2025 (10) TMI 1060 - AT - Income Tax

Marketing-related receipts not taxable as royalty or FTS; travel agent commissions for hotel bookings excluded under s.9(1)(vii)

ITAT (Del-AT) held that marketing-related receipts (MRC) are not taxable as royalty or fees for technical services, following coordinate bench and HC ... Taxability of Marketing and reservation related receipts - Assessee is a company incorporated and a tax resident of USA. The Assessee is part of the Inter-Continental Hotel Group ('IHG') and was the legal and beneficial owner of the registered trademark of certain IHG brands including 'Holiday Inn', 'Holiday Inn Express' and 'Crowne Plaza' - HELD THAT:- Issue of taxability of MRC has been subject to scrutiny in the past years and it has been consistently held that MRC receipts are not taxable as royalty/FIS by the Hon’ble Jurisdictional High Court and the said issue is covered by the order of the Co-ordinate Bench of the Tribunal, allowing Ground No. 1 of both the Appeals. Addition proposed in relation to receipts in the nature of reimbursement received from India Hotels - The issue involved in the above ground is covered in Assessee’s own case for Assessment Year 2020-21 [2024 (6) TMI 697 - ITAT DELHI] wherein it has been held by the Tribunal that the amount of travel agent commission program received by the Assessee is not in the nature of Fees for Technical Services under the Act and under India US-DTAA. The amount charged by the Assessee as TACP for booking hotel rooms for third-party Indian Hotels cannot be said to be in the nature of managerial, technical or consultancy in nature for treating the same as FTS under the provisions of section 9(1)(vii) of the Act. Short grant of TDS credit - Assessee submitted that the TDS Credit were not granted by the A.O. in the Final Assessment Orders - Considering the submission made by the Assessee's Representative, we remand the issue to the file of the A.O. to examine the claim of the Assessee and direct the A.O. to grant TDS Credit in accordance with law in both the Assessment Years after considering the submissions of the Assessee. Assessee is also at liberty to claim/press the claim already made for income tax refund or TDS credit, which shall be considered by the A.O. in accordance with law. ISSUES PRESENTED AND CONSIDERED 1. Whether Marketing and Reservation Contributions (MRC) received by a non-resident licensor of trademarks are taxable in India as Royalty or Fees for Technical Services (FTS)/Fees for Included Services (FIS) under the Income-tax Act, 1961 and the India-USA Double Taxation Avoidance Agreement (DTAA). 2. Whether amounts received as reimbursement from Indian hotels, specifically Travel Agent Commission Program (TACP) receipts and other reimbursements, constitute FTS/FIS taxable in India. 3. Whether the Assessing Officer correctly allowed/credited Tax Deducted at Source (TDS) claimed by the taxpayer under Rule 37BA(2) and related provisions (i.e., whether there was short grant of TDS credit and entitlement to refund/TDS credit). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of MRC as Royalty/FTS/FIS Legal framework: The assessment involves characterization of receipts as 'royalty' and/or 'fees for technical services' under the Income-tax Act and the India-USA DTAA (Article addressing FIS/FTS). The domestic definition of FTS (Explanation 2 to section 9(1)(vii)) requires consideration to be quid pro quo for rendering managerial, technical or consultancy services (including provision of personnel), and royalty definitions require transfer or use of intellectual property as per applicable provisions. Precedent treatment: The Tribunal relied on a series of earlier coordinate decisions in the taxpayer's own cases and decisions of other Benches which consistently held marketing and reservation related receipts not taxable as Royalty/FTS. These include multiple ITAT orders for earlier assessment years, acceptance by revenue (no appeal), and a combined order from another Bench covering later years; the Tribunal followed those ratios. Interpretation and reasoning: The Tribunal examined the character of MRC (marketing contribution, reward club receipts, reservation contribution, Holidex fees) and treated the issue as squarely covered by prior Tribunal rulings which concluded that such receipts are not consideration for managerial, technical or consultancy services (nor constitute royalty under the DTAA/domestic law). The Tribunal accepted the reasoning of coordinate decisions that the nature of services/consideration did not meet the statutory tests for FTS/royalty. Ratio vs. Obiter: The holding that MRC is not taxable as Royalty/FTS/FIS is applied as the operative ratio in the present appeals (binding on the coordinate Bench in like circumstances). Observations describing factual underpinnings of earlier rulings are treated as ratio insofar as they control characterization; ancillary remarks about the history of litigation are obiter. Conclusion: Ground relating to non-taxability of MRC for both assessment years is allowed by following the precedents; MRC receipts are not taxable as Royalty/FTS/FIS under the Act or the India-USA DTAA. Issue 2 - Taxability of TACP and other reimbursements as FTS/FIS Legal framework: Characterization under Explanation 2 to section 9(1)(vii) (FTS) and corresponding DTAA provisions. FTS requires quid pro quo for managerial, technical or consultancy services rendered by the recipient to the remitter. Precedent treatment: The Tribunal referred to its own coordinate Bench decision for a subsequent assessment year where the TACP issue was considered and decided in favour of the taxpayer. The decision also relied on multiple judicial precedents holding that commission charged by commission agents outside India is not taxable in India (decisions of High Courts and ITATs cited in the Tribunal's reasoning). Interpretation and reasoning: The Tribunal applied the explanatory test for FTS and found: (i) travel agents rendered services to the Indian hotels, not to the non-resident licensor; (ii) the non-resident paid travel agents on behalf of Indian hotels and recovered such payments on a cost-to-cost basis without any income element; (iii) the non-resident did not render managerial/technical/consultancy services to Indian hotels in relation to TACP; and (iv) commission charged by agents outside India is not ordinarily taxable in India. These factual and legal findings led to the conclusion that TACP and similar reimbursements lack the necessary quid pro quo and service content to be FTS. Ratio vs. Obiter: The conclusion that TACP/reimbursements are not FTS is treated as the operative ratio applied to the assessment year under appeal; the catalogue of precedents is relied upon as authority and forms part of the ratio insofar as they establish legal principle regarding commission/agency receipts. Conclusion: Ground challenging the addition of INR 8,10,38,864 (TACP and reimbursements) as FTS/FIS is allowed; such receipts are not taxable as FTS/FIS under the Act or India-USA DTAA. Issue 3 - Short grant of TDS credit / entitlement to refund Legal framework: Claim for TDS credit as per Rule 37BA(2) of the Income-tax Rules, entitlement to adjust/claim TDS credits and refunds in accordance with law; Assessing Officer's duty to allow credit where properly claimable. Precedent treatment: No specific precedent was necessary; issue remitted to AO for verification and application of law consistent with Tribunal directions and statutory provisions. Interpretation and reasoning: The Tribunal noted the assessee's claimed TDS credits (specified amounts for each assessment year) and found that the final assessment orders did not grant those credits. Given factual questions of entitlement and documentary verification, the Tribunal remitted the matter to the Assessing Officer for examination and directed the AO to grant TDS credit in accordance with law after considering the assessee's submissions. The assessee was also permitted to press existing refund or TDS credit claims for consideration by the AO. Ratio vs. Obiter: The remand and direction to grant TDS credit where supported by law and proof is an operative procedural direction (ratio for implementation); incidental observations about amounts claimed are factual and obiter beyond the remand instruction. Conclusion: The Tribunal remanded the TDS credit/ refund issue to the AO for determination in accordance with law and allowed the assessee liberty to press claims; appeals are partly allowed for statistical purposes to the extent indicated. Cross-References 1. Issues 1 and 2 are interrelated through the common legal test under Explanation 2 to section 9(1)(vii) (quid pro quo and nature of services); the Tribunal applied coordinate Bench authority on both questions. 2. The direction under Issue 3 is procedural and contingent on factual/documentary verification arising from issues decided under Issues 1 and 2 (i.e., taxability outcomes affect net tax/TDS consequences), and is therefore remitted to the AO for consequential adjustment.