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:
