RHW Hotel Management Services Ltd., Gurgaon V. DCIT, New Delhi

ITA 540/DEL/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6737 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 14-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 30-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V R SONBHADRA
• Assessee Lawyers: R K KAPOOR

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F, NEW DELHI BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER & SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO. 540/DEL/20013 ASSTT. YEAR : 2009-10 RHW HOTEL MANAGEMENT SERVICES LTD. (PRESENTLY KNOWN AS CARLSON HOTELS (SOUTH ASIA P. LTD.), 336, PHASE-IV, UDYOG VIHAR, GURGAON-122006 VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), C.R. BUILDING, NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AABCR1707K ASSESSEE BY : SH. PRADEEP DINODIA CA & SH. R.K. KAPOOR, CA REVENUE BY : SH. V. R. SONBHADRA, SR. DR DATE OF HEARING : 14.12.2015 DATE OF PRONOUNCEMENT : 23.02.2016 ORDER PER BEENA PILLAI, JM: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 15.11.2012 BY LD. CIT(A)-XVIII, NEW DELHI FOR THE ASSESSMENT YEAR 2009-10, ON THE FOLLOWING GROUNDS; 2. THE BRIEF FACTS AS RECORDED BY THE AUTHORITIES B ELOW ARE AS UNDER; 2.1. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30. 09.2009 DECLARING A TOTAL INCOME OF RS.1,64,18,893/-. IN DO ING SO, IT DECLARED IN THE PROFIT AND LOSS ACCOUNT ON THE CRED IT SIDE, INCOME OF RS.1,78,75,045/- AND, ON THE DEBIT SIDE SUM OF R S.44,68,763/. THE ASSESSEE HAD CLAIMED ROYALTY AND COMMISSION OF 2 ITA NO. 540/DEL/2013 RS.56,97,904/-. OUT OF TOTAL EXPENDITURE OF RS.56,9 7,904/-, REVENUE SHARING WITH A.B. HOTELS AMOUNTED TO RS.44, 68,763/- AND FINDER FEE PAID, AMOUNTED TO RS.12,29,140/-. TH E ASSESSEE HAD ENTERED INTO A MEMORANDUM OF UNDERSTANDING WITH A.B. HOTELS LTD., ON 27.03.2000, ACCORDING TO WHICH OUT OF THE FEE RECEIVED 20% WILL BE ALLOCATED TOWARDS EXPENDITURE TO BE BORNE BY RHW AND BALANCE 80% WILL BE SHARED EQUALLY BETWEEN A.B. HOTELS LTD. AND THE ASSESSEE. 2.2.THE ASSESSEE HAD ALSO FILED A LETTER DATED 23.1 0.2007 WRITTEN BY DR. R. KAPUR, MANAGING DIRECTOR, RADISON HOTEL D ELHI WHICH IS REPRODUCED IN THE PAGE 2 OF THE ASSESSMENT ORDER, A GREEING FOR REVISED TERMS; ........... 50% OF THE REVENUE WILL BE ADJUSTED TOWARDS EXPENDI TURE OF RHW AND THE BALANCE 50% WILL BE SHARED IN THE RA TIO OF 50:50 BETWEEN A B HOTELS & RHW. THE SALARY OF CHEF VAKEEL AHMED WILL BE BORNE BY A B HOTELS. 2.3. THE LD. AO ACCORDINGLY HELD AS UNDER; 3.3 THE ASSESSEE HAD DEDUCTED TAX SOURCE ON ALL PAYMENTS MADE TO A B HOTELS LTD. BUT FOR ROYALTY. I N VIEW OF THE ABOVE, THE ASSESSEE HAD CLEARLY VIOLATED THE PROVISIONS OF SECTION 194J OF THE IT ACT AND THUS T HE EXPENDITURE ON ACCOUNT OF FEE FOR PROFIT SHARING AM OUNTING TO RS.44,68,763/- IS NOT AN ALLOWABLE EXPENDITURE U NDER SECTION 40(A)(IA) OF THE ACT. 4. AGGRIEVED BY THE ORDER OF THE LD. AO ASSESSEE PR EFERRED APPEAL BEFORE THE LD. CIT(A). LD. CIT(A) UPHELD THE FINDINGS OF LD. 3 ITA NO. 540/DEL/2013 AO. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) ASSESS EE IS IN APPEAL BEFORE US. 4.1. THAT SOLITARY ISSUE INVOLVED IN THE INSTANT AP PEAL IS REGARDING DISALLOWANCE OF RS.46,69,763/- REPRESENTING EXPENDI TURE INCURRED ON PAYMENTS MADE TO M/S A.B. HOTELS LTD. U NDER THE MEMORANDUM OF UNDERSTANDING WITH M/S A.B. HOTELS LT D. DATED 27.03.2000 (SEE PAGES 17-18 OF THE PAPER BOOK) AND DISALLOWED BY THE LEARNED AO BY INVOKING THE PROVISIONS OF SEC TION 194J OF THE ACT READ WITH SECTION 40(A)(IA) OF THE ACT. 4.2. LD. AR SUBMITTED THAT, ASSESSEE WAS INCORPORA TED AS A JOINT VENTURE COMPANY OF M/S RADISSON HOTEL INTERNATIONA L INC. AND UNITECH GROUP, AND HAS BEEN ENGAGED IN THE BUSINESS OF PROMOTING A BRAND AND BASIC SUPPORT SERVICES TO A B RAND, SINCE INCORPORATION. 4.3. LD. AR FURTHER SUBMITTED THAT, IN ORDER TO PRO VIDE SUCH SERVICES, THE ASSESSEE HAS NECESSARY EXPERTISE FOR ORGANIZING AND DEVELOPING A SYSTEMATIC ARRAY FOR SPECIALIZED TRAIN ING AND SPECIFIC PROCEDURES FOR THE STRUCTURE AND OPERATION OF FRANC HISE OPERATIONS IN THE FIELD OF SPECIALITY RESTAURANTS. 4.4. LD. AR SUBMITTED THAT, IN PURSUANT TO THE ABOV E OBJECTIVE, THE ASSESSEE IN THE ASSESSMENT YEAR 2000-01, I.E. O N 27.03.2000 ENTERED INTO A MEMORANDUM OF UNDERSTANDING WITH A.B . HOTELS LIMITED (SEE PAGE 3-4 OF THE PAPER BOOK) WHO WAS TH E OWNER OF THE BRAND THE GREAT KABAB FACTORY TO FORM A JOINT VENTURE FOR THE DEVELOPMENT AND FRANCHISE OF THE BRAND THE GRE AT KABAB FACTORY (HEREINAFTER REFERRED TO AS MOU). 4 ITA NO. 540/DEL/2013 4.5. IT IS SUBMITTED THAT, SUBSEQUENTLY THE TERMS A ND CONDITIONS OF THE AFORESAID MOU WERE REVISED VIDE LETTER DATED 23.10.2007 (SEE PAGES 5-6 OF THE PAPER BOOK). 4.6. IT IS SUBMITTED THAT, PURSUANT TO THE ABOVE MO U, THE ASSESSEE ENTERED INTO VARIOUS FRANCHSIE AGREEMENTS AND MANAGEMENT AGREEMENTS FOR INTER ALIA SETTING UP OF RESTAURANTS UNDER THE BRAND THE GREAT KABAB FACTORY, ONE OF S UCH I.E. BETWEEN M/S BESTECH HOSPITALITIES (P) LTD. AND M/S RWH HOTEL MANAGEMENT SERVICES LTD. IS PLACED AT PAGES 7.27 OF PAPER BOOK. 4.7. IT IS SUBMITTED THAT DURING THE YEAR UNDER CO NSIDERATION, THE AGGREGATE SUM RECEIVED BY THE ASSESSEE TOWARDS ROYALTY FEES, INCENTIVE FEE AND PREOPENING FEE AGGREGATED TO RS.1 ,78,75,045/- AND OUT OF THE AFORESAID SUM, SHARE OF THE M/S A.B. HOTELS LTD. UNDER THE JOINT VENTURE WAS CALCULATED (AS ENVISAGE D IN THE MOU DATED 27.03.2000 READ WITH LETTER DATED 23.10.2007) AT RS.44,68,763/- (SEE PAGES 28-32 OF THE PAPER BOOK). 4.8. THE LD. AR SUBMITTED THAT, ASSUMING THAT, SUM PAID UNDER THE REVENUE SHARING ARRANGEMENT IS EXPENDITURE, THE N TOO APPLICATION OF SECTION 194J OF THE ACT IS HIGHLY MI SCONCEIVED. 4.9. IT WAS THUS SUBMITTED MERE FACT UNDER THE MOU BETWEEN THE ASSESSEE AND M/S A.B. HOTELS LTD., RADISSON HOTEL, DELHI WAS TO EXTEND FULL HELP AND CO-OPERATION OF THE EXERCISE O F DEVELOPING A MANUAL RELATING TO THE CUISINE, SYSTEMS AND PROCEDU RES FOR THE OPERATION OF A FRANCHISE AGREEMENT WITH POTENTIAL C USTOMERS AND DOES NOT IMPLY THAT ANY SERVICES HAD BEEN RENDERED BY RADISSON HOTEL, DELHI. 