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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI PRAMOD KUMAR & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned order dated 28/02/2019 passed under section 250 of the Income Tax Act, 1961 („the Act‘) by the learned Commissioner of Income Tax (Appeals)–56, Mumbai [„learned CIT(A)‟], for the assessment year 2009–10.
International Hotel Licensing Company SARL ITA no.2951/Mum./2019 2. In its appeal, assessee has raised following grounds:
―Based on the facts and circumstances of the case, International Hotel Licensing Company SARL (hereinafter referred to as "THLC or the Appellant) respectfully craves leave to prefer an appeal under section 253(1) of the Income-tax Act, 1961 (the Act) against the order passed by the Commissioner of Income-tax (Appeals) 35 CIT(A) dated February 28, 2019 under section 250 of the Act on the following grounds , which are independent and without prejudice to each other
1. On the facts and circumstances of the case and in law, the CIT(A) erred in determining the total income of the Appellant at Rs 9,63,05,200.
2. On the facts and circumstances of the case and in law, the CIT(A) erred in holding that the marketing contribution and reimbursement of expenses ('IMPPA receipts') received by the Appellant from the Indian hotel owners pursuant to the International Marketing Program Participation Agreement (IMPPA) are taxable as 'royalty'.
3. On the facts and circumstances of the case and in law, the CIT(A) has erred in holding that the IMPPA receipts are taxable as fees for technical services".
4. On the facts and circumstances of the case and in law, the CIT(A) has erred in not considering that the marketing contribution and reimbursement of expenses pursuant to the IMPPA are in the nature of pure cost reimbursements without any profit element embedded therein and therefore, not liable to tax in India.
5. On the facts and circumstances of the case and in law, the CIT(A) has erred in not considering that the marketing contribution and reimbursement of expenses pursuant to the IMPPA does not constitute income of the Appellant as per the provisions of the Act since these receipts are not unfettered receipts but received with the corresponding obligation to be spent in a prescribed manner for a specific purpose namely for carrying out marketing activities and that any surplus or deficit is to the account of the member hotel owner.
6. On the facts and circumstances of the case and in law, the CIT(A) erred in holding that the Appellant's case is not covered by the principle of mutuality without any basis and cogent reasons:
7. On the facts and circumstances of the case and in law, the CIT(A) has erred in not considering that the IMPPA receipts can at best be considered as business income of the Appellant and in the absence of business connection or permanent establishment in India, such business income cannot be chargeable to tax in India as business profits
International Hotel Licensing Company SARL ITA no.2951/Mum./2019 On the facts and circumstances of the case and in law, the CITIA) has erred in disagreeing with the Appellant's contention that an additional claim can be made before the appellate authorities. 9. On the facts and circumstances of the case and in law, the CIT(A) has erred in placing reliance on incorrect facts surmises and conjectures.
2. The only grievance of the assessee in the present appeal is against taxability of payment received by the assessee from Indian hotel owners pursuant to the International Marketing Program Participation Agreement („IMPPA‟).
The brief facts of the case, as emanating from the record, are: The the assessee‟s attacks resident of Luxembourg. For the year under consideration assessee filed its return of income on 31/03/2009 declaring total taxable income at Rs. 9,63,05,202. During the year, the assessee has received sales and marketing fees from Palm Grove Beach Hotels Pvt. Ltd., Chatel Hotels Ltd. and Viceroy Hotel Ltd., as per the agreement is entered there with.
4. The Assessing Officer vide order dated 21/12/2011 passed under section 143(3) of the Act observed that Marriott is a leading worldwide hospitality group. Under the IMPPA, assessee is to provide for advertising space in magazines, newspapers and other printing media, advertising slots on radio, television, and other electronic media. Further, the marketing and business promotion expenditure is intended not only for the benefit of Indian Hotel, but for the Marriott group as a whole. The assessee is in the business of promoting enterprises and is conducting
International Hotel Licensing Company SARL ITA no.2951/Mum./2019 international advertising, marketing and sales programme for Marriott chain of hotels to promote them in foreign markets. Further, the Assessing Officer noted that in the advertisements, the main emphasis is on the brand, i.e. Renaissance Hotels, JW Marriott. Moreover, all these advertisements carry a copyright of Marriott International, Inc. or by the assessee itself. The Assessing Officer further held that the expenditure incurred by the assessee in international advertising is for building up of the brand “Marriott” and accordingly payment has been made by the owner towards Royalty for the use of international brand and therefore the entire consideration received by the assessee from the Indian Hotel Owner under the IMPPA is taxable in India as Royalty under section 9(1)(vi) of the Act. Further, the assessing officer held that the services provided by the assessee both within and outside India in the form of advertising, marketing promotion, sales programme and special services and other programmes for which payments are made by the hotel owner, would amount to rendering managerial and consultancy services and therefore, the amounts received by the assessee from the Indian hotel owner under the IMPPA would be taxable in India as fees for technical services under section 9(1)(vii) of the Act.
