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Case Number
Attorney(S)
  • Appellant by: Shri S.E Dastur & Shri Niraj Sheth
  • Respondent by: Smt. Neeraja Pradhan
Judges
  • P.M Jagtap, A.M
  • Amit Shuka, J.M
Acts
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Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Appellant by: Shri S.E Dastur & Shri Niraj Sheth
  • Respondent by: Smt. Neeraja Pradhan
Judges
  • P.M Jagtap, A.M
  • Amit Shuka, J.M
Acts
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Smart Summary

Tribunal Summary — Appeals by Assessee (A.Y. 2006-07 & 2008-09)

Factual and Procedural Background

The assessee is a company incorporated and resident in the Grand Duchy of Luxembourg which maintains and operates the System Marketing Fund for the Courtyard International Hotel System (the Fund), administered by Marriott International Inc. The Fund provided general brand advertising and sales/promotion services for Courtyard International Hotels outside the USA and Canada. During the years under consideration, several Indian hotel owners participated in the Fund and made payments to the assessee described by the assessee as marketing fees and reimbursements of marketing expenses.

For A.Y. 2006-07 the assessee declared income as nil and stated receipts from Palm Grove Bench Hotels Pvt. Ltd. (PGBHPL) totaling Rs. 49,16,203/- (of which Rs. 3,50,751/- was claimed as marketing fees and Rs. 45,65,452/- as reimbursements). For A.Y. 2008-09 receipts included amounts from PGBHPL, Chalet Hotels Limited (CHL) and Viceroy Hotels Ltd. (VHL) comprising marketing fees and reimbursements as set out in the opinion.

The assessing officer (A.O.) completed assessments under section 143(3), characterizing payments from hotel owners as (a) royalty for use of the Marriott international brand and/or (b) fees for technical services; he brought the amounts to tax on a gross basis under section 115A at 20%. The Commissioner of Income-tax (Appeals) (CIT(A)) upheld the A.O.'s orders and dismissed the assessee's appeals. The assessee then appealed to the Tribunal challenging those conclusions and seeking, inter alia, admission of an additional ground invoking the principle of mutuality.

Legal Issues Presented

  1. Whether the payments received by the assessee under the International Marketing Program Participation Agreement (IMPPA) were reimbursements of expenses (not taxable) or were taxable receipts (characterizable as royalty or fees for technical services).
  2. Whether the assessee had a business connection or source of income in India such that the payments under the IMPPA were deemed to accrue or arise in India.
  3. Whether none of the assessee's activities were performed in India and therefore not taxable in India.
  4. Whether the payments received under the IMPPA were taxable under the principle of mutuality.
  5. Procedural question: whether an additional ground invoking the principle of mutuality should be admitted at the Tribunal stage and whether the matter should be restored to the A.O. for adjudication on that ground.

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The payments received under the IMPPA were, in substantial part, reimbursement of expenses and not income; the assessee thus declared nil income for the years under consideration.
  • The marketing fees received were not in the nature of “fees for technical services” and therefore not chargeable in India; similarly reimbursement amounts were not income.
  • The assessee had no permanent establishment or business connection in India; none of the assessee's activities were performed in India.
  • Specific grounds alleged errors by the CIT(A) including (for A.Y. 2006-07) incorrect characterisation of receipts, factual errors about sources of receipts, and imposition of interest under section 234B (sic as stated in the grounds). For A.Y. 2008-09, one ground challenged the application of an Authority for Advance Rulings' ruling despite a Special Leave Petition pending in the Supreme Court.
  • At the Tribunal stage the assessee sought admission of an additional ground that the payments were not taxable as per the “principle of mutuality,” relying on the agreements and documents already on the record and asserting that no new material or investigation was required to decide that legal issue.

Respondent's (Revenue / ld. Departmental Representative) Arguments

  • The ld. D.R. agreed the principle of mutuality is a legal issue but strongly objected to admission of the additional ground on the basis that all relevant facts to decide the issue were not on record and that adjudication might require investigation into new facts or verification.
  • The ld. D.R. referred to the Hon'ble Supreme Court decision in Bangalore Club v. CIT (350 ITR 509) and submitted that specific conditions for applying the principle of mutuality (e.g., absence of commerciality, complete identity between contributors and participants) must be satisfied; because the assessee had not raised the mutuality point earlier before the A.O. or the CIT(A), the opportunity to examine whether those conditions were met had not arisen.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Bangalore Club v. CIT, 350 ITR 509 (Hon'ble Supreme Court) The decision was cited for the guidelines on the applicability of the “principle of mutuality,” including that there should not be a taint of commerciality and there must be a complete identity between contributors and participants. The Tribunal noted that the ld. D.R. relied on Bangalore Club to argue that conditions for mutuality require factual verification. The Tribunal nevertheless admitted the additional ground invoking mutuality and directed that the A.O. examine/verify whether the assessee satisfies the Bangalore Club conditions on the record and decide the issue on merit after giving the assessee an opportunity of being heard.

