2016 (7) TMI 1043 - AT - Income Tax

Taxability of royalty income - nature of income - PE in India - DTAA India USA - Held that - The authorities below have proceeded on the assumption that the assessee company is the same entity which has entered into agreements in 1991 and is continuing whereas the fact of the matter is the assessee company is incorporated only on 15-03-2006 for which certificate of incorporation is placed on record by the assessee company at page 25-27 of paper book containing additional evidences. Thus, the fundamental premise on which the authorities proceeded in the matter has crept with an error which goes to the root of the matter and the orders of the authorities below cannot be sustained under these circumstances. In our considered view and in the interest of justice, the issues arising from these appeals needs to be set aside and restored to the file of the A.O. for denovo determination of all the issues on merits . As such, we set aside the matter back to the file of the A.O. with a direction to re-determine the issue de-novo on merits after considering the existing structure of the assessee company and the fresh agreements entered into with various entities in the light of provisions of the Act and DTAA entered into between USA and India . Needless to say that the assessee company be provided with proper and adequate opportunity of being heard by the AO in accordance with the principles of natural justice in accordance with law. The assessee company will be allowed to submit relevant additional evidences , material and explanations in support of its contentions in its defense, which shall be admitted by the AO and adjudicated on merits. - Decided in favour of assessee for statistical purpose.

Issues Involved:
1. Determination of Permanent Establishment (PE) status of Graviss Foods Private Limited (GFPL).
2. Classification and taxation of royalty income.
3. Restriction of expenses allowance and depreciation on trademarks.
4. Levy of interest under sections 234D and 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Determination of Permanent Establishment (PE) Status of Graviss Foods Private Limited (GFPL):
The primary issue was whether GFPL constituted a dependent agent PE of the assessee company, Baskin Robbins Franchising LLC (BRF). The AO concluded that GFPL was a dependent agent PE, based on the agreements between BRF and GFPL, including the Manufacturing License Agreement, Franchise Agreement, and Development Agreement. The AO's assessment was based on the assumption that BRF had a continuous business presence in India since 1991 through a joint venture. However, the assessee contended that BRF was incorporated only on 15-03-2006 and entered into fresh agreements with GFPL post-2007 restructuring. The Tribunal found that the authorities below had erroneously assumed the continuity of the old joint venture agreements and did not consider the new structure and agreements post-2007. Therefore, the Tribunal set aside the matter for de-novo determination, directing the AO to re-evaluate the PE status considering the correct existing structure and agreements.

2. Classification and Taxation of Royalty Income:
The AO treated the royalty income as "Business income" taxable under section 28 read with section 44DA of the Act, instead of "Income from Other Sources" as declared by the assessee. The royalty income included initial franchisee fees, royalty payment on store opening, and royalty payment on sales and access fees. The Tribunal noted the need to re-evaluate the classification of royalty income based on the new agreements and structure post-2007. The matter was remanded back to the AO for reconsideration in light of the correct facts and applicable provisions of the Act and the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

3. Restriction of Expenses Allowance and Depreciation on Trademarks:
The AO restricted the allowance of expenses to 5% of the royalty fees without any basis and did not allow a deduction for depreciation on the trademark. The assessee argued that the authorities did not appreciate the fresh agreements and the restructuring, leading to an erroneous conclusion. The Tribunal directed the AO to re-examine the allowance of expenses and depreciation claims in the context of the new agreements and structure.

4. Levy of Interest under Sections 234D and 234B:
The AO levied interest under section 234D amounting to ?2,12,264 on the amount of refund not received by the assessee and under section 234B amounting to ?17,35,846. The Tribunal did not specifically address this issue in detail but implied that all aspects, including the levy of interest, should be re-evaluated by the AO during the de-novo assessment.

Conclusion:
The Tribunal found that the authorities below had proceeded based on incorrect assumptions regarding the continuity of the old joint venture agreements and did not consider the new structure and agreements post-2007. The Tribunal set aside the assessment order and remanded the matter back to the AO for de-novo determination of all issues on merits, considering the correct existing structure and agreements. The AO was directed to provide the assessee with a proper opportunity to present additional evidence and explanations. The appeal was allowed for statistical purposes.

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