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Payment can be characterised as “royalties” only if it is consideration for use or right to use any defined property in existence at the time of use—since the payment made was not for pre-existing defined property, it could not be characterised as “royalties”. Contribution linked to percentage of turnover is unlikely to be regarded as reimbursement of expenses.
Facts:
The taxpayer was a company incorporated in, and tax resident of, the Netherlands. The taxpayer had entered into a Franchise Agreement with a hotel in India for providing sales, marketing publicity and promotion services outside India. The Indian hotel was also to participate in the hotel system of the taxpayer. Clause 3.2 of the agreement provided that the hotel was to pay certain proportion of its gross revenue for international marketing activities which were in the nature of advertising and printed media, marketing, promotional, public relations and sales campaigns etc. The issue before the Tribunal was, whether the payment made under clause 3.2 of the agreement was purely reimbursement of expenses on sales promotion and marketing and hence was not “royalties”?
Held:
To cover any amount within the purview of Article 12(4) of India-Netherlands DTAA, the payment should be received as consideration ‘for the use of or right to use’ any defined property (i.e. copyright, patent, trademark, etc). Thus, a payment would be “royalties” if it is made for defined property existing at the time of use and not for creation of defined property. Even if the payment contributed towards brand building, it would not be for use of the brand and hence cannot be characterised as “royalties”.
The contribution, being a percentage of gross revenue, was not reimbursement of actual expenses on itemised basis and no material was placed on record to demonstrate that actual expenses were equal to the reimbursed amount. Therefore, the AO should decide on the taxability of the amounts under Article 7 of India-Netherlands DTAA.