In appeal, learned CIT(A) vide impugned order dated 28/02/2019, dismissed the appeal filed by the assessee, by observing as under:
―20. In para B1 of submission appellant attempted to distinguish decision of Hon. ITAT with that of appellant by comparing the nature of agreement. In para 3 of submission date 27.03.2018, more detailed breakup was presented. It is as under: Page | 4
International Hotel Licensing Company SARL ITA no.2951/Mum./2019
Sr. Key Appellant‘s Case MILC‘s Case no. Similarities The subject agreement is a The subject agreement is a marketing agreement marketing agreement executed executed by the Appellant Nature of by MILC with the Indian hotel 1. with the Indian hotel agreement owners. A sample copy of the marketing agreement is marketing agreement is enclosed as Annexure–5 enclosed as Annexure–4 The services include– The services include – (i) Purchase of advertising (i) Purchase of space in magazines, advertisement space in newspapers and other similar magazines, newspapers and media; other similar media; (ii) Purchase of advertising (ii) Purchase of advertise– and publication of pamphlets, ment on radio television and brochures, directories and other electronic media; other materials; (iii) Printing and publication (iii) Printing and of pamphlets, brochures, Nature of publication of pamphlets, directories, other directories 2. services brochures, directories and and material; other materials; (iv) Advertising, marketing, (iv) Marketing, promotional promotional, public relations, and public relations revenue management and campaigns; sales campaigns; (v) Market research and (v) Market research, development and marketing customer surveys; products; (vi) Conducting frequent (vi) Conducting frequent traveler program. traveler program. Receipts from hotel owners: Receipts from hotel owners: (i) Contribution for (i) Contribution for undertaking international undertaking international marketing activities as a marketing activities as a Nature of percentage of gross revenue percentage of gross revenue of 3. receipts of the respective hotels; and the respective hotels; and (ii) Reimbursement of cost (ii) Reimbursements of cost in relation to other services on in relation to other services on a fair and reasonable basis. a fair and reasonable basis. The international marketing The international marketing Place of activities are undertaken activities are undertaken rendering outside India as evidenced in 4. outside India services clause 3.2 of the marketing agreement. A centralized marketing fund is mentioned and A centralized marketing fund is administered for the purpose mentioned and administered of undertaking advertising, for the purpose of undertaking marketing, promotion and Operating advertising, marketing, sales activities on behalf of 5. construct promotion and sales activities hotel owners who have been on behalf of hotel owners who licensed to 'Marriott' brands. have been licensed to use use 'Marriott' brands.
International Hotel Licensing Company SARL ITA no.2951/Mum./2019 Royalty agreement IHLC has also entered into MILC has entered into royalty entered royalty agreement with agreement with certain Indian 6. into with certain India hotel owners. hotel owners. the hotel owners The difference cited is that there is no provision for Centralized Reservation System in regard to services and for Marketing fee regarding income (paragrapli B-1 of written Submission). With reference to table above, the first thing to be considered is that each contract/agreement differs and is always agreed upon its consideration of commercial environment the contracting/agreeing parties operate upon and their business requirements. Going through the table reproduced above, it can be seen that both for receipt and service the broad character remain same Nature of agreement is vividly similar as per submission of Appellant. This differences highlighted ore minor and in no way result is a decision to the extent that similarity is absent. This difference does not result in a different decision on the basis that facts and circumstances are not identical.