5 ITA NO. 540/DEL/2013 4.10. THE LD. AR SUBMITTED THAT RADISSON HOTEL, DEL HI IS OPERATED AND RUN BY M/S A.B. HOTELS LTD., AND AS SU CH THE ASSUMPTION THAT M/S A.B. HOTELS LTD. IS IN EXISTENC E ON BEHALF OF RADISSON HOTEL, DELHI AND IS PAID THE SHARE OF FEE BEING THE ROYALTY TO UTILIZE THE NAME OF RADISSON HOTEL DELHI IS FACTUALLY INCORRECT. 4.11. FROM THE SUBSTANCE OF THE TRANSACTION, IT IS SEEN, THAT SHARE OF M/S A.B. HOTELS LTD. WERE NEVER THE INCOME OF THE ASSESSEE. LD.AR PLACED IS RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS B.M. KHARWAR RE PORTED IN 72 ITR 603 (SC), WHERE IT WAS HELD THAT, LEGAL RELA TION ALONE CAN DETERMINE THE TAXABILITY OF THE RECEIPTS ARISING FR OM THE TRANSACTION. HE CONTENDED THAT IN THE YEAR UNDER CO NSIDERATION ALL WHAT HAD HAPPENED WAS UNDER THE MOU DATED 27.03 .2000, READ WITH LETTER DATED 23.10.2007, REVENUE WAS SHAR ED IN RESPECT OF THE JOINT VENTURE BETWEEN THE ASSESSEE AND M/S A .B. HOTELS LTD. FOR DEVELOPMENT AND FRANCHISE OF THE GREAT KA BAB FACTORY(TGKF) BRAND. THE LD.AR SUBMITTED THAT THIS WOULD ALSO BE EVIDENT FROM THE AGREEMENT DATED 7.12.2004 BETWE EN M/S BESTECH HOSPITALITIES (P) LTD. AND M/S RHW HOTEL MA NAGEMENT SERVICES LTD. (PAGES 7.-27 OF PAPER BOOK) WHEREIN I T WOULD BE SEEN THAT IN RESPECT OF THE INCOME SO GENERATED NO SERVICES ARE BEING PROVIDED BY RADISSON HOTELS, DELHI. 5. ON THE OTHER HAND LD.DR PLACES HIS RELIANCE ON T HE DECISION OF THE AUTHORITIES BELOW. 6. WE HAVE PERUSED THE RECORD PLACED BEFORE US, THE ORDER OF THE AUTHORITIES BELOW AND THE JUDGMENTS RELIED UPON BY THE PARTIES. 6 ITA NO. 540/DEL/2013 6.1. IN THE INSTANT CASE PAYMENT MADE OF RS.44,68,7 63/- BY THE ASSESSEE TO M/S A.B. HOTELS WAS NOT FOR THE PURPOSE OF ACQUISITION OF ANY RIGHT IN THE BRAND THE GREAT KA BAB FACTOY BUT WAS THE SHARE OF REVENUE OF M/S A.B. HOTELS LTD . UNDER THE MEMORANDUM OF UNDERSTANDING DATED 27.03.2000. UNDER THE MEMORANDUM OF UNDERSTANDING, ASSESSEE ITSELF WAS NO T GRANTED ANY RIGHT TO USE OR WAS IMPARTED ANY INFORMATION BY M/S A.B. HOTELS IN RESPECT OF THE BRAND THE GREAT KABAB FAC TORY, BUT IT WAS THE ASSESSEE WHO WAS TO MARKET THE BRAND AND FR ANCHISE THE BRAND THE GREAT KABAB FACTORY OWNED BY RADISSON H OTELS. THE BRAND THE GREAT KABAB FACTORY ALWAYS REMAINED WIT H M/S A.B. HOTELS PVT. LTD., AND FRANCHISES WHO WERE INTRODUCE D BY THE ASSESSEE WERE USING THE BRAND THE GREAT KABAB FACT OYR I.E. THEY WERE OPERATING UNDER THE BRAND THE GREAT KABA B FACTORY FOR ITS OWN. 6.2. THE REMITTANCE BY THE ASSESSEE TO AB HOTELS LT D., WAS ONLY A DIVERSION OF , ON WHICH AB HOTELS LTD., HAD AN OVER RIDING TITLE. SUCH INCOME TO THE EXTENT OF SHARE OF AB HOTELS, NE VER ACCRUED TO THE ASSESSEE IN ITS OWN RIGHTS. THE ASSESSEE ACTED MERELY AS A FACILITATOR TO GET THIS INCOME AND PASS IT ON TO AB HOTELS LTD. THE PAYER HAS DEDUCTED TDS ON FULL AMOUNT WHICH WAS DUL LY ACCOUNTED FOR BY THE ASSESSEE. IN RESPECT OF THE GR ANTING OF FRANCHISE, ASSESSEE WAS TO RECEIVE FROM EACH FRANCH ISE THE FOLLOWING SUMS: - DEVELOPMENT FEE: RS.10 LAKHS, IN TOTAL, TO BE COLLE CTED UPON SIGNING OF THE AGREEMENT AND IN LATER STAGES OF DEV ELOPMENT SUBJECT TO NEGOTIATIONS. - THE ROYALTY FEE: 2.5% OF THE GROSS SALES. 