2022 (3) TMI 1475 - AT - Income Tax

Payments for centralized services not considered royalty under Income Tax Act; no tax withholding required

The Tribunal upheld the CIT(A)'s decision that payments made to HCSL for centralized services were not considered royalty under the Income Tax Act, ... TDS u/s 195 - royalty / Fees for Technical Service (“FTS”) taxable under section 9(1)(vi)/(vii) - payments proposed to be made to Hyatt Chain Services Ltd., Hongkong (“HCSL”) for provision of centralised services i.e. advertisement, sales promotion and computerised reservation to the assessee amongst others - assessee is running a hotel under the name and style of Hyatt Regency as a franchise of Hyatt International Asia Pacific Limited known as Hyatt - whether the chain marketing services provided by HCSL to assessee falls within the scope of Explanation 2 to section 9(1)(vi) of the Act? - HELD THAT:- As per SOA the remittance to HCSL is made by the assessee in relation to centralised services provided by HCSL outside India for advisement, sales promotion and computer reservation. In our view, payments to HCSL are not made for consideration for any of the items (i) to (vi) enumerated in Explanation 2 to section 9(1)(vi). There are numerous decisions wherein the issue relating to the nature of provision of centralised marketing services by way of advertising and computer reservation etc. rendered by one of the group of company particularly in the field of hospitality industry outside India has been considered. In the case of Director of Income Tax vs. Sheraton International Inc. [2009 (1) TMI 27 - DELHI HIGH COURT] wherein such type of service was under consideration, the Hon’ble Delhi High Court held that such services are neither royalty nor FTS as per the provisions of section 9 of the Act and accordingly not liable to tax in India. Thus we hold that the payments made to the HSCL by the assessee are not in the nature of royalty under the provisions of section 9(1)(vi) of the Act and thus not chargeable to tax and not requiring the assesee to withhold any tax on such payments. It is a settled position of law that under section 195 of the Act, tax is not required to be withheld on remittance made by the assessee in respect of the income of the payee which is not chargeable to tax under the provisions of the Act. In support, reliance is placed on the judgements of the Hon’ble Supreme Court in Transmission Corporation of A.P. Ltd. & Anr. [1999 (8) TMI 2 - SUPREME COURT] and GE India Technology Cen. (P) Ltd. [2010 (9) TMI 7 - SUPREME COURT] Alternate argument that the payment for chain marketing services has been made to HSCL as reimbursement of the proportionate expenses incurred by HSCL on cost to cost basis and there was no element of income at all - We find force in the argument of the Ld. AR. The Hon’ble Delhi High Court in CIT vs. Expeditors International (India) (P.) Ltd. [2011 (12) TMI 104 - DELHI HIGH COURT] held that the assessee was not liable to withhold tax in respect of the reimbursement of global management expenses, communication uplink charges and other expenses made to its parent company located outside India. Thus in our view, no income can be said to accrue or arise to HCSL in India making the assessee liable to withhold tax under section 195 of the Act. We accordingly uphold the order of the Ld. CIT(A) and reject the appeal of the Revenue. Issues Involved:1. Whether the payments made by the assessee to HCSL, Hongkong under the Strategic Oversight Service Agreement (SOA) are considered 'royalty' under Explanation 2 of Section 9(1)(vi) of the Income Tax Act, 1961.Issue-wise Analysis:1. Nature of Payments under SOA:The assessee filed an application under section 195(2) of the Income Tax Act, 1961, proposing to remit payments to Hyatt Chain Services Ltd., Hongkong (HCSL) for centralized services such as advertisement, sales promotion, and computerized reservation. The AO determined these payments as royalty/Fees for Technical Service (FTS) taxable under section 9(1)(vi)/(vii) of the Act, requiring tax withholding. However, the CIT(A) held that these payments were not subject to withholding tax as they were reimbursements for services rendered outside India without profit elements.2. Findings of the AO:The AO relied on the DRP's findings in HISWAL's assessment for AY 2009-10, concluding that the payments to HCSL were in the nature of royalty/FTS. The AO rejected the claim that HCSL was a separate entity operating on a no-profit-no-loss basis and argued that the payments were not mere reimbursements but had a business connection in India.3. CIT(A)'s Decision:The CIT(A) found that HCSL provided various chain services outside India to Hyatt hotels globally, reimbursed on a proportionate cost basis without profit. The CIT(A) noted that there was no evidence that HCSL's services were specifically for the assessee, and the services were not rendered in India. The CIT(A) concluded that the payments were not FTS or royalty under domestic law and did not require tax withholding.4. Appeal by Revenue:The Revenue contended that the payments to HCSL fell within the definition of royalty under Explanation 2 of section 9(1)(vi) and required tax withholding. The Revenue relied on the findings in HISWAL's assessment for AY 2009-10, asserting that HCSL's services had a business connection in India.5. Tribunal's Analysis:The Tribunal observed that HCSL is a separate, independent no-profit entity providing services outside India to various Hyatt hotels. The Tribunal upheld the CIT(A)'s finding that no evidence suggested HCSL's services were specifically for the assessee. The Tribunal also noted that HCSL had no PE or business connection in India, distinguishing the case from HISWAL's assessment. The Tribunal concluded that the payments to HCSL did not fall within the definition of royalty under Explanation 2 to section 9(1)(vi) and were not subject to tax withholding.6. Legal Precedents:The Tribunal referred to the Delhi High Court's judgment in DIT vs. Sheraton International Inc. (313 ITR 267) and the Karnataka High Court's judgment in CIT/ITO (TDS) vs. ITC Hotels Ltd., which held that payments for centralized marketing services by group companies outside India were not royalty or FTS and were not taxable in India.Conclusion:The Tribunal upheld the CIT(A)'s order, concluding that the payments made to HCSL were not in the nature of royalty under section 9(1)(vi) of the Act and did not require tax withholding. The appeal by the Revenue was dismissed.