Coming to para E of written submission filed on 12.11.2018 the matter is as to in whose hands income is to be assessed Here assesse is the recipient of sums received. Thus on receipt basis it is in hands of appellant. If it is not so, the onus is an appellant to establish that the same is not taxable in their hands but on a different person. This is not discharged, Both the owner of Marriot Brand and appellant receives sums as a lined percentage of turnover and they are related parties It therefore is imperative on part of appellant to establish any alternate person in whose hands income is to be assessed.
The appellant in para E states that owner of trade mark "Marriot is brand owner and hence can be assessed in their hands. In letter dated 13.08.2018 addressed to appellant the following were stated.
Please produce (a) agreement, if any, between you (wholly–owned indirect subsidiary of Marriot International Inc.) and Marriot International Inc. at time of hearing.
3. You can, if you desire, produce details concerning Marriot International Inc. like there Indian Income Tax Rules return of income, any commission or other payment by you to M/s. Marriot International Inc etc.
Decision of our Hon ITAT in & 1997/Mum./2011 dated 14.11.2015 in case of M/s Marriot International Inc. (PAN: AAECM8040K) will be discussed at time of hearing. It is keeping in view the decision of Hon. ITAT dated 14.11.2015 the posers were made in response, the reply was "1. Produce a copy of the agreement, if any, between Marriott International Inc. (MII) and IHLC has not entered into any agreement with MII in connection with the impugned transaction under consideration and therefore, the above details are not applicable. This brings to fore the fact that nothing is payable to brand Page | 6 International Hotel Licensing Company SARL ITA no.2951/Mum./2019 owner and the income aspect of the receipt is to be absorbed by appellant itself.
There is a missing link in the argument above. Para C of IMPPA read as under: C. As of the late of this Agreement, IHLC is a wholly-owned, indirect subsidiary of Marriott International, Inc. IHLC and its Affiliates have expertise and experience in providing international advertising, marketing, promotion and sales services to Courtyard System hotels. Owner desires to participate in such program conducted by IHLC outside India and IHLC desires to accept Owner into such program upon He terms and conditions set forth in this Agreement. It is not explained as to how the appellant can exist in isolation and still do activity independent of owner of brand. This is a point that needs explanation. Irrespective of any agreement between Appellant and owner of brand, the authority under which the program operates is not explained. If the role is executed as a subsidiary, then it is to be so stated.
The written submission filed on 12112018 and 27.03.2018 highlights certain case decisions. My decision bases itself to latest decisions of jurisdictional Hon. ITAT. Two of the cape decisions cited are Six Continental Hotels [(2011) 11 taxmann.com 332] and Bass International Holdings BV vs JCIT, Special Range 12. Mumbai (ITA No. 4341/Mum/2002) In the former the claim is that sum received as "Marketing and Reservation Fee with corresponding obligation to use for agreed purpose cannot be viewed as income and cannot be held as business profit. In the latter the finding of former was reiterated. However, these are decisions before the decision of jurisdictional Hon. ITAT dated 14.03.2015, was rendered. The later decision are specific and closer to the facts and circumstances of the case of appellant. The fact of ‗colourable devise‘, disproportionately high payment towards marketing program vis–a–vis Royalty etc. were brought to fore for the first time in a decision of Hon. ITAT in this later decision. Thus the earlier case decisions which is relied upon by Appellant are ones that has lost relevance.
In paragraph C2 Appellant states about approval al Government of India for making payment. The matter before me is not relating to approval but decision whether the ms are table in hands of Appellant. The argument is held as not valid.
The payment to Appellant is tagged with the payment of royalty for licensed use of Marriot Brands. In submission filed on 22.06.2016, paragraph 1.2 reads as under: 1.2 At a global level, IHLC inter–alia undertakes advertising, marketing and promotion activities of a central/group basis. Such activities are undertaken on behalf of, and for the benefit of the hotel which have been licensed the use of Marriot brands. Thus the receipt in hands of Appellant is tagged with receipt for use of Marriot brand, the owner of which in this case is a different entity. In Page | 7 International Hotel Licensing Company SARL ITA no.2951/Mum./2019 hands of owner of Marriot brand, the same is taxable as Royalty. There is no logic or reason to hold the receipt distinct and separate, especially when both are paid as a fixed percentage of turnover.
