BASKIN ROBBINS FRANCHISING LLC,MUMBAI vs. DCIT (IT) 1(2)(1),

सुनवाई क" तार"ख /Date of Hearing : 21-4-2016 घोषणा क" तार"ख /Date of Pronouncement : 15-07-2016 आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member

ITA 1376/Mum/2015 2

2. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-

“The appellant objects to the order dated 23 January 2015 (received on 3 February 2015) passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (''the Act') by the learned Deputy Commissioner of Income-tax (International-taxation) - 1(2)(1) ('DCIT'). The said order was passed pursuant to the directions dated 26 December 2014 issued by Dispute Resolution Panel- I, Mumbai '(DRP'), on the following amongst other grounds:

Each of the following grounds of appeal is without prejudice to the other.- On the facts and in the circumstances of the case and in law, 1.1. The learned DCIT erred in holding that Graviss Foods Private Limited (GFPL) was a dependent agent Permanent Establishment of the appellant.

1.2. The learned DCIT erred in not appreciating the fact that GFPL was an independent entity and there was no legal or economic dependence on the appellant. He erred in not considering his own observation that transfer pricing provisions were not applicable.

1.3. The learned DCIT erred in observing that the appellant had a joint venture in India since 1991. He erred in not appreciating the fact that the appellant was incorporated only on 15 March 2006 and it was not a party to the erstwhile joint venture agreement.

1.4. The learned DCIT erred in treating the royalty income as "Business income" taxable under section 28 read with section 44DA of the Act as against "Income from Other Sources" by appellant in its return of income filed for the aforesaid assessment year.

1.5. The learned DCIT erred in taxing the royalty income of Rs. 1,88,64,440 (after allowing deduction for expenses of 5% of royalty fees) under section 28 read with section 44DA of the Act as against taxability thereof on gross basis under section 115A of the Act offered by the appellant in its return of income filed for the aforesaid assessment year.

1.6. Without prejudice to the above, ITA 1376/Mum/2015 3 a. The learned DCIT has erred in restricting the allowance of expenses to 5% of the royalty fees without any basis; b. The learned CIT erred in not allowing a deduction for depreciation on the trademark of the appellant. 1.

7. The learned DCIT erred in levying interest of Rs. 2,12,264 under section 234D of the Act on the amount of refund which has not been received by the assessee. 1.8. The learned AO erred in levying interest of Rs. 17,35,846 under section 234B of the Act. The appellant craves leave to add to, alter, amend, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as it may be advised.”

The assessee company has entered into Multiple Unit Development and Franchise Agreement with GFPL and has granted the later the right to manufacture and sell the above mentioned products either itself or through approved sub-franchisees. The period of agreement is for 20 years starting from 27th December, 2007 with an option to renew it for further consecutive terms of 10 years. The assessee company submitted that it receives royalty income pursuant to the provisions of the agreement and also that the assessee company has no office or any place of business in India. It was submitted that GFPL is an independent and unrelated entity, part of Graviss ITA 1376/Mum/2015 4 group founded in 1945 engaged in hospitality and foods business in India and GFPL has its own manufacturing and cold storage facility for manufacturing and storing Baskin Robbins products in India. The manufacture and sale of assessee company’s products are being carried out by the franchisee-GFPL and/or sub-franchisees appointed by GLFL on their own account and the assessee company merely receives royalty.

Under the above arrangements, the assessee company has received the following income as royalty during the relevant previous year to the assessment year 2011-12:

Particulars Amount (Rs) Initial Franchisee fees (4th 38,80,000 installment Royalty payment on store 33,14,881/- opening Royalty payment on sales 1,26,62,421/- and access fees Total 1,98,57,302 The assessee company submitted that it has no Permanent Establishment (PE) in India and the royalty income received in India was offered to tax under income from other sources , and not under the head profit and gains of business and profession.

The A.O. asked the assessee company to submit the agreements entered into with GFPL which were duly submitted by the assessee company and on perusal of the same it was observed by the AO that the assessee company has entered into three different agreements with GFPL which are as under:- i) Manufacturing License Agreement, ii) Franchise Agreement & ITA 1376/Mum/2015 5 iii) Development agreement 8.1 In the Manufacturing License Agreement, the assessee has given right to the GFPL right to use the Brand name of 'Baskin Robins', the trade name 31" ICE CREAM, Trade Secrets, System (techniques for the distribution, sale and marketing of the products) and License to manufacture the Baskin Robins's products in the territory.

