TaxTMI 
TaxTMI 
2021 (6) TMI 479
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....the present application on August 25, 2020 pertaining to these two agreements and the following questions have been raised in the application : "1. On the facts and circumstances of the case and in law, whether the amounts received by the applicant from ABC India pursuant to system fund support service agreement for provision of marketing, frequency marketing programme ("ABC Rewards"), distribution mar keting and pursuant to reservation system facility agreement for reservation system facility, would be chargeable to tax in India under the provisions of the Income-tax Act, 1961 ('the Act') and under India-A Double Taxation Avoidance Agreement ('DTAA') ? 2. On the facts and circumstances of the case and in law, whether the amounts received by the applicant from ABC India for provision of marketing, ABC rewards, distribution marketing and reservation system facility would be chargeable to tax in India as royalty as per the provisions of section 9(1)(vi) of the Act and under article 12 of India-A DTAA ? 3. On the facts and circumstances of the case and in law, whether the amounts received by the applicant from ABC India for provision of marke....
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....2019. The applicant had entered into a new arrangement with ABC India in the form of two different agreements with effect from April 1, 2019 : system fund support service agreement (SFS) and reservation system facility agreement (RSF) instead of one composite agreement with the applicant earlier. According to the Revenue that this new arrangement was with an intention to avoid the taxability of the receipts. It was pointed out that even under this new arrangement the applicant would provide similar services as before and the actual nature of transaction was identical. The precise objection of the Revenue on these two issues is as under : "In reference to clause (i) of sub-section (2) of section 245R : The applicant has raised the questions related to the taxability of amount received by it from ABC India, a group company, in pursuance to system fund support service agreement for provision of marketing and in pursuance to reservation system facility agreement for reservation system facility. The receipts of the applicant for providing such services has been held taxable in India as royalty/fee for included services under section 9(1)(vi) and 9(1)(vii) of the Income....
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....16-17. She has drawn our attention to the grounds taken by the applicant before the Commissioner of Income-tax (Appeals) wherein the issues regarding taxability of these receipts under the earlier arrangement was raised. She further submitted that the addition made by the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals) and the issues are now pending before the learned Income-tax Appellate Tribunal. She submitted that as the questions raised in the present application were already pending before the Income-tax Appellate Tribunal, the application may not be admitted. Further, she reiterated the stand of the Revenue that the arrangement by way of two fresh agreements for providing the identical services as already being provided earlier and the receipts of which has been held as taxable by the Department, was nothing but a ploy to evade tax. The learned Departmental representative submitted that the only change made under the new arrangement was to bifurcate the agreement into two parts, i. e., SFS and RSF agreement with SFS agreement covering marketing and frequency marketing programme while RSF covering services related to reservation system. Therefore, t....
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....g the hotels under ABC brand standards in consideration of franchisee fees/license fees. The Indian entity of the group, namely, ABC India under the hotel management agreement was designated as "manager", obligated to provide hotel management, operation and technical support services to ABC brand hotels in India. The applicant (as an affiliate of ABC AP), was required to provide certain marketing and reservation related services to such third-party Indian hotels. The hotel management agreement referred by learned Commissioner of Income-tax in its report dated December 3, 2020 is a tripartite agreement executed prior to April 1, 2019 between DHI Ltd.-referred to as "owner" in the hotel management agreement, ABC India referred as "manager" in the hotel management agreement and ABCAP - referred as "licensor" in the hotel management agreement. The description of services provided under the aforesaid hotel management agreement to Indian hotels is tabulated below : Sl. No. Name of the party Type of fee Description of service 1 ABCAP designated as "licensor" in the hotel management agreement License fee for use of marks/brand name and associate....
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....and reservation related services to the India hotels, which the applicant (as an affiliate of ABC AP) was earlier obligated to provide. The new business model is between 2 India resident entities (i. e., third-party hotel owners and ABC India). It was adopted with the objective to ensure ease of doing business for the third-party hotel owners, which in-turn will result in growth of ABC brand hotels in India. With the above background and to enable ABC India to fulfil its obligations under the hotel management agreement, it has entered into the following inter-company agreements with the applicant : - Licence agreement between ABCAP and ABC India for the right to use ABC's intellectual property ; - System fund support services agreement ("SFS agreement") between the applicant and ABC India ; and - Reservation system facility agreement ("RSF agreement") between the applicant and ABC India. Comparison between Business model before and after April 1, 2019 : Under the new hotel management agreement, your honours may kindly note that there is a change in contractual obligations, as ABC India is required to provide the services und....
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....implemented with effect from April 1, 2019. A reference of the above change in business operations of ABC India has also been provided in the audited financial statement of ABC India for the year ending March, 2020, wherein incremental revenues and cost which shall accrue to ABC India with effect from April 1, 2019. Copy of the relevant extract of the audited financial statement is attached herewith as annexure 3 for your honour's kind reference. Therefore, the above change in the role of ABC India has affected the role and position of foreign ABC entities (i. e., ABCAP and XYZI) vis-a-vis third-party Indian hotels. Under the new business model with effect from April 1, 2019, ABC India undertakes the primary responsibility under the hotel management agreement to procure and provide marketing and reservation related services to the Indian hotels, whereas previously such obligation falls on XYZI as an affiliate of ABC AP. It is further submitted that XYZI used to invoice directly to the third-party hotels in India previously, in relation to marketing and reservation related services provided by it, whereas ABC India is now the billing entity for aforesaid services to the....
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....he case of a resident applicant falling in sub-clause (iii) of clause (b) of section 245N or in the case of an applicant falling in sub-clause (iiia) of clause (b) of section 245N" 8. The first objection of the Revenue is that the issues raised in the present application were already pending before the Income-tax authority and, therefore, the bar under clause (i) of the proviso to section 245R(2) was attracted. The questions raised in the present application are in respect of the amounts received by the applicant from ABC India for the services rendered under SFS and RSF. These questions relate to provision of marketing, frequency marketing programmes (ABC rewards) and distribution marketing under SFS and reservation system facility under RSF. The present agreements were effective from April 1, 2019 and the first year in which these services as per new agreements would be subject to examination by the Department is the assessment year 2020-21. However, the proceedings pending before the Department are for earlier assessment years. The contention of the Revenue is that identical services were provided under the earlier agreements. Therefore, we have to first examine the nature of....
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....usiness in the territory. Such business requires ABCI to provide, or procure the provision of, reservation system facility to ABC system hotels. (c) For the purpose of achieving efficiency in operation and management, ABCI will provide or procure reservation system facility to ABC system hotels, as may be required that meets ABCI's obligations to those hotels. In return, ABCI will pay facility charges to XYZI." 11. It is thus evident that the applicant was already providing reservation system facility to ABC system hotels under hotel management agreement of ABC India with Indian hotels. As per the RSF agreement dated April 1, 2019, the applicant had agreed to continue the provision of reservation system facility to ABC system hotels on behalf of the ABC India. The effective date for RSF agreement was identical with that of SFS agreement. In essence, the reservation system facility being provided by the applicant to Indian hotels under hotel management agreement prior to RSF agreement was continued. The only change was in the nature of collection of facility charges for RSF services. Clause 3.1 of the agreement stipulated that ABC India shall pay XYZI fee of an amoun....
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....including as specified in this agreement or as designated from time to time by manager ("System"). The system at present includes, but is not limited to : (a) the copyrights, trademarks and similar intellectual property rights made available by manager's affiliates to owners of hotels operating under the system ; (b) all rights to the domain names and other identifications or elements used in electronic commerce as may be designated from time to time by manager's affiliates in accordance with manager's specifications to be part of the system ; (c) access to the reservation system, frequency marketing program, property management system, sales and catering system and information technology system operated in accordance with specifications established by manager from time to time ; (d) distribution of advertising, publicity and other marketing programs and materials ; (e) support from ABC's global sales force for wholesale accounts and third-party intermediates ; (f) the furnishing of training programs and materials ; (g) confidential or proprietary information relating to standards, specification....
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....ll return the operating manual to the manager. Owner agrees that the operating manual is at all times the property of the owner of the reservation system." 14. The applicant has provided a copy of the hotel management agreement dated October 8, 2019 (after the effective date of SFS and RSF) in respect of QB between the owner of the hotel and ABC India as manager of the hotel. It is found that the clause for providing access to reservation system in this bipartite agreement is exactly identical with the provision of access to reservation system in the earlier tripartite agreements as reproduced above. Further, the nature of system fund activities under the two agreements is also found to be identical. 15. The payment for all these services was in the form of contribution to systems fund which the owner was obliged to discharge. Clause 10.1 of the agreement stipulated that "For the duration of the term, owner shall pay the licensor, or if directed by licensor, its affiliates, the system contribution". As stated by the applicant the services in respect of system funds were provided by the applicant directly to the respective Indian hotels. It was also mentioned in the agreement ....
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....red by the applicant, which has no impact on deciding the issue of pendency. The contention of the applicant that the change in the model has resulted in incremental revenue is also not relevant to decide the issue before us. What is relevant is the nature of services being rendered by the applicant under the two models, which are found to be identical. 18. The applicant has contended that the role of ABC India has changed significantly under the new hotel management agreement and there was a change in contractual obligations post implementation of the new business model. It is submitted that ABC India was responsible for procuring and providing marketing and reservation related services to the India hotels, whereas under the former business model, XYZI (as an affiliate) was obliged to provide the aforesaid services directly to the Indian hotels under the hotel management agreement. We have considered the submission of the applicant. There was a change in role of ABC in the new model in respect of provision of right to use trademark/brands. But we do not find any change in the role of ABC India so far as providing marketing and reservation related services to the Indian hotels a....
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....received from Indian hotels as taxable as fee for included ser vices (FIS) also under article 12(4) of the DTAA without appreciating that : (a) The said services are neither technical nor-consultancy in nature. (b) The said services are not ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is received by the applicant ; and (c) The said services do not make available any technical know ledge, experience, skill know-now, or processes etc." 20. As informed by the Revenue the additions made by the Assessing Officer were confirmed by the Commissioner of Income-tax (Appeals) and the issues are now pending before the learned Income-tax Appellate Tribunal and this fact has not been disputed by the applicant. It is found that the questions raised in the present application are in respect of the issues which were already pending before the Income-tax authority in different years. Therefore, the bar under clause (i) of the proviso to section 245R(2) is found squarely attracted in this case. 21. The applicant has relied upon the ruling of this authority in the case of L. S. Cables....