DCIT (IT) 2(1)(2), MUMBAI V. DOMINOS PIZZA INTERNATIONAL FRANCHISING INC, MUMBAI

ITA 1447/MUM/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 7397 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 16-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMUEL DARSE SHRI M P LOHIA
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 143(3); 92F

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL L BENCH MUMB AI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.1447/MUM/2016 (ASSESSMENT YEAR 201 2-13 ) DCIT (IT)-2(1) (2), ROOM NO.1713, 17 TH FLOOR, AIR INDIA BUILDING, NARIMAN POINT, MUMBAI-400021. VS. M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC, C/O SRBC & ASSOCIATES, 16 TH FLOOR, THE RUBY, 29 SENAPATI BAPAT MARG, DADAR (W), MUMBAI-400028. PAN: AAECD2315C APPELLANT RESPONDENT APPELLANT BY : SHRI SAMUEL DARSE (CIT-DR) RESPONDENT BY : SHRI M.P. LOHIA (AR) DATE OF HEARING : 20.02.2018 DATE OF PRONOUNCEMEN T : 18.05.2018 ORDERUNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ASSE SSMENT ORDER UNDER SECTION 143(3) R.W.S.144C(13) DATED 22.01.2016, PAS SED IN PURSUANCE OF DIRECTION OF DISPUTE RESOLUTION PANEL-1, (DRP) MUMB AI DATED 22.12.2015 FOR ASSESSMENT YEAR 2012-13. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. WHETHER ON THE FACTS AND UNDER THE CIRCUMSTANCE S OF THE CASE AND IN LAW, THE LD. DRP IS RIGHT IN HOLDING THAT JUBILANT FOOD WORKS LIMITED DOES NOT CONSTITUTE A PERMANENT ESTABLISHMENT OF THE ASSESSE E IN INDIA. 2. WHETHER ON THE FACTS AND UNDER THE CIRCUMSTANCE S OF THE CASE AND IN LAW, THE LD. DRP IS RIGHT IN HOLDING THAT THE INCOME OF THE ASSESSEE SHOULD BE TREATED AS ROYALTY INCOME ONLY AND NOT INCOME U/S 4 4DA OF THE INCOME-TAX ACT, 1961. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. DR P ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE REST ORED. ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY IS TAX RESIDENT OF UNITED STATES OF AMERICA (USA), FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2012-13 ON 27.09.2012 DECLARING TOT AL INCOME OF RS. 1,65,33,247/-. THE ASSESSEE HAS OFFERED THE INCOME IN THE NATURE OF ROYALTY TAXABLE @ 10% AS PER INDIA-USA DOUBLE TAXAT ION AVOIDANCE AGREEMENT (DTAA). THE ASSESSEE HAS OFFERED THE INCO ME FROM FRANCHISE FEE AND CONSULTANCY SERVICES PROVIDED TO M/S JUBILA NT FOOD WORKS LIMITED (JUBILANT) FOR OPENING OF STORE. THE ASSESS ING OFFICER PASSED THE DRAFT ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C DATED 27.03.2015. THE ASSESSING OFFICER WHILE PASSING THE DRAFT ASSESSMENT HELD THAT ASSESSEE CONSTITUTED A DEPENDENT AGENCY/P ERMANENT ESTABLISHMENT IN INDIA AS PER ARTICLE-5 OF DTAA B ETWEEN INDIA AND USA. THE ASSESSING OFFICER ALSO TOOK THE VIEW THAT THE A MOUNT OF 5% OF THE TOTAL INCOME SHOULD BE ALLOWED AS DEDUCTION FOR THE PURPOSE OF COMPUTING THE INCOME FROM BUSINESS OF ASSESSEE. THEREFORE, 95 % OF THE INCOME OFFERED BY ASSESSEE WAS SUBJECTED TO TAX @ 40% WITH STATUTORY SURCHARGE. AGGRIEVED BY THE ORDER OF SAID DRAFT ASSESSMENT ORD ER, THE ASSESSEE FILED OBJECTION BEFORE THE DRP, OBJECTING ON THE GROUND T HAT ASSESSEE HAS NOT CONSTITUTED A DEPENDENT AGENCY/PERMANENT ESTABLISHM ENT IN INDIA AS PER ARTICLE 5 OF INDIA-US DTAA AND ALSO CHALLENGED THE ACTION OF ASSESSING OFFICER IN HOLDING THAT 5% OF THE TOTAL INCOME O F THE ASSESSEE SHOULD BE ALLOWED AS DEDUCTION FOR THE PURPOSE OF COMPUTING INCOME FROM ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 3 BUSINESS. THE DRP ACCEPTED THE CONTENTION OF ASSESS EE THAT THE JUBILANT DOES NOT CONSTITUTE A PERMANENT ESTABLISHMENT OR DE PENDENT AGENCY OR AN AGENCY PE OF ASSESSEE. CONSEQUENT UPON THE ACTION O F ASSESSING OFFICER IN TREATING THE ROYALTY INCOME AS PROFIT & GAIN FRO M BUSINESS UNDER SECTION 44DA WAS ALSO SET-ASIDE. PURSUANT TO THE D IRECTION OF DRP, THE ASSESSING OFFICER PASSED THE ASSESSMENT ORDER DATED 22.01.2016 UNDER SECTION 143(3) R.W.S. 144C(13). THEREFORE, AGGRIEVE D BY THE DIRECTION OF DRP, THE REVENUE HAS FILED THE PRESENT APPEAL BEFOR E US. 3. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTATIVE ( DR) FOR THE REVENUE AND LD. AUTHORIZED REPRESENTATIVE (AR) OF THE ASSES SEE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. DR FOR THE RE VENUE SUPPORTED THE ORDER OF DRAFT ASSESSMENT PASSED BY ASSESSING OFFIC ER. THE LD. DR FURTHER SUBMITS THAT JUBILANT IS AN AGENCY PE OF THE ASSESS EE AS PER DEFINITION PROVIDED UNDER INDIA US DTAA MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH BUSINESS OR ENTERPRISE IS WHOLLY OR PARTLY CA RRIED ON. THERE IS ONE EXCEPTION TO THE GENERAL RULE I.E. UNDER CERTAIN CO NDITION, A PERSON IS ACTING ON BEHALF OF ENTERPRISES AND THEN ENTERPRISE S CAN BE DEEMED TO HAVE A PE IN INDIA THOUGH IT DOES NOT HAVE ANY FIXED PLA CE OF BUSINESS. AS PER THE PROVISIONS OF INCOME-TAX ACT, THE INCOME ARISIN G BY FOREIGN ENTERPRISES THROUGH BUSINESS CONNECTION IN INDIA W OULD BE TAXABLE IN INDIA. THE BUSINESS CONNECTION POSTULATES EXISTENC E OF SUBSTANTIALLY ELEMENT OF ENDURING OR PERMANENT NATURE, OF FOREIGN ENTERPRISES IN ANOTHER ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 4 COUNTRY, WHICH CAN BE ATTRIBUTED TO FIXED PLACE OF BUSINESS IN THAT COUNTRY. EVEN SECTION 92F DEFINES PERMANENT ESTABLISHMENT, W HICH INCLUDES FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OR ENT ERPRISE IS WHOLLY OR PARTLY CARRIED ON. IN SUPPORT OF HIS SUBMISSION, TH E LD. DR RELIED UPON THE DECISION OF FORMULA ONE WORLD CHAMPIONSHIP LTD. VS. CIT 394 ITR 80/[2017] 80 TAXMANN.COM 347 (SC). 4. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE SUPPO RTED THE ORDER OF DRP. THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT THE ASSESSEE ENTERED INTO MASTER FRANCHISES AGREEMENT (MFA) WITH DOMINO PIZZA INDIA LIMITED, NOW KNOWN AS JUBILANT AND FOR THE FRANCHISE OF DOMI NOS PIZZA STORE. COPY OF MFA WAS FURNISHED TO THE ASSESSING OFFICER. THE SAID MFA PROVIDE CERTAIN STORE/CONSULTANCY SERVICES TO JUBIL ANT. IN CONSIDERATION THAT JUBILANT PAID STORE OPENING FEES FOR THOSE SERVICES . THE FRANCHISE FEE IS RECEIVED BY ASSESSEE FROM JUBILANT FOR ONGOING USE OF DOMINOS TRADEMARK AND ALSO FOR THE RIGHT TO USE THE NEW TECHNOLOGY, N EW PRODUCT DEVELOPMENT AND SYSTEM IMPROVEMENT. AS PER MFA DATED 23.09.2009 , THE ASSESSEE IS ENTITLED TO CHARGE 3% OF THE SALES OF STORE OF JUBI LANT AND FURTHER 3% ON SALE OF THEIR SUB-FRANCHISE STORE. (COPY OF MFA IS PLACED ON RECORD AT PAGE NO.16 TO 108 OF PB) & (COPY OF SUB-FRANCHISE AGREEM ENT DATED 23.02.2010 IS AT PAGE NO. 109 TO 142 OF PB). THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT M/S JUBILANT DOES NOT ACT ON BEHALF OF ASSESSEE (CLAUSE-1.4 OF THE AGREEMENT PROVIDES IRREVOCABLE RIGHT TO JUBILAN T TO ESTABLISH OR APPOINT ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 5 ITS COMMISSIONAIRE IN INDIA, FOR THE PURPOSE OF SUP PLY OF FOOD INGREDIENTS AND BEVERAGE PRODUCT AND OTHER SUPPLY. CLAUSE-10 OF MFA (AGREEMENT) IMPOSES OBLIGATION TO JUBILANT WITH THE STATUTORY O BLIGATION IN INDIA, WITHOUT ANY INTERVENTION OF ASSESSEE. FURTHER CLAUS E-11 OF AGREEMENT PROVIDES THE RIGHT TO DETERMINE THE PRICE CHARGED B Y ASSESSEE ITS STORE AND SUB-FRANCHISE IN INDIA. THE ASSESSEE HAS NO SAY IN THE MATTER, AND CAN ONLY PLACE ADVISORY ROLE. NO GUIDANCE OFFERED BY ASSESSE E WHICH DEEMED OR CONSTITUTES TO IMPOSE ANY OBLIGATION TO CHARGE ANY FIXED MINIMUM OR MAXIMUM PRICE. THEREFORE, THE JUBILANT HAS COMPLETE INDEPENDENCE WITH REGARD TO ITS BUSINESS DEALING AND TRANSACTION AND DOES NOT ACT ON BEHALF OF ASSESSEE OR UNDER ITS INSTRUCTION. THE LD. AR OF TH E ASSESSEE FURTHER SUBMITS THAT FOR EXISTENCE OF DEPENDENT AGENT PE, T HE AGENT MUST HAVE AUTHORITY TO CONCLUDE CONTRACT IN THE NAME OF FOREI GN ENTERPRISES AND AGENT RECORDED AS AUTHORIZE TO CONCLUDE CONTRACT ON BEHAL F OF PRINCIPLE IF HE IS PERMITTED TO NEGOTIATE ALL ASPECT OF THE CONTRACT I N A MATTER THAT MIGHT EFFECTIVELY BIND ITS PRINCIPLE. FURTHER, CLAUSE-3 A ND CLAUSE-5.1 OF AGREEMENT DEALS WITH SUB-FRANCHISE AGREEMENT. CLAUS E -3.1 SPECIFICALLY STATES THAT ASSESSEE HAS SOLE TO LAY DOWN THE CRITE RIA ADOPTED BY JUBILANT OR FOR APPROVAL OF ALL SUB-FRANCHISES IN INDIA. THE LD . AR OF THE ASSESSEE FURTHER SUBMITS THAT JUBILANT IS LEGAL AND ECONOMIC ALLY THE INDEPENDENT ENTITY. IN SUPPORT OF HIS SUBMISSION, THE LD. AR O F THE ASSESSEE HAS FILED A LIST OF VARIOUS CASE LAW, HOWEVER, WHILE MAKING SUB MISSIONS RELIED ONLY ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 6 UPON THE DECISION OF BHOPAL SUGAR INDUSTRIES VS SAL ES TAX OFFICER (1977 CTR 284) AND WESTERN UNION FINANCIAL SERVICES INC ( 104 ITD 40) (DEL). 5. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE AL SO GONE THROUGH THE COPY OF MFA DATED 23.09.2009 (PB 16 TO 108), COPY O F SUB-FRANCHISE AGREEMENT BETWEEN THE JUBILANT FOOD WORKS PVT. LTD. WITH TRAVEL FOOD SERVICES PVT. LTD. DATED 23.02.2010 FOR MUMBAI LOCA TION (PB 109 TO 142) AND JUBILANT FOOD WORKS PVT. LTD. AND TRAVEL FOOD S ERVICES PVT. LTD. FOR DELHI LOCATION EFFECTIVE FROM 01.05.2010 (PB 143 TO 172). WE HAVE ALSO PERUSED THE VARIOUS PROVISIONS OF INDIA-US DTAA. WE HAVE NOTED THAT THE ASSESSING OFFICER WHILE PASSING ASSESSMENT ORDER HE LD THAT ASSESSEE CONSTITUTE A DEPENDENT AGENCY PERMANENT ESTABLISHME NT IN INDIA AS PER ARTICLE 5 OF INDIA-USA DTAA. THE ASSESSING OFFICER TOOK THE VIEW THAT JUBILANT IS TOTALLY DEPENDENT UPON THE ASSESSEE. AS SESSEE HAS EXCLUSIVE FRANCHISE RIGHT IN INDIA. JUBILANT IS NOT ALLOWED A NY OTHER ACTIVITIES OTHER THAN ACTIVITIES PRESCRIBED IN THE AGREEMENT. FURTHE R, THE QUALITY OF MATERIAL AND EQUIPMENT USED HAS TO BE APPROVED BY THE ASSESS EE. THE EXPENSES ON ADVERTISEMENT AND MARKETING ARE ALSO CARRIED OUT IN ACCORDANCE WITH THE PROVISION OF AGREEMENT. FOR EXPANSION OF THE MARKET OR PENETRATION HAS TO BE FOLLOWED WITH THE CONDITION OF MFA. PRINCES ARE ALSO DECIDED BY ASSESSEE AND NOT BY JUBILANT OR SUB-FRANCHISE. ON T HE BASIS OF ABOVE OBSERVATION, THE ASSESSING OFFICER CONCLUDED THAT J UBILANT DOES NOT HAVE ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 7 ECONOMIC INDEPENDENCE AND ITS MODUS-OPERANDI IS NOT ON PRINCIPAL TO PRINCIPAL BASIS. THEREFORE, JUBILANT IS DEPENDENT A GENT FOR THE PURPOSE OF DETERMINING A PE. THE ASSESSING OFFICER TREATED THE RECEIPT FROM OPERATIONS IN INDIA AS A BUSINESS RECEIPT TAXABLE @ 40% ALONG WITH STATUTORY CESS. 6. BEFORE DRP, THE ASSESSEE URGED THE SIMILAR CONTENTI ON AS URGED BEFORE US. IN ADDITION TO THE SUBMISSION, THE ASSESSEE CONTEND ED THAT DURING THE PROCEEDING BEFORE DRP, THERE WAS MISTAKE IN SUBMISS ION OF FACT THAT ASSESSEE HAS SOLE RIGHT TO LAY DOWN THE TERM AND CO NDITION WITH SOME FRANCHISE AND THAT ALL CONTRACT AND SUB-FRANCHISE A RE CONCLUDED AND SIGNED ONLY BY ASSESSEE. THE CORRECT FACT THAT THE SUB-FRA NCHISE AGREEMENT IS EXECUTED BETWEEN JUBILANT AND SUB-FRANCHISE AND NOT BETWEEN THE ASSESSEE AND SUB-FRANCHISE. WE HAVE VERIFIED THESE FACTS FRO M THE COPY OF MFA AND SUB-FRANCHISE AGREEMENT (SFA) (PAGE NO. 16 TO 108 A ND 109 TO 142 AND 143 TO 172 OF PB) AND FIND THAT THE ASSERTION OF AS SESSEE IS CORRECT. THE SFA IS SIGNED ON BEHALF OF JUBILANT AND TRAVEL FOOD SERVICES PVT. LTD. FOR MUMBAI AND DELHI LOCATION. AS PER THE CLAUSE OF MFA , THE ASSESSEE IS ENTITLED TO 3% OF SALE PROCEED AND FURTHER ENTITLED FOR STORE OPENING FEES AS WELL AS SUB-FRANCHISE FEES. WE HAVE ALSO NOTED THAT THE PROFIT AND LOSS FROM THE BUSINESS BELONGS TO JUBILANT OR SUB-FRANCH ISE. WE HAVE NOTED THAT CERTAIN CLAUSES AND THE AGREEMENT ENTITLES THE ASSE SSEE TO EXAMINE THE ACCOUNTS, APPROVE SUPPLIERS AND ALLOWING CONTROL OV ER ADVERTISEMENT, ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 8 HOWEVER, THE JUBILANT OR SUB-FRANCHISE ARE NOT STOR ING ANY GOODS ON BEHALF OF ASSESSEE. FROM THE SUB-FRANCHISE, THE ASSESSEE I S ENTITLED ONLY ROYALTY AND STORE OPENING FEES. WE HAVE ALSO PERUSED ARTICL E-5 OF INDIA-USA DTAA AND FOUND THAT NONE OF THE CONDITION PRESCRIBE D UNDER CLAUSE-(A) TO CLAUSE-(L) OF ARTICLE-5.2 ARE ATTRACTED. THE ASSESS ING OFFICER HAS RELIED UPON ARTICLE-5.4 OF INDIA-USA DTAA. HOWEVER, WE HAV E NOTED THAT THE ASSESSEE HAS NO AUTHORITY TO MAINTAIN IN THE FIRST MENTIONED STATE ITS STOCK OR GOODS OR MERCHANDISE FROM WHICH HE REGULARLY DEL IVER GOODS OR MERCHANDISE ON BEHALF OF THE ASSESSEE. NO ACTIVITIE S ARE CARRIED OUT BY THE BY JUBILANT ON BEHALF OF THE ASSESSEE. IN OUR VIEW, NONE OF THE CLAUSE EITHER (A), (B) OR (C) OF ARTICLE-5.4 ARE APPLICABLE ON TH E ASSESSEE. THEREFORE, CONSIDERING THE CONTENTS OF THE MFA AND SFA, THE MA STER FRANCHISE ARE INDEPENDENT BUSINESS ENTITY, THE RESTRICTION PROVI DED IN MFA AND SFA ARE ONLY TO SAFEGUARD THE BRAND VALUE AND TO ENSURE THE CORRECT RECEIPT OF ROYALTY INCOME AS CONCLUDED BY LD. DRP. HENCE, WE D O NOT FIND ANY INFIRMITY OR ILLEGALITY IN THE ASSESSMENT ORDER PAS SED IN PURSUANCE OF DIRECTION OF DRP. THE CASE LAW RELIED BY LD. DR IN FORMULA ONE WORLD CHAMPIONSHIP LTD. IS NOT HELPFUL TO THE REVENUE. AS THE FACT OF THE SAID CASE ARE AT VARIANCE. IN THE SAID CASE PHYSICAL CONTROL OF THE CIRCUIT WA S WITH FORMULA ONE WORLD CHAMPIONSHIP LTD. (FOWC) AND ITS AFFILIATES FROM THE INCEPTION. HOWEVER, IN THE PRESENT CASE, T HERE IS NO PHYSICAL CONTROL ON THE BUSINESS OF FRANCHISE AND SUB-FRANCH ISE BY THE ASSESSEE. IN ITA NO.1447/M/16- M/S DOMINOS PIZZA INTERNATIONAL FRANCHISING INC 9 THE RESULT, WE DO NOT FIND ANY MERIT IN THE GROUND NO.1 OF THE APPEAL OF THE REVENUE. 7. AS WE HAVE CONFIRMED THE FINDING OF LD. DRP ON GROU ND NO.1 OF THE APPEAL, THEREFORE, DISCUSSION ON OTHER GROUNDS OF A PPEAL RAISED BY REVENUE HAS BECOME ACADEMIC. 8. IN THE RESULT, APPEAL FILED BY REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 18.05.2018. SD/- SD/- B.R. BASKARAN PAWAN SINGH ACCOUNTANT MEMBER JUDIC IAL MEMBER MUMBAI, DATE: 18.05.2018 SK COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. DR L BENCH, ITAT, MUMBAI 6. GUARD FILE BY ORDER, DY./ASST. REGISTRAR ITAT, MUMBAI