M/S. SIX CONTINENTS HOTEL INC., V. THE DY. DIT (I.T) 2(1),

ITA 3619/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48757 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L1
• Next Hearing Date: 28-04-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 23-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MALATHI R SRIDHARAN
• Assessee Lawyers: SUNIL M LALA ZEEL JAMBUWALA
• Keywords: Double taxation relief; Permanent establishment
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI B.RAMAKOTAIA H (A.M) ITA NO.3618/MUM/08 (A.Y. 2004-05) ITA NO.3619/MUM/08(A.Y.2003-04) SIX CONTINENTS HOTELS INC. C/O. BSR & CO. KPMG HOUSE, KAMALA MILLS COMPOUND, 448, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 13. PAN:AAHCS 7853B (APPELLANT) VS. THE DCIT (INTERNATIONAL TAXATION), RANGE 2(1), 1 ST FLOOR, SCINDIA HOUSE, BALLARD PIER, N.M.ROAD, MUMBAI 400 038. (RESPONDENT) APPELLANT BY : S/SHRI SUNIL M. LALA/ ZEEL JAMBUWALA RESPONDENT BY : SMT. MALATHI R. SRIDHARAN ORDER PER N.V.VASUDEVAN, J.M, ITA NO.3619/M/08 IS AN APPEAL BY THE ASSESSEE AGAI NST THE ORDER DATED 19/3/2008 OF CIT(A) XXXI, MUMBAI RELATING TO ASSESSMENT YEAR 2004- 05, WHILE ITA NO.3619/M/08 IS ALSO AN APPEAL BY TH E ASSESSEE AGAINST THE ORDER DATED 24/3/2008 OF CIT(A) XXXI, MUMBAI RELATI NG TO ASSESSMENT YEAR 2003-04. 2. IN BOTH THESE APPEALS THE ONLY ISSUE THAT ARISE S FOR CONSIDERATION IS AS TO WHETHER THE MARKETING AND RESERVATION CONTRIBUTION RECEIVED BY THE ASSESSEE FROM INDIAN HOTEL OWNERS IS FEE FOR INCLUDED SERVI CES(FIS) UNDER ARTICLE 12(4) OF THE INDO-US DOUBLE TAXATION AVOIDANCE AGRE EMENT(DTAA) AND THEREFORE TAXABLE IN INDIA. ITA NO.3618/MUM/08 (A.Y. 2004-05) ITA NO.3619/MUM/08(A.Y.2003-04) 2 3. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE ABOV E ISSUE ARISES FOR CONSIDERATION ARE AS FOLLOWS: THE ASSESSEE IS A NON-RESIDENT, BEING A COMPANY IN CORPORATED IN USA AND IS THE OWNER OF CERTAIN TRADEMARKS AND SERVICE MARKS AND OPERATES AND LICENSES THE SAME UNDER THE NAME HOLIDAY INN. DU RING THE RELEVANT ASSESSMENT YEARS, VARIOUS INDIAN HOTELS WERE LICENS EE TO THE TRADEMARK HOLIDAY INN AND WERE OPERATING AS PER THE STANDAR DS AND TERMS OF THE RESPECTIVE AGREEMENTS WITH THE ASSESSEE. AS PER TH E RESPECTIVE LICENSE AGREEMENTS SUCH INDIAN HOTELS WERE ENTITLED TO USE THE TRADE MARK HOLIDAY INN OWNED BY THE ASSESSEE. FOR USE OF THE TRADEMA RK, THE INDIAN HOTELS PAY FEE TO THE APPELLANT AND THE SAID FEE HAS BEEN OFFE RED TO TAX IN INDIA AS ROYALTY AS PER ARTICLE 12(3)(A) OF DOUBLE TAXATIO N AVOIDANCE AGREEMENT BETWEEN INDIA AND USA (DTAA), IN THE RETURN FILED BY THE ASSESSEE. BESIDES THE ABOVE LICENSE FEE, THE ASSESSEE MAINTAINS A SEP ARATE FUND WHEREIN IT RECEIVES THE