Jubilant Foods will have to pay 10% tax on royalty, says ITAT

Tribunal says Jubilant Foods will have to pay 10% tax on royalty instead of the earlier demand of 40%

The Income Tax Appellate Tribunal (ITAT) has rejected tax officials’ demand of a 40 per cent tax on sales at Jubilant Foods stores, and instead allowed the chain to pay 10 per cent tax on royalty. Jubilant  Foods runs the chain of Domino’s Pizza stores in India.

The issue relates to permanent establishment (PE) of multinational corporations (MNCs) when these companies have a franchisee agreement with Indian players.  

The ITAT has turned down the revenue department’s appeal that Jubilant Foods constitutes a permanent establishment of US-based Domino’s Pizza International Franchising Inc. The case relates to assessment year 2012-13 and an income of Rs 10.65 million.

The assessing officer (AO) contended that Jubilant Foods had an exclusive franchise in India and was dependent on Dominos, said Naveen Wadhwa, a tax expert at Taxmann.

The quality of material and equipment used by Jubilant Foods has to be approved by the US-based company, he argued. Prices are decided by the assessee and not by Jubilant Foods or sub-franchise, he said.

According to the assessing officer, Jubilant Foods does not have economic independence and should be treated as a dependent agent for the purpose of determining a PE. The assessing officer, accordingly, passed a draft assessment order and treated the company's receipt from operations in India as a business receipt, taxable at 40per cent.

In response, Domino’s filed an appeal before the Dispute Resolution Panel, objecting on the ground that the assessee did not constitute a dependent agency or permanent establishment in India according to Article 5 of India-US Double Taxation Avoidance Agreement (DTAA).

The Dispute Resolution Panel accepted the contention of the assessee and set aside the action of the assessing officer in treating the royalty income as profit and gain from business.

The revenue department contested this case at the ITAT, Mumbai.

The tribunal examined the Master Franchise Agreement between Domino’s and Jubilant Foods. According to the agreement, the assessee was entitled to only 3 per cent of the sale proceeds as its franchise fee. Profit and loss from the franchise business belonged to Jubilant Foods or its sub-franchise.

Jubilant Foods does not maintain any stock or merchandise in India on behalf of Domino’s and no activities are carried out by Jubilant Foods on behalf of the assessee. The tribunal held that master franchisees are independent business entities. Restrictions provided in the agreement, with respect to pricing or advertisement, are only to safeguard the brand value and ensure the correct receipt of royalty income.

Accordingly, the tribunal ruled that franchisee fees is to be taxed as royalty at 10per cent.