DDIT Vs Yum! Restaurants (Asia) Pte. Ltd. (ITAT Delhi)
The issue which is arising in the present appeal is whether there is DAPE. The Assessing Officer has alleged the existence of DAPE on account of alleged marketing activities undertaken by Indian entity on behalf of the assessee company. The case of the assessee before us is that it is an entity in Singapore and has entered into TLA with only YRIPL, which was in charge of operations of Pizza Hut & KFC restaurants in India. In order to run its business, YRIPL had franchised different outlets and was also running own stores. Yum! Restaurants Marketing Pvt.Ltd. (in short “YRMPL”) was set up for undertaking AMP activities on behalf of YRIPL and its franchisees. The assessee company was not a party to this Agreement which was exclusively between the Indian concern and its marketing company. The Assessing Officer was of the view that the marketing activities also benefit the assessee company and hence DAPE.
The condition which needs to be fulfilled in Article 5(8) of the DTAA between India and Singapore for holding of DAPE and the same reads as under:-
8. “Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent of an independent status to whom paragraph 9 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if-
(a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise;
(b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise,” or
(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise.”
The aforesaid conditions need to be satisfied for establishing DAPE in India and in the absence of the same, it cannot be said that the assessee company had DAPE. The Assessing Officer has failed to establish his case and where none of the conditions specified in Article 5(8) of the DTAA have been satisfied, then it cannot be said that the assessee had any DAPE in India. In any case, the marketing activities undertaken by the YRMPL were on behalf of the YRIPL and its franchisees and in the absence of any link whatsoever with the business of the assessee company, there is no merit in attribution of contribution made by the Independent third-party franchisees, to constitute PE of the assessee company in India.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by Revenue is against order of CIT(A)-XXIX, New Delhi dated 18.09.2012 relating to assessment year 2008-09 against the order passed under section 143(3) r.w.s 144C of the Income-tax Act, 1961 (in short ‘the Act’).
2. The Revenue has raised following grounds of appeal:-
1. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in ignoring the dictum that existence of a PE is a finding of fact and allowed relief relying upon case laws distinguishable from the case on hand on facts, thus ignoring the whelming facts in support of existence of PE.
2. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in ignoring the facts that seconded employee Mr. Mehboobani retained lien over his employment with YRAPL, that his deputation agreement did not spell out his terms of work and that YRAPL continued to disburse his salary , all pointing to existence of PE.
3. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in concluding that there is no link between the royalty income earned by YRAPL and the functions performed by Mr Mehboobani, when the stewardship activities of the employee of furthering the business of YRIPL through new equity stores, franchisees and business development contribute to increased royalty received by YRAPL and require no further evidence supporting the AO’s finding of PE.
4. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in ignoring the detailed finding given by AO in the assessment order regarding the fact that the assessee has a place of management constituting a PE in India and reimbursement of salary and other expenses made by YRIPL to the assessee YRAPL is to be characterized as FTS.
5. Whether on the facts and circumstances of the case the CIT(A) has erred in holding that Indian affiliates namely YRIPL and YRMPL do not constitute DAPE or PE of the assessee in India despite facts marshalled by AO to show the assignment of rights and obligations by YRIPL to YRAPL and that Indian AE’s were working without compensation
6. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in not adjudicating the attribution of AMP receipts of YRMPL to asses sees PE, holding this ground to be infructuous and incorrectly concluding that AMP expenditure of independent franchisees cannot be held attributable to asessees PE.
7. Whether on the facts and circumstances of the case, the CIT(A) has erred in law in holding that interest u/s234B was not chargeable in the assessee’s case, by relying upon the decision of Hon’ble Delhi High Court dt.30.08.201 0 in the case of DIT Vs Jacobs Civil Incorporated, without appreciating that the levy of interest u/s 234B is mandatory as held in the case of CIT Vs Anjum M. H. Ghaswala & others 252 ITR1 (SC).”
3. The issue in the present appeal is against the addition on account of salary reimbursement cost treated as fee for technical services (in short “FTS”) taxable @ 10% amounting to Rs.1,47,35,151/- and income from business and profession taxable @ 40% amounting to Rs.11,82,90,721/-.
4. Briefly in the facts of the case the assessee is a company incorporated in Singapore, which is engaged in the business of franchising KFC, Pizza Hut and Taco Bell brands for a number of territories in the Asia Pacific region (including India). For the operation of restaurant outlets, the assessee entered into Technology License Agreement (in short “TLA”) for license of “Technology”and “System” with Yum! Restaurants (India) Private Limited (in short “YRIPL”). YRIPL in turn had appointed various franchisees for operating restaurants in India under the brand name KFC and Pizza Hut. YRIPL also operated the company owned KFC restaurants in India. As per the terms of the Technology License Agreement, the assessee was to receive royalty as under:-
