Case Law Details
Marriot International Inc. Vs DDIT-International Taxation (ITAT Mumbai)
In the instant case, the assessee has undertaken the job of marketing the “Marriott / Rennaisance” brands. There is no doubt that the assessee company belongs to Marriott group. Further the claim of the assessee that it was undertaking the marketing work on cost to cost basis without any mark up defies the business logic or prudence. A commercial company shall never work without profit. The very fact that it was functioning on cost to cost basis or without profit motive itself proves that the assessee company is only an extended arm of “Marriott group company” owning the Brand name.
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 these amounts are to be assed 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 with the direction to consider the question of taxation of receipts as royalty in the hands of the assessee as representative assessee or in the hands of any other group company. The assessee should be given adequate opportunity in this regard.
FULL TEXT OF THE ITAT JUDGEMENT
The appeals filed by the assessee relate to the assessment years 2006-07 to 2009-10. The appeal filed by the revenue relates to the assessment year 2008-09. All these appeals are directed against the orders passed by Ld CIT(A). All these appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
2. Since the issues agitated in the appeals filed by the assessee are almost identical in nature, we shall take up the appeal relating to the assessment year 2006-07 as the lead case. The facts relating to the issues under consideration are discussed hereunder with reference to A.Y 2006-07.
3. The assessee is aggrieved by the decision of Ld CIT(A) in holding that the amounts received by it from the Indian Hotels under an agreement titled as “International Sales and Marketing Agreement” are not reimbursement of expenses, but they are income taxable under the Act in the category of “Royalty” and “Fee for included services” in terms of Indo-US tax treaty.
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 running Hotels in India (these three companies shall be collectively referred as “Indian Hotels” or “Hotels” in the succeeding paragraphs).
(a) M/s Juhu Beach Resorts Ltd, which owns “J.W. Marriott Hotel” in Mumbai.
(b) M/s Chalet Hotels Ltd (formerly known as “K. Raheja Resorts and Hotels Ltd), which owns “Renaissance Hotel” and “Marriott Executive apartment” in Mumbai.
(c) M/s V.M. Salgaonkar and Brothers Pvt Ltd (formerly known as “Palm Hotels Ltd), which owns “Goa Marriott Resort”.
The above said three Indian Companies have entered into an agreement with M/s MWC for using the brand name “Marriot” and/or “Renaissance”, as the case may be, and they have paid royalty to M/s MWC as per the agreement entered by each of them with M/s MWC. It is stated that M/s MWC has offered the royalty received from the above said three companies as its income. There is no dispute with regard to this fact.
6. We have noticed earlier that the assessee herein is also an affiliate of “Marriott” group. The assessee has entered into an agreement with the above said three Indian Hotel Companies titled as “International Sales and Marketing Agreement” (ISIM), as per which, the assessee has agreed to carry out “sales and marketing services” outside India. It is stated that the terms and conditions of agreement entered by each of the Indian Hotel Company with the assessee are substantially identical. The above said agreement was entered in the year 1997 / 1998. The initial term of the agreement entered by first and third Indian Hotel company, referred above, was 20 years, with an option to renew it for further period of 10 years on same terms and conditions. In the case of second Indian Hotel Company, the initial term was 15 years, with an option to renew it for further two successive additional periods of five years.
7. The services that are proposed to be provided by the assessee to the three Indian Hotel Companies are stated in Article-II of the Agreement. Broadly, they have been classified into following three categories:-
(a) International Sales and marketing Agreement (ISMA) – Article 2.01
(b) International Sales and Marketing Fee (ISMF) – Article 2.05
(c) Reimbursement of Expenses incurred on providing services on centralized basis to all the Marriott group of companies. These services have been described under the heads “Special Chain Services”(article 2.02), “Reservation Systems”(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 undertake market research and development of marketing products, advertising, marketing, promotion and sales activities of Marriott’s and its Affiliates. It is specifically provided that any advertising, marketing, promotion or sales services generated directly by the Hotel, whether in India or outside India, shall not be part of the International Sales and Marketing Services.
(b) Articles 2.02 to 2.04 is related to the reimbursement of expenses.
(i) As per article 2.02 (titled as “Special Chain Services”), the Marriott shall provide and/or cause one or more Affiliates to provide on a central or regional basis to Marriott Chain of hotels “Special marketing services and programs” other than those described in Section 2.01. The said services are intended to benefit the Marriott Chain (“Special Chain services”), and Marriott may require the Hotel to participate in such Special Chain Services. As of the effective date, these Special Chain services include the “Frequent Traveler Program”.
(ii) As per Article 2.03 (titled as “Reservations System”), Marriott shall make available and/or cause one or more of its Affiliates to make available for the benefit of Hotel Marriott’s International centralized reservations system (“Reservations System”) and the Hotel Shall be required to use the Reservations Systems. As of the effective date, the Reservation System includes, without limitation, the international reservations centre, the toll-free reservations telephone networks (currently available in over 45 countries world wide), reservation and similar literature, all Marriott Sales and reservations offices throughout the world, and participation in International reservations associations in which Marriott and/or any of its Affiliates is a member.
(iii) As per article 2.04 (titled as “Special Advertising Costs”) reads as under:-
To compensate Marriott for the provision of special Services related to International advertising and potential liabilities arising therefrom and to participation of the Hotel in the Marriott Chain, Owner (here it means the Indian Hotels, referred above) shall reimburse Marriott each calendar year for the Hotel’s allocable share of all costs and expenses incurred by Marriott and its Affiliates in providing such special Services which shall be charged to all participating Marriott Chain Hotel hotels on a fair and reasonable basis..”
(c) Article 2.05 is 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% |
| 49 and thereafter | 1.50% |
The amount collected by the assessee as “Fees” as per clause 2.05 varies from hotel to hotel. In case of Juhu Beach Resorts Ltd., the assessee has collected fees at 2% of the gross revenue for the entire period of agreement and in case of M/s Chalet Hotels, it was collected at 1% of the gross revenue for the entire period of agreement.
10. During the year under consideration, the assessee received following amounts from the three Indian Hotels, referred above.
| Name of Party | ISMA (Taxes withheld) Article 2.01 | ISMF (Taxes withheld) Aticle 2.05 | Reimbursement of Expenses (Taxes withheld)Art.2.02 to 2.04 |
| M/s Juhu Beach Resorts Ltd | 2,51,13,937 (37,67,089) | 3,34,85,249 (50,22,787) | NIL (NA) |
| M/s Chalet Hotels Ltd | 1,80,67,666
(27,10,151) |
1,31,90,139
(19,78,520) |
2,61,86,356
(39,27,955) |
| M/s V.M. Salgaonkar & Brothers Ltd | 58,51,058 (NIL) | 58,51,058 (NIL) | NIL (NA) |
| TOTAL | 4,90,32,661 (64,77,240) | 5,25,26,446 (70,01,307) | 2,61,86,356 (39,27,955) |
The assessee filed its return of income for the year under consideration on 30.11.2006 declaring a total income of Rs.2,61,86,356/- . Subsequently, the assessee filed a revised return of income on 07.02.2007 declaring NIL income and accordingly sought refund of entire TDS amount of Rs.1,74,06,511/- (64,77,240 + 70,01,307 + 39,27,955+ rounding off difference). In the revised return of income, the assessee has contended that the above said receipts are in the nature of reimbursement of expenses and hence nothing is taxable in its hands.
11. On the basis of revised return of income, the assessee submitted before the AO that it has received the said amounts from the Indian Hotels towards reimbursement of expenses incurred for general marketing activities and further they have been received on actual basis (cost to cost) without adding any mark-up. It is further stated that the Indian Hotels are paying Royalties to a different entity under a separate agreement and hence these reimbursements cannot be considered as Royalty. The above said explanations were not acceptable to the assessing officer. The AO held that the amount of Rs.4,90,32,661/- received in respect of International Sales and Marketing Services is taxable as “Royalty”. The relevant observations made by the AO are extracted below, for the sake of convenience:-
“5.3……. The marketing 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 that there is no element of markup on this payment and that the hotels are already paying Royalty to another entity under a separate agreement is also not correct in view of the fact that the expenses are allocated and not based on actuals. Further the fact that the hotels are already paying Royalty to another entity is also not relevant since the nature of payment will have to be decided on the facts and situation of each payment and not on the terminology used in the agreement.
12. With regard to the amount of Rs.5,25,26,446/- received as “International Service Marketing Fees”, the AO held that the marketing services are to be provided to the Marriott brand of hotel and not to the individual owner and hence there is direct nexus (sic – “no direct nexus”) between the owner or the individual hotels and provision of such services and hence the payment received is not in the nature of reimbursements. The AO took the view that the above said fee paid falls in the category of managerial services u/s 9(1)(vi) of the Act and in the category of “Fee for included services” under Article 13(4) [sic. 12(4)] of the Indo-US DTAA.
13. With regard to the amount of Rs.2,61,86,356/- received as reimbursement of expenses incurred in connection with marketing, the AO held that there is no direct nexus between the individual Marriott Hotels and rendering of these services and that these receipts are part and parcel of amount received as “Fees”. Accordingly, the AO held that the above said amount also falls under the category of “Fee for included services”. Accordingly the assessing officer brought to tax the aggregate amount of Rs.12,77,45,463/- relating to all the three types of receipts as the income of the assessee and levied tax @ 15%. The AO also charged interest u/s 234B of the Act for non-payment of advance tax.
14. The assessee challenged the order passed by the AO by filing appeal before Ld CIT(A). Before the first appellate authority, the assessee contended that the payments related to International Sales and Marketing Services (Article 2.01 – ISMA) are received towards marketing activities undertaken by the assessee and they do not fall within the definition of “royalties” as provided in Article 12 of Indo-US treaty. It was submitted that the assessee company has received contributions from the participant hotels to defray the expenses incurred for 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 “Marriott”) would fall within the definition of ‘royalty’.
(c) In the present case, the assessee company has received consideration of Rs.4,90,32,661/- for promoting use of brand “Marriott” from three Indian hotel Companies and this image has been built by charging the amount spent on global program of advertising, marketing and sales promotion from the participating hotels.
(d) The amount paid by the Indian owner companies (Hotels) subject to maximum of one and half percent of gross revenue does not point out to any specific item of expenditure incurred on behalf of the hotel owner companies.
(e) Merely because the assessee company and other company of the same group have signed two different agreements with the hotel companies, one for promoting global brand of the assessee company and the other one for payment of “royalty” does not change the true nature of the transaction. It is a case of splitting of royalty amount by signing two different agreements with two different companies of the “Marriot” group.
(f) The three agreements signed by the assessee company with three Indian Companies is a colourable device to reduce the gross “royalty amount” earned by the Marriott group of companies in India, which was taxable in India.
(g) A company charging “royalty” from various other companies for use of a brand name has to incur expenditure out of the ‘royalty’ amount earned by it in order to promote and build international brand name worldwide. But the said expenditure is not deductible against the royalty amount under the Act. (Hence the assessee has resorted to these types of segregating the royalty amount).
(h) The assessee company has not incurred expenses for promoting a particular hotel. In that case, how the Indian hotel companies can reimburse expenses to the assessee company when the expenses are not directly related to these hotels.
(i) Hence the above said amount of Rs.4.90 crores is royalty only.