MARKETING AND RESERVATION CONTRIBUTION FROM THE HOTELS WORLDWIDE (INCLUDING HOTELS IN INDIA). ACCORDING T O THE ASSESSEE, SUCH FUNDS ARE SOLELY USED TO MEET OUT COMMON EXPENSES OF MARK ETING AND PROVIDING CENTRALIZED RESERVATION FACILITIES TO ALL ITS FRANC HISEE HOTELS WORLDWIDE. THESE CONTRIBUTIONS MADE BY HOTELS FOR INCURRING COMMONS EXPENSES ARE NOT OFFERED TO TAX AS THE SAME ARE NOT IN THE NATURE OF INCOME. 4. THE ASSESSEE EXPLAINED THE NATURE OF MARKETING C ONTRIBUTION AS A PAYMENT MADE BY THE FRANCHISEE HOTELS WORLDWIDE TO ASSESSEE UNDER THE LICENSE AGREEMENT AS THEIR SHARE TOWARDS THE COMMON MARKETING EXPENDITURE INCURRED BY ASSESSEE FOR BENEFIT OF ALL THE FRANCHISEES. THE ASSESSEE EXPLAINED THAT MARKETING AND ADVERTISEMENT EXPENDITURE IS INCURRED BY THE ASSESSEE TO PROMOTE ITS WORLDWIDE C HAIN OF HOTELS OPERATING UNDER THE BRAND NAME OF HOLIDAY INN. THIS EXPEND ITURE IS INCURRED FOR COMMON BENEFIT OF ALL THE HOTELS AND IS THEREFORE R ECOVERED FROM THE HOTELS BY WAY OF MARKETING CONTRIBUTION. THE ADVANTAGE OF SUCH COMMON ITA NO.3618/MUM/08 (A.Y. 2004-05) ITA NO.3619/MUM/08(A.Y.2003-04) 3 MARKETING CAMPAIGNS IS THAT THERE IS NO DUPLICATION OF EXPENSES AND EFFORTS, GLOBAL STANDARDS ARE MAINTAINED, THERE IS ECONOMY O F SCALE AND NEED FOR MARKETING AND ADVERTISEMENT EXPENSE AT INDIVIDUAL L EVEL IS ELIMINATED. 5. RESERVATION SYSTEM PROVIDES ONLINE CENTRALIZED L INK TO ALL THE FRANCHISEE HOTELS AND CUSTOMERS AND HELPS THE HOTEL S AND THE CUSTOMERS TO AVAIL BENEFIT OF FASTER BOOKINGS. ACCORDING TO THE ASSESSEE, THIS FACILITY THAT IS OFFERED TO THE CUSTOMERS INCREASES THE CUSTOMER BASE OF ALL FRANCHISEE HOTELS UNDER THE HOLIDAY INN CHAIN WORLDWIDE. THE ASSESSEE INCURS ALL RELATED COST TO MAINTAIN AND OPERATE THE RESERVATIO N SYSTEM AND RECOVERS THE SAME IN THE FORM OF RESERVATION. 6. IN THE RETURN OF INCOME FILED FOR THE RELEVANT A SSESSMENT YEARS, THE ASSESSEE FILED COMPUTATION OF INCOME, DETAILS OF ST ATEMENT OF ROYALTY AND MARKETING & RESERVATIONS CONTRIBUTIONS RECEIVED FRO M VARIOUS INDIAN HOTELS, AND NOTES TO COMPUTATION. IN THE NOTES TO COMPUTAT ION, THE ASSESSEE, BY RELYING ON VARIOUS JUDICIAL PRECEDENTS, CLARIFIED T HAT MARKETING AND RESERVATION CONTRIBUTIONS ARE NOT CHARGEABLE TO TA X FOR THE FOLLOWING REASONS: - IT IS NOT IN THE NATURE OF INCOME AND IS AKIN TO REIMBURSEMENT OF EXPENSES; - IN CONSIDERATION OF SUCH CONTRIBUTION, THE ASSE SSEE DOES NOT MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKIL L, KNOW-HOW OR PROCESSES ETC. - WITHOUT PREJUDICE TO ABOVE, SUCH CONTRIBUTIONS C OULD BE BUSINESS PROFITS AND CANNOT BE SUBJECTED TO TAX IN ABSENCE O F PERMANENT ESTABLISHMENT OF ASSESSEE IN INDIA. 