening fees. The assessee has no authority to maintain in the first mentioned state its stock or goods or merchandise from which he regularly deliver goods or merchandise on behalf of the assessee. No activities are carried out by the by Jubilant on behalf of the assessee. In our view, none of the clause either (a), (b) or (c) of Article-5.4 are applicable on the assessee. Considering the contents of the MFA and SFA, the Master franchise are independent business entity, the restriction provided in MFA and SFA are only to safeguard the brand value and to ensure the correct receipt of royalty income as concluded by DRP. Hence, we do not find any infirmity or illegality in the assessment order passed in pursuance of direction of DRP. The case law relied by DR in Formula One World Championship Ltd. 2017 (4) TMI 1109 - SUPREME COURT OF INDIA is not helpful to the Revenue. As the fact of the said case are at variance. In the said case physical control of the circuit was with Formula One World Championship Ltd. (FOWC) and its affiliates from the inception. However, in the present case, there is no physical control on the business of franchise and sub-franchise by the assessee. - Decided against revenue

Summary

Issues:
1. Whether Jubilant Food Works Limited constitutes a Permanent Establishment of the assessee in India.
2. Whether the income of the assessee should be treated as royalty income only and not income u/s 44DA of the Income-tax Act, 1961.

Issue 1: Permanent Establishment (PE) in India
The Revenue contended that Jubilant is an agency PE of the assessee under the India-US DTAA, emphasizing the fixed place of business criterion. The Revenue argued that foreign enterprises' income through a business connection in India is taxable. The Revenue relied on the decision of Formula One World Championship Ltd. vs. CIT to support its position.

The assessee, on the other hand, maintained that Jubilant's independence and lack of authority to conclude contracts on behalf of the assessee refute the existence of a dependent agent PE. The assessee highlighted clauses in the Master Franchise Agreement (MFA) showing Jubilant's autonomy in business operations and decision-making. The assessee presented case laws like Bhopal Sugar Industries Vs Sales Tax Officer and Western Union Financial Services Inc to support its stance.

The Tribunal analyzed the MFA and sub-franchise agreements, concluding that Jubilant operated as an independent entity and did not meet the criteria for a dependent agent PE. The Tribunal found no merit in the Revenue's argument, distinguishing the case facts from Formula One World Championship Ltd. The Tribunal upheld the DRP's decision, dismissing the Revenue's appeal on this ground.

Issue 2: Treatment of Income
The Revenue's appeal on this issue became academic after the Tribunal's decision on the first issue. Since the finding on the first issue was confirmed, the discussion on the treatment of income under section 44DA did not proceed further.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the DRP's decision that Jubilant Food Works Limited did not constitute a Permanent Establishment of the assessee in India. The Tribunal's detailed analysis of the agreements and legal provisions supported the conclusion that the assessee's income should be treated as royalty income, not income under section 44DA of the Income-tax Act, 1961.