2022 (11) TMI 32 - AT - Income Tax

Income not taxable as royalty or FTS under India-USA DTAA

The Tribunal allowed the appeal, ruling that the payment received by the assessee under the Master Franchise Agreement was not taxable as royalty, FTS, or ... Taxability of payments under Master Franchise Agreement as royalty/FTS/FIS - application of Article 12(4)(a) of India USA DTAA - centralized services not ancillary or subsidiary to licence fee - precedential effect of the assessee's own earlier Tribunal decisionTaxability of payments under Master Franchise Agreement as royalty/FTS/FIS - application of Article 12(4)(a) of India USA DTAA - centralized services not ancillary or subsidiary to licence fee - Whether amounts received under the Master Franchise Agreement are taxable as royalty/fee for technical services/fees for included services (FIS) under domestic law or the India USA DTAA. - HELD THAT: - The Tribunal held that the factual matrix in the assessment year under appeal is identical to its earlier decision in the assessee's own case for assessment year 2016 17. In that earlier decision the Tribunal examined and rejected the applicability of Article 12(4)(a) of the India USA DTAA to the centralized service fee, concluding that centralized services such as marketing, promotion and reservations do not flow from, nor are ancillary or subsidiary to, the grant of a licence to use the brand. The Tribunal applied its reasoning in Starwood Hotels & Resorts Worldwide Inc., observed that the service fee cannot be treated as ancillary to the licence merely because both are contained in a single agreement or by reference to relative quantum, and held that the receipts fit within the illustration in example 2 of the MoU to the DTAA. Respectfully following that precedent, the Tribunal concluded that the amounts received under the Master Franchise Agreement are not royalty, FTS or FIS under domestic law or the DTAA.Addition treating the disputed receipts as royalty/FTS/FIS deleted; amounts not taxable as royalty/FTS/FIS.Final Conclusion: Following its earlier decision in the assessee's own case for assessment year 2016 17, the Tribunal held that the payments under the Master Franchise Agreement are not chargeable as royalty, fee for technical services or fees for included services under domestic law or the India USA DTAA, set aside the addition and allowed the appeal. Issues:Taxability of payment received by the assessee under Master Franchise Agreement as Royalty/Fee for Technical Services (FTS) under Domestic Law and India-USA Double Taxation Avoidance Agreement (DTAA).Analysis:The appeal was filed by the assessee challenging the final assessment order for the assessment year 2018-19, concerning the taxability of payment received under a Master Franchise Agreement. The assessing officer added back the amount received by the assessee under the agreement to their income, considering it as either royalty or FTS. The assessee contended that the amount was not in the nature of royalty or FTS but related to third-party reservation, marketing fee, and other services. Despite the assessee's objections before the Dispute Resolution Panel (DRP), the addition was upheld based on previous decisions. The Tribunal noted that the issue was covered in favor of the assessee by a previous decision in the assessee's own case for the assessment year 2016-17. The Tribunal highlighted the relevance of the earlier decision and the incorrect application of the law by the departmental authorities in the current case.The Tribunal referred to the observations made in the previous order related to the assessee's case for the assessment year 2016-17. The Tribunal emphasized that the service fee received by the assessee should not be considered ancillary or subsidiary to the license fee, based on an in-depth analysis of the facts and relevant provisions. The Tribunal concluded that the payment received under the Master Franchise Agreement did not fall under the categories of royalty, FTS, or Fees for Included Services (FIS) under the India-USA DTAA. Therefore, the addition made by the assessing officer was deleted, following the decision in the earlier case for the assessment year 2016-17.In conclusion, the Tribunal allowed the appeal, holding that the amount received by the assessee under the Master Franchise Agreement could not be treated as royalty, FTS, or FIS. The decision was based on the findings of the Tribunal in the assessee's previous case for the assessment year 2016-17. The addition made by the assessing officer was deemed incorrect, and therefore, it was deleted in favor of the assessee.