Franchise service receipts were not royalty or technical service fees because they were separate from the licence consideration.

Centralized service receipts under a Master Franchise Agreement were examined for characterization as royalty or fees for technical services, including fees for included services, under domestic law and the India-USA DTAA. The receipts for marketing, promotion, reservation and allied services were treated as a separate stream of consideration and not as ancillary and subsidiary to the licence fee. As they did not independently satisfy the treaty definition of fees for included services, and were not otherwise shown to be royalty or fees for technical services, the addition was deleted and the receipts were held not taxable on that basis.

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Issues: Whether the amounts received under the Master Franchise Agreement were taxable as royalty or fees for technical services/fees for included services under domestic law and the India-USA Double Taxation Avoidance Agreement.

Analysis: The dispute was held to be identical to an issue already decided in the assessee's own case for an earlier year. The centralized service receipts formed part of the same commercial arrangement, but they were not shown to be ancillary and subsidiary to the licence fee merely because they were received under a single agreement. The payment for centralized services such as marketing, promotion, reservation and allied services was treated as a separate stream of consideration and was not brought within the treaty definition of fees for included services. On that basis, the amount could not be characterized as royalty, fees for technical services, or fees for included services.

Conclusion: The addition was deleted and the receipts under the Master Franchise Agreement were held not taxable as royalty or fees for technical services/fees for included services.

Ratio Decidendi: Centralized service fees received under a franchise arrangement are not taxable as royalty or fees for technical services/fees for included services where they are not ancillary and subsidiary to the licence and do not independently satisfy the treaty definition.

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