India-USA DTAA fees for included services test failed for centralized hotel-support receipts; business income treatment applied.

Centralized hotel-support receipts for marketing, reservation, loyalty and technology services were held not to be fees for included services under Article 12(4)(a) or 12(4)(b) of the India-USA DTAA. The services were provided under a distinct commercial arrangement, and the predominant object was advertising, marketing and promotion of the hotel business rather than facilitation of brand or trademark rights. The service fee was not ancillary and subsidiary to royalty, and the make-available condition was not satisfied. The receipts were therefore treated as business income not taxable in India absent a permanent establishment, and the additions were deleted.

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Issues: Whether the receipts from centralized services provided to Indian franchise hotels were taxable as fees for included services under Article 12(4)(a) of the India-USA DTAA.

Analysis: The centralized service fee was received under a distinct arrangement for marketing, reservation, loyalty, technology and related hotel-support services. The royalty for use of brand name and trademark was separately taxed. The decisive inquiry was whether the service fee was ancillary and subsidiary to the royalty-linked right, property or information within Article 12(4)(a). The arrangement and the nature of the services showed that the predominant object was advertisement, marketing and promotion of hotel business, not facilitation of the use of trademark or brand rights. The service fee was not a mere incident of royalty, and the quantum of service fee itself exceeded or substantially matched the royalty receipts, negating the claim that it was ancillary to the royalty arrangement. The fee also could not be brought within Article 12(4)(b), as the make-available condition was not satisfied.

Conclusion: The centralized service receipts were not taxable as fees for included services under Article 12(4)(a) or Article 12(4)(b) of the India-USA DTAA and were to be treated as business income not taxable in India in the absence of a permanent establishment.

Final Conclusion: The additions made on account of centralized service receipts were deleted and the assessee's appeals succeeded.

Ratio Decidendi: Where centralized hotel-related services are rendered under an integrated commercial arrangement whose predominant purpose is marketing and promotion, and the payments for such services are neither ancillary and subsidiary to royalty nor satisfy the make-available requirement, the receipts are not fees for included services under the India-USA DTAA.

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