Court's Reasoning and Analysis

The Tribunal's analysis focused on whether to admit the assessee's additional ground invoking the principle of mutuality and, if admitted, what remedial step to take. The Tribunal proceeded as follows:

  1. Characterisation of the issue: The Tribunal accepted that the question whether the principle of mutuality applies is essentially a legal issue; the ld. D.R. agreed the issue was legal.
  2. Objection by Revenue: The ld. D.R. objected to admission because adjudication might require investigation into facts not presently on record; she relied on Bangalore Club to emphasise that mutuality has specific factual preconditions (e.g., no commerciality, complete identity between contributors and participants) which, in her submission, had not been tested because the point was not raised earlier before the A.O. or the CIT(A).
  3. Assessee's response: The assessee's counsel submitted the mutuality claim was based on the terms of the agreements and other documents already in the A.O.'s record, and that no new material or investigation was required to decide the legal issue; accordingly, the additional ground should be admitted and the matter remitted to the A.O. for verification and decision on the merits.
  4. Tribunal's evaluation of submissions: The Tribunal observed that the crucial question at the admission stage is whether the issue is a legal issue and whether the relevant facts necessary to decide that legal issue are available on the record. The Tribunal noted the ld. D.R. had not specifically identified what new facts would be required; the assessee had represented that the relevant agreements and documents were already before the A.O.
  5. Conclusion on admission: On balance the Tribunal concluded the conditions for admission were satisfied — the issue was legal and the relevant facts were on the record — and therefore admitted the additional ground invoking the principle of mutuality.
  6. Remedial direction: Because the mutuality issue is a preliminary matter that goes to the root of the case, the Tribunal restored the matter to the file of the A.O. with a direction to decide the issue on the merits after affording the assessee an opportunity to be heard. The Tribunal declined to decide the other original grounds at that stage and kept them open with liberty to the assessee to raise them again if it fails on the mutuality point.

Holding and Implications

ADMISSION OF ADDITIONAL GROUND; MATTER RESTORED TO THE A.O.; APPEALS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE.

Direct consequences and implications explicitly set out in the opinion:

  • The Tribunal admitted the assessee's additional ground that the payments received under the IMPPA may be not taxable under the principle of mutuality.
  • The Tribunal restored the matter to the A.O. with a direction to decide the mutuality issue on its merits after giving the assessee an opportunity of being heard; the Tribunal recognised that the A.O. can independently verify whether the conditions for mutuality (as per Bangalore Club) are satisfied on the material on record.
  • The Tribunal left the other issues raised in the original grounds undecided at this stage because the admitted mutuality issue is preliminary and goes to the root; those issues are kept open and the assessee has liberty to pursue them if it fails on the mutuality point.
  • The appeals were treated as partly allowed for statistical purposes in consequence of admitting the additional ground and restoring the matter to the A.O.

The opinion does not state that a new legal precedent was established; it directs factual and legal examination by the A.O. in light of the established Supreme Court guidance in Bangalore Club.

Show full summary ...

    International Hotel Licensing Company v. Dit

    P.M Jagtap, A.M:— These two appeals filed by the assessee against two separate orders passed by the ld. CIT(A) 10, Mumbai dated 11-2-2010 and 4-3-2011 for assessment years 2006-2007 and 2008-2009 involve common issues and the same therefore have been heard together and are being disposed of by single consolidated order for the sake of convenience.