8.2 In the Franchise Agreement, the assessee grants to the franchisee an exclusive right and license to use and operate the Franchised Business in the territories. By virtue of this agreement the business of existing business of BR in India was given to the GFPL. It is pertinent to mentioned here that the Baskin Robins business was managed and control by the entities called Baskin Robins Franchisee Company Private Limited. The structure of this entities was as a South Asian Ice Cream Company ( SAIC) USA, a joint venture between Baskin Robins Franchising LLC USA( 40%) and a NRI Mr. A.Malhotra (60%) established a franchisee company in India again a joint venture with an Indian entities GL Ice-cream. This franchisee company, Baskin Robins Franchisee Company Private Limited was joint venture of SAlC (40%) and GL Ice-cream (60%). GL Ice-cream is partnership firm between Mr. Ravi Ghai and Mr. Gaurav Ghai. In 2007 in a restricting was happened in the group company. In result, the assessee company Baskin Robins Franchisee LCC becomes a 100% subsidiary of Dunkin Brands Inc, entered with franchisee agreement with GFPL. It is worth while to mention here that GFPL is closely held Private Limited Company controlled by Mr. Ravi Ghai and Mr. Gaurav Ghai & family.

In the Development agreement, the road map of business development of the Baskin Robbins is mentioned. How the business shall be developed in the territory a detailed Road map was given. In this agreement the developer (GFPL) agreed to follow business strategy and development schedule given by the BRINT (BSF).”

Thus, the authorities below after detailed study , information available on public domain and information obtained u/s 133(6) of the Act from GFPL came to the conclusion that the assessee company has PE in India i.e. GFPL ITA 1376/Mum/2015 6 being a dependent agent and the income derived was brought to tax under the head “profit and gains of business” u/s 44DA of the Act whereby draft assessment order was proposed vide order dated 31st March, 2014 u/s 144C(1) r.w.s. 143(3) of the Act , which was confirmed by the DRP vide their directions dated 26th December, 2014 u/s 144C(5) of the Act. Thereafter, the assessment orders was passed by the AO vide orders dated 23-01-2015 u/s. 144C(13) r.w.s. 143(3) of the Act .

“21st April, 2016. Hon’ble Members, “L” Bench, Income Tax Appellate Tribunal, Pratishtha Bhavan, Maharshi Karve Marg, Mumbai – 400 020. Dear Sirs, Re.: Baskin-Robbins Franchising LLC USA-Appellant v/s. Deputy Commissioner of Income Tax…. Respondent (International Taxation) – 1(2)(1), Mumbai ITA 1376/Mum/2015 7 Assessment Year 2011-12 This has reference to the aforesaid appeal in case of the appellant above- named for the aforementioned assessment year. The appeal was taken up for hearing by your Honours on 20 April 2016 and in the course of hearing your honours were kind enough to instruct that the facts which were explained leading to the filing of additional evidence be provided in the form of a written note.

3. In this connection, we humbly submit the following; a) At the outset, the learned DCIT has erroneously proceeded on the basis that the appellant (Baskin-Robbins Franchising LLC) was a party to the previous joint venture (JV) agreement (referred in Para 4 below) and hence concluded that the same arrangement is being continued under a different form. b) In doing so, the learned DCIT has failed to appreciate that the previous joint venture agreement was entered into by Baskin-Rohbins International LLC (an entity different from the appellant) which had a stake in Baskin-Robbins Franchise Company Private Limited pursuant to a joint venture (JV) agreement. The said JV agreement was in fact terminated on 30 July 2007. c. The earlier joint venture structure is depicted hereunder:-

Baskin Robbins International Mr. A.N.Malhotra Mr. Ravi Ghai Mr. Gaurav Ghai LLC, USA 40% 60% ITA 1376/Mum/2015 8 South Asian Ice- Partnership firm Cream Company, USA GL Ice-cream Dissolved in 2006 Partnership Firm 40% 60% d) In fact, the appellant company was incorporated only on 15 March 2006. The certification of incorporation of the appellant has been filed by means of additional evidence vide letter dated l3 April 2016 in order to show that learned AO has grossly erred on facts leading to a conclusion which created serious infirmity in his order. e) In 2007, the appellant company entered into franchising agreement, manufacturing license agreement and development agreement with Graviss Foods Private Limited (the franchisee) which is a totally independent entity and is controlled by Ghai family and not only by two brothers, namely S/Shri Ravi & Gaurav Ghai who were partners in a firm which had 60% stake in the Indian franchisee-Company, f) The franchisee structure post-2007 is depicted hereunder:

Dunkin Brands Inc. USA 100% Agreement to work under Graviss Foods Private Baskin Robbins Franchisee model in India ITA 1376/Mum/2015 9 Limited Franchising LLC, USA (closely held company controlled (company formed in 2006) by Ghai & Family) Change in name and shareholding g) The structure of the group prior to 2007 and from 2007 onwards has also been included at Page 374 and 375 of the Paper book compilation filed by the appellant. h) Based on the above, your honour will appreciate that the structure included at Page 8 of the Directions given by the Dispute Resolution Panel (DRP) is incorrect as the same shows the appellant as a party to the previous joint venture arrangement and thus learned Members of the DRP have also grossly erred on facts leading to an erroneous conclusion.

