2023 (9) TMI 1448 - AT - Income Tax

US entity's hotel service payments not taxable as technical fees under Section 9(1)(vii) or Indo-US DTAA Article 12(4)(a)

DCIT, Circle -3 (1) (2), International Taxation, New Delhi Versus Starwood (M) International Inc.,

ITAT Delhi held that payments received by a US-incorporated non-resident entity from Indian customers for centralized services to hotels do not constitute ... Accrual of income in India - payments received by the assessee from its Indian customers on account of Centralized Services - whether would constitute Fee for Technical Services as defined u/s 9(1)(vii) of the Income Tax Act, 1961 or “Fee for included services as defined under Article 12(4)(a) of the Indo-US DTAA.” - assessee is a non-resident corporate entity incorporated in United States of America (‘USA’) engaged in the business of providing various services to hotels in different countries across the world, including India - HELD THAT:- We find, while deciding identical issue in assessee’s own case in [2022 (9) TMI 1572 - ITAT DELHI] for assessment years 2016-17 and 2017- 18, the Tribunal, in order after analyzing in detail the nature and character of receipts has held that they cannot be treated as FTS/FIS, either under the provisions of the Act or under the treaty provisions. Notably, the aforesaid decision of the Coordinate Bench has been affirmed by the Hon’ble Jurisdictional High Court while deciding Revenue’s appeal in judgment [2023 (5) TMI 1313 - DELHI HIGH COURT] Since, the issue in dispute is squarely covered in favour of the assessee by the decision of the Tribunal and Hon’ble Jurisdictional High Court, we find no reason to interfere with the decision of learned first appellate authority in declaring the receipts from centralized services to be not in the nature of FTS/FIS. Ground is dismissed. Issues Involved:1. Whether the payments received by the assessee from its Indian customers on account of Centralized Services constituted Fee for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961 or Fee for Included Services (FIS) under Article 12(4)(a) of the Indo-US DTAA.Summary:Issue 1: Nature of Payments as FTS/FIS:The primary issue raised by the Revenue was whether the payments received by the assessee from its Indian customers for Centralized Services constituted Fee for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961 or Fee for Included Services (FIS) under Article 12(4)(a) of the Indo-US DTAA. The assessee, a non-resident corporate entity from the USA, provided centralized services such as sales, marketing, reservation, and loyalty programs to Indian hotels from outside India. The assessee declared nil income in its tax returns, claiming the receipts as business profits not taxable in India due to the absence of a Permanent Establishment (PE) under the Indo-US DTAA. The Assessing Officer disagreed, treating the receipts as FTS/FIS and bringing them to tax.The first appellate authority reversed the Assessing Officer's decision, relying on previous Tribunal and Delhi High Court rulings in the assessee's favor for earlier assessment years. The Tribunal, in its detailed analysis, found that the nature of the services provided did not qualify as FTS/FIS under the Act or the treaty provisions. The Tribunal highlighted that the services rendered did not facilitate the use of trade names or trademarks but were primarily for advertisement, marketing, and promotion of hotels, which do not fall under the definition of FIS as per Article 12(4)(a) of the Indo-US DTAA.The Tribunal further noted that the centralized services fee and the license fee were not part of a single contract, and the predominant purpose of the Centralized Services Agreement was to provide advertisement, marketing, and promotion services, not technical services. The Tribunal's observations were upheld by the Hon'ble Jurisdictional High Court, confirming that the centralized services fee could not be treated as FIS under Article 12(4)(a) of the Treaty.Additionally, the Tribunal referenced several judicial precedents, including the case of Sheraton International Inc., where similar issues were decided in favor of the assessee. The Tribunal also dismissed the Revenue's reliance on other judicial precedents, finding them factually distinguishable.In conclusion, the Tribunal directed the Assessing Officer to delete the addition, affirming that the receipts from centralized services were not taxable as FTS/FIS in India. The appeals by the Revenue were dismissed, and the decision of the first appellate authority was upheld.Order pronounced in the open court on 22nd September, 2023.