TaxTMI 
TaxTMI 
2022 (7) TMI 781
X X X X Extracts X X X X
X X X X Extracts X X X X
....rent assesses challenging the taxability of amount received towards centralized services fee from Indian hotels as Fee for Technical/Included Services (FTS/FIS). The appeals have reached this stage either through Dispute Resolution Panel (DRP) or Commissioner of Income Tax (Appeals) route. 2. Since, facts relating to the core issue, more or less, are identical except minor variations, for ease of reference, we propose to take up ITA No.2011/Del/2019, in case of Starwood Hotels & Resorts Worldwide Inc. as the lead appeal. ITA No.2011/Del/2019 for AY: 2015-16 3. Briefly the facts relating to the issue in dispute are, the assessee is a company incorporated under the laws of United States of America (USA) and is a tax resident of that country. As stated by the Assessing Officer, assessee is engaged in the business of providing hotel related services in several countries around the world, including India. For this purpose, the assessee and group affiliates have entered into three separate agreements with Indian Hotels. The agreements are of the following nature: (a) Licence Agreement for grant of right to use trade name; (b) Operating Services Agreement; and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e has a vast knowledge and experience in the field of hotel business. Therefore, the experience acquired by the assessee is in the nature of information pertaining to industrial, commercial and scientific experience. He observed, Sheraton Group is renowned in the hotel industries all over the world and is the owner of many permanent brands, namely, Sheraton, Westin, Marriott etc. The group over the years has standardized many processes, designs, hotel layouts, room interiors, management etc. which have to be adhered to while providing services to licensee. He observed, though, the assessee and group affiliates has entered into separate agreements for provision of services, however, such services are provided as a package under one contract and licensee does not have any option to refuse to take certain kind of services from the Sheraton Group. He observed, practically, the various kinds of services provided by the assessee and group affiliates cannot be separated and are part of a package. Therefore, they should not be split up and analyzed separately only for the purpose of taxation. 3.4 Thus, ultimately, the Assessing Officer concluded that the amount received by the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of Sheraton International Inc. (supra) has not examined or dealt with the applicability of Article 12(4)(a) of the Treaty, the ratio laid down by Hon'ble Delhi High Court would not apply. Therefore, deviating from the finding of the Assessing Officer that the amount received towards centralized services is assessable under Article 12(4)(b), learned Commissioner (Appeals) held that the amount in dispute is assessable under Article 12(4)(a) of the Tax Treaty. While doing so, he also referred to Memorandum explaining Article 12(4)(a) of the Tax Treaty. Thus, ultimately, learned Commissioner (Appeals) concluded that the amount in dispute is taxable as FIS under Article 12(4)(a) of the Treaty. 4. Before us, Shri Tarandeep Singh, learned counsel for the assessee submitted, neither the Assessing Officer nor learned Commissioner (Appeals) have disputed that the issue has been decided in favour of the assessee not only by the Tribunal but also by the Hon'ble Jurisdictional High Court. However, no valid reason has been provided by them for not following the decision of the Hon'ble Jurisdictional High Court. To emphasize that the issue in dispute is squarely covered by the decision of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., publicity and sales promotion undertaken by the assessee. He submitted, for applying Article 12(4)(a) it is necessary that the services should be directly related to the application or enjoyment of the right, property and information as described in Article 12(3)(a) and (b) and the predominant purpose of the arrangement under which service fee is paid is the application or enjoyment of the right, property or information described in Article 12(3)(a)/(b). He submitted, the expression "ancillary and subsidiary" used in Article 12(4)(a) must be read with reference to the words "application or enjoyment of the right, property or information" for which royalty was paid. He submitted, in assessee's case, the amounts paid towards centralized services are not ancillary and subsidiary to the payment of license fee. Thus, the receipt cannot be treated FIS under Article 12(4)(a). He submitted, in the present case, learned Commissioner (Appeals) has presumed that the amount received by the assessee towards centralized services are for use of trade mark, however, the terms of the agreement make it clear that the payments are not for use of trade mark. Therefore, unless the services are ancill....