7. THE AO HOWEVER OBSERVED THAT THE ASSESSEE MUST H AVE DEVELOPED ITS OWN SECRET SYSTEM TO BE USED BY THE FRANCHISE OTHER WISE IT WOULD NOT HAVE CHARGED SUCH HUGE AMOUNT. IT WAS ALSO OBSERVED THAT THERE WAS NO EVIDENCE ITA NO.3618/MUM/08 (A.Y. 2004-05) ITA NO.3619/MUM/08(A.Y.2003-04) 4 OF ANY EXPENDITURE BEING INCURRED BY THE ASSESSEE. HE THEREFORE ASSESSED THE AMOUNT AS ROYALTY. 8. THE CIT(A) CONFIRMED THE ORDERS OF THE AO GIVIN G RAISE TO THESE APPEALS BY THE ASSESSEE BEFORE THE TRIBUNAL. 9. WE HAVE HEARD BOTH THE PARTIES IN THE MATTER. TH E LEARNED AR REITERATED THE SUBMISSIONS MADE BEFORE CIT(A) WHERE AS THE LEARNED DR PLACED RELIANCE ON THE ORDER OF AO. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. WE FIND THAT THE I DENTICAL ISSUE OF TAXABILITY OF MARKETING AND RESERVATION CONTRIBUTION FEES RECE IVED BY THE ASSESSEE FROM THE INDIAN HOTELS HAS ALREADY BEEN CONSIDERED BY TH E TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.1997-98 AND THE TRIBUNAL VIDE ORDER DATED 12.5.2006 IN ITA NO.4341/M/2002 HELD THAT MARKETING AND RESERVATION FEES RECEIVED BY THE ASSESSEE WAS WITH A CORRESPONDING OBLIGATION TO USE IT FOR THE AGREED PURPOSES AND IT WAS NOT AN UNFETTERED RECEIPT IN TH E HANDS OF THE ASSESSEE. THE TRIBUNAL ACCORDINGLY HELD THAT THE RECEIPTS COU LD NOT BE VIEWED AS INCOME OF THE ASSESSEE. THE TRIBUNAL ALSO HELD THAT THE RECEIPTS COULD ALSO NOT BE CHARGED AS BUSINESS PROFIT UNDER ARTICLE-7 O F DTAA AS THE ASSESSEE HAD NO PE IN INDIA. THE TRIBUNAL ACCORDINGLY DELETE D THE ADDITION MADE. WE ALSO NOTE THAT THE AO IN ASSESSEES OWN CASE IN A.Y .2006-07 AND 2008-09 IN THE SCRUTINY ASSESSMENT UNDER SECTION 143(3) DATED 18.11.2008 AND 8.12.2010 HAS HELD THAT MARKETING AND RESERVATION C ONTRIBUTION FEES RECEIVED BY THE ASSESSEE FROM INDIAN HOTELS IS NOT CHARGEABLE IN INDIA. UNDER THESE CIRCUMSTANCES IN OUR VIEW THE ADDITION HAS TO BE DELETED. WE ACCORDINGLY HOLD THAT THE MARKETING AND RESERVATION CHARGES ARE NOT ROYALTY ITA NO.3618/MUM/08 (A.Y. 2004-05) ITA NO.3619/MUM/08(A.Y.2003-04) 5 OR FIS AND THEY ARE IN THE NATURE OF BUSINESS INCOM E AND SINCE THE ASSESSEE DOES NOT HAVE A PE IN INDIA, THE SAME ARE NOT TAXAB LE IN INDIA. 9. IN THE RESULT, APPEALS OF THE ASSESSEE ARE ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 11 TH DAY OF MAY, 2011. SD/- SD/- (B.RAMAKOTAIAH ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 11 TH MAY.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RL BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.3618/MUM/08 (A.Y. 2004-05) ITA NO.3619/MUM/08(A.Y.2003-04) 6 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 5/5/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 6/5/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER