RHW HOTEL MANAGEMENT SERVICES LTD.,GURGAON vs. DCIT, NEW DELHI

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;

2.2.The assessee had also filed a letter dated 23.10.2007 written by Dr. R. Kapur, Managing Director, Radison Hotel Delhi which is reproduced in the page 2 of the assessment order, agreeing for revised terms; “........... • 50% of the revenue will be adjusted towards expenditure 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. 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. In view of the above, the assessee had clearly violated the provisions of section 194J of the IT Act and thus the expenditure on account of fee for profit sharing amounting to Rs.44,68,763/- is not an allowable expenditure under section 40(a)(ia) of the Act. 4. Aggrieved by the order of the ld. AO assessee preferred appeal before the ld. CIT(A). Ld. CIT(A) upheld the findings of ld.

AO. Aggrieved by the order of the ld. CIT(A) assessee is in appeal before us.

4.1. That solitary issue involved in the instant appeal is regarding disallowance of Rs.46,69,763/- representing expenditure incurred on payments made to M/s A.B. Hotels Ltd. under the memorandum of understanding with M/s A.B. Hotels Ltd. dated 27.03.2000 (see pages 17-18 of the Paper Book) and disallowed by the learned AO by invoking the provisions of section 194J of the Act read with section 40(a)(ia) of the Act.

4.2. Ld. AR submitted that, assessee was incorporated as a “joint venture company” of M/s Radisson Hotel International Inc. and Unitech Group, and has been engaged in the business of promoting a brand and basic support services to a brand, since incorporation.

4.3. Ld. AR further submitted that, in order to provide such services, the assessee has necessary expertise for organizing and developing a systematic array for specialized training and specific procedures for the structure and operation of franchise operations in the field of speciality restaurants.

4.4. Ld. AR submitted that, in pursuant to the above objective, the assessee in the assessment year 2000-01, i.e. on 27.03.2000 entered into a Memorandum of Understanding with A.B. Hotels Limited (see page 3-4 of the Paper Book) who was the owner of the brand ‘The Great Kabab Factory’ to form a joint venture for the development and franchise of the brand ‘The Great Kabab Factory’ (hereinafter referred to as “MOU”).

4.5. It is submitted that, subsequently the terms and 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 MOU, 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 such 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 consideration, 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 envisaged 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, then too application of section 194J of the Act is highly misconceived.

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 of developing a manual relating to the cuisine, systems and procedures for the operation of a franchise agreement with potential customers and does not imply that any services had been rendered by Radisson Hotel, Delhi.

4.10. The Ld. AR submitted that Radisson Hotel, Delhi is operated and run by M/s A.B. Hotels Ltd., and as such the assumption that M/s A.B. Hotels Ltd. is in existence 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 Hon’ble Supreme Court in the case of CIT VS B.M. Kharwar reported in 72 ITR 603 (SC), where it was held that, legal relation alone can determine the taxability of the receipts arising from the transaction. He contended that in the year under consideration all what had happened was under the MOU dated 27.03.2000, read with letter dated 23.10.2007, revenue was shared in respect of the joint venture between the assessee and M/s A.B. Hotels Ltd. for development and franchise of “The Great Kabab Factory”(TGKF) Brand. The Ld.AR submitted that this would also be evident from the agreement dated 7.12.2004 between M/s Bestech Hospitalities (P) ltd. and M/s RHW Hotel Management Services Ltd. (pages 7.-27 of Paper Book) wherein it would be seen that in respect of the income so generated no services are being provided by Radisson Hotels, Delhi.

6.1. In the instant case payment made of Rs.44,68,763/- by the assessee to M/s A.B. Hotels was not for the purpose of acquisition of any right in the Brand ‘The Great Kabab 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 not granted any right to use or was imparted any information by M/s A.B. Hotels in respect of the brand ‘The Great Kabab Factory’, but it was the assessee who was to market the Brand and franchise the Brand ‘The Great Kabab Factory’ owned by Radisson Hotels. The Brand ‘The Great Kabab Factory’ always remained with M/s A.B. Hotels Pvt. Ltd., and franchises who were introduced by the assessee were using the Brand ‘The Great Kabab Factoyr’ i.e. they were operating under the brand ‘The Great Kabab Factory’ for its own.

6.2. The remittance by the assessee to AB hotels Ltd., was only a diversion of , on which AB hotels Ltd., had an overriding title. Such income to the extent of share of AB Hotels, never 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 dully accounted for by the assessee. In respect of the granting of franchise, assessee was to receive from each franchise the following sums:

- Development Fee: Rs.10 lakhs, in total, to be collected upon signing of the agreement and in later stages of development subject to negotiations. - The Royalty Fee: 2.5% of the gross sales.

- Management Incentive Fee: 6% - 7.5% of the GOP 6.3. That aforesaid fee received by the joint venture 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 assessee. It is submitted that this initial arrangement of the revenue sharing was modified by the letter dated 23.10.2007 which provided as under: • 50% of the revenue will be adjusted towards expenditure 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 franchises to various persons in India. The assessee was to charge 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 sharing 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 and assessee received various payments from the persons who got into franchise agreement with assessee and all such payments to the assessee were made after deducting TDS by such franchises.

6.5. Thus, the year under consideration under the aforesaid MOU, assessee earned a total sum of Rs.1,78,75,045/- and in accordance with the aforesaid letter dated 23.20.2007, an amount of Rs.44,68,763/- paid to M/s A.B. Hotels Ltd. 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 194J 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 findings, 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. Accordingly the ground raised by the assessee is allowed.