(ii) Without prejudice to the above, it can also be considered as “Fee for included services”, since these services are ancillary and subsidiary to the enjoyment of the right and the information, for which a payment has already been made as ‘royalty’.
15. With regard to the receipt of Rs.5,25,26,446/- as per article 2.05 of the agreement, the Ld CIT(A) rejected the contentions of the assessee that they are in the nature of reimbursement 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 Rs.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 placed reliance on the Circular No.715 dated 8th Aug., 1995 issued by the CBDT.
18. With regard to the issue relating charging of interest u/s 234B, the Ld CIT(A) dismissed the same by holding that the assessee did not put forth any argument on that issue.
19. Thus, the Ld CIT(A) dismissed the appeal filed by the assessee. Aggrieved, the assessee has filed this appeal before us.
20. The Ld A.R submitted that the impugned payments received by the assessee are mere reimbursement of expenses. He submitted that though the agreement provides for payment of expenditure/cost incurred in providing International Sales and Marketing services under article 2.01 and for payment of fees under article 2.05 as a percentage of Gross revenue, yet the surplus, if any, available after incurring the concerned expenses is either refunded to the hotels or included in the next year’s spending. He further submitted that the assessee is allocating the expenses and costs incurred for marketing programs on actual basis without adding any mark-up for profit. Accordingly he submitted that the assessee did not make any profit out of these amounts. He further submitted that the amount received as “Fees” under article 2.05 and also the other two kinds of receipts may, at the most, be considered as the business receipts of the assessee. In that case, it can be subjected to tax under Article 7 of the Indo-US DTAA, if the assessee has established “Permanent Establishment” in India. The fact that the assessee did not have Permanent Establishment in India was mentioned in the Return of Income and the said fact was also brought to the notice of the AO through the letter dated 13-08-2008. He submitted that the assessing officer has also accepted the fact that the assessee does not a Permanent Establishment in India. Accordingly he submitted that the impugned receipts cannot be taxed as business profits.
21. He further submitted that there was difference of opinion between the AO and CIT(A) with regard to the nature of receipts. While the AO has considered the receipts falling under Article 2.01 as “Royalty” and other two receipts as “Fee for included services, the Ld CIT(A) has considered the receipts falling under Article 2.01 and 2.05 as “Royalty” and the remaining receipt as “Fee for included services”. Ld A.R submitted that the assessee has been receiving these kind of receipts in pursuance of 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 etc. Accordingly he contended that each payment is made for specific purposes and hence all of them cannot considered as “Royalty” or “Fee for included services”. Accordingly he contended that the tax authorities are not correct in taking an a stand which contradicts with the approval given by the Government of India.
22. The Ld A.R submitted that the Hotel companies have paid “royalty” for use of the brand name Marriot and Renaissance to another group company. On the other hand, they have made the impugned payments to the assessee company for providing specific services and hence they cannot fall in the category of “Royalty” as per the definition given in Article 12(3) of the Indo-US DTAA. He further submitted that the assessee company is not ancillary or subsidiary of the Company, which gave license to the Hotel companies to use the brand names. He submitted that the Royalty can be paid by the user even without availing specific services. However, in the instant case, the assessee herein has provided independent services which are not at all linked to the royalty payment. He further submitted that the Ld CIT(A) has expressed a view that the payments made as per article 2.02 to 2.05 are in the nature of ‘Fee for included services’ as defined in Article 12(4)(a) of the Indo-US DTAA with the reasoning that the said payments are ancillary and subsidiary to the application or enjoyment of the right for which ‘royalty’ was paid. The Ld A.R submitted that Hotel companies have paid royalty to another Company and not to the assessee. In the agreement entered by the assessee with the Hotel companies, there is no reference to the “royalty” and hence Ld CIT(A) was not correct in invoking Article 12(4)(a) of the Indo-US treaty, since these payments have been for specific services, which are not connected with the payment of Royalty. The services provided by the assessee company do not fall in the category of “technical” or “consultancy” services also. He further submitted that the said services may fall in the category of “managerial” services and in that case, it will not be hit by Article 12(4) of the Indo-US DTAA.
23. The Ld A.R further submitted that the payments made to the assessee by M/s V.M.Salgaonkar Bros. Pvt Ltd (one of the hotels referred above) was subject matter of dispute between the said hotel and the revenue. The above said hotel contended that the payment 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 submitted that identical issues has already been decided by the Mumbai bench of Tribunal in another case. He invited our attention to the order dated 17-07-2013 passed by the Mumbai bench of Tribunal in the case of a group Company named M/s Marriott International Licensing Company BV, Netherland in ITA No. 416/Mum/2008 relating to the assessment year 2004-05.
He submitted that the assessee therein had also received identical type of payments viz., International Sales and Marketing services (article 3.2 equivalent to article 2.01 ), Special advertisement costs (article 3.3 equivalent to articles 2.02 to 2.04) and Fees (article 3.1 equivalent to article 2.05). The above said assessee claimed the above said receipts as exempt. But the AO assessed the all the three types of receipts as “Royalty”. The Ld CIT(A) held that the Fee receipts (article 3.1 equivalent to article 2.05) is royalty and other two types of receipts are ‘reimbursement of expenses”. The assessee therein accepted the order passed by Ld CIT(A). The revenue preferred appeal before the ITAT challenging the decision rendered by Ld CIT(A) in holding that the other two types of receipts are reimbursement of expenses, viz., International Sales and Marketing Services and Special Advertisement costs. The revenue contended before the Tribunal that the impugned expenses were directed towards brand building and go to benefit the “brand name” only. However, the Tribunal has held as under:-
“Even if we accept that the contribution made by AHL towards the international marketing activities led to the brand building, still it would be a payment for the creation or swelling of the brand and not for the use of such brand, which could qualify to be characterized as “royalties”. Viewed from any angle, it is abundantly clear that the amount in question relatable to clauses 3.2 and 3.3 of the Agreement cannot be held as “royalties” falling within the ambit of Article 12(4) of the DTAA. Thus the AO’s action in treating this amount as royalties is set aside.”