Another point emphasized by appellant is that IMPPA is non-profit making exercise. According to Appellant, the expense in for specified purpose matches income is in pre determined manner and there is no surplus to be taxed. This argument is valid if attempt is to the same as business profit, which is never the focus of this discussion. It also is to be noted that in this appellate order at various stages, it is held that IMPPA cannot exist in isolation of payment of Royalty for Marriot Brand.
Let us consider this receipt of Royalty income in accordance with provisions of double Taxation Avoidance Agreement. Under Double Taxation Avoidance Agreement, income is not determined, but tax is determined as a fixed per cent of gross RECEIPT. The perspective whether there is profit or loss and whatever be its extent, tax is determined at a fixed rate. This is the manner in which Royalty suffers tax in hands of brand owner and extent of expenses does not count. The same principle applies in regard to royalty under section 115A also. A receipt tagged to recipient of Royalty (Payment by hotels in India is for overall benefit of use of Marriot Brand, though made to Appellant who is not the brand owner) cannot have a distinct character different from main character. For the hotels in India, all the three payments viz (a) Royalty, (b) Marketing fee and (c) Reimbursement of expenses are in an integrated manner needed to successfully use Marriot Brand which in turn increases their business.
Value of Marriot Brand soars when turnover increases of Hotels using Marriot Brand. Payment under IMPPA referred to in clause 1.01B of IMPPA reads as under:– B. Owner‘s contribution to costs and expenses associated with the International Advertising, Marketing, Promotion, and Sales Program for the Hotel shall be 1.5% of Gross Revenues, net of Taxes for each Accounting Period. The above reveal that payment to IMPPA is transaction dependent. As turnover it Hotels in India which are signatory to IMPPA increases sum payable to both owner of Marmot Brand and appellant increases Simultaneously value of Marriot Brand increases, which in turn increases the turnover of hotels in India which are signatory in IMPPA, which further increases payment by Hotels in India to both appellant and owner of Marriot Brand The whole arrangement is deeply interlinked and are inseparable. The appellant being indirect subsidiary of Marriot International Inc are related does receive sums exactly in the manner of what is received/receivable by the brand owner le a fixed percentage of turnover. This absorbs aspect of mutuality also, since the entwining of the transactions takes matter out of realm of mutuality. Thus the additional ground of appeal
is dismissed.
30. The recipient cannot unbundle this integrated receipt and hold that certain parts of same are not taxable. All have same character and hence Page | 8 International Hotel Licensing Company SARL ITA no.2951/Mum./2019 same treatment. Thus the argument of the appellant fails. The receipts by Appellant, unless Appellant establish that the same belongs to another person, which they have nut, is royalty to be assessed in their hands.
The points discussed above are in addition to reasons recorded by CIT (Appeals) in appellate order for A.Y. 2006–07 and 2008–09 (the Hon. ITAT did not get into decision of CIT(Appeals) for there two A.Ys, but straight dealt with additional ground of appeal
) while dismissing the appeal. This is also relied upon.
32. Coming to judicial precedence we have AAR ruling in case of appellant itself with decision of jurisdictional ITAT on identical facts and circumstances. Section 245S of Income Tax Act 1961 reads as under: Applicability of advance ruling. 245S. (I) The advance ruling pronounced by the Authority under section 245R shall be binding only— (a) on the applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the Principal Commissioner or Commissioner, and the income-lax authorities subordinate to him, in respect of the applicant and the said transaction. (2) The advance ruling referred to in sub-section (1) shall he binding as aforesaid unless there is a change in law or facts on the basis ol which the advance ruling has been pronounced. Since there is no change in facts, the IMPPA remaining same, the decision of AAR has applicability in case of appellant. Coming to sub- section (2) of section 245S, there is (judicial decision on character of income and (b) no decision on aspect of mutuality. On (b) Hon. ITAT has merely reverted matter to Assessing Officer and no firm decision is available to follow. The additional ground on mutuality is dismissed by me in paragraph.
33. Overall, after considering above and views of appellant reproduced in paragraph 12 of this order, I find that the decision of AAR subsist in the case even though the parties concerned is different since broad character of transactions remain same. Independently also test of mutuality fails and Hon. ITAT has held the income of similar nature to be Royalty. Accordingly grounds B to F stands dismissed.
