2022 (5) TMI 730 - AT - Income Tax

Income of royalty arising out of the above trademark of brand Marriott - taxable in the hands of the assessee or not? - HELD THAT - Assessee has given a registration certificate dated 21st august, 2006 and covers above assessment years. No doubt, as held by the Hon'ble Delhi High Court in the case of CUB Pty Limited 2016 (7) TMI 1094 - DELHI HIGH COURT that since the brand owner not located in India, the situs of the brand would also be outside India and naturally, the income arising there from would be chargeable to tax in the hands of the owner of the brand. In fact, Marriott International Inc. (assessee) in these appeals is not the owners of the brand as per certificate of ownership produce before us. Therefore, it is chargeable to tax in the hands of the person who owns the brand. Nevertheless, it is not the contention of the assessee that no tax should have been deducted under section 195 of the Act on the payments made by, Juhu Beach Resorts Limited, V.M. Salgaonkar and Brothers Pvt. Ltd. and Chalet Hotels Limited and we are also conscious of the fact that sum is received by the assessee and provision of section 163 of the act also needs to be examined. However, there is a substantive provision for that. We set aside all these four appeals back to the file of the learned Assessing Officer with a direction to consider the certificate of registration on trademark dated 21 August 2006, which was applied for on 24 November 2003. AO may re-consider that in whose hands the above income is chargeable to tax as royalty income. AO may also consider that who received the above sum on behalf of the non- resident tax payers and whether the provision of section 163 of the Act can be invoked or not considering assessee as an agent of Non-resident. Appeal allowed for statistical purposes.

Summary

Issues Involved:
1. Taxability of amounts received under the International Sales and Marketing Agreement (ISMA).
2. Determination of the rightful entity liable for tax on ISMA receipts.
3. Classification of ISMA receipts as royalty or reimbursement of expenses.
4. Application of section 271(1)(c) of the Income Tax Act for penalty proceedings.
5. Consideration of the assessee as an agent under section 163 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of amounts received under the International Sales and Marketing Agreement (ISMA):
The primary issue was whether the amounts received by the assessee under ISMA should be taxed in the hands of the assessee or another group company. The assessee argued that these amounts were reimbursements and not taxable, whereas the Assessing Officer (AO) held that these amounts were chargeable to tax as royalty. The ITAT had previously directed the AO to re-examine this issue, considering the assessee as a potential representative of the original brand owner.

2. Determination of the rightful entity liable for tax on ISMA receipts:
The ITAT had earlier observed that the assessee, being an extended arm of the Marriott group, could be seen as a facade of the company owning the brand. The AO was directed to determine whether the amounts received should be taxed in the hands of the assessee or another group company. The AO concluded that the amounts should be taxed in the hands of the assessee, as it was acting as a facade for the brand owner, Marriott Worldwide Corporation (MWC).

3. Classification of ISMA receipts as royalty or reimbursement of expenses:
The AO classified the ISMA receipts as royalty, stating that the assessee's activities contributed to the brand's value, which should be considered royalty under Article 12 of the Indo-US DTAA. The AO also held that the reimbursement of expenses was taxable as fees for included services. The CIT(A) upheld this classification, noting that the assessee failed to provide documentary evidence to support its claim that the amounts were mere reimbursements.

4. Application of section 271(1)(c) of the Income Tax Act for penalty proceedings:
The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. The AO noted that the assessee had failed to produce documentary evidence to substantiate its claims, despite repeated opportunities. The CIT(A) supported the AO's decision, emphasizing the lack of evidence provided by the assessee.

5. Consideration of the assessee as an agent under section 163 of the Income Tax Act:
The AO considered the assessee as an agent of the non-resident entity (MWC) under section 163, stating that the assessee received the amounts on behalf of MWC. The CIT(A) upheld this view, noting that the assessee did not provide sufficient evidence to refute this claim.

Conclusion:
The ITAT set aside the appeals back to the AO, directing the AO to reconsider the taxability of the royalty income, taking into account the trademark registration certificate dated 21 August 2006. The AO was instructed to determine the rightful entity liable for tax and whether the provisions of section 163 could be invoked. The AO was also directed to examine whether the tax was deducted under section 195 by the payer and whether the payer could be considered an agent of the non-resident. All four appeals were allowed for statistical purposes, and the AO was instructed to issue requisite notices before proceeding against any assessee.