The Ld A.R submitted that the assessee, in the above said case, accepted the decision of Ld CIT(A) in holding that the payments received as Fees (Article 3.1 equivalent to Article 2.05) is taxable as “royalty”. However, in a subsequent assessment year, i.e., AY 2007-08, the assessee challenged the order of Ld CIT(A) in respect of all the three types of receipts. 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 IndoUS 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 is either refunded to the hotels or included in the next year’s spending. He, then, invited our attention to pages 141 and 142 of the paper book and submitted that these financial documents pertain to the contributions received from the participating hotel. He submitted that these financial documents clearly show that the assessee did not make any profit and further they also substantiate the claim that the unspent amount are either spent or carried forward to the next year’s spending. Accordingly, he reiterated that the contributions received by the assessee from the hotels are only “Advance receipts” to be spent for specific purposes. In this regard, the Ld A.R placed reliance on the order dated 12-05-2006 passed by the Mumbai bench of Tribunal in the case of Bass International Holding NV in ITA No.4341/Mum/2002 relating to the AY 1997-98. He submitted that the Tribunal, in the above cited case, has held that the contributions received by the assessee therein for marketing purpose (identical with the facts available in the instant case) is having corresponding obligation to use for the agreed purposes and hence it was not an unfettered receipt in the hands of the assessee therein. The Tribunal further held that it was a kind of ‘trust money’ and received in a fiduciary capacity. Accordingly the Tribunal, in the above cited case, has held that the amount received as marketing contribution is not taxable.
27. With regard to the issue relating to charging of interest u/s 234B of the Act, the Ld A.R submitted that the TDS was deductible from the payment received by the assessee and hence the assessee was not liable to pay advance tax. The Ld. A.R submitted that there is no question of charging of interest u/s 234B of the Act, since the assessee was not liable to pay advance tax. In this regard, the Ld A.R placed reliance on the decision rendered by Hon’ble jurisdictional Bombay High Court in the case of DIT Vs. NGC Networks Asia LLC (313 ITR 187).
28. The Ld. D.R, on the contrary, submitted that the assessee has collected the payments covered by Article 2.01 as a fixed percentage of the Gross revenue. The receipts covered by Article 2.02 to 2.04 are only allocated to the hotels on a fair and reasonable basis. Further the assessee has collected fees for services also as a percentage of Gross revenue. However, the assessee is not promoting any individual hotel, instead it has indulged in promoting the brand “Marriott” only.The assessee has admitted this fact in his letter dated 17.01. 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 parties. But there is nothing on record to show that the price negotiated between the assessee and third parties and the amounts reflected in the invoices issued by the third parties are prices comparable to similar services provided by international parties. The assessee has not established that it had offered services to the subsidiary company on cost to cost basis at best reasonable and competent prices available at the point of time. Therefore it is not proper to rule out an element of profit in the invoices raised by third parties themselves, even though what was paid by the subsidiary company to the assessee is the same amount as reflected in the invoices…..As the assessee has not explained the pricing factor with reference to the services reflected in the invoices issued by the third parties, it is not possible to say that the assessee had not rendered any service to its Indian subsidiary in India.”
Accordingly, the Ld D.R submitted that the assessee has not substantiated its claim that there was no profit mark up in the bills raised against the Indian hotel companies.
30. The Ld D.R submitted that the assessee has been receiving the payments as a percentage of the Gross revenue of the Hotels, but the alleged benefit shall accrue equally to each member. Further the advertisement programs are not directed to any particular hotel but to the brand name of “Marriott” and “Renaissance”. Hence, there is no direct nexus between the Indian Hotels and the expenses/ costs of providing the services. Even if it is assumed for a moment that a member Hotel does not contribute to the so called advertisement fund, yet the benefit of the advertisement and sales promotion carried out by the assessee shall be enjoyed by the said Hotel also. The Ld D.R submitted that the Hon’ble Authority for Advance Rulings has considered an identical issue in the case of International Hotel Licensing Company S.A.R.L., in RE (2007)(288 ITR 534) and has held that
“Amount received by non-resident applicant from Indian Hotel in connection with marketing and business promotion activities conducted outside India cannot be treated as mere reimbursement of costs and expenses; there being real and intimate relation between the business activities carried on by the applicant outside India and the activities of the hotel owner in India a business connection exists within the meaning of s. 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 contended that the said decision cannot come to the help of the assessee herein.
33. The ld D.R further submitted that the group company of the assessee herein M/s Marriott International Licensing Company BV, Netherlands had entered into an identical agreement to provide International Sales and Marketing services with an Indian Company named M/s Ansal Hotels Ltd. The above said Netherland company collected three types of payments, which are identical with the three types prevailing in the instant case also. While finalizing the assessment of the above said Netherland company, the assessing officer assessed all the three types of receipts as “Royalty” income. The Ld CIT(A) however held that the payments received towards Fees (identical with Article 2. 05) as “Royalty” income and the other two types as “Reimbursements”. The assessee therein, a group company, has accepted the order of Ld CIT(A). Accordingly, the Ld D.R submitted that the payments received under Article 2.05 is to be assessed as “royalty” income. With regard to the other two types receipts, the revenue went in appeal before the Tribunal. The Mumbai bench of Tribunal (in ITA No.416/Mum/2008 dated 17.07.2013) has held that the receipts of other two types are not in the nature of “reimbursement of expenses”. In this regard, the Ld D.R invited our attention to paragraph 16 of the order passed by the Tribunal, wherein the Tribunal has given a finding that it is an out and out contribution for marketing expenses at a fixed rate on quarterly basis and such contributions are not in the nature of actual reimbursement of expenses. Accordingly, the Ld D.R submitted that the Tribunal has already rejected the identical claim made by another group company.