7 ITA NO. 540/DEL/2013 - MANAGEMENT INCENTIVE FEE: 6% - 7.5% OF THE GOP 6.3. THAT AFORESAID FEE RECEIVED BY THE JOINT VENTU RE WAS TO BE SHARED BETWEEN THE ASSESSEE AND M/S A.B. HOTELS LTD . IT IS SUBMITTED THAT OUT OF THE DEVELOPMENT FEE, ROYALTY AND THE MANAGEMENT INCENTIVE FEE, 20% WAS ALLOCATED TOWARDS EXPENDITURE TO BE BORNE BY ASSESSEE, AND BALANCE OF 80% WAS TO BE SHARED EQUALLY BETWEEN M/S. AB HOTELS LTD AND AS SESSEE. IT IS SUBMITTED THAT THIS INITIAL ARRANGEMENT OF THE REVE NUE SHARING WAS MODIFIED BY THE LETTER DATED 23.10.2007 WHICH P ROVIDED AS UNDER: 50% OF THE REVENUE WILL BE ADJUSTED TOWARDS EXPENDI TURE OF RHW AND THE BALANCE 50% WILL BE SHARED IN THE RATIO OF 50:50 BETWEEN A.B. HOTELS & RHW. THE SALARY OF CHEF VAKEEL AHMED WILL BE BORNE BY A. B. HOTELS. THE ABOVE ARRANGEMENT WILL BE EFFECTIVE FROM APRIL 01, 2007. 6.4. FROM THE MOU REFERRED ABOVE, IT IS CLEAR THAT THE ASSESSEE WAS NOT TO RECEIVE ANY SERVICED FROM AB HOTELS LTD. AB HOTELS OWNED THE BRAND NAMELY, THE GREAT KABAB FACTORY, WHICH WAS TO BE PROMOTED BY THE ASSESSEE THROUGH PROVIDING FR ANCHISES TO VARIOUS PERSONS IN INDIA. THE ASSESSEE WAS TO CHARG E FEES FROM VARIOUS PERSONS WHO WANTED TO USE THIS BRAND AS AN AUTHORISED FRANCHISE AND THE FEE WAS TO BE SHARED BETWEEN THE ASSESSEE AND M/S. AB HOTELS IN THE MANNER SPECIFIED ABOVE. THE S HARING OF THE REVENUE CLEARLY DEMONSTRATES THAT NO SERVICES WERE TO BE RENDERED BY M/S.AB HOTELS TO THE ASSESSEE. IN FACT IT WAS ASSESSEE WHO HAD UNDERTAKEN TO PROMOTE THE BRAND AN D ASSESSEE RECEIVED VARIOUS PAYMENTS FROM THE PERSONS WHO GOT INTO 8 ITA NO. 540/DEL/2013 FRANCHISE AGREEMENT WITH ASSESSEE AND ALL SUCH PAYM ENTS TO THE ASSESSEE WERE MADE AFTER DEDUCTING TDS BY SUCH FRAN CHISES. 6.5. THUS, THE YEAR UNDER CONSIDERATION UNDER THE A FORESAID MOU, ASSESSEE EARNED A TOTAL SUM OF RS.1,78,75,045/ - AND IN ACCORDANCE WITH THE AFORESAID LETTER DATED 23.20.20 07, AN AMOUNT OF RS.44,68,763/- PAID TO M/S A.B. HOTELS LT D. WAS IN THE SHARE OF REVENUE OF M/S A.B. HOTELS LTD. AND AS SUCH, TAX WAS NOT REQUIRED TO BE DEDUCTED IN TERMS OF SECTION 194 J OF THE ACT AND SUCH DISALLOWANCE MADE UNDER SECTION 40(A)(IA) IS UNWARRANTED AND UNSUSTAINABLE IN LAW. 6.6. ON THE BASIS OF THE ABOVE DISCUSSIONS AND FIND INGS, WE ARE OF THE CONSIDERED OPINION THAT THE INCOME PAID BY THE ASSESSEE WAS ONLY A PASS THROUGH ARRANGEMENT AND THE CONTENTION OF THE REVENUE THAT SUCH PAYMENT MADE BY THE ASSESSEE TO M /S.AB HOTELS LTD., IS ROYALTY, STANDS REJECTED. ACCORDI NGLY THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. IN THE RESULT THE ASSESSEES APPEAL STANDS ALLOWED THE ORDER PRONOUNCED IN THE OPEN COURT ON 23/02/201 6 SD/- SD/- (N. K. SAINI) (BEENA PILLAI) ACCOUNTANT MEMBE JUDICIA L MEMBER DATED: 23/02/2016 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR 9 ITA NO. 540/DEL/2013