    2. The assessee in the present case is a company incorporated in the Grand Duchy of Luxembourg and is a tax resident of Luxembourg. It maintains and operates the System Marketing Fund for the Courtyard International Hotel System (Fund) which is administered by Marriott International Inc. on behalf of various affiliated subsidiaries pursuant to contracts with owners or franchisees of the hotels. All Courtyard Hotels located outside of the USA and Canada are collectively referred to as Courtyard International Hotels. The primary activities of the Fund are to provide general brand advertising as well as sales and promotion services and materials intended to maximize general public recognition, acceptance and use of Courtyard International Hotels. During the years under consideration, 58 Courtyard International Hotels participated in the Fund including Palm Grove Bench Hotels Pvt. Ltd. (PGBHPL) in India. During the previous years relevant A.Y 2006-2007, PGBHPL made a total contribution of Rs. 49,16,203/- which, as claimed by the assessee, was comprising of a sum of Rs. 3,50,751/- as marketing fees and the balance amount of Rs. 45,65,452/- towards reimbursement of expenses actually incurred on marketing. In the previous year relevant to A.Y 2008-2009, the amount claimed to be received by the assessee from PGBHPL was Rs. 39,52,845/- on account of marketing fees and Rs. 1,10,83,868/- towards reimbursement of marketing expenses. In this year, Chalet Hotels Limited (CHL) and Viceroy Hotels Ltd. (VHL) also participated in the Fund and the amount received by the assessee from CHL and VHL on account of marketing fees was Rs. 3,04,23,756/- and Rs. 1,20,32,137/- respectively. The amount received towards reimbursement of expenses from CHL and VHL was Rs. 2,98,16,096/- and Rs. 2,73,11,652/- respectively. According to the assessee, it had no permanent establishment in India during the years under consideration and the amount of marketing fees received in these years being not in the nature of “fees for technical services”, the same was not chargeable to tax in India in its hand. Similarly, the amount received towards reimbursement of expenses was claimed to be not chargeable to tax in India by the assessee being not in the nature of “income”. Accordingly, returns of income for both the years under consideration were filed by the assessee declaring total income at “nil”.

    3. In the assessments completed u/s. 143(3) of the Act for both the years under consideration, the A.O held that the payments made by the owners of the hotel to the assessee were for the use of international brand of Marriot and the amount of such payments therefore was chargeable to tax in the hands of the assessee in India as royalty. He also held that the said amount received by the assessee for the services rendered by way of advertisements and worldwide business promotion of the brand was alternatively covered within the wide scope of “Fees for technical Services” and the same was chargeable to tax in the hands of the assessee in India. Accordingly, the total amount of Rs. 49,16,203/- and Rs. 11,46,30,350/- received by the assessee on account of marketing fees and reimbursement of expenses in both the years under consideration i.e A.Y 2006-2007 and 2008-2009 respectively was brought to tax by the A.O in the hands of the assessee @ 20% on gross basis u/s. 115A of the Act. On appeal, the ld. CIT(A) upheld the orders of the A.O for both the years under consideration and dismissed the appeals filed by the assessee.

    4. Aggrieved by the orders of the ld. CIT(A), the assessee has preferred these appeals before the Tribunal on the following grounds:—

    For A.Y 2006-2007:

    “Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned Commissioner of Income-tax (Appeals) — 10, Mumbai has in order under section 250 of the Income-tax Act, 1961 (‘the Act’) erred on the following grounds:

    (i) In adjudicating that the payments received by the Appellant under the International Marketing Program Participation Agreement (‘IMPPA’) are not in the nature of reimbursement of expenses without assigning any reasons.

    (ii) In holding that the Appellant has business connection in India and consequently the payments received by Appellant under the IMPPA are deemed to accrue or arise in India.

    (iii) In holding that the Appellant has a source of income in India and consequently the payments received by the Appellant under the IMPPA are deemed to accrue or arise in India.

    (iv) In not considering that none of the Appellant's activities were performed in India and consequently not taxable in India.

    (v) In relation to the payments received under the IMPPA, holding that the payment received by the Appellant is in the nature of fees for technical services and also in the nature of royalty for the use of international brand.

    (vi) In holding that the Appellant has received sales and marketing fees from Palm Grove Hotels Pvt. Ltd., Hotel Raj Park Pvt. Ltd. and Advani Hotels & Resorts Ltd. However, factually the Appellant has received sales and marketing fees in the subject assessment year only from Palm Grove Hotels Pvt. Ltd.

    (vii) In confirming the levy of interest under section 2348 of the Act.”

    For A.Y 2008-2009:

    “Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned Commissioner of Income-tax (Appeals) — 10, Mumbai has, in its order under section 250 of the Income-tax Act, 1961 (‘the Act’), erred on the following grounds:

    1. In applying the ruling rendered by the Authority for Advance Rulings in the Appellant's case without giving cognizance to the fact that a special leave petition has been filed with the honorable Supreme Court of India and that the matter is pending before the honorable Supreme Court for hearing

    2. In holding that payments received by the Appellant towards reimbursement of expenses under the International Marketing Program Participation Agreement (‘IMPPA’) are not in the nature of reimbursement of expenses.

    3. In holding that the Appellant has business connection in India and consequently the payments received by Appellant under the IMPPA are deemed to accrue or arise in India.

    4. In holding that the Appellant has a source of income in India and consequently the payments received by the Appellant under the IMPPA are deemed to accrue or arise in India.

    5. In not considering that none of the Appellant's activities were performed in India and consequently not taxable in India.

    6. In holding that the payment received by the Appellant towards marketing fees pursuant to the IMPPA are in the nature of fees for technical services as well as royalty under the provisions of the Act.

    7. In holding that the payments received by the Appellant towards reimbursement of expenses under the IMPPA are in the nature of fees for technical services as well as royalty under the provisions of the Act.”

    5. During the course of appellate proceedings before the Tribunal, the assessee has filed applications seeking admission of the following additional ground of appeal which identical in both the years under consideration:—

    “Based on the facts and circumstances of the case, the appellant respectfully submits that the ld. Commissioner of Income-tax (Appeals) - 10, Mumbai has in its order under section 250 of the Income-tax act 1961 (“the Act”) erred on the following ground:

    “1. In not appreciating that the payments received by the Appellant under the IMPPA were not taxable as per the ‘principle of mutuality’.”

    6. We have heard the arguments of the ld. Representatives of both the sides on the issue of admission of additional ground. Although, the ld. D.R has agreed that the issue raised by the assessee in the additional ground is purely a legal issue, she has strongly objected to the admission of the said additional ground on the basis that all the relevant facts to decide the issue raised by the assessee in the additional ground are not available on record. She has contended that the Hon'ble Supreme Court has laid down certain specific guidelines for applying the “principle of mutuality” in the case of Bangalore Club v. CIT, 350 ITR 509. She has submitted that some of the conditions laid down by the Hon'ble Supreme Court in this regard are that there should not be any taint of commerciality and there must be a complete identity between the contributors and participants. She has contended that since this issue was not raised by the assessee either before the A.O or before the ld. CIT(A), the occasion to examine/verify as to whether the assessee satisfied all the conditions to claim the benefit of principle of mutuality did not arise. She has contended that the adjudication of the issue as to whether the principle of mutuality is applicable in the case of the assessee as raised in the additional ground may require investigation into the new facts which are not available on record and urged that the additional ground raised by the assessee should not be admitted.

    7. The ld. Counsel for the assessee, on the other hand, has submitted that although the issue regarding applicability of principle of mutuality in this case has been raised by the assessee for the first time before the Tribunal, the said claim is being made on the basis of terms and conditions of the relevant agreements and other documents which are already part of record before the A.O He has contended that no new material or investigation into new facts is required to adjudicate upon the issue raised by the assessee in the additional ground. He urged that the additional ground raised by the assessee may therefore be admitted and the matter can be restored to the file of the A.O for deciding the issue raised by the assessee therein relating to application of principle of mutuality after necessary verification.

    8. After considering the rival submissions and perusing the relevant material available on record, we are of the view that the additional ground raised by the assessee in its appeals for both the years under consideration deserves to be admitted. The issue raised by the assessee in this appeal is a legal issue and this position has been accepted by the ld. D.R She, however, has objected to the admission of the additional ground by submitting that the adjudication of the issue raised therein may require investigation into new facts. She, however, has not been able to point out specifically what exactly are the new facts or material which may be required to adjudicate the issue raised by the assessee in the additional ground. The ld. Counsel for the assessee, on the other hand, has submitted that the claim of the assessee for the applicability of principle of mutuality in its case as made in the additional ground is based on the relevant agreements and other documents which are already part of the record of the A.O In our opinion, whether the assessee satisfies the conditions for application of principle of mutuality as per the decision of Hon'ble Supreme Court in the case of Bangalore Club (supra) is the matter of verification/examination which can be done by the A.O independently. In so far as the admission of additional ground is concerned, what is to be seen at this stage is whether the issue involved therein is a legal issue and all the relevant facts required to decide the said issue is available on record. After having considered the submissions of both the sides, we are of the view that these conditions are satisfied in the present case. We, therefore, admit the additional ground raised by the assessee in both the present appeals and restore the matter to the file of the A.O with a direction to decide the same on merit after giving the assessee an opportunity of being heard.

    9. Since the issue raised in the additional ground by the assessee is a preliminary issue which goes to the root of the matter, the ld. Representatives of both the sides have agreed that the other issues involved in both these appeals as raised in the original grounds need not be decided at this stage and the same may be kept open with a liberty to the assessee to raise the same again if it fails on the preliminary issue relating to its claim for applicability of principle of mutuality.

    10. In the result, appeals of the assessee are treated as partly allowed for statistical purpose.

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    Comments

    International Hotel Licensing Company v. Dit
    (Mar 5, 2014)