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TMI Blog2013 (7) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the defined property which is already in existence and the payment is agreed for its use or right to use. If the payment made is of such a nature which helps in the creation of the defined property, that cannot fall within the ambit of Article 12(4) of the DTAA. When admittedly contribution at the rate of 1.5% by AHL to the assessee, amounting to Rs. 38.59 lacs, is towards marketing activities, it can not be characterized as 'royalties' falling within the ambit of Article 12 of the DTAA – Decided in favor of Assessee. - IT APPEAL NO. 416 (MUM.) OF 2008 - - - Dated:- 17-7-2013 - Vivek Varma And R.S.Syal , JJ. For the Appellant : Ms. Neeraja Pradhan. For the Respondent : K.K. Ved. ORDER:- PER : R.S. Syal This appeal by the Revenue arises out of the order passed by the CIT(A) on 24.10.2007 in relation to the A.Y. 2004-05. 2. The only effective ground raised in this appeal is as under:- "On the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in holding that the payments made under Article 3.1 of the Franchise Agreement and the International sales Marketing Agreement (ISMA) with M/s Ansal Hotels Limited(AHL) is "Royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther electronic media etc. to AHL outside India in order to attract foreign guests. It was also noticed that the marketing and business promotion expenditure was aimed not only for the benefit of the Indian Hotel, but also the Marriot Group as a whole. Since, assessee did not furnish any documentary evidence such as copies of reimbursement of bills of invoices etc. to show the actual nature of services rendered by the assessee, the Assessing Officer held that there was no evidence that the expenditure incurred by the assessee had any link with the money received from AHL. The AO held that the assessee's contention in this regard about the same being "Reimbursement of expenses" was not capable of acceptance. He took note of certain clauses of the Sales and Marketing Agreement dated 26.09.2000 (hereinafter also called 'the Agreement') between assessee and AHL for reaching the conclusion that AHL used the confidential information, know-how of the challenging scenario relating to the market/Industry. He considered Article 12(4) of the DTAA to hold that the entire payment of Rs.90.06 lacs received by the assessee was towards 'Royalty' for the use of brand 'Marriott'/brand preference/bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anchisee shall reimburse in U.S. Dollars to Marriott, or as otherwise directed by Marriott, with respect to each Quarterly Period an "International Marketing Payment'" which as of the Effective Date shall be one and one-half percent(1.5%) of Gross Revenues for each. Quarterly Period during the term of this Agreement beginning on the Opening Date, as a contribution to the International Marketing Fund. All amounts received by Marriot under this Section 3.2A shall be used to pay for International Marketing Activities outside of India. B. In addition to the International Marketing Payment, Franchisee shall reimburse in U.S. Dollars to Marriott, or as otherwise directed by Marriott, the Hotel's share, as determined by Marriott, of the costs of every additional advertising, marketing, promotional or public relations program or activity outside of India in which Franchisee is required to participate pursuant to Sections 4.1 and 4.5 A or in which Franchisee elects to participate pursuant to Section 4.5 B. At the request of Franchisee, Marriott shall provide necessary supporting invoices, bills, debit notes, etc. evidencing such costs. 3.3 Special Advertising Costs To c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "International Marketing Activities" means advertising, marketing, promotional, public relations and sales campaigns, materials, programs, seminars and other activities for MHRS International Hotels and other hotels designated by Marriott. Not all International Marketing Activities will include all MHRS International Hotels. Programs described in section 4.5 are not include in International Marketing Activities. International Marketing Activities shall include the following: purchase of advertising space in magazines, newspapers, and similar printed media; purchase of advertising on radio, television and other electronic media: printing and publication of pamphlets, brochures, the Directory, other directories, and other materials; advertising marketing, promotional, public relations, revenue management and sales campaigns designed to increase sales or public awareness of the System of MHRS International Hotels; market research, customer surveys and guest satisfaction audits; the development of marketing products; the retention of advertising agencies, marketing consultants, and other professionals to assist in the development and implementation of any of the foregoing; the adverti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly when such property is in existence at the time of use. If a property does not pre-exist or is likely to come into existence because of the given payment, the same cannot qualify as 'royalties' because it would, in such circumstances, lack the condition of 'use or right to use'. In other words, the term 'royalties' as per article 12(4) contemplates a consideration for the use of or right to use of the defined property which is already in existence and the payment is agreed for its use or right to use. If the payment made is of such a nature which helps in the creation of the defined property, that cannot fall within the ambit of Article 12(4) of the DTAA. 14. Reverting to the contents of clauses 3.2 and 3.3 of the Agreement, it is manifest that AHL made contribution at the rate of 1.5% towards 'International Marketing Activities', which, in turn, means purchase of advertisement space in magazines, newspaper and other similar media ; advertisement on radio, television and etc. and other activities of the advertising and marketing nature. The Revenue authorities have accepted the Agreement as bona fide without doubting its correctness in any manner. When admittedly contribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to tax. The logic is simple that if Rs. X have been incurred as business expense and the same amount of Rs. X is recovered, then the net outflow is zero, neither warranting any deduction for expense nor leading to the generation of any income. In such a case, the occasion of receipt of reimbursement of expenses cannot attract any taxability. But if against the actually incurring of expense amounting to Rs. X, the reimbursement is Rs. X+Y, then it would mean that the reimbursement is with mark up. Such reimbursement cannot be equated with the actual reimbursement of expenses not attracting any taxation. In order to claim any reimbursement of expense as immune from taxation, the burden of proof is always on the assessee to establish beyond a shadow of doubt that there is no profit element in such reimbursement. 16. Reverting to clause 3.2 of the Agreement, it is noticed that AHL agreed to contribute @ 1.5% of its gross revenue for each quarter towards the international marketing activities. Thus, it is evident that there is an out and out contribution for marketing expenses at a fixed rate on quarterly basis, which was determined in the year 2000. Such contribution at 1.5% of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its taxability or otherwise. 19. It is pertinent to note that the amount of Rs. 38.59 lacs has been received by the assessee from its business franchisee which is in the nature of a revenue receipt. It has no semblance of capital receipt. Obviously such amount, in the absence of any concrete evidence to show as equal to the amount spent, needs to be treated as a receipt in the nature of 'Business profits' covered under Article 7 of the DTAA. Para 1 of this Article clearly provides that the profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise of one State carries on business in other State through a permanent establishment situated therein, then the profits of the enterprises may be taxed in the other State but only so much of them as are attributable to that permanent establishment. The assessee before us is a tax resident of Netherlands. Its business profits are otherwise chargeable to tax in Netherlands. However, the taxability will be attracted in India if assessee carries on business in India through a permanent establ ..... 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