SIX CONTINENTS HOTELS, INC, MUMBAI V. DDIT (IT) 2(1), MUMBAI

ITA 2813/MUM/2013

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9382 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 10-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 10-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Keywords: Double taxation relief
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L , MUMBAI . . , , , BEFORE SHRI N.K.BILLAIYA , A M AND SHRI AMIT SHUKLA , J M ITA NO. 2813 /MUM/201 3 : ASST.YEAR 200 9 - 20 1 0 M/S. SIX CONTINENTS HOTELS, INC. C/O.BSR & CO. LODHA EXCELLUS 2 ND FLOOR, APOLLO MILLS COMPOUND N.M.JOSHI MARG, MAHALAXMI MUMBAI 400 011. PAN : AAHCS7853B. / VS. THE DEPUTY DIRECTOR OF INCOME - TAX INTERNATIONAL TAXATION 2(1 ) MUMBAI. ( / APPELLANT) ( / RESPONDENT) /APPELLANT BY : S/ SHRI PARAS SAVLA & HARSH KAPADIA /RESPONDENT BY : SHRI PREMANAND J. / DATE OF HEARING : 1 0 .0 2 .2015 / DATE OF PRONOUNCEMENT : 25 .02.2015. / O R D E R PER AMIT SHUKLA (JM) : THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 24.01.2013 , PASSED BY THE COMMI SSIONER OF INCOME - TAX (APPEALS) - XI , MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143 ( 3 ) FOR THE ASSESSMENT YEAR 2009 - 20 1 0 . THE FOLLOWING GROUNDS OF APPEAL HAS BEEN RAISED BY THE ASSESSEE: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN UPHOLDING TH E ASSESSING OFFICER S ORDER, COMPUTING THE TAX LIABILITY OF THE APPELLANT, BY APPLYING A TAX RATE OF 15 PERCENT ON ROYALTY INCOME RECEIVED FROM TODAY ITA NO. 2813 /MUM/201 3 . M/S. SIX CONTINENT HOTELS, INC . 2 HOTELS PRIVATE LIMITED AS AGAINST A BENEFICIAL TAX RATE OF 11.33% UNDER SECTION 115A OF THE ACT. 2. ON T HE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN OBSERVING THAT ROYALTY RECEIVED BY THE APPELLANT FROM TODAY HOTELS PRIVATE LIMITED WAS NOT IN PURSUANCE TO THE AGREEMENT DATED 17 JANUARY 2006 ENTERED WITH TODAY HOTELS PRIVATE LIMI TED. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN UPHOLDING THE ACTION OF THE AO OF LEVYING INTEREST UNDER SECTION 234D OF THE INCOME TAX ACT, 1961 ( THE ACT ). 2. THE BRIEF FACTS OF THE CASE ARE THAT , THE ASSESSEE IS A COMPANY INCORPORATED IN UNITED STATES AND IS A TAX RESIDENT OF USA. IT HOLDS REGISTERED TRADE MARK OF `HOLIDAY INN AND `CROWNE PLAZA AND HAD ENTERED INTO LICENSE AGREEMENTS WITH VARIOUS INDIAN HOTELS, ALLOWING THEM TO USE OF THESE TRAD EMARKS IN THEIR BUSINESS. APART FROM THAT, THESE HOTELS ARE PROVIDED WITH VARIOUS PROGRAMMES AND OTHER SYSTEMS INCLUDING RESERVATION /SALES AND MARKETING SUPPORT, WHICH WOULD ENABLE THEM TO PROVIDE THE SAME STANDARD QUALITY OF SERVICES AS OFFERED BY HOLIDA Y INN AND CROWNE PLAZA. THE CONSIDERATION PAYABLE FOR THE USE OF THE LICENSE IS IN THE NATURE OF `ROYALTY , BASED ON CERTAIN PERCENTAGE OF G ROSS ROOM REVENUE OF THE HOTELS. IN THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAS EARNED ROYALTY INCOME FROM FOLLOW ING FRANCHISEE HOTELS : - SR. NO . NAME OF THE HOTEL AMOUNT (RS.) DATE OF AGREEMENT RATE U/S 115A RATE AS PER DTAA BENEFICIAL RATE APPLIED 1. COMPETENT HOTELS (P) LIMITED 14,93,626 PRIOR TO 1 ST JUNE, 2005 22.66% 15% 15% 2. GEM HOLIDAY RESORTS LTD. 18,34,368 PRIOR TO 1 ST JUNE, 2005 22.66% 15% 15% ITA NO. 2813 /MUM/201 3 . M/S. SIX CONTINENT HOTELS, INC . 