2023 (9) TMI 1470 - AT - Income Tax

Revenue's appeal dismissed: centralized services receipts not taxable as Fee for Technical Services under section 9(1)(vii) or Indo-US DTAA Article 12(4)(a)

DCIT, Circle -3 (1) (1), International Taxation, New Delhi Versus Westin Hotel Management L.P.

ITAT Delhi dismissed revenue's appeal regarding taxability of payments received by assessee from Indian customers for centralized services. The Tribunal ... Income taxable in India or not - payments received by the assessee from its Indian customers on account of Centralized Services - Fee for Technical Services as defined u/s 9(1)(vii) or Fee for included services as defined under Article 12(4)(a) of the Indo-US DTAA - HELD THAT:- We find, while deciding identical issue in assessee’s own case [2022 (7) TMI 781 - ITAT DELHI] for assessment year 2015-16, the Tribunal 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 [2022 (11) TMI 631 - DELHI 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 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.Summary:Issue 1: 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 LLP incorporated in the USA, provided centralized services to various Indian hotel owners, including sales and marketing, reservation, loyalty programs, and other centralized services, from outside India. The assessee claimed that these receipts were business profits and not taxable in India due to the absence of a Permanent Establishment (PE) under the India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) treated these receipts as Fee for Technical Services (FTS) or Fee for Included Services (FIS) under both the Income Tax Act and Article 12(4) of the DTAA, and brought them to tax.The first appellate authority reversed the AO's decision, relying on a previous Tribunal decision for the assessment year 2015-16, which was confirmed by the Hon'ble Delhi High Court. The Tribunal found that the nature of the services provided by the assessee did not constitute FTS/FIS under the Act or the treaty provisions. The Tribunal observed that the services provided were primarily for publicity, marketing, and reservation, which were ancillary to the main objective of promoting the hotel business.The Tribunal noted that the AO had accepted the facts and decisions in favor of the assessee but followed the past assessment years' decisions and observed that the Revenue had preferred a Special Leave Petition (SLP) before the Hon'ble Supreme Court against the High Court's decision. The Tribunal concluded that the payments received for centralized services did not fall under Article 12(4)(a) as they were not ancillary and subsidiary to the application or enjoyment of the right, property, or information for which royalty was received under Article 12(3).The Tribunal emphasized that the services rendered by the assessee did not facilitate the use of the trade name/trademark but were primarily for advertisement, marketing, and promotion of the hotels. The Tribunal referred to the Memorandum of Understanding (MoU) to the India-USA Tax Treaty, which outlines the parameters for determining FIS under Article 12(4)(a), and found that most of these parameters did not apply to the centralized service fee received by the assessee.The Tribunal further noted that the issue of taxability of centralized service fees as FIS was a recurring issue and had been consistently decided in favor of the assessee in previous years, including by the Hon'ble Jurisdictional High Court. The Tribunal concluded that the fee received by the assessee under the Centralized Services Agreement could not be treated as FIS under Article 12(4)(a) or 12(4)(b) of the India-USA Tax Treaty and should be treated as business income, which is not taxable in the absence of a PE in India.The Tribunal dismissed the Revenue's appeals and directed the AO to delete the addition. The decision was pronounced in the open court on 22nd September 2023.