TaxTMI 