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d stand in a different footing than assessment year 2009-10, wherein, the Tribunal and Hon'ble High Court has decided the issue in favour of the assessee. In support, he relied upon the following decisions: 1. Marriott International Inc. Vs. CIT, 2015-TII-08-ITAT-MUM-INTL 2. J.C. Bamford Excavators Ltd. Vs. DCIT, 2018-TII-276-ITAT-INTL 8. In rejoinder, learned counsel for the assessee submitted, learned Departmental Representative, at this stage, cannot change the factual position by arguing something which is not the case of either the Assessing Officer or Commissioner (Appeals). Further, he submitted, the decision rendered in case of Marriott International Inc. Vs. CIT (supra) cited by learned Departmental Representative being clearly distinguishable on facts would not be applicable. He submitted, in case of Marriott International Inc. (supra) there is a factual finding of the Tribunal that the entire arrangement is intended to split consideration for royalty and, therefore, consideration paid for services were nothing but a tax planning to lower the taxes. Further, the interlinkage between the agreements was established to hold that the royalty payments were....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces Under this category, assessee provides Network Support Services ("NSS") and Starwood Portal Services ("SPS") to provide connectivity of hotels to Technology Centre. While Network Support Services supports day to day operations of Wide Area Network (WAN), email and remote access. Starwood Hotel Service acts as a tool for knowledge sharing and access to business content. (e) Operation Services Under this category, guests are offered a number of ways to get access to key information on their stay experience, including in-room video, internet and paper. It is intended to maximize the independent collection of data and facilitate customer services and service complaint resolution. (f) Human Resources/Training Courses The assessee conducts training courses directed at various levels of hotel personnel to assist in employee development and to enhance guest satisfaction. 10. When the Assessing Officer intended to treat the amount received by the assessee towards centralized services as fee for included services under Article 12(4)(b) of the Tax Treaty, the assessee had relied upon the decision of the Sheraton International Inc. (supra) re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xed in India. It is the reasoning of learned Commissioner (Appeals) that since the services rendered by the assessee under Centralized Services Agreement is ancillary and subsidiary to the License Agreement for grant of right to use trade name, the amount received by the assessee in pursuance to Centralized Services Agreement has to be treated as FIS under Article 12(4)(a) of the Tax Treaty. 13. It is relevant to observe, identical issue relating to taxability of centralized service fee as FIS under Article 12(4) came up for consideration before the Coordinate Bench in case of Sheraton International Inc. (supra) in assessment years 1995-96, 1996-97, 1999-2000 and 2000-01. After analyzing the terms of Centralized Services Agreement, which is more or less identical to the agreement entered into by the present assessee, the Tribunal observed that the assessee is basically providing the Indian hotels services for publicity, marketing and reservation. The main purpose/intention of the association between the assessee and the Indian hotels was to promote the hotel business in their mutual business interest through worldwide publicity, marketing and advertisement. The various facilitie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts flow from the License Agreement. 17. For better appreciation, it is necessary to look into the provisions contained under Article 12(4)(a), which in turn, refers to Article 12(3) of the Tax Treaty. Article 12(3) of the Tax Treaty readS as under: "USA ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 1. .............. 2............... 3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) is received. 20. In the facts of the present appeal, undisputedly, the assessee is neither the owner of the trademark nor has received any payment as a consideration for the use of, or right to use of trademark in terms of Article 12(3)(a). The payment was received by the group affiliates under a distinct and separate license agreement. Whereas, the assessee provided centralized services relating to marketing, advertisement, promotion etc. under a distinct and separate agreement. So, when the assessee is not the owner of the property, there is no question of allowing a third party to use or right to use of the property. That being the case, the services for which payments are received cannot be considered to be ancillary and subsidiary to the application or enjoyment of the right of property or information for which royalty has been paid. Further, the MoU to India - USA Tax Treaty while explaining the import of Article 12(4)(a) has laid down the following parameters: "Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cribed in paragraph 3 [for this purpose, persons are considered related if their relationship is described in Article 9 (Associated Enterprises) or if the person providing the service is doing so in connection with an overall arrangement which includes the payer and recipient of the royalties]. To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a royalty payment under paragraph 3 is made, such services shall be considered "included services" only to the extent that they are described in paragraph 4(b)." 