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Baskin-Robbins Franchising LLC Versus Dy. Commissioner of Income Tax (International Taxation) - 1 (2) (1) , Mumbai

2016 (7) TMI 1043 - ITAT MUMBAI

Taxability of royalty income - nature of income - PE in India - DTAA India USA - Held that:- The authorities below have proceeded on the assumption that the assessee company is the same entity which has entered into agreements in 1991 and is continuing whereas the fact of the matter is the assessee company is incorporated only on 15-03-2006 for which certificate of incorporation is placed on record by the assessee company at page 25-27 of paper book containing additional evidences. Thus, the fun .....

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rection to re-determine the issue de-novo on merits after considering the existing structure of the assessee company and the fresh agreements entered into with various entities in the light of provisions of the Act and DTAA entered into between USA and India . Needless to say that the assessee company be provided with proper and adequate opportunity of being heard by the AO in accordance with the principles of natural justice in accordance with law. The assessee company will be allowed to submit .....

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s appeal, filed by the assessee company, being ITA No. 1376/Mum/2015, is directed against the assessment order dated 23-01-2015 passed by the Assessing Officer (hereinafter called the AO ) u/s 144C(13) r.w.s. 143(3) of the Income Tax Act,1961 (Hereinafter called the Act ), arising out of directions dated 26.12.2014 u/s. 144C(5) of the Act issued by Dispute Resolution Panel-1, Mumbai in consequent to draft assessment order dated 31-03-2014 passed by AO u/s. 144C(1) r.w.s. 143(3) of the Act. 2. Th .....

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pursuant to the directions dated 26 December 2014 issued by Dispute Resolution Panel- I, Mumbai '(DRP'), on the following amongst other grounds: Each of the following grounds of appeal is without prejudice to the other.- On the facts and in the circumstances of the case and in law, 1.1. The learned DCIT erred in holding that Graviss Foods Private Limited (GFPL) was a dependent agent Permanent Establishment of the appellant. 1.2. The learned DCIT erred in not appreciating the fact that GF .....

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royalty income as "Business income" taxable under section 28 read with section 44DA of the Act as against "Income from Other Sources" by appellant in its return of income filed for the aforesaid assessment year. 1.5. The learned DCIT erred in taxing the royalty income of ₹ 1,88,64,440 (after allowing deduction for expenses of 5% of royalty fees) under section 28 read with section 44DA of the Act as against taxability thereof on gross basis under section 115A of the Act .....

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by the assessee. 1.8. The learned AO erred in levying interest of ₹ 17,35,846 under section 234B of the Act. The appellant craves leave to add to, alter, amend, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as it may be advised. 3. The Brief facts of the case are that Baskin Robbins Franchising LLC (in short BRF ) , the assessee company is a company incorporated in Canton Massachu .....

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ranchise Agreement with GFPL and has granted the later the right to manufacture and sell the above mentioned products either itself or through approved sub-franchisees. The period of agreement is for 20 years starting from 27th December, 2007 with an option to renew it for further consecutive terms of 10 years. The assessee company submitted that it receives royalty income pursuant to the provisions of the agreement and also that the assessee company has no office or any place of business in Ind .....

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der the above arrangements, the assessee company has received the following income as royalty during the relevant previous year to the assessment year 2011-12: Particulars Amount (Rs) Initial Franchisee fees (4th installment 38,80,000 Royalty payment on store opening 33,14,881/- Royalty payment on sales and access fees 1,26,62,421/- Total 1,98,57,302 The assessee company submitted that it has no Permanent Establishment (PE) in India and the royalty income received in India was offered to tax und .....

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ring License Agreement, the assessee has given right to the GFPL right to use the Brand name of 'Baskin Robins', the trade name "31" ICE CREAM, Trade Secrets, System (techniques for the distribution, sale and marketing of the products) and License to manufacture the Baskin Robins's products in the territory. 8.2 In the Franchise Agreement, the assessee grants to the franchisee an exclusive right and license to use and operate the Franchised Business in the territories. By v .....

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with an Indian entities GL Ice-cream. This franchisee company, Baskin Robins Franchisee Company Private Limited was joint venture of SAlC (40%) and GL Ice-cream (60%). GL Ice-cream is partnership firm between Mr. Ravi Ghai and Mr. Gaurav Ghai. In 2007 in a restricting was happened in the group company. In result, the assessee company Baskin Robins Franchisee LCC becomes a 100% subsidiary of Dunkin Brands Inc, entered with franchisee agreement with GFPL. It is worth while to mention here that GF .....

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domain and information obtained u/s 133(6) of the Act from GFPL came to the conclusion that the assessee company has PE in India i.e. GFPL being a dependent agent and the income derived was brought to tax under the head profit and gains of business u/s 44DA of the Act whereby draft assessment order was proposed vide order dated 31st March, 2014 u/s 144C(1) r.w.s. 143(3) of the Act , which was confirmed by the DRP vide their directions dated 26th December, 2014 u/s 144C(5) of the Act. Thereafter, .....

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submitting as under:- 21st April, 2016. Hon ble Members, L Bench, Income Tax Appellate Tribunal, Pratishtha Bhavan, Maharshi Karve Marg, Mumbai - 400 020. Dear Sirs, Re.: Baskin-Robbins Franchising LLC USA-Appellant v/s. Deputy Commissioner of Income Tax…. Respondent (International Taxation) - 1(2)(1), Mumbai ITA No. 1376/Mum/2015 Assessment Year 2011-12 This has reference to the aforesaid appeal in case of the appellant above- named for the aforementioned assessment year. The appeal was .....

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viss Foods Pvt Ltd were nothing but extension or continuation of similar agreements which the appellant entered into, with the erstwhile Indian entity. This resulted into complete misappreciation of the facts as both the entities in 2007 were different than the entities which were parties to the earlier agreements. 3. In this connection, we humbly submit the following; a) At the outset, the learned DCIT has erroneously proceeded on the basis that the appellant (Baskin-Robbins Franchising LLC) wa .....

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was in fact terminated on 30 July 2007. c. The earlier joint venture structure is depicted hereunder:- d) In fact, the appellant company was incorporated only on 15 March 2006. The certification of incorporation of the appellant has been filed by means of additional evidence vide letter dated l3 April 2016 in order to show that learned AO has grossly erred on facts leading to a conclusion which created serious infirmity in his order. e) In 2007, the appellant company entered into franchising ag .....

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rom 2007 onwards has also been included at Page 374 and 375 of the Paper book compilation filed by the appellant. h) Based on the above, your honour will appreciate that the structure included at Page 8 of the Directions given by the Dispute Resolution Panel (DRP) is incorrect as the same shows the appellant as a party to the previous joint venture arrangement and thus learned Members of the DRP have also grossly erred on facts leading to an erroneous conclusion. 4. Under the circumstances, it i .....

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ely independent third party namely Graviss Foods Private Limited (100% owned and controlled by Ghai family) which bears the entire risks and rewards of the Indian territory; Sd/- (GIRISH DAVE) Counsel It was submitted that the authorities below have not considered the current structure of the organization whereby the assessee company was incorporated on 15-03-2006 (certificate of incorporation placed in paper book carrying additional evidences at page 25-27) and the fresh agreements were entered .....

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of the group of which the assessee company was part of and which agreements were already terminated on 30th July, 2007, copy of which are placed in paper book page 1 to 24 of the paper book containing additional evidences filed before the Tribunal which are placed in file. These additional evidences are to be considered by the authorities below on merits before arriving at the decisions of chargeability of income to tax under the provisions of the Act and DTAA between India and USA.It is the say .....

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is set aside to the file of the A.O. with directions to determine the issue de-novo on merits after considering the correct existing structure of the assessee company and the fresh agreements entered into with various entities by the assessee company on merits. 7. We have considered the rival contentions and also perused the material available on record. We have observed that there is a substantial change in the existing structure , whereby the assessee company was incorporated only on 15th Mar .....

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e authorities below which are placed in paper book filed with Tribunal vide replies filed before the AO dated 30-09-2013, 17-12-2013,20-12-2013 and 18-02-2014 which are placed in paper book pages B-33-B222,B226,B227- B244 and B-247 to B-252 filed with the Tribunal. We have observed that the authorities below proceeded to determine the taxability of the royalty income of the assessee company based on the assumption that the assessee company is an old entity itself which is restructured and has en .....

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highlighting the errors which have crept in the orders of the authorities below which is reproduced in the preceding para s of this order. We would like to highlight the relevant para from the order of the DRP to that effect to reflect the fundamental error creeping in the orders of the authorities below which goes to the root of the matter as under: Para 7.4 of DRP directions dated 26.12.2014 passed u/s 144C(5) of the Act 7.4 Discussions and Directions : We have considered the submissions of t .....

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ia and the joint-venture company called South Asia Ice-cream Co.(SAIC) was floated, in which the assessee held 40% shares and Shri Malhotra held 60% shares. The company SAIC entered into further joint-venture agreement with GL Ice- cream (a firm having its partners as Mr Ravi and Mr. Ghai) of India and the name of this joint-venture company was Baskin-Robbins Franchisee Co. Private Limited . It is seen that in the said company Baskin-Robbins Franchisee Co. Private Limited , the assessee also had .....

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