2015 (6) TMI 380 - AT - Income Tax

Royalty income from franchisee hotels - use of registered trade mark of Holiday Inn and Crowne Plaza in hotel business - whether the royalty income should be taxed at the rate of 11.33% or at the rate of 15%, as per the DTAA? - DTAA with USA - Held that - From the perusal of the said agreement, it is seen that the agreement is between SC Hotels & Resorts (India) Pte. Ltd., which has been referred to as manager ; Inter Continental Hotels Group (Asia Pacific) Pte. Ltd., which has been referred as guarantor ; and Today Hotels Private Limited, Indian Company, which has been referred as the owner . The title of the said agreement is for management of the hotels and the terms and conditions under which the manager on behalf of owner will manage the hotel. Here, neither the owner nor the manager has any reference to the assessee. Even clause 9.5, it is seen that the same only provides that the owner will pay to SC Hotels & Resorts (India) Pte. Ltd. the license fees. Here again, there is no reference of the assessee. Further nothing has been brought on record that there was any kind of correspondence or a letter between the assessee and Today Hotels Private Limited, setting out the terms and conditions for the payment of royalty. Under these facts, it cannot be held that the payment of royalty has been made in pursuance of an agreement . Once there is a clear cut provision under the statute, which mandates certain terms and conditions for applying a beneficial rate, then the same has to be applied in a letter and spirit. Thus, we hold that the finding of the CIT(A) that, there is no agreement in terms of which the assessee was paid royalty is legally and factually correct, and therefore, the beneficial rate of tax will not apply. The A.O. has rightly charged the tax rate of 15% as given in the DTAA. - Decided against assessee.

Summary

Issues:
1. Tax rate on royalty income
2. Interpretation of agreement for royalty payment
3. Charging of interest under section 234D

Analysis:

Issue 1: Tax rate on royalty income
The appellant challenged the tax rate applied on royalty income from Today Hotels Private Limited, arguing for a beneficial rate of 11.33% under section 115A of the Income Tax Act, 1961. The Assessing Officer had levied a tax rate of 15%, resulting in increased tax liability. The appellant contended that the Management Agreement dated 17th January, 2006, clearly outlined provisions for royalty payment, even though the appellant was not a direct party to the agreement. The appellant emphasized the intention of the parties and relied on the Indian Contract Act, 1872, to support the argument for applying the beneficial tax rate. However, the Departmental Representative highlighted that section 115A(b)(AA) required royalty to be received in pursuance of an agreement made after 1st June, 2005, with specific terms and conditions. The Tribunal observed that the agreement in question did not involve the appellant directly, and there was no evidence of a separate agreement or correspondence between the appellant and Today Hotels Private Limited regarding royalty payment. Consequently, the Tribunal upheld the tax rate of 15% as per the DTAA, dismissing the appellant's appeal on this issue.

Issue 2: Interpretation of agreement for royalty payment
The disagreement centered on whether the royalty income was received in pursuance of a valid agreement, as stipulated under section 115A(b)(AA). The appellant argued that the Management Agreement implied provisions for royalty payment, either through written or oral agreement, considering the appellant's role as the brand owner. However, the Tribunal found that the agreement did not explicitly involve the appellant, and there was no documented agreement or communication establishing the royalty terms between the appellant and Today Hotels Private Limited. As per the statutory requirement, the Tribunal concluded that the beneficial tax rate could not be applied in the absence of a specific agreement, leading to the confirmation of the tax rate at 15%.

Issue 3: Charging of interest under section 234D
Both parties acknowledged that the issue of charging interest under section 234D was consequential. Consequently, the Tribunal dismissed the appeal on this ground without further elaboration.

In conclusion, the Tribunal upheld the tax rate of 15% on royalty income from Today Hotels Private Limited, emphasizing the necessity of a clear agreement for applying beneficial tax rates under section 115A. The dismissal of the appeal on all grounds resulted in the affirmation of the original tax assessment for the appellant.