Income deemed to accrue or arise in India

Marketing and reservation contribution received by the assessee, non-resident, owner of a trademark from Indian hotel owners with a corresponding obligation to use it for the agreed purposes are not Royalty or Fees for Included Services and they are in the nature of business income and since the assessee does not have a PE in India, the same are not taxable in India — as held by MumTrib in Six Continents Hotels Inc v DCIT — In favour of: The Assessee ; IT (Appeal) Nos. 3618 and 3619 (Mum.) of 2008 : Assessment Years: 2003–2004 and 2004–2005

Six Continents Hotels Inc. v DCIT

ITAT, Mumbai

IT (Appeal) Nos. 3618 and 3619 (Mum.) of 2008

Assessment Years: 2003-04 and 2004-05

N.V. Vasudevan, JM and B. Ramakotaiah, AM

Decided on: 11 May 2011

Counsel appeared:

Sunil M. Lala and Zeel Jambuwala for the appellant

Malathi R. Sridharan for the respondent

Order

N.V. Vasudevan, JM

1. ITA No.3619/M/08 is an appeal by the assessee against 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 the assessee against the order dated 24-3-2008 of CIT(A) XXXI, Mumbai relating to

assessment year 2003-04.

2. In both these appeals the only issue that arises for consideration is as to whether the marketing

and reservation contribution received by the assessee from Indian hotel owners is "Fee for

Included Services('FIS') under Article 12(4) of the Indo-US Double Taxation Avoidance

Agreement('DTAA') and therefore taxable in India.

3. The facts and circumstances under which the above issue arises for consideration are as

follows:

The assessee is a non-resident, being a company incorporated in USA and is the owner of

certain trademarks and service marks and operates and licenses the same under the name

'Holiday Inn'. During the relevant assessment years, various Indian hotels were licensee

to the trademark 'Holiday Inn' and were operating as per the standards and terms of the

respective agreements with the assessee. As per the respective license agreements such

Indian Hotels were entitled to use the trade mark 'Holiday Inn' owned by the assessee.

For use of the trademark, the Indian Hotels pay fee to the appellant and the said fee has

been offered to tax in India as 'Royalty' as per Article 12(3)(a) of Double Taxation

Avoidance Agreement between India and USA ('DTAA'), in the return filed by the

assessee. Besides the above License fee, the assessee maintains a separate fund wherein it

receives the marketing and reservation contribution from the hotels worldwide (including

hotels in India). According to the Assessee, such funds are solely used to meet out

common expenses of marketing and providing centralized reservation facilities to all its

franchisee 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 contribution 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 chain of hotels operating under the brand name of "Holiday Inn". This

expenditure is incurred for common benefit of all the hotels and is therefore recovered from the

hotels by way of 'marketing contribution'. The advantage of such common marketing campaigns

is that there is no duplication of expenses and efforts, global standards are maintained, there is

economy of scale and need for marketing and advertisement expense at individual level is

eliminated.

5. Reservation System provides online centralized link to all the franchisee hotels and customers

and helps the hotels 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 reservation system and recovers the same in the form of reservation.

6. In the return of income filed for the relevant assessment years, the assessee filed computation

of income, details of statement of Royalty and Marketing and Reservations contributions received

from various Indian Hotels, and notes to computation. In the notes to computation, the assessee,

by relying on various judicial precedents, clarified that marketing and reservation contributions

are not chargeable to tax 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 assessee does not make available any technical

knowledge, experience, skill, know-how or processes etc.

Without prejudice to above, such contributions could be business profits and cannot be

subjected to tax in absence of Permanent Establishment of assessee in India.

7. The AO however observed that the assessee must have developed its own secret system to be

used by the franchise otherwise it would not have charged such huge amount. It was also

observed that there was no evidence 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 giving raise to these appeals by the assessee before

the Tribunal.

9. We have heard both the parties in the matter. The Learned AR reiterated the submissions made

before CIT(A) whereas the Learned DR placed reliance on the order of AO. We have perused the

records and considered the matter carefully. We find that the identical issue of taxability of

marketing and reservation contribution fees received by the assessee from the Indian hotels has

already been considered by the Tribunal in assessee's 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 the hands of the assessee. The Tribunal accordingly held that

the receipts could 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 of DTAA as the assessee had

no PE in India. The Tribunal accordingly deleted the addition made. We also note that the AO in

assessee's own case in A.Y's. 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 contribution 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 or FIS and they are in the nature of business income and since

the assessee does not have a PE in India, the same are not taxable in India.

10. In the result, appeals of the assessee are allowed.