2025 (4) TMI 1459 - HC - Income Tax

Revenue's appeal dismissed on technical services fees versus included services under section 9(1)(vii) and Article 12(4)(a) DTAA

The Commissioner Of Income Tax - International Taxation -3 Versus Six Continents Hotels Inc.

Delhi HC dismissed revenue's appeal regarding fees for technical services under section 9(1)(vii) versus fees for included services under Article 12(4)(a) ... Fees for technical services as defined u/s 9(1)(vii) or Fees for Included Services as covered under Article 12 (4) (a) of the DTAA - payments received by the Assessee on account of providing certain centralised services including marketing services and reservation services - HELD THAT:- Admittedly, the said issue is covered in favour of the Assessee and against the Revenue by several decisions of this court including Sheraton International Inc. [2009 (1) TMI 27 - DELHI HIGH COURT] Sheraton International LLC. [2023 (5) TMI 1435 - DELHI HIGH COURT] Westin Hotel Management LP [2024 (4) TMI 1250 - DELHI HIGH COURT] and Shangri-La International Hotel Management Pte Ltd. [2023 (9) TMI 1683 - DELHI HIGH COURT] In the case of Radisson Hotel International Incorporated [2022 (11) TMI 641 - DELHI HIGH COURT] this court had referred to the earlier decisions and dismissed the case holding that no substantial questions of law arise for consideration by this court. The present appeal must bear the same fate. The core legal questions considered by the Court include:1. Whether the payments received by the Assessee from Indian affiliates for marketing contribution, priority club receipts, reservation contribution, and Holidex fees constitute taxable income under the Income Tax Act, 1961, specifically as Royalty or Fees for Included Services (FIS) under Section 9(1)(vii) of the Act.2. Whether such payments qualify as Royalty or Fees for Included Services under the India-USA Double Taxation Avoidance Agreement (DTAA), particularly under Article 12(3) and Article 12(4)(a) and (b) of the DTAA.3. The impact of the change in the Assessee's business model effective from April 1, 2019, on the taxability of the receipts, especially considering the new arrangements involving licensing and provision of marketing and reservation services.4. The applicability and interpretation of the 'ancillary and subsidiary' services test under the DTAA's Fees for Included Services provision, including the relevance of the Memorandum of Understanding (MoU) between India and the USA regarding such services.5. Whether the Assessing Officer's and Dispute Resolution Panel's (DRP) findings that the receipts are taxable as Royalty or Fees for Included Services are sustainable in law and on facts.6. The effect of prior judicial precedents and ITAT decisions on the present assessment year and whether any substantial question of law arises warranting interference.Issue-wise Detailed Analysis:1. Taxability of the Receipts as Royalty or Fees for Included Services under the Income Tax Act and DTAAThe legal framework involves Section 9(1)(vi) and (vii) of the Income Tax Act, 1961, which deal with income deemed to accrue or arise in India, including Royalty and Fees for Technical Services (FTS). The India-USA DTAA's Article 12 defines Royalty and Fees for Included Services, with specific clauses setting out the nature of payments chargeable to tax.Precedents relied upon include the decisions in Sheraton International Inc., Westin Hotel Management LP, and Shangri-La International Hotel Management Pte Ltd., which have interpreted similar receipts in the context of brand licensing and services.The Court noted that the Assessing Officer and DRP treated the payments as Royalty or alternatively as Fees for Included Services, relying on the DTAA provisions and the MoU clarifying the 'ancillary and subsidiary' nature of such services. The MoU specifies that fees for services ancillary to the application or enjoyment of a right or property for which royalty is paid qualify as Fees for Included Services.Applying these principles, the Court observed that the payments received by the Assessee relate to marketing and reservation services that are ancillary and subsidiary to the use of the brand and trademark rights licensed to Indian hotels. The predominant purpose of the arrangement is the use of the brand, and the services facilitate effective enjoyment of the brand.The Court distinguished the Assessee's case from precedents cited by the Revenue, such as Renaissance Services BV, where the taxpayer was not the beneficial owner of the brand or trademark. Here, the Assessee retained legal and beneficial ownership of the brand, making the receipts fall within the ambit of Royalty or Fees for Included Services under the DTAA.The Court emphasized that the payments are not standalone service fees but are integrally connected to the licensing arrangement, supported by contractual and factual