21. If one critically examines the determinative factors/parameters to qualify as FIS under Article 12(4)(a), it can be seen, most of the determinative factors/parameters do not apply to the centralized service fee received by the assessee. This is so, because, the services rendered by the assessee do not facilitate the use of trade name/trademark. Rather, as has been held by the Coordinate Bench in case of Sheraton International Inc. (supra) and affirmed by the Hon'ble Jurisdictional High Court, the predominant object is advertisement, marketing and promotion of the ho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....)(a) of the Tax Treaty. 23. The factual position, in a way, is quite similar in the present case. The aforesaid illustration to some extent can be made applicable to the facts of the present appeal. Even if one agrees with learned Commissioner (Appeals) that the License Agreement and Centralized Services Agreement are related to each other and the Centralized Services Agreement actually flows out of the License Agreement but still the issue which requires examination is, whether the Centralized Services Agreement is ancillary or subsidiary to the License Agreement. In our view, the answer to the aforesaid question would be in the negative. Clearly, predominant purpose of the Centralized Service Agreement and the overall arrangement between the parties is to provide advertisement, marketing and promotion of the hotel business. Even, the quantum of fees received under both the agreements would demonstrate the aforesaid fact. 24. As could be seen from the materials placed on record, as against the license fee of Rs.6,05,43,227/- received by the affiliates, the assessee has received centralized services fee of Rs.6,93,56,315/-. Therefore, the quantum of fee received by the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd decide the issues raised in these additional grounds also on merits. In support of the Revenue's case that the impugned amount received by the assessee from the Indian hotels/clients was in the nature of 'royalty' or 'fees for included services' as per the DTAA between India and America, reliance thus has been placed by it mainly on the provisions of Articles 12(3)(a) as well as 12(4)(r/) and 12(4)( b). Article 12(3){b) being specifically applicable only to payments received for the use of or the right to use of any equipment of industrial, commercial or scientific nature, in any case, is not applicable to the facts of the present case. It is, therefore, relevant to consider as to whether the payment received by the assessee from the Indian hotels/clients was in the nature of "royalties" or "fees for included services" within the meaning given in Article 12(3)(a), 12(4)(a) or 12(4){b) of the DTAA between India and USA or "fees for technical services" within the meaning given in Explanation 2 to section 9(1){vii). 73. In order to decide this issue relating to the applicability of Article 12(3)(a), 12(4)( a) or 12(4)(b) of the DTAA or the provisions of section 9(1)(vii) r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the services relating to advertising, publicity and sales promotion including reservations of the Indian hotels worldwide in mutual interest cannot be relied upon by picking and choosing the same in isolation so as to say that part of the consideration received by the assessee, as attributable to the said services, was in the nature of 'royalties' or 'fees for included services'. Such an approach adopted by the Revenue authorities, in our opinion, was neither permissible in law nor practicable in the facts of the case and the conclusion drawn by them on the basis of such approach to cover the said services taken individually or in isolation divorced from the main intention within the meaning of 'royalties' or 'technical services' as defined in Explanation 2 to section 9( 1)(v/) or to section 9(l)(v») and/or that of "royalties" or "fees for included services" as defined in Article 12(3) and 12(4) of the DTAA between India and USA was neither well-founded nor justified. 74. On the other hand, the pre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lable' and 'making use of' is that the mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience, skill etc. 77. As already observed, a close reading of the relevant agreements especially the payment clause, the predominant nature of the services rendered, the integrated arrangement between assesseecompany and Indian hotels/clients as well as the nature of relationship between them as reflected in the relevant agreements so also as understood by both the sides leaves no doubt that the entire consideration was paid by the Indian hotels/clients to the assesseecompany for the services rendered in relation to advertisement, publicity and sales promotion of the hotel business worldwi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....udicial pronouncements, it was held that the principle which emerges from the various decisions is that in a contract for manufacture, installation, sale or supply of goods, the element of services will always be present and where such services are inextricably linked with manufacture, installation, sale or supply, they cannot be evaluated for the purpose of FTS. It is only where services are separable and independent that the FTS will be assessable. In the present case, the services sought to be treated as 'fees for technical services' or 'fees for included services' were of ancillary or auxiliary in nature and being integral part of the job undertaken by the assessee-company, the same were neither independent of nor separable from the said job undertaken by the assessee in relation to publicity, advertisement and sales promotion of the hotel business worldwide. 