US Company's India hotel services not taxable as "Fees for Technical Services" under Income Tax Act

The High Court held that payments received by a US company for providing hotel-related services in India were not taxable as "Fees for Technical Services" under the Income Tax Act and India-US Double Taxation Avoidance Agreement. The Court found the services provided were for business promotion, not technical in nature, and the company did not have a permanent establishment in India. The Tribunal upheld this decision, dismissing the revenue's appeal.

---

---

Issues Involved:
1. Taxability of Centralized Services Fee as "Fees for Technical Services" (FTS) under Section 9 of the Income Tax Act, 1961, and Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA).

Issue-wise Detailed Analysis:

1. Taxability of Centralized Services Fee as "Fees for Technical Services" (FTS):

The main issue in the appeal was whether the Centralized services fee received by the appellant for rendering various services such as Sales and Marketing, Loyalty Programs, Reservation Service, Technological Service, Operational Services, and Training Program to customers in India were taxable as "Fees for Technical Services" (FTS) in terms of Section 9 of the Income Tax Act, 1961, as well as Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA).

Contentions of the Assessee:
The assessee argued that the payments received for rendering various marketing and advertisement services to customers in India were not taxable as "Fees for Technical Services" (FTS) under Article 12 of the India-US DTAA. The assessee contended that the Assessing Officer (AO) erred in mechanically following the assessment order for AY 1998-99, disregarding the fact that the same had been overruled by the Delhi High Court in the assessee's own case for AY 1995-96 to 2000-01. The AO also erred in not following the Delhi High Court's decision merely because the Department had filed an appeal before the Supreme Court.

Facts of the Case:
The assessee, a company incorporated in the USA and engaged in providing hotel-related services globally, entered into agreements with various Indian hotels for services including worldwide publicity, marketing, and advertising through its system of sales, advertising, promotion, public relations, and reservations. The assessee received amounts on account of license fees, sales & marketing, reservation charge, and reservation booking fee, out of which only the license fees were offered to tax, claiming the other incomes as exempt under the DTAA. The AO treated these amounts as FTS and taxable under Section 9(1)(vii) read with Explanation 2 of the Income Tax Act, 1961.

Tribunal's Findings:
The issue of taxability of these services as FTS under Section 9(1)(vii) was already decided by the ITAT for AY 1995-96 in the assessee's favor. The Tribunal's order was affirmed by the Delhi High Court (313 ITR 267). The AO's addition was based on the Department not accepting the High Court's judgment and filing an SLP before the Supreme Court. The Tribunal held that the issue was covered by the jurisdictional High Court's judgment, hence no addition on this ground was warranted.

High Court's Judgment:
The High Court found that the main purpose of the agreement between the assessee and its clients-hotels was to promote business through worldwide publicity, marketing, and advertisement. All other services were incidental and/or ancillary to this main object. The payments received by the assessee were neither in the nature of royalty under Section 9(1)(vi) read with Explanation 2 or Article 12(3) of the DTAA nor FTS under Section 9(1)(vii) read with Explanation 2 or Article 12(4) of the DTAA. The High Court concluded that the payments represented "business profit" not liable to tax under Article 7 of the DTAA as the assessee did not have a permanent establishment in India.

The High Court also noted that Article 12(4)(b) of the DTAA, which applies to services making technology available, did not apply to the hotel industry. The services rendered by the assessee were related to advertisement, publicity, and sales promotion, not technical or consultancy services involving making technology available.

Conclusion:
The Tribunal agreed with the High Court's reasoning and found no fault with the CIT(A)'s order. The appeal of the revenue was dismissed, and the Tribunal declined to interfere with the CIT(A)'s order.

Final Order:
The appeal of the revenue was dismissed. The order was pronounced in the Open Court on 17/10/2019.

---