If a property was likely to come into existence because of certain payment, the same couldn’t be deemed as 'royalty' because it lacked the condition of 'use or right to use'. Even if payment was made for creation of the brand and not for the use of such brand, the same couldn’t be characterized as 'royalty'
In the instant case the assessee, a foreign company (Marriot), entered into a franchise agreement with a franchisee-hotel in India (‘AHL’) to establish and operate MRHS International Hotel. The franchisee desired certain sales, marketing, publicity and promotion services to be performed outside India in support of the operation of the hotel. It agreed to perform such services. AHL agreed to pay 1.5% of its gross revenue to the assessee for 'International Marketing Activities'. During assessment the AO brought this amount to tax as "royalty" under Article 12(4) of India-Netherlands DTAA (‘treaty’). Further, the CIT(A) allowed the assessee’s appeal holding the amounts to be reimbursements. Aggrieved revenue filed the instant appeal.
The Tribunal held as under:
1) As per Article 12(4) of the treaty, in order to cover any payment within the purview of "royalty", it was imperative that the payment must be for a consideration for use or right to use any copyright of the literary artistic work, etc., or any patent, trademark, etc. (i.e., ‘defined property');
2) Payment could be made as a consideration for the use or right to use of the defined property only when such property was in existence at the time of use. If a property didn’t exist or was likely to come into existence because of the payment made, the same couldn’t qualify as 'royalty' because it lacked the condition of 'use or right to use';
3) The term 'royalty' as per Article 12(4) of treaty contemplates a consideration for the use of or right to use of the defined property already in existence and the payment was agreed to be made for its use or right to use. If the payment made was of such a nature which helped in the creation of the defined property, that couldn’t regarded as royalty;
4) Even if payment made by AHL towards the international marketing activities led to the brand building, it would still be a payment for the creation of the brand and not for the use of such brand, which could be characterized as 'royalty';
5) Thus, the impugned consideration couldn’t be deemed as 'royalty' under Article 12 of treaty. The actual expenses to be incurred by the assessee might have been more or less than the said fixed rate of consideration. In such a situation, there was every possibility of the assessee having some mark up on the costs incurred by it on advertisement. No material had been placed on record to demonstrate that the actual expenses incurred by the assessee were equal to the amount received. Thus, the CIT(A) was not justified in deleting the addition by holding that it represented 'reimbursement of expenses'. Matter remanded to AO to decide whether amounts taxable as Business Profits under Article 7 of treaty – Dy. DIT v. Marriott International Licensing Company BV [2013] 35 taxmann.com 400 (Mumbai - Trib.)
In the instant case the assessee, a foreign company (Marriot), entered into a franchise agreement with a franchisee-hotel in India (‘AHL’) to establish and operate MRHS International Hotel. The franchisee desired certain sales, marketing, publicity and promotion services to be performed outside India in support of the operation of the hotel. It agreed to perform such services. AHL agreed to pay 1.5% of its gross revenue to the assessee for 'International Marketing Activities'. During assessment the AO brought this amount to tax as "royalty" under Article 12(4) of India-Netherlands DTAA (‘treaty’). Further, the CIT(A) allowed the assessee’s appeal holding the amounts to be reimbursements. Aggrieved revenue filed the instant appeal.
The Tribunal held as under:
1) As per Article 12(4) of the treaty, in order to cover any payment within the purview of "royalty", it was imperative that the payment must be for a consideration for use or right to use any copyright of the literary artistic work, etc., or any patent, trademark, etc. (i.e., ‘defined property');
2) Payment could be made as a consideration for the use or right to use of the defined property only when such property was in existence at the time of use. If a property didn’t exist or was likely to come into existence because of the payment made, the same couldn’t qualify as 'royalty' because it lacked the condition of 'use or right to use';
3) The term 'royalty' as per Article 12(4) of treaty contemplates a consideration for the use of or right to use of the defined property already in existence and the payment was agreed to be made for its use or right to use. If the payment made was of such a nature which helped in the creation of the defined property, that couldn’t regarded as royalty;
4) Even if payment made by AHL towards the international marketing activities led to the brand building, it would still be a payment for the creation of the brand and not for the use of such brand, which could be characterized as 'royalty';
5) Thus, the impugned consideration couldn’t be deemed as 'royalty' under Article 12 of treaty. The actual expenses to be incurred by the assessee might have been more or less than the said fixed rate of consideration. In such a situation, there was every possibility of the assessee having some mark up on the costs incurred by it on advertisement. No material had been placed on record to demonstrate that the actual expenses incurred by the assessee were equal to the amount received. Thus, the CIT(A) was not justified in deleting the addition by holding that it represented 'reimbursement of expenses'. Matter remanded to AO to decide whether amounts taxable as Business Profits under Article 7 of treaty – Dy. DIT v. Marriott International Licensing Company BV [2013] 35 taxmann.com 400 (Mumbai - Trib.)
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