3 3. CRAFT PALACE HOTELS (I) PRIVATE LIMITED 9,83,273 PRIOR TO 1 ST JUNE, 2005 22.66% 15% 15% 4. CHL LIMITED 90,93,119 PRIOR TO 1 ST JUNE, 2005 22.66% 15% 15% 5. AVERINA INTERNATIONAL RESORTS LIMITED 68,28,703 PRIOR TO 1 ST JUNE, 2005 22.66% 15% 15% 6. HOTEL MARINA 27,92,174 PRIOR TO 1 ST JUNE, 2005 22.66% 15% 15% 7. TODAY HOTELS PVT.LTD. 1,08,60,173 17 TH JANUARY 2006 11.33% 15% 15% TOTAL ROYALTY INCOME 3,38,85,436 2.1 THE ASSESSEE S RETURNED INCOME OF RS.3,38,85,436 HAS BEEN ACCEPTED BY THE ASSESSING OFFICER U/S 143(3) VIDE ORDER DATED 15.12.2011. HOWEVER, THE ONLY DISPUTE IS WITH REGARD TO APPLICATION OF TAX RATE OF 15% ON THE ROYALTY INCOME FROM TODAY HOTELS PRIVATE L IMITED INSTEAD OF 11.33% SHOWN BY THE ASSESSEE. THIS HAS RESULTED IN INCREASE OF TAX LIABILITY OF RS.4,31,017. 3. BEFORE THE CIT(A), THE ASSESSEE FILED A COPY OF M ANAGEMENT A GREEMENT DATED 17 TH JANUARY, 2006, IN TERMS OF WHICH, TODAY HOTELS PRIVATE LIMITED IN CONSIDERATION FOR USE OF THE BRAND `CROWNE PLAZA WAS LIABLE TO PAY THE ASSESSEE, LICENSE FEES OF 1% OF THE GROSS REVENUE. NO OTHER AGREEMENT WAS ENTERED WITH TODAY HOTELS PRIVATE LIMITED B Y THE ASSESSEE EITHER IN THE PREVIOUS YEAR OR IN THE SUBSEQUENT YEARS. SINCE THERE WAS NO DISCUSSION IN THE ASSESSMENT ORDER, THE LEARNED CIT(A) SOUGHT FOR REMAND REPORT FROM THE ASSESSING OFFICER. IN THE REMAND REPORT DATED 07.11.2012, THE ASSESSING OFFIC ER CONTENDED THAT THE ASSESSEE WAS NOT A PARTY TO THE `M ANAGEMENT A GREEMENT DATED 17 TH JANUARY, 2006 AS THE SAME WAS BETWEEN SC HOTELS & RESORTS (INDIA) PTE. LTD. (INDIAN COMPANY MANAGER) , INTER CONTINENTAL HOTELS GROUP (ASIA PACIFIC PTE. LTD. GUARA NTOR) AND TODAY HOTELS PRIVATE LIMITED (OWNER) . HENCE, IN VIEW OF THE PROVISIONS OF ITA NO. 2813 /MUM/201 3 . M/S. SIX CONTINENT HOTELS, INC . 4 SECTION 115A( B )(AA), THE BENEFICIAL RATE OF 10% WAS NOT APPLICABLE, BECAUSE THE SECTION CLEARLY PROVIDES THAT SUCH A BENEFICIAL RATE WOULD BE APPLICABLE IF THE ROYALTY HAS BEEN RECEIVED IN PURSUANCE OF AN AGREEMENT. THE LEARNED CIT(A) AGREED WITH THE CONTENTIONS OF THE ASSESSING OFFICER AND HELD THAT, FIRSTLY, THE ASSESSEE IS NOT ABLE TO PRODUCE ANY AGREEMENT BETWEEN ITSELF AND TODAY HOTELS PRIVATE LIMITED ; SECONDLY, THE ASSESSEE IS NOT A PARTY TO THE AGREEMENT, AND; LASTLY , THE ASSESSEE HAS NOT DEMONSTRATED THAT INCOME FROM ROYALTY WAS IN PURSUANCE OF AN AGREEMENT ENTERED INTO SUBSEQUENT TO 1 ST JUNE, 2005, AS STIPULATED IN SECTION 115A(B)(AA) . ACCORDINGLY, HE CONFIRMED THE ACTION OF THE ASSESSING OFFICER. 4. BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT IT IS AN UNDISPUTED FACT THAT THE ASSESSEE IS A BRAND OWNER AND ITS INCOME HAS ACCRUED FROM TODAY HOTELS PRIVATE LIMITED FOR GIVING THE LICENSE TO USE THE BRAND CROWNE PLAZA . HE POINTED OUT THAT IN THE `M ANAGEMENT A GREEMENT DATED 17 TH JANUARY, 2006, CLAUSES 9.2, 9.5, 10.1 AND 10.2 MAKE IT QUITE CLEAR THAT THERE IS A PROVISION FOR PAYMENT OF ROYALTY TO THE ASSESSEE. THUS, IT CANNOT BE HELD THAT THERE IS NO MENTION IN THE AGREEMENT REGARDING THE PAYMENT OF ROYALTY. WITHOUT PREJUDICE, HE SUBMITTED THAT, EVEN THOUGH THE ASSESSEE IS NOT DIRECT PARTY TO THE AGREEMENT, HOWEVER, IN SUBSTANCE, IT IS TO BE CONSIDERED THAT THE ASSESSEE BEING THE BRAND OWNER AND THE P ARTIES TO THE SIGNATORIES, HAVE AGREED TO PAY THE LICENSE, THAT SHOULD BE CONSTRUE D THAT ROYALTY HAS BEEN PAID IN PURSUANCE OF AN AGREEMENT ONLY. FURTHER, EVEN IF THERE IS NO WRITTEN AGREEMENT, THEN THE SURROUNDING FACTS AND CIRCUMSTANCES HAVE TO BE SEEN A LONG WITH THE INTENTION OF THE PARTIES. THERE COULD BE ORAL CONTRACT ALSO, WHICH IS ALSO A BINDING CONTRACT. IN SUPPORT OF HIS CONTENTION, HE RELIED UPON ITA NO. 2813 /MUM/201 3 . M/S. SIX CONTINENT HOTELS, INC . 5 SECTION 2 OF THE INDIAN CONTRACT ACT, 1872 . LASTLY, HE SUBMITTED THAT IN ASSESSMENT YEAR 2011 - 2012, THE DEPARTMENT HAD TAXED THE ROYALTY AT THE BENEFICIAL RATE IN THE ORDER PASSED U/S 143(3), THEREFORE, CONSISTENT WITH THE VIEW, THE TAX RATE FOR ROYALTY SHOULD BE 11.33%. 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE P ROVISIONS OF SECTION 115A(B)(AA) CATEGORICALLY PROVIDES THAT THE AMOUNT OF INCOME - TAX CALCULATED ON THE INCOME BY WAY OF ROYALTY WOULD BE 10% , ONLY IF SUCH ROYALTY IS RECEIVED IN PURSUANCE OF AN AGREEMENT MADE AFTER 1 ST JUNE, 2005. THE PHRASE IN PURSUANCE OF AN AGREEMENT , CONNOTES A DEFINITE TERMS AND CONDITIONS IN THE FORM OF A WRITTEN AGREEMENT. ADMITTEDLY, IN THE `M ANAGEMENT A GREEMENT DATED 17 TH JANUARY, 2006, THE ASSESSEE IS NOT A PARTY TO SUCH AN AGREEMENT AS THE SAME IS BETWEEN SC HOTELS & RESORTS (INDIA) PTE. LTD., INTER CONTINENTAL HOTELS GROUP AND TODAY HOTELS PRIVATE LIMITED. THERE IS NO REFERENCE OF THE ASSESSEE AT ALL IN THE SAID AGREEMENT. THUS, THE ORDER OF THE CIT(A) SHOULD BE CONFIRMED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AN D PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. THE SOLE DISPUTE BEFORE US IS , WHETHER THE ROYALTY INCOME SHOULD BE TAXED AT THE RATE OF 11.33% OR AT THE RATE OF 15%, AS PER THE DTAA. SECTION 115A(B)(AA) AS IT STOOD PRIOR TO 01.04.2014 RE A D AS UNDER: - THE AMOUNT OF INCOME - TAX CALCULATED ON THE INCOME BY WAY OF ROYALTY, IF ANY, INCLUDED IN THE TOTAL INCOME, AT THE RATE OF TEN PER CENT IF SUCH ROYALTY IS RECEIVED IN PURSUANCE OF AN AGREEMENT MADE ON OR AFTER THE 1 ST DAY OF JUNE, 2005. ITA NO. 2813 /MUM/201 3 . M/S. SIX CONTINENT HOTELS, INC . 6 6.1 THUS, THE BENEFICIAL RATE OF 10% OF INCOME TAX IS TO BE CALCULATED ON THE INCOME OF ROYALTY, IF SUCH ROYALTY IS RECEIVED IN PURSUANCE OF AN AGREEMENT MADE ON OR AFTER 1 ST JUNE, 2005. THE SECTION CLEARLY PROVIDES THAT THERE HAS TO BE AN AGREEMENT FOR THE PAYMENT OF R OYALTY. THE LEARNED COUNSEL S CASE BEFORE US IS THAT IN THE `M ANAGEMENT A GREEMENT DATED 17 TH JANUARY, 2006, THERE ARE CERTAIN CLAUSES, WHICH PROVIDES THAT THE PARTIES WILL PAY LICENSE FEE TO THE OWNER, AND THEREFORE, IT SHOULD BE CONSTRUED THAT SUCH A PAY MENT OF ROYALTY IS IN PURSUANCE OF AN AGREEMENT. BESIDES THIS, IT HAS ALSO BEEN CONTENDED THAT SUCH A PAYMENT CAN BE SAID TO BE IN PURSUANCE OF AN ORAL AGREEMENT, WHICH IS EVIDENT FROM THE INTENT OF THE PARTIES. FROM THE PERUSAL OF THE SAID AGREEMENT, IT I S SEEN THAT THE AGREEMENT IS BETWEEN SC HOTELS & RESORTS (INDIA) PTE. LTD., WHICH HAS BEEN REFERRED TO AS ` MANAGER ; INTER CONTINENTAL HOTELS GROUP ( ASIA PACIFIC ) PTE. LTD., WHICH HAS BEEN REFERRED AS ` GUARANTOR ; AND TODAY HOTELS PRIVATE LIMITED , INDIAN COMPANY, WHICH HAS BEEN REFERRED AS THE ` OWNER . THE TITLE OF THE SAID AGREEMENT IS FOR MANAGEMENT OF THE HOTELS AND THE TERMS AND CONDITIONS UNDER WHICH THE MANAGER ON BEHALF OF OWNER WILL MANAGE THE HOTEL. HERE, NEITHER THE OWNER NOR THE MANAGER HAS ANY REFERENCE TO THE ASSESSEE. EVEN CLAUSE 9.5, AS REFERRED TO BY THE LEARNED COUNSEL, IT IS SEEN THAT THE SAME ONLY PROVIDES THAT THE OWNER WILL PAY TO SC HOTELS & RESORTS (INDIA) PTE. LTD. THE LICENSE FEES. HERE AGAIN, THERE IS NO REFERENCE OF T HE A SSESSEE. FURTHER NOTHING HAS BEEN BROUGHT ON RECORD THAT THERE WAS ANY KIND OF CORRESPONDENCE OR A LETTER BETWEEN THE ASSESSEE AND TODAY HOTE LS PRIVATE LIMITED, SETTING OUT THE TERMS AND CONDITIONS FOR THE PAYMENT OF ROYALTY. UNDER THESE FACTS, IT CANNOT B E HELD THAT THE PAYMENT OF ROYALTY HAS BEEN MADE IN PURSUANCE OF AN ITA NO. 2813 /MUM/201 3 . M/S. SIX CONTINENT HOTELS, INC . 7 AGREEMENT . ONCE THERE IS A CLEAR CUT PROVISION UNDER THE STATUTE, WHICH MANDATES CERTAIN TERMS AND CONDITIONS FOR APPLYING A BENEFICIAL RATE, THEN THE SAME HAS TO BE APPLIED IN A LETTER AND SPIRIT. THUS, WE HOLD THAT THE FINDING OF THE CIT(A) THAT , THERE IS NO AGREEMENT IN TERMS OF WHICH THE ASSESSEE WAS PAID ROYALTY IS LEGALLY AND FACTUALLY CORRECT , AND THEREFORE, THE BENEFICIAL RATE OF TAX WILL NOT APPLY . T HE A.O. HAS RIGHTLY CHARGED TH E TAX RATE OF 15% AS GIVEN IN THE DTAA. ACCORDINGLY, GROUND NOS.1 AND 2 ARE TREATED AS DISMISSED. 7. GROUND NO.3 RELATES TO CHARGING OF INTEREST U/S 234D, IT HAS BEEN ADMITTED BY THE PARTIES THAT IT IS CONSEQUENTIAL. THEREFORE, GROUND NO.3 IS ALSO DISMIS SED. 8 . IN THE RESULT, ASSESSEE S APPEAL IS DISMISSED . ORDER PRONOUNCED ON THIS 25 TH DAY OF FEBRUARY, 2015 . SD/ - SD/ - ( N.K.BILLAIYA ) ( AMIT SHUKLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 25 TH FEBRUARY, 2015 . DEVDAS* / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT , MUMBAI. 4. / CIT(A) - XI , MUMBAI ITA NO. 2813 /MUM/201 3 . M/S. SIX CONTINENT HOTELS, INC . 8 / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE.