9911796707
TMI Blog2015 (1) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company, being only an extended arm of “Marriott group company” owning the Brand name, can be considered as a facade of that company. We have already noticed that one of the group companies of Marriott has received royalty payment @ 0.5% of gross revenue and the assessee company has received about 3% gross revenue towards marketing program. Thus it is clear tax planning by adopting colourable device. Accordingly,as separate legal identity of the assessee company gets blurred and corporate veil should be lifted. Hence, the amount received by the present assessee company should be examined from the point of view of the original owner of the brand. We have already noticed that all the advertisement/marketing program are carried out in the name of “Marriot” and/or “Rennaissance”. Hence all of them go to swell the existing Brand names referred above. Hence they become taxable as royalty in terms of Article 12 of the Indo US DTAA. However as argued by ld. AR, the assessee in whose hands these amounts are to be assessed is the question that needs to be answered. In our view this question requires examination at the end of the AO. Accordingly, we restore this matter to the file of AO wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4. The facts in brief are that the assessee herein is a corporation organized and existing under the laws of the 'State of Dalware' with its principal place of business located at Maryland, United States of America (USA). Hence, it is stated that the assessee is tax resident of USA. The assessee belongs to "Marriott" group, which is engaged in the business of operating hotels worldwide under different brands, viz., "Marriott" and "Renaissance". Besides the above, it is also giving franchisee licence to other hotels so that they can also use the above said brand names. M/s Marriott Worldwide Corporation ('MWC') appears to be one of the affiliate companies belonging to "Marriott" group and it appears to have entered into a "license and Royalty Agreement" with owner of the brands viz., "Renaissance" and "Marriott", meaning thereby these two brands are owned by some other affiliated company of the Group. Under the authority obtained under "License and Royalty Agreement", referred above, M/s MWC gives permission or licence to other Hotels to use above said two brand names on payment of Royalty on agreed terms. 5. Following three Indian companies are engaged in the business of runnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystems"(article 2.03) and "Special Advertising Costs"(article 2.04). 8. As stated earlier, the nature of services to be performed in each of the category are described under Artcile-II of the agreement. From the reading of the agreement dated 05-02-1998 entered between the assessee and M/s Palm Hotels (India) Ltd (presently known as M/s V.M. Salgaonkar and Brothers Pvt Ltd), we notice that the assessee is providing following kind of services to the Indian hotels:- (a) Article 2.01 is related to the International Sales and Marketing Services. According to this clause, the assessee shall provide and/or cause its Affiliates to provide to the Hotels the international services for advertising, marketing, promotion, public relations and sales provided on a central or other group basis for the benefit of Marriott Chain hotels. Such services may be provided in the form of purchasing of advertising space in magazines, newspapers and other printed media; purchase of advertising on radio, television, and other electronic media, printing and publication of pamphlets, brochures etc. All these efforts are designed to increase public awareness of Marriott Chain. The assessee shall also undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s related to the Fees (As per AO, International Sales and Marketing Fees). As per this article, the Marriott shall be paid a fee for the Services to be provided under the agreement, which is in addition to the reimbursement for the costs and expenses incurred. 9. In respect of the services discussed above, the assessee is required to be compensated as under:- (As per the agreement placed at pages 57 -77 of paper book.) (a) For International Sales and Marketing Services as provided in article 2.01, the assessee shall be reimbursed up to one and one-half percent (1.5%) of Gross Revenue for such accounting period (clarified by Ld A.R as "calendar month") as the Hotel's allocable share of the actual costs and expenses of International Sales and Marketing Services. (b) The expenses incurred by Marriott and its Affiliates for provision of services described in Article 2.02 to 2.04 shall be charged to all participating Marriott Chain hotels on a fair and reasonable basis. (c) Towards Fees as per clause 2.05, the Marriott shall be paid at the rate equal to a percentage of Gross Revenue in the following amounts: Accounting Period Percentage of Gross revenues 1-24 1.00% 25-48 1.25% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g activity under this agreement is in general for the Marriott branch and not for any specific hotel or resort. The assessee has itself admitted by way of a written submission dated 17.10.2008, that on account of this activity, the Marriott hotels are able to sell their rooms abroad and hence their demand and profitability increases. However in making this submission, the assessee has failed to understand that the marketing activity under this agreement has benefitted individual hotels inspect of the fact no marketing activity has been carried out in the name of the individual hotels. Thus what has been marketed and sold is the Brand Marriott in its entirety and not any particular hotel or resort & the payment is a consideration for using this trade mark, in the nature of the brand name of Marriott. 5.4 As per sec. 9(1)(vi) of the Income tax Act, 1961 payments made for the use of trade mark are taxable as Royalty. As per Article 13(3) [sic. 12(3)] of the Indo-US DTAA, payments made in any form for use of trade mark is in the nature of Royalty. In view of the same payments received by the assessee under ISMA is in the nature of Royalty. 5.5 More over the contention of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r conducting and also for coordinating the international sales and marketing activities of the hotels within the Marriott chain. In case, the assessee is left with any surplus amount, the same will be carried forward for next year's marketing activities. Accordingly it was submitted that the assessee did not make any profit in undertaking these activities. The Ld CIT(A) did not agree with the contentions of the assessee. The Ld CIT(A) held that (a) the question whether a payment under an agreement is 'royalty' has to be decided on the facts and circumstances of the case and on the terms of the agreement. It is true nature of the consideration and not the nomenclature of an agreement that determines whether a particular receipt is 'royalty' or not. The substance of the transaction must be considered to arrive at a conclusion. (b) The assessee company has a vast knowledge and expertise in the field of international business in the field of international hotel business. The industrial and commercial information is utilized by the assessee company in building image of "Marriott" hotels all over the world. Under Article 12(3) of the DTAA, the payment for use of such assets (brand name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of expenses and held that they are also in the nature of "royalty" only. We have already noticed that the AO had assessed this amount as "Fee for included services". However, the Ld CIT(A) directed the AO to assess this amount as "royalty". 16. With regard to the amount of ₹ 2,61,86,356/- received under Article 2.02 to 2.04, the Ld CIT(A) has expressed the view that the assessee company has received the same for enjoyment of the brand "Marriott" and hence it is directly related to the enjoyment of the same. Though the Ld CIT(A) expressed the view that this amount can also be assessed as "royalty", yet he chose to confirm the view taken by the AO that it is in the nature of "Fee for included services". 17. The Ld CIT(A) placed reliance on the following case laws in support of his view:- (a) Steffen, Robertson & Kristen Consulting Engineers and Scientists Vs. CIT (230 ITR 206)(AAR) (b) Wallace Pharmaceuticals Pvt Ltd (2005)(278 ITR 97)(AAR) (c) Central Mine, Planning & Design Institute Ltd Vs. DCIT (1998)(67 ITD 195)(Pat.) (d) Mahindra & Mahindra Ltd Vs. DCIT (2005)(1 SOT 896)(Mum) (e) Hindalco Industries Ltd Vs. ACIT (2005)(94 TTJ 944)(Mum). The Ld CIT(A) also place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreements entered in the years 1997 and 1998 for a period of 20 years with the right to renew for further period of 10 years. Inviting our attention to pages 96 to 100 of the paper book filed for AY 2006-07, the Ld A.R submitted that the concerned hotels have obtained approval from Government of India for entering into foreign collaboration with the assessee company. He submitted that the approval dated 26-10-1998 was obtained by M/s K. Raheja Resorts & Hotels Ltd (presently known as M/s Chalet Hotels) for entering into a collaboration with M/s Marriott International Design and Con. Services Inc. and other affiliates. Inviting our attention to page 98 of the paper book, the Ld A.R submitted that the Government of India has approved the payments to be made by the Hotels towards Royalty as well as towards marketing/public support fee and the same includes approval for reimbursement of costs from EEFC account for International Sales and Marketing Costs covered by Articles 2.01 to 2.04. Accordingly the Ld A.R submitted that the said approval makes it very clear that the assessee hotels are making different kind of payments, i.e., towards Royalty, reimbursement of expenses, fees e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment made to the assessee herein does not fall in the category of either 'Royalty or 'Fee for included services'. The Panaji bench of Tribunal, vide its order dated 23.12.2013 passed in ITA Nos. 206, 207, 220 & 221/PNJ/2013, has held that the payments made to the assessee by the above said hotel will not fall in the category of either "Royalty" or "Fee for technical services". 24. The Ld A.R submitted that the Government of India has authorized the payment of Royalty to different affiliates of Marriott group. The Government did not authorise payment of "Royalty" to the assessee company. The Ld A.R submitted that there is no presumption about illegality in law. In this regard, he placed reliance on the following observations made by Hon'ble Kerala High Court in the case of Commissioner of Agricultural Income tax Vs. M.J.Cherian (117 ITR 371):-. "12. As justice Rajagopalan pointed out in A.S. Sivan Pillai Vs. CIT (1958) 34 ITR 328 at page 334, "there is no presumption in favour of any illegality of a transaction. In fact, the presumption is the other way about. There must be evidence to show that the assessee did sell goods in excess of the legally fixed rates". 25. The ld A.R su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that the Tribunal, in its order dated 29.11.2003 in ITA No.2083/Mum/2011, has held that these payments are in the nature of business receipts and accordingly set aside the matter to the file of the AO to examine the same in terms of Article 7 of Indo- US DTAA. The department filed a Miscellaneous Application numbered as MA.No.444/Mum/2013 before the Tribunal, but the Tribunal, vide its order dated 02-04-2014, has dismissed the same. The Ld A.R further submitted that the AO, in the instant case, has accepted that the assessee herein does not have a Permanent Establishment in India. Accordingly, he submitted that the impugned receipts cannot be taxed as "business receipts" under Article 7 also. 26. In the alternative, the Ld A.R submitted that the payments received by the assessee from the Hotels are in the nature of "Advance payments" and hence do not have characteristics of income. Inviting our attention to page 105 of the paper book, the Ld A.R submitted that the assessee has clarified the AO that each marketing program is operated on a cost to cost basis, without any profit mark-up. It has further been clarified that the unspent amount remaining at the end of a year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, instead it has indulged in promoting the brand "Marriott" only. The assessee has admitted this fact in his letter dated 17.10.2008 filed before the AO, wherein, in paragraph (c), it is stated that all the marketing activities are performed to promote their hotels in general and they are not geared towards specific hotels. 29. The Ld D.R further submitted that the assessee could not identify the expenses relating to any particular Indian Hotel out of the alleged marketing expenses incurred by it. The assessee has conceded that it is allocating the said expenses on a fair and reasonable basis. The Ld D.R further submitted that the Chennai bench of Tribunal has considered an identical issue in the case of M/s Van Oord ACZ Marine in ITA No. 1733/Mds/2011 (23 Taxmann.com 146) and has held as under:- "Apart from arguing that the payments were in the nature of reimbursement of expenses, the assessee has not explained anything about the pricing of the services, for which the so-called reimbursements were made by the Indian subsidiary to the assessee company. It is the case of the assessee that expenses were reimbursed by the Indian subsidiary at par with invoices issued by the third p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 9(1)(i) and, therefore, the amount received by the applicant from the Indian Hotel would be taxable in India; such payments would constitute "fee for technical services" as defined in s. 9(1)(vii)." The Ld D.R submitted that the principles discussed in the above said case shall apply equally to the facts prevailing in the instant case. 31. With regard to the reliance placed on the approval given by the Government of India to the Indian Hotels for entering collaboration agreements with the companies belonging to the assessee's group, the Ld D.R submitted that the said approval was given in the year 1998 for two years only. Further the Ld D.R submitted that the said approval does not override the Income tax Act. The Ld D.R submitted that the conditions attached in that approval specifically provide that the agreement shall be subject to Indian Laws. 32. With regard to the decision rendered by the Panaji bench of Tribunal in the case of M/s V.M. Salgaonkar & Bro. (P) Ltd (supra), the ld D.R submitted that the Tribunal has given its decision with the rider (para 5.3.2 of the order) that the counsels there in did not show any other contrary decision. Accordingly, the Ld D.R contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, in fact, filed a Miscellaneous petition, but the same was also rejected by the Tribunal without realizing that the order passed for AY 2004-05 does not cover the "Fees" receipts. 35. The Ld. D.R submitted that the Ld CIT(A) has given a clear finding that the assessee has trifurcated the royalty amounts into different types of payments and accordingly held that the two types of receipts covered by Article 2.01 and 2.05 are "royalty" only. Accordingly the Ld D.R submitted that the assessee's group has bifurcated the royalty amount into different types of receipts only to suit its convenience. In reality, the assessee's group is using the funds so collected in different names only to promote the brand name. Accordingly, the Ld D.R submitted that the form should be ignored and the substance should be looked at. 36. With regard to the issue relating to charging of interest u/s 234B, the Ld D.R submitted that it is consequential in nature. The Ld D.R submitted that the assessee is taking contradictory stands viz., on one hand it claims that the Tax is deductible at source by the Indian Hotel while making payments and hence for the failure of the Indian Hotels, it should not be cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the identical proposition was laid down by Hon'ble High Court of Calcutta in the case of CIT Vs. Arun Dua (1989)(45 Taxman 246). He further submitted that the Hon'ble Kerala High Court has held in the case of M.J. Cherian (supra) that there is no presumption in favour of illegality of a transaction. 40. The Ld A.R submitted that assessee has provided services to the hotels and they were independent of the "royalty" payment. The case of the revenue is that there is no one to one correlation between the expenditure and reimbursement. In that regard, he submitted that it was a matter of convenience between the parties and the manner of incurring expenses would depend upon the business model followed by the parties. One of such business model was putting the receipts in a common pool for incurring the expenses on behalf of all. Such kind of business model cannot change the character of reimbursement of expenses into "royalty" payment. 41. The Ld A.R submitted that the view expressed by the Tribunal in the case of M/s Marriott International Licencing Company BV (ITA No.416/Mum/2008) cannot be relied upon by the revenue, since the concession given by that assessee was not binding upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis or absence of element of profit are not deciding factors and it has been so held in the case of Centrica India Offshore P Ltd (364 ITR 336) by Hon'ble Delhi High Court. Accordingly he submitted that the tax authorities are required to see the objective for which the amounts were received by the assessee. 44. He submitted that the hotels have made the impugned payments at the instance of "Marriot" group only. He submitted that the Hotels are constrained to enter into both "Franchisee Agreement" and "International Sales and Marketing Agreement" simultaneously. In fact the survival of the ISMA agreement would depend on the validity of the Franchisee agreement and this fact is evident, if one compares both the agreements. The Ld D.R invited our attention to Clause 3.01(B) dated 11-02-1997 entered between the assessee and Juhu Beach Resorts Ltd, i.e., the above said clause says that if the ISMA agreement is coterminus with the Operating Agreement and Advisory services agreement. If the later one is terminated, then this agreement shall be terminated and if the later one is renewed and this agreement shall be automatically renewed. Further the Hotels are obliged to fully perform i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o portal only by use of computer facility, but the access fee is given only by use of computer system and software system provided by the assessee under license. With regard to the contentions that the identity as separate and different companies should be dismantled, the Ld A.R submitted that even if the claim of the revenue is accepted, still the question as to which company should be assessed, i.e., the question of finding out the right person for assessing all the income shall remain to be answered and whether the assessee can be subjected to tax in respect of brand owned by another person would also remain as critical question to be answered. 48. At the time of hearing, the Ld D.R gave write up containing his contentions. When it was given to Ld A.R, he agreed to furnish a written submission addressing the various contentions within three weeks time. The assessee filed the reply on 12.12.2004. In that letter, it was submitted that the written submissions given by Ld D.R should be ignored. On merits, the assessee has placed reliance on the following decisions rendered by the Co-ordinate benches of Tribunal, which were referred to earlier, to contend that the payments received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon at the time of hearing. However, we notice that the Ld CIT(A) has cited this. 51. Another contention of the assessee is that the Government of India has accorded necessary permission to remit the payment on specific heads and hence the tax authorities are not entitled to take a different view. We are unable to agree with this contention. As submitted by the Ld D.R, the conditions attached to the permission given by Government of India specifically provide that the approval shall be subject to Indian Laws. 52. Now let us recapitulate the facts prevailing in the instant case in brief. The brands "Marriott" and "Renaissance" is owned by a Company (hereinafter "Owner of brand"). The name of the said company is not available on record. The said company has given license to M/s Marriott Worldwide Corporation ('MWC') or M/s Rennaissance International Inc. to permit the use of brands cited above to other hotels on receipt of Royalty. The terms of agreement between the original owner of the brand and M/s MWC is also not available on record. However, as per the authority obtained under the agreement entered with the original owner of the brand, M/s MWC has granted the hotels permissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 3.01(B) of the agreement. From the 'Recital' part of the agreement, it is seen that the Operating Agreement has been entered by M/s Marriott Hotels Private Limited. The Hotels are required to obtain approval from Government of India for entering into Collaboration agreement. One such approval obtained from Government of India is placed at pages 96 to 100 of the paper book. A perusal of the same would show that the Name and address of the foreign Collaborator is given as under:- 1. M/s Marriott International Design and Con. Services Inc., 10400 Fernwood Road, Bethesda, Maryland 20817. 2. Marriott Hotel Services Inc. 3. Renaissance Services B.V 4. Marriott International Inc. 5. Marriott Worldwide Corporation 6. Rennaissance International Inc. 7. Marriott International Hotels Inc. Thus, it is seen that all the above said companies appear to have same address. The details of payments proposed to be made is given in Clause 4 of the approval, as per which (i) Lump sum Technical Services Fee was proposed to be paid to M/s Marriott International Design & Construction Services Inc. (ii) Lump sum 'Pre-opening technical assistance' amount was proposed to be paid to M/s Marriott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e brand. Hence it becomes necessary for the Brand owner to ensure that the public at large do not forget the brand. Hence, in order to maintain the "Brand Value", the brand owner has to take all kind of steps to ensure that the value of the brand remain intact. Hence the responsibility to maintain and/or enhance the "Brand value" always remains with the brand owner. Normally the "Brand value" is maintained by continuous and sustained advertisement/marketing activity, as can be noticed from the repeated advertisements made in the various types of media. 58. In the instant case, it appears that the brands "Marriott" and "Renaissance" are owned by one company, whose name and the activities are not available on record. However, the case of the revenue is that the International Sales and Marketing Agreement (ISMA) entered by the assessee shows that the responsibility to promote the "Brand Value" has been entrusted with the assessee herein, since the marketing activities have been carried out in the name of "Marriott" and/or "Renaissance" only. Since the assessee has collected the charges from the Hotels for carrying out the marketing activities, the revenue has contended that the charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the revenue, the above said methodology would be the fair method of declaring income and the revenue would have collected tax amount of ₹ 15/- under this methodology. 60. The contention of the revenue is that the Marriott group has not adopted the above said method. The royalty was collected by one of the companies of the Marriott group and the responsibility for undertaking International marketing program has been placed upon another company, i.e., the assessee herein. The "Brand users", i.e., the hotels, have been made to pay the cost of international marketing program to the assessee company. In the above said example, the company which has granted license to use the brand shall be receiving royalty amount of ₹ 30/- and the expenses of ₹ 70/- would be collected by the company which took the responsibility of undertaking International marketing program. In this process, the brand owner shall be paying tax @ 15% on ₹ 30/-, i.e., ₹ 4.50. According to revenue, it is deprived of tax to the extent of ₹ 10.50, when the brand owner adopts the second methodology, i.e., the case of the revenue is that the above said methodology is nothing but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's case passed for AY 2007-08 in ITA No.2083/Mum/2011, wherein the Tribunal has held that all the receipts,i.e., the receipts covered by Article 2.01 to 2.04 and also Article 2.05 are in the nature of "Business Profits". Accordingly the matter was restored to the file of the Assessing officer for examining the receipts under Article 7 of the Indo US treaty. He also submitted that the Miscellaneous Application filed by the revenue has been dismissed by the Tribunal. 64. The Ld A.R submitted that these receipts are taxable in India as Business profits, only if the assessee has got Permanent Establishment in India. He submitted that there is no dispute with regard to the fact that the assessee did not have "Permanent Establishment" in India. Accordingly he submitted that these receipts are not taxable in Indo-US DTAA. He further submitted that the concession given by the above said assessee in AY 2004-05 is not binding on the assessee and in any case the principle of res-judicata is not applicable to the Income tax proceedings. 65. However, we notice that in the case of M/s Marriot International Licensing Company BV (supra), the nature of receipt of charges as per ISMA agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arun Dua (supra) to contend that the agreement should not be understood in any other manner, when the same was understood in a certain way by the parties to the agreement. In our view, this case also does not support the case of the assessee. In the instant case, the question is not about interpretation of the agreement, but the dispute is about the "nature of receipts" received by the assessee in the context of tax laws. It is well settled principle that the "Substance shall prevail over Form", when considering the transactions from tax angles. The Ld A.R also placed reliance on the decision rendered by Panaji bench of Tribunal in the case of M/s V.M.Salgaocar & Brs. Pvt Ltd (supra). In this case, the assessee therein is one of the Indian Hotels and the Tribunal has examined the matter from the point of view of the hotel, i.e., the payer of the royalty and other amounts. The Ld D.R has rightly pointed out that all the relevant details concerning the payment were not available before the Tribunal and hence we are of the view the said decision cannot be taken support of. 69. The foregoing discussions would show that the real question in the instat case is -Whether the Marriott has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otive itself proves that the assessee company is only an extended arm of "Marriott group company" owning the Brand name. 72. Hence, we are of the view that the assessee company, being only an extended arm of "Marriott group company" owning the Brand name, can be considered as a facade of that company. We have already noticed that one of the group companies of Marriott has received royalty payment @ 0.5% of gross revenue and the assessee company has received about 3% gross revenue towards marketing program. In our view, it is clear tax planning by adopting colourable device. Accordingly, we are of the view that the separate legal identity of the assessee company gets blurred and corporate veil should be lifted. Hence, the amount received by the present assessee company should be examined from the point of view of the original owner of the brand. We have already noticed that all the advertisement/marketing program are carried out in the name of "Marriot" and/or "Rennaissance". Hence all of them go to swell the existing Brand names referred above. Hence they become taxable as royalty in terms of Article 12 of the Indo US DTAA. However as argued by ld. AR, the assessee in whose hands ..... X X X X Extracts X X X X X X X X Extracts X X X X
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