matrix.2. Impact of Change in Business Model Effective April 1, 2019The Assessee's business model changed from a tri-partite arrangement involving direct provision of marketing and reservation services by the Assessee to Indian hotels, to a model where IHG India was granted a non-exclusive license for trademark use and undertook hotel management and marketing services, with the Assessee providing support services to IHG India under inter-company agreements.The Court acknowledged this change but held that mere tweaking of the business model does not alter the fundamental nature of the receipts. The services provided remain ancillary and subsidiary to the use of the trademark and brand rights.The Court noted that IHG India's role as a licensee and service provider does not negate the fact that the ultimate payments received by the Assessee relate to the enjoyment of the brand and are therefore taxable under the same provisions.The Assessing Officer was directed to consider the new business model in the final assessment but the overall taxability stance remained unchanged.3. Application of the 'Ancillary and Subsidiary' Test under the DTAA and MoUThe Court extensively referred to the MoU between India and the USA that clarifies the interpretation of Fees for Included Services under the DTAA. The MoU sets out factors to determine whether services are ancillary and subsidiary, including the extent to which services facilitate the use of the right, whether payments are insubstantial relative to royalties, and whether payments are made under a single contract.The Court found that the facts of the case satisfy these criteria: the marketing and reservation services facilitate the use of the brand, the payments for services are a minor portion of the total payments, and the arrangements are under a single integrated contractual framework.The Court rejected the Revenue's arguments that the services are standalone technical services, holding that these are integrally linked to the brand licensing and thus fall within Fees for Included Services.4. Treatment of Competing Arguments and PrecedentsThe Revenue relied on the Assessing Officer's and DRP's findings and certain precedents to argue that the receipts are taxable as Royalty or Fees for Included Services. The Assessee contended that the receipts are not taxable under the DTAA and that the new business model changes the nature of receipts.The Court held that the issue is settled by binding precedents, including recent decisions of this Court and ITAT, which have consistently held in favor of the Assessee on similar facts for multiple assessment years.The Court noted that the Revenue's appeal for earlier assessment years was dismissed and that no substantial question of law arises in the present appeal. The Court also referred to a recent dismissal of a similar appeal for AY 2016-17, reinforcing the settled position.5. ConclusionsThe Court concluded that the payments received by the Assessee for marketing, distribution marketing, frequency marketing, and reservation services are taxable neither as Royalty nor as Fees for Included Services under the DTAA for the relevant assessment year, consistent with prior years' decisions.The change in the business model effective from April 1, 2019, does not alter the taxability of the receipts, as the nature of the services remains ancillary and subsidiary to the use of the brand.The appeal filed by the Revenue under Section 260A of the Income Tax Act was dismissed, as no substantial question of law arises for consideration.Significant Holdings:'The various activities in relation to the system contribution fund are essentially of the nature of marketing and brand development activities for the purpose of brand enhancement and hence are ancillary and subsidiary to the application or enjoyment of the right, property or information for which the royalty is received under the said license within the meaning of sub-paragraphs (a) of paragraph 3 and 4 of Article 12 of the DTAA.''The payments are fees for included services. The services described in this example are ancillary and subsidiary to the use of a manufacturing process protected by law as described in paragraph 3(1)(a) of Article 12 because the services are related to the application or enjoyment of the intangible and the granting of the right to use the intangible is the clearly predominant purpose of the arrangement.''Mere tweaking of business model doesn't change the nature of receipts chargeable to tax.''No substantial questions of law arise for consideration before this court.'These holdings reaffirm the principle that payments for services ancillary and subsidiary to the use of licensed intellectual property rights are taxable under the DTAA as Fees for Included Services, and that changes in contractual or business arrangements do not alter the fundamental tax character of such receipts.