79. Before us, the learned Special Counsel for the Revenue has referred to some of the Articles of the agreements between the assessee and the Indian hotels/clients to submit that the drawings, designs, documents, systems and other facilities agreed to be provided by the assessee to the Indian hotels/clients in te....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... between the parties as is evident from the relevant terms and conditions of the agreements and this is the way in which both the sides had apparently understood and acted upon such arrangement. It was thus neither desirable nor possible to apportion any portion of the consideration received by the assesseecompany from the Indian hotels/clients towards use of trademark, trade name etc. by the Indian hotels/clients. Having regard to all these facts and circumstances of the case borne out from the record including especially the relevant agreements between the parties, we find it difficult to accept the stand taken by the Revenue that the payments received by the assessee-company from the Indian hotels/clients in pursuance of the said agreements or any part was in the nature of royalties within the meaning of Article 12(3)(a). 81. As regards Article 12(3)(b) covering the payments received as consideration for the use of or the right to use any industrial, commercial or scientific equipment, we have already noted that neither the Revenue has invoked the provisions of this Article in the assessee's case nor the same otherwise also is applicable to the facts of the present case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rocesses has misrepresented certain facts. 25. Be that as it may, the fact on record reveal that the taxability of centralized services fee as FIS is a recurring issue between the assessee and the Revenue from the past years. It is relevant to observe, while deciding the issue in assessment year 2010-11, the Tribunal in ITA No.202/Del./2016, dated 28.09.2017, has held as under: "5. We have heard the ld. Authorized Representative of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 6. Ld. DR for the revenue relied upon the order of the AO. However, the ld. AR for the assessee relied upon the order passed by the ld. CIT (A). 7. For the sake of ready reference, the findings returned by the ld. CIT(A) allowing the appeal is reproduced as under "8. I have carefully considered the above submissions, and the contentions of the appellant. I have also perused the assessment order and the orders of the Hon'ble ITAT and the Hon'ble Delhi High Court for the A Vs. 1995-96 to 2000-2001 in the case of Sheraton International Inc ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stantial question of law arose out of the order of the Tribunal" 9. So, following the decision rendered by Hon'ble Delhi High Court in case of Director of Income-tax vs. Sheraton International Inc. (supra), we are of the considered view that the revenue received by the assessee for providing centralized services is not in the nature of Fee for Technical Services (FTS) u/s 9( I )(vi) Explanation 2, but it is a business income. Since the assessee is not having any PE in India, its business income earned is not taxable in India. under:- 10. So, in view of what has been discussed above, we find no illegality or perversity in the impugned order passed by the Id. CIT (A), hence present appeal filed by the Revenue is hereby dismissed." 26. The aforesaid decision was upheld by the Hon'ble Jurisdictional High Court while dismissing Revenue's Appeal. The same view was reiterated by the Tribunal while deciding assessee's appeal in assessment year 2011-12 in ITA No. 203/Del/2016, dated 18.12.2018. It is relevant to observe, the aforesaid decisions of the Coordinate Bench have been upheld by the Hon'ble Jurisdictional High Court while dismissing Revenue's appeals. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f no help to advance the case of the Revenue. 29. In view of the aforesaid, we direct the Assessing Officer to delete the addition. ITA No. 2012/Del/2019 for AY : 2015-16 ITA No. 2013/Del/2019 for AY : 2015-16 ITA No.2015/Del/2019 for AY : 2015-16 30. The factual position in these appeals are, more or less, identical to ITA No. 2011/Del/2019 decided in the earlier part of the order. Hence, our decision therein would apply mutatis mutandis to all these appeals. Accordingly, additions are deleted. ITA No.9265/Del/2019 for AY : 2016-17 ITA No.9689/Del/2019 for AY : 2016-17 31. The present appeals stand in a slightly different factual footing, as, in contrast to the other assesses, in the present case, the assessees have entered into a single agreement with the Indian hotel owners to operate hotels in India under their respective brand names. The agreements also provide for rendering of hotel related services by the assessees, such as, marketing, reservation and allied services. The assessees have received royalty/license fee for license to use the brand name which has been offered to tax in India. Insofar as, fee received for marketing, reservation and allied s....