Jubilant Food Works Limited is not a PE of Domino’s Pizza International Franchising Inc: ITAT [Read Order]

In DCIT vs. M/s. Dominos Pizza International Franchising Inc., the Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) held that Jubilant Food Works Limited, who holds the Master Franchise for Domino’s Pizza in India is not a Permanent Establishment of the Domino’s Pizza International Franchising Inc.

In the instant case, the assessee engaged in the business of pizza restaurant chain. It franchises its business to various companies. In India, Jubilant Food Works Limited holds the Master Franchise. The assessee declared its income and offered the income in the nature of Royalty at the rate of 10% as per the India-USA Double Taxation Avoidance Agreement (DTAA). The assessee has offered the income from franchise fee and consultancy services provided to M/s Jubilant Food Works Limited (Jubilant) for opening of store. The Assessing Officer (A.O.) treated Jubilant Food Works Limited as a Permanent Establishment (PE) of the assessee on the ground that Jubilant is not allowed any other activities other than activities prescribed in the Master Franchise Agreement (MFA). Further, the quality of material and equipment used has to be approved by the assessee. The expenses on advertisement and marketing are also carried out in accordance with the provision of agreement. For expansion of the market or penetration has to be followed with the condition of MFA. Princes are also decided by assessee and not by Jubilant or sub-franchise.

Thus, 95% of the income offered by assessee was subjected to tax @ 40% with statutory surcharge. However, the Dispute Resolution Panel (DRP) accepted the contention of assessee that the Jubilant does not constitute a permanent establishment or dependent agency or an agency PE of assessee. Consequent upon the action of Assessing Officer in treating the royalty income as Profit & Gain from business under section 44DA was also set-aside. Revenue appealed to ITAT.

The Counsel for the Revenue argued that Jubilant is an agency PE of the assessee as per definition

provided under India US DTAA means a fixed place of business through which business or enterprise is wholly or partly carried on. Whereas the Counsel for the assessee contended that for existence of dependent agent PE, the Agent must have authority to conclude contract in the name of foreign enterprises and agent recorded as authorize to conclude contract on behalf of Principle if he is permitted to negotiate all aspect of the contract in a matter that might effectively bind its principle. Further, he argued that Jubilant is legal and economically the independent entity.

Considering an appeal against the order of the Dispute Resolution Panel, the Bench Comprising of Judicial Member Pawan Singh and Accountant Member B.R. Baskaran observed that a perusal of the Master Franchise Agreement (MFA) and the Sub Franchise Agreement (SFA) shows that Jubilant Food Works Limited, the Master Franchise is an independent business entity and the restrictions provided in MFA and SFA are only to safeguard the brand value and to ensure the correct receipt of royalty income.