Article 12, India-USA DTAA – Payment towards re-imbursement of advertising/marketing expenses by franchisees were “royalty” under Article 12 of India-USA DTAA since the responsibility to maintain the brand is of the brand owner.
Facts:
The taxpayer, an American Company, was part of the Marriott Group which is engaged in operation of hotels worldwide under different brands. The Group also grants licenses to franchisees to operate hotels under its brands. A Group entity had granted licenses to an affiliate Group company to use certain brands. Pursuant to the licenses, the affiliate Group company granted sub-licenses to three Indian companies for use of these brands. The royalty received by the affiliate from the Indian companies was offered for tax in India. Separately, the taxpayer had entered into international sales and marketing agreement with the three Indian companies whereunder, the taxpayer had agreed to provide sales and marketing services outside India. Accordingly, the three Indian companies made payments for (i) international sales and marketing services, (ii) international sales and marketing fees and (iii) reimbursement of expenses. The taxpayer was to apportion the costs of these services on fair and reasonable basis amongst all the entities to which it was providing such services. Accordingly, the three participating Indian companies were required to pay the taxpayer for provision of these services. In the return of its income the taxpayer treated these receipts as taxable but later it revised the return of its income and claimed that since the expenses were in the nature of reimbursement of costs (without any mark-up), they were not taxable.
The issue before the Tribunal was: whether the payments made by Indian companies to the taxpayer towards reimbursement of international sales and marketing expenses were in the nature of royalty/FTS in terms of India-USA DTAA and whether instead of single payment, royalty was artificially separated into more than one component.
Held:
The contention of the taxpayer that the tax authorities were not entitled to take a different view, since the Government of India had accorded necessary permission to remit the payment under the specific heads, was not correct.
The responsibility to maintain the value of the brands is that of the brand owner. Normally it is done by continuous and sustained advertising/marketing activity. Since the taxpayer had collected charges from the hotels towards reimbursement of expenses for marketing/ popularizing the brand name, such receipts should be considered only as “royalty” because such activity is the responsibility of brand owner.
The agreements entered into between the three Indian companies and Marriott group showed that while the three Indian companies were considering them as agreements pertaining to a single transaction, they had agreed to pay the amount to different companies. Thus, it was seen that the Marriott group had planned to dissect the single transaction into more than one transaction and had ensured that each of the components was received by a different Group company.
The claim of the taxpayer that it was undertaking marketing work on cost-to-cost basis without any mark-up defies business logic or prudence since a commercial company will never work without profit. Hence, this fact itself proves that the taxpayer was an extended arm of the brand owner company and can be considered a façade of that company. This is a clear case of tax planning by adopting a colourable device and hence corporate veil should be lifted.
As all payments made by the Indian companies swelled the existing brands owned by the brand owner, the amounts received by the taxpayer should be examined form the point of view of the original brand owner and accordingly, be taxed as royalty in terms of Article 12 of India-USA DTAA .