4. Under the circumstances, it is submitted that the learned DCIT has passed the order ignoring the correct structure submitted vide letter dated 11 March 2014 and without appreciating the following facts- - the appellant was not a party to the previous joint venture. which was terminated in 2007; - the appellant was incorporated on 15 March 2006; - the appellant had no stake in the previous JV entity, namely, Baskin-Robbins Franchise Company Private Limited - the appellant has entered into franchising arrangement with a completely independent third party namely Graviss Foods Private Limited (100% owned and controlled by Ghai family) which bears the entire risks and rewards of the Indian territory; (GIRISH DAVE) Counsel”

ITA 1376/Mum/2015 10 It was submitted that the authorities below have not considered the current structure of the organization whereby the assessee company was incorporated on 15-03-2006 (certificate of incorporation placed in paper book carrying additional evidences at page 25-27) and the fresh agreements were entered into by the parties post restructuring as set-out above, and hence the entire orders of the authorities below are perverse and in the interest of justice, the matter should go back to the file of the A.O. for de-novo determination of the issues on merits after considering the existing structure of the assessee company and the fresh agreements , which are placed in paper book page B- 33 to B222 entered into with various entities instead of relying upon the old structure of the erstwhile company of the group of which the assessee company was part of and which agreements were already terminated on 30th July, 2007, copy of which are placed in paper book page 1 to 24 of the paper book containing additional evidences filed before the Tribunal which are placed in file. These additional evidences are to be considered by the authorities below on merits before arriving at the decisions of chargeability of income to tax under the provisions of the Act and DTAA between India and USA.It is the say of the learned counsel for the assessee company that all the agreements prior to the restructuring as well post restructuring were placed before the AO with detailed notes vide replies dated 30-09-2013, 17-12- 2013,20-12-2013 and 18-02-2014 which are placed in paper book pages B- 33-B222,B226,B227-B244 and B-247 to B-252 filed with the Tribunal and the authorities have not appreciated the said agreements in the right perspective .

ITA 1376/Mum/2015 11

ITA 1376/Mum/2015 12 Para 7.4 of DRP directions dated 26.12.2014 passed u/s 144C(5) of the Act “7.4 Discussions and Directions : We have considered the submissions of the assessee, the order passed by the AO as well as the documents produced before us including the three agreements between the assessee and Graviss Foods Private Limited . Before deciding the issue at hand , certain factual aspects in respect thereof must be narrated. It may be noted that earlier (around 1991) , a joint-venture agreement , including a shareholder agreement between the assessee and one NRI, Shri A.R.Malhotra was entered into, for establishing the business of Baskin-Robbins in India and the joint-venture company called South Asia Ice-cream Co.(SAIC) was floated, in which the assessee held 40% shares and Shri Malhotra held 60% shares. The company SAIC entered into further joint-venture agreement with GL Ice- cream (a firm having its partners as Mr Ravi and Mr. Ghai) of India and the name of this joint-venture company was Baskin-Robbins Franchisee Co. Private Limited . It is seen that in the said company Baskin-Robbins Franchisee Co. Private Limited , the assessee also had a direct stake in terms of its shareholding.”

Thus, it could be seen that the authorities below have proceeded on the assumption that the assessee company is the same entity which has entered into agreements in 1991 and is continuing whereas the fact of the matter is the assessee company is incorporated only on 15-03-2006 for which certificate of incorporation is placed on record by the assessee company at page 25-27 of paper book containing additional evidences. Thus, the fundamental premise on which the authorities proceeded in the matter has ITA 1376/Mum/2015 13 crept with an error which goes to the root of the matter and the orders of the authorities below cannot be sustained under these circumstances.

In our considered view and in the interest of justice, the issues’ arising from these appeals needs to be set aside and restored to the file of the A.O. for de- novo determination of all the issues on merits . As such, we set aside the matter back to the file of the A.O. with a direction to re-determine the issue de-novo on merits after considering the existing structure of the assessee company and the fresh agreements entered into with various entities in the light of provisions of the Act and DTAA entered into between USA and India . Needless to say that the assessee company be provided with proper and adequate opportunity of being heard by the AO in accordance with the principles of natural justice in accordance with law. The assessee company will be allowed to submit relevant additional evidences , material and explanations in support of its contentions in its defense, which shall be admitted by the AO and adjudicated on merits. We order accordingly.