34. I had raised the issue of eligibility to reduce income subsequent to disclosure in return of income and conclusion of assessment proceedings without any disturbance to returned income and not making any plea before Assessing Officer as evidenced by assessment order Prima facie there is no case for appeal as such and further appellate platform is not meant for continuous and perpetual revision of return of income. Submission of appellant has been filed on the matter and heard. Since on Page | 9
International Hotel Licensing Company SARL ITA no.2951/Mum./2019 merits I had dismissed the appeal, separate discussion and decision is not made, despite disagreement with the appellant on the issue. 35. The appeal is dismissed.‖
Being aggrieved, assessee in appeal before us.
During the course of hearing, learned Authorised Representative („learned AR‟) submitted that the payment received by the assessee cannot be characterised as Royalty under the Act as the said payment are not made for the use of any copyright, patent, trademark, etc rendering any services in connection with the use of any patent, trademark, etc. Further, the payment also does not qualify as a consideration for information concerning industrial, commercial scientific experience.
On the other hand, learned Departmental Representative by vehemently relying upon the orders passed by the lower authorities submitted that recently coordinate bench of the Tribunal in Marriott International Inc. Vs DCIT, in ITAs No. 3232/Mum./2015 to 3235/Mum./ 2015, vide order dated 06/05/2022, has adjudicated on similar issue.
In a short rebuttal, learned AR submitted that even if the aforesaid decision rendered by coordinate bench of the Tribunal is applied to the present case, the payment received would not be taxable in the hands of the assessee as Royalty, since the assessee is not the owner of the Marriott brand.
International Hotel Licensing Company SARL ITA no.2951/Mum./2019 9. We have considered the rival submissions and perused the material available on record. We find that coordinate bench of the Tribunal in Marriott International Inc. (supra), observed as under:
―013. We have carefully considered the rival contention and perused the orders of the lower authorities. The only issue involved in this appeal is that income of royalty arising out of the above trademark of ‗ brand ― Marriott‘ is taxable in the hands of the assessee or not. Now, assessee has given a registration certificate dated 21st august, 2006 and covers above assessment years. No doubt, as held by the Hon'ble Delhi High Court in the case of CUB Pty Limited vs. [2016] 71 taxmann.com 315 (Delhi) that since the brand owner not located in India, the situs of the brand would also be outside India and naturally, the income arising there from would be chargeable to tax in the hands of the owner of the brand. In fact, Marriott International Inc. (assessee) in these appeals is not the owners of the brand as per certificate of ownership produce before us. Therefore, it is chargeable to tax in the hands of the person who owns the brand. Nevertheless, it is not the contention of the assessee that no tax should have been deducted under section 195 of the Act on the payments made by, Juhu Beach Resorts Limited, V.M. Salgaonkar and Brothers Pvt. Ltd. and Chalet Hotels Limited and we are also conscious of the fact that sum is received by the assessee and provision of section 163 of the act also needs to be examined. However, there is a substantive provision for that.
In view of these facts, we set aside all these four appeals back to the file of the learned Assessing Officer with a direction to consider the certificate of registration on trademark dated 21 August 2006, which was applied for on 24 November 2003. The learned Assessing Officer may re- consider that in whose hands the above income is chargeable to tax as royalty income. The learned Assessing Officer may also consider that who received the above sum on behalf of the non- resident tax payers and whether the provision of section 163 of the Act can be invoked or not considering assessee as an ‗agent‘ of Nonresident. The learned Assessing Officer may also consider that if the tax is required to be deducted under section 195 of the Act, then whether the tax has been deducted by the payer or not and whether they can be held to be agent of the non- resident. However, the learned Assessing Officer before proceeding against any other assessee or this assessee may issue requisite notice. In view of the above facts, we set aside all the grounds of appeal back to the file of the learned Assessing Officer for deciding the taxability of royalty.‖
10. From the perusal of comparative table of agreements involved in Marriott International Inc. and in the case of assessee, which is forming part of the impugned order, it is evident that both the agreements are International Hotel Licensing Company SARL ITA no.2951/Mum./2019 broadly similar in respect of nature of services and consideration received. Thus, respectfully following the aforesaid decision, we deem it appropriate to set aside all the grounds raised in assessee‟s appeal to the file of the assessing officer with similar directions, as passed in the aforesaid decision.
During the course of hearing, learned AR wish to not press the application seeking admission of additional ground. Accordingly, the said application is dismissed as not pressed.