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DCIT, Circle 6(1), New Delhi Versus M/s. Mcdonald's India (P) Ltd.

2015 (4) TMI 710 - ITAT DELHI

Accrual of income - reduction in taxable income - evasion of tax - Shown lesser amount in agreement - Unilateral Modification in Master License Agreement and the Franchise agreement - Held that:- All these agreements read with correspondence clearly show that assessee was entitled to USD 22,500 and not USD 45,000 during FY 2002- 03. Ld. Standing Counsel has submitted that there could not be any unilateral amendment to the Franchisee agreement. However, contents of letter dated 8-12-2002, reprodu .....

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ssee. We may clarify that we are not giving any finding on the issue relating to assessee's alternate claim on the ground that in any case, no income was assessable in the hands of assessee as the assessee was required to make the payment to McDonald Corporation because this has trapping on TP issues, particularly because there was no permission for remitting the amount prior to 3-2-2004 in respect of new restaurant opened as per letter dated 3-2-2004 of the Under Secretary, Ministry of Fina .....

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n our opinion, confirmed to both the conditions because the same has been addressed to Franchisee by Franchiser. We, accordingly, do not find any reason to interfere with the order of ld. CIT(A) to the extent that since no real income accrued to assessee, no addition was called for. - Decided against the revenue. - ITA No. 960/Del/2010 - Dated:- 18-3-2015 - S. V. Mehrotra, AM And H. S. Sidhu, JM,JJ. For the Appellant : Shri Judy James (Standing Counsel) For the Respondent : Shri G N Gupta ITP OR .....

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volved for consideration. We, therefore, proceed to decide the department's appeal. We may observe that the observations made in this appeal have no bearing on transfer pricing issues. 3. Brief facts of the case are that during the year under consideration the assessee was engaged in the business of management services for fast food outlets. The assessee had entered into a Master License Agreement, a Service agreement with its parent company - McDonald's Corporation, USA ("MDC USA&q .....

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ssessee replied vide its letter dated 7/2/06 stating that: "The opening franchise fee was reduced from USD 45,000 to USD 22,500 with effect from July 1, 2002 through December 31,2004 by means of a management decision with a view to broaden' the restaurant base and strengthen the position of the company in India by increasing the sale of McDonald's products." 3.2 The assessee further replied vide its letter dated 6/3/06 stating that: "the assessee has not been operating any .....

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e 30,2002. From July 2002 the 'Initial Franchise Fee' has been revised to USD 22.500 to be paid prior to the opening of any restaurant operated or franchised by the company. One such agreement between MIPL, C,PRPL and Vikram Bakshi dated March 5, 2003 had already been furnished vide our submissions dated November 23, 2005. As per this agreement the initial franchise fees of USD 22,500 is receivable by MIPL from CPRPL on the opening or franchising of an outlet named in the agreement. Rele .....

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ding and valid agreement signed by authorized personnel of MIPL and the JV companies." 3.1. The AO did not accept the assessee's contention for the following reasons: (a) The assessee neither gave any justification, substantiated with facts and figures nor had submitted any proof in support of its claim that the initial franchise fee had been reduced to USD 22,500. (b) The assessee was conducting its entire business in accordance with the terms and conditions mentioned in the Master Lic .....

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as the joint venture companies were already showing losses and payment of initial franchise fee at a lower rate by the joint venture companies to the assessee will not have the effect of increasing their taxable income. He, accordingly, took the amount of initial franchise fee @ USD 45000 and made an addition of ₹ 97,81,425/- being the difference between the initial franchise fee returned by assessee and that as per Master License Agreement. 3.3. Ld. CIT(A) allowed the assessee's appea .....

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ncome arose to the appellant by the receipt and disbursement of initial franchise fees and also the notional income cannot be taxed. Further I agree that even if the appellant should have collected the l franchise fee @ USD 45,000, the same was payable to McDonald's Corporation US and it would not have been the income of the appellant." 3.4. Aggrieved, revenue is in appeal before us. 4. Ld. Standing counsel for the department referred to Master License Agreement, contained at pages 1 to .....

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9;s India Private Limited is a wholly owned subsidiary of McDonald's Corporation and McDonald's Indi Private Limited holds fifty (50) present of the capital of Connaught Plaza Restaurants Pvt. Ltd. C. McDonald's has authorized Franchisor to grant franchises to operate McDonald's restaurants using the McDonald's System in India. D. Franchisee desires to acquire the right to adopt and use the McDonald's System in a restaurant at the location specified in this Agreement.&quo .....

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(iii) to adopt and use, but only in connection with the sale at the Restaurant of those food and beverage products which have been designated by Franchisor at the Restaurant, the trade names, trademarks and service marks which Franchisor shall designate, from time to time, to be part of the McDonald's System. (b) Unless earlier terminated under the terms hereof, the term of this Franchise shall convene upon the date the subject Restaurant opens for business and expires twenty (20) years the .....

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ee shall pay to Franchisor fee for the right to operate the Restaurant in accordance with this Agreement in the amount of the Indian Rupee equivalent of forty-five thousand United Sales Dollars (US.S 45,000.00). Franchisor reserves the right, in case construction of the Restaurant should be abandoned the lease assigned or other interest in the premises be relinquished to terminate this Agreement upon reimbursement to Franchisee of the Franchise Fee." 4.5. With reference to these two agreeme .....

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tia From: Arosha Wijemuni Date: December 8,2002 Subject: License & Location Fees. Dear Vikram & Amit: Further to your discussion with Tim Fenton regarding the license and location fees for your market, this memo confirms that the fee will be US$ 22,500 per store. The fee is as per the agreement with Tim Fenton and Jim Kramer and is effective 1st July 2002 through to 31st December 2004. If you have any further queries, please do not hesitate to let me know." 4.6. He submitted that on .....

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under: "26. Scope and modification of this agreement: With the exception of the Joint Venture Agreement dated March 31, 1995 by and between McDonald's India Private Limited and Franchise this Agreement including any exhibits and attachment hereto) constitutes the entire agreement between the parties and supersedes all prior, oral or written, agreements or understandings of the parties. No interpretation, change, termination or waiver of any of the provisions hereof shall be binding upo .....

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which occurred prior to the date of such modification, waiver, termination, rescission, discharge or cancellation." 5.1. Ld. standing counsel submitted that if the initial Franchise fee was to be reduced from USD 45,000 to USD 22,500, then there was change in the substance of agreement and the same was required to be duly executed by the parties. No unilateral execution of the same is permissible. 5.2. Ld. Standing counsel submitted that no supporting evidence in proof of claim of USD 45,00 .....

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A) are contained, in which it was, inter alia, submitted that in any case even if the asessee should have collected the Franchise fee @ USD 45,000, the same was payable to McDonald's Corporation and was not the income of the asessee. 7. We have considered rival submissions and perused the record of the case. At the outset we may clarify that we are deciding the issue to the extent of entitlement of Franchisee fee as per the Master License Agreement read with JV agreement and Franchisee agree .....

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-2004 of the Under Secretary, Ministry of Finance, available at page 217 of the PB. 7.1. There is no dispute that assessee had received only USD 22,500 and not USD 45,000, which was as per Master License Agreement and the Franchise agreement , noted earlier. However, in the Franchisee agreement dated 5-3-2003, contained at pages 70 onwards of the PB, the franchise fee has been mentioned at USD 22500. There is also communication dated 8-12- 2002 at page 68 of the PB, which reads as under: "T .....

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