34. With regard to the submission of the Ld A.R that the Tribunal has considered the three types of payments in the case of M/s Marriott International Licensing Company BV in AY 2007-08 (supra) and has set aside the matter to the file of the AO to examine the same under Article 7 of Indo-US DTAA, the Ld D.R submitted that, in AY 2007-08, the Tribunal has simply followed the order passed by the co-ordinate bench in AY 2004-05 in ITA No.416/Mum/2008 (supra) and applied the principles of the same to all the three issues, without realizing that the Tribunal has decided the matters relating to two types of receipts of only. The Ld D.R further submitted that the department, 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 charged with interest u/s 234B of the Act; on the other hand it claims that the said receipts are not at all assessable in India.
37. In the rejoinder, the Ld A.R submitted that the Tribunal, in the case of M/s Marriott International Licensing Company BV (supra) has clearly held that the receipts are in the nature of business receipts, in which case, the same is taxable in India only if the recipient has established a Permanent Establishment in India. With regard to the contention of the assessee with regard to the order passed by the Tribunal for AY 2007-08 in the hands of M/s Marriott International Licensing Company BV, the Ld A.R submitted that identical claim made by the revenue in the miscellaneous petition, referred supra, has since been rejected by the Tribunal. With regard to the reliance placed in the decision rendered by the Hon’ble Authority for Advance Rulings in the case of International Hotel Licencing Company S.A.R.L. in RE (supra), the Ld A.R submitted that the said decision does not have binding effect on the Tribunal. The Ld A.R further reiterated that the assessee has received impugned amounts as “on account” payments only and it has allocated the expenses on actual basis without any profit mark-up and accordingly contended that the said receipts cannot be taxed under Indo-US DTAA either as royalty or Fee for included services.
38. On going through the orders of the tax authorities, we notice that they have taken a stand that it was a case of bifurcation of royalty amount into “royalty” and “reimbursement of expenses”. Since the parties were not heard on this aspect, the cases were fixed for clarification and accordingly parties were heard on 26-09-2014.
39. The Ld A.R submitted that the assessee has received payments for specific services provided by it as per the agreement. He submitted that the services provided were in the nature of either sales services or sales support services. He submitted that the services provided by the assessee includes “Frequent Traveler Program”, “Reservation systems” are specific services and they are nothing to do with the brand. He submitted that the parties to the agreement have understood the terms and conditions of agreement in a particular manner and have also acted in that manner. In that case, it was not open to the AO to give another interpretation and accordingly tax the assessee. He submitted that 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 the assessee herein. He further submitted that the ‘Principle of resjudicata’ cannot be applied in the Income tax proceedings. He submitted that an identical issue was considered by the Delhi bench of Tribunal in the case of Sheraton International Inc. Vs. DDIT (106 TTJ 620) and the Tribunal held that the amount received by the assessee cited above was predominantly in relation to advertisement, publicity and sales promotion of hotel business worldwide in mutual interest and the use of trade mark, trade names etc. of the assessee company by the Indian hotels were merely incidental to the undertaking of main job. Accordingly, the Tribunal held that amount received by the assessee cannot be treated as ‘royalty’ or ‘fee for technical services’ either under the relevant provisions of the Income tax Act or even under DTAA. The Ld A.R submitted that the Hon’ble High Court of Delhi has approved the decision of the Tribunal in its order rendered in the case of DIT Vs. Sheraton International Inc. (313 ITR 267).
42. The Ld A.R further submitted that the assessee herein was not the owner of brands mentioned above. The assessee has been providing specific services only to the Indian Hotels. The royalty was received by some other company. Accordingly, the Ld A.R submitted that the theory of question of bifurcation of “royalty” amount into “royalty” and “reimbursement of expenses” cannot be applied in this case. He submitted that even if it is assumed for a moment that the amount of reimbursements are to be taken as “royalty”, the question that would arise is whether the assessee herein could be assessed in respect of royalty payment, when it is not the owner of the brands or entitled to receive the royalty.
43. On the contrary, the Ld D.R submitted that, in the cases of “reimbursement of expenses”, the direction to incur expenses shall always from the side of the person who reimburses the amount. However, in the instant case, the Hotels are not giving any kind of such direction, but are obliged to pay the amount as per the agreement. He further submitted that there is no evidence on record to show that the market value of services received by the Hotels were equivalent to the payments made. On the contrary, the assessee is charging from the Hotels as a percentage of the gross revenues of the Hotels. The Ld. D.R further submitted that the reimbursement on cost to cost 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 co-terminus 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 its obligations under the “Marriott Agreements”, as per Clause 7.01(4). Further, as per clause 8.10, all the Marriott Agreements shall constitute ‘entire agreement’. Accordingly he submitted that Ld D.R submitted that all the agreements are interdependent upon each other and hence there is interlacing between the various types of agreements. Accordingly the Ld D.R submitted that each of the agreements cannot stand on its own. To substantiate this contention, the Ld D.R invited our attention to certain clauses of Franchisee Agreement entered by another company viz., M/s Marriott International Licensing Company B.V with M/s Ansal Hotels Ltd, wherein there is reference to ISMA agreement and identical clauses relating to inter dependence, entirety of the agreements.
45. The Ld D.R then invited our attention to the decision dated 18-07-2014 passed by the Mumbai bench of Tribunal in the case of Reuters Transaction Services Ltd (ITA No.6947/Mum/2012) and submitted that the Tribunal has held that the inter connected services rendered by two different companies should be considered as identical in nature.
46. The Ld D.R then reiterated the earlier contentions that all the expenses incurred by the assessee are associated with the Brand name and hence they actually go to increase the value of the brand. The nature of services like “Frequent traveler program”, “online booking system” actually attract the customers towards the “Brand”. Accordingly he submitted that the activities of the assessee should be examined in a broader perspective by considering the intention of the parties, in which case, it would become clear that the activities of the assessee actually increases the “Brand value”, even if the activities are meant to be pure services. Accordingly he submitted that the identity as separate and different companies should be dismantled and the purpose or intention of the Marriott group should be taken as prime factor to decide the issue under consideration.
47. In reply, the Ld A.R submitted that the facts prevailing in the case of Reuters Transaction Services Ltd are totally different. In the above said case, one company provided license and assessee therein provided computer and software systems. The Tribunal noticed that there was a link between the license and services. Accordingly, the Tribunal held that it was not a case of simplicitor payment for access to 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 by the assessee are not in the nature of Royalty:-
(a) Marriott International Licensing Company BV (ITA No.416/Mum/2008) relating to AY 2004-05.
(b) Marriott International Licensing Company BV (ITA No.2083/Mum/2011) relating to AY 2007-08.
(c) M/s V.M. Salgaocar & Brs. Pvt Ltd (ITA No.206-7/PNJ/13)
In short, the contention of the assessee was that the impugned issue stands concluded by the decisions referred above.
49. In other responses, the assessee has pointed out that the Ld D.R could not have placed reliance on new case law and should not have put forth new arguments. It was further submitted that the written submissions of Ld D.R expresses doubt about the correctness of the Tribunal decisions referred in the preceding paragraph, which could not be taken at this stage. It is also submitted that the reference to a franchisee agreement, not belonging to the assessee, was also not correct. In the written submissions, the Ld D.R had referred to a decision rendered by the co-ordinate bench of Tribunal in the case of Hindalco Industries Ltd (94 ITD 242)(Del) to submit that the transactions/agreements ancillary or subservient to main agreement/transaction have to take colour from the main agreement or transaction. In reply, the assessee has submitted that this decision should not be considered, as the same was not cited at the time of original hearing. In the alternative, it is submitted that, if this contention of Ld D.R is accepted, then the payments received by the assessee should be assessed in the hands of the brand owner and on this count alone, the entire addition should be deleted in the hands of the assessee.
50. We have heard the rival contentions and carefully all the material available on record. The Ld A.R, in his reply to the written submissions of Ld D.R, has contended strongly that the revenue is not entitled to raise fresh contentions in the hearing fixed for seeking clarifications. However, we may notice that the assessee has also raised fresh contentions in this proceeding. Further, in the Tribunal proceedings, the technicalities are given least importance. The role of both the parties is to assist the bench and hence, viewed from this angle, this contention of the assessee is required to be rejected. The assessee had submitted that the decision rendered by the Tribunal in the case of Hindalco Industries Ltd (94 ITD 242) was not relied 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 permission to use the brands and it is stated that the royalty received by M/s MWC has been duly offered to Income tax.
53. The assessee company has undertaken the job of undertaking International advertisement and marketing programs for “Marriott” and “Renaissance” brands on behalf of the hotels worldwide. The contention of the assessee is that it has undertaken the international marketing programs on behalf of all the hotels in general. We have already noticed that the assessee has collected charges under three different categories:-
(a) International Sales and Marketing Services. It is collected as a percentage of Gross revenue of the Hotels.
(b) Special services allocated on a fair and reasonable basis.
(c) Fee for services as a percentage of gross revenue.
54. Thus, it can be seen that first company is the owner of brands, the second company is authorized by the first company to give license to the Hotels and collect Royalty and the third company (the assessee company) is entrusted with the job of undertaking international marketing works of both the brands. Though M/s MWC and the assessee has entered independent agreements with the hotels separately, apparently, there is reference to the other agreement in each of the agreements. All the agreements have been referred to collectively as “Marriott agreements”. Clause 8.10 of the agreement entered with Palm Hotels (India ) Ltd reads as under:-
“8.10 Entire Agreement :
The following constitute the entire agreement between the parties and/or their respective affiliates, supersede all prior understandings and writings, and may be changed only by a writing signed by the parties and/or their respective Affiliates : (i) the Marriott Agreements; (ii) the Technical Services Agreements; (iii) any instruments to be executed and delivered pursuant to any of the foregoing agreements; and (iv) any other writings executed by the parties or their respective Affiliates, which writings are stated to be supplemental to or to amend any of the foregoing agreements.”
This clause apparently refers to all the agreements entered by all the affiliates of Marriot group with the Hotels. Further as submitted by Ld D.R, the survival of the ISMA agreement entered by the assessee herein would also be dependent upon the survival of other agreements titled as ‘Operating agreement and Advisory services Agreement”. This is evident from Clause 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 Hotel Services Inc.
(iii) Lump sum Pre-opening technical assistance’ amount was proposed to be paid to M/s Rennaissance Services B.V
(iv) International Sales and Marketing fee (upto 2.5%) & Reimbursement of cost (as per prescribed rates) was proposed to be paid to M/s Marriott International Inc. (the assessee herein as per Article (2.05 and (2.01 to 2.04)) respectively.
(v) Royalty was proposed to be paid to M/s Marriott Worldwide Corporation @ 0.5% of gross revenue and also to M/s Rennaissance International Inc. @ 0.5% of gross revenue.
The expenses described as “Franchise Marketing/Publicity Support Fee” are proposed to be paid approximately at 2.5% of the gross revenue in addition to the contribution towards Frequent traveler programme (up to 5% of the amount paid by the guest), frequent flyer programme (US $ 8.00), Central Reservation system (US $ 9.40) and Special services for potential liabilities (0.15% of gross revenue).
55. The compensation proposed to be paid by the hotel would show that the royalty was paid @ 0.5% of the gross revenue, whereas the expenses proposed to be paid was 2.65% of the gross revenue plus contribution towards special programs (approx. 3%). The expenses shall also include insurance like contribution towards potential liabilities at 0.15% of the gross revenue. The above said discussion would show that M/s Marriott group has undertaken clear tax planning and accordingly entrusted each facet of the job to different companies and each of the said companies have entered separate agreement with the hotels. However, all the agreements have been interlinked with each other so that all the operations have ultimate control with Marriott group only.
56. Normally value of a Brand is created by popularizing the same amongst public. The value of a Brand would depend upon the acceptance level of the public. More the public admire a brand, more would be its value. Once the public at large start reposing confidence on the “Brand”, the same becomes a marketable product in the business circles. Once it becomes a marketable product, the owner of the brand would be entitled to give licenses to others on payment of “Royalty” in return.
57. It is a well known fact that the human memory is having short span of life and hence there is every possibility that the public would forget the “Brand name”, if they are not continuously reminded about the 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 charges so collected should also be construed as part of “Royalty” only. The Ld CIT(A) has held that two types of payments are in the nature of Royalty and another type of payment is in the nature of “Fee for included services”. The following observations made by Ld CIT(A) are relevant to understand the contentions of the revenue:-
(a) The amount paid by the Indian owner companies (Hotels) does not point out to any specific item of expenditure incurred on behalf of the hotel owner companies.
(b) Merely because the assessee company and other company of the same group have signed two different agreements with the hotel companies, one for promoting global brand of the assessee company and the other one for payment of “royalty” does not change the true nature of the transaction. It is a case of splitting of royalty amount by signing two different agreements with two different companies of the “Marriot” group.
(c) The three agreements signed by the assessee company with three Indian Companies is a colourable device to reduce the gross “royalty amount” earned by the Marriott group of companies in India, which was taxable in India.
(d) A company charging “royalty” from various other companies for use of a brand name has to incur expenditure out of the ‘royalty’ amount earned by it in order to promote and build international brand name worldwide. But the said expenditure is not deductible against the royalty amount under the Act. (Hence the assessee has resorted to these types of segregating the royalty amount).
(e) The assessee company has not incurred expenses for promoting a particular hotel. In that case, how the Indian hotel companies can reimburse expenses to the assessee company when the expenses are not directly related to these hotels.
59. We may explain the view point of the revenue with an example. Suppose a company would like to collect royalty of say Rs.100/-. As stated earlier, it is the responsibility of the brand owner to incur expenditure to maintain and promote the Brand Value. Hence, let us assume that the brand owner spends a sum of Rs.70/- towards expenses. Under the tax laws, the recipient of royalty is required to pay tax @ 15% on gross amount of royalty. Hence the company would be paying a sum of Rs.15/- as tax. Thus, the net profit that would remain with the company would be Rs.15/- (Rs.100/- (-) (Rs.70/-+Rs.15/-)). According to the revenue, the above said methodology would be the fair method of declaring income and the revenue would have collected tax amount of Rs.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 Rs.30/- and the expenses of Rs.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 Rs.30/-, i.e., Rs.4.50. According to revenue, it is deprived of tax to the extent of Rs.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 a clear tax planning by colourable device by bifurcating the royalty receipts. Hence, the revenue is contending that the amount received by the assessee company as reimbursement of expenses from the Indian Hotels should be considered as “Royalty” only, since the said amount has been spent on popularizing the “Brand name”, which would otherwise be the responsibility of the brand owner. Since the amount collected towards International Marketing activities have been collected on three heads, one portion was treated as “royalty” and other portion was treated “Fee for included services” by the Ld CIT(A).
61. On the contrary, we notice that the assessee is mainly placing reliance on the various case laws to validate its methodology. In the case of M/s Bass International Holdings NV (supra), it has been held that the amounts of identical nature received by the assessee therein was held to be a trust money received in fiduciary capacity.
62. In the case of M/s Marriot International Licensing Company BV (ITA No.416/Mum/2008 relating to AY 2004-05), the assessee therein had accepted the decision of Ld CIT(A) in holding that the Marketing fee (Article 2.05) as royalty. However, other items of receipts were held by Ld CIT(A) as reimbursement of expenses and the said decision was not acceptable to the revenue. Hence the revenue preferred appeal before the ITAT and the Tribunal held that other items of receipts (Article 2.01 to 2.04) are not in the nature of royalty, on the reasoning that the contribution received for marketing activities was not for use of brand, but for creation or swelling of brand. Since the hotels were contributing towards marketing expenses at a fixed rate on quarterly basis, the Tribunal held that it cannot be taken as reimbursement of expenses on itemized basis. Accordingly the Tribunal held that such contributions are to be treated as a receipt in the nature of “Business Profits” covered by Article 7 of DTAA. Since the AO has not examined the receipts under Article 7, the matter was restored to the file of the assessing officer.
63. By placing reliance on the above said decision, the Ld A.R has contended that the amounts of identical nature specified under Article 2.01 to 2.04 has been held to be “Business Profits” by the co-ordinate bench of Tribunal. The ld A.R also referred to the decision rendered by the Co-ordinate bench in the above said 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 agreement was considered per se, i.e., independently without linking the same with the Royalty payment. However, in the instant case, the tax authorities have taken the view that the Marriott group has bifurcated the royalty payment into more than one component. Apparently this view point of the revenue was not available or raised before the Tribunal in the above said case.
6. The Ld A.R also placed reliance on the decision rendered by Hon’ble Delhi High Court in the case of DIT Vs. Sheraton International Inc. (supra). The facts prevailing in the above said case, in our view, are different. In the above said case, there was no separate royalty agreement. Besides the Hotel therein, viz., M/s ITC group of hotels were having separate brand name, viz., “Welcome group” as well as separate net work “Welcomnet”. Further, the ITC hotels were allowed to use stylish “S” only. Hence the agreement entered by M/s Sheraton International Inc. with M/s ITC group was held to be for mutual benefit. Further, the Tribunal in this case gave a clear finding that there was nothing on record to show that the real transaction was other than what was stated in the agreement, that is, the use of the trade mark etc. was not free of cost but was camouflaged in the composite payment made for various services. Under these set of facts, it was held that the advertisement, publicity and sales promotion keeping in mind their mutual interest and, in that context, the use of trade mark, trade name or the Stylised “S” or other enumerated services referred to in the agreement with the assessee were incidental to the said main service payment received by the assessee therein was not in the nature of Royalty. We may notice that the facts prevailing in the instant case are altogether different and hence the said decision rendered by Hon’ble Delhi High Court, in our view, cannot be taken support of.
67. The Ld A.R placed reliance on the decision rendered by Hon’ble Kerala High Court in the case of Commissioner of Agricultural..Vs. M.J.Cherian (supra) to submit that there is no presumption about illegality of a transaction. However, in our view, there is no question of any illegality of transaction in the present dispute. The dispute is with regard to the nature of receipt only.
68. The Ld A.R also placed reliance on the decision rendered by Hon’ble Calcutta High Court rendered in the case of CIT Vs. 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 bifurcated the “royalty” amount into more than one component or not. The discussions made in the previous paragraphs, viz.,
(a) all the group companies of “Marriott group” have entered into separate agreements with the Indian Hotels.
(b) all the group companies have same address.
(c) all the agreements are interlinked and referred to as “entirety of the agreement”
(d) the survival of each of the agreement is dependent upon the survival of the other agreement.
(e) A single approval for entering into foreign collaboration with all group companies has been obtained
would show that the Indian Hotels have considered agreements entered with M/s Marriott group as agreements pertaining to single transaction, but agreed to pay the amount to different companies. Thus, it is seen that the Marriott group has planned to dissect the single transaction into more than one component and further, Marriott group has seen that each of the component was received by a different company.
70. We have already noticed that the responsibility to maintain the “Brand Value” always lies with the brand owner. If the brand value goes down in the market, nothing would prevent the Indian Hotels to terminate the agreement with a particular brand owner and switch to another brand. In this kind of factual situation, we are of the view that the Brand owner normally ensures that the “brand value” does not go down in the market. As stated earlier, repeated advertisements in all types of media are given for promotion of the brands only and the same vindicate this fact. In this kind of situation, it is inconceivable that the brand owner shall entrust the responsibility to maintain /promoting to a third party without associating or supervising the other party’s activities. Even if the other person undertakes the responsibility, he would do it only for profit only and further the brand owner shall be required to incur the same.
71. In the instant case, the assessee has undertaken the job of marketing the “Marriott / Rennaisance” brands. There is no doubt that the assessee company belongs to Marriott group. Further the claim of the assessee that it was undertaking the marketing work on cost to cost basis without any mark up defies the business logic or prudence. A commercial company shall never work without profit. The very fact that it was functioning on cost to cost basis or without profit motive 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 these amounts are to be assed 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 with the direction to consider the question of taxation of receipts as royalty in the hands of the assessee as representative assessee or in the hands of any other group company. The assessee should be given adequate opportunity in this regard.
73. The next issue relates to levy of interest u/s 234B of the Act. In this regard, the Ld A.R placed reliance on the decision rendered by the jurisdictional Hon’ble Bombay High Court in the case of DIT Vs. NGC Network Asia LLC (313 ITR 187), where in the High Court has held that the amount of tax deductible at source is to be taken into account to determine the liability to pay advance tax. Since the amounts received by the assessee is subject to tax deduction at source, the Ld A.R contended that the assessee is not liable to pay advance tax and accordingly the assessing officer was not justified in levying interest u/s 234B of the Act. Since the said contentions are in accordance with the decision rendered by the jurisdictional High Court, we agree with his contentions. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the assessing officer to follow the decision of Hon’ble jurisdictional High Court referred above.
74. The assessee has filed appeals for assessment years 2007-08 to 2009-10 raising identical grounds. Following the decision rendered by us for assessment year 2006-07, we uphold the order of Ld CIT(A) passed in respect of the amount received by the assessee. The assessee has also raised a ground relating to the chargeability of the interest u/s 234A/234B in Ay 2007-08. We direct the assessing officer to follow the decision of the jurisdictional High Court in the case of NGC Network Asia LLC (supra) and accordingly, the order of Ld CIT(A) on this issue is set aside.
75. The revenue has filed appeal for AY 2008-09 challenging the order of Ld CIT(A) with regard to the charging of interest u/s 234B of the Act. We notice that the Ld CIT(A) has decided the issue by following the decision rendered by the jurisdictional High Court in the case of NGC Network Asia LLC (supra). Hence, we do not find it necessary to interfere with his decision on this issue.
76. In the result, the appeals filed by the assessee for assessment years 2006-07 and 2007-08 are partly allowed. The appeals filed by the assessee for assessment years 2008-09 and 2009-10 and the appeal of the revenue for assessment year 2008-09 are dismissed.
The above order was pronounced in the open court on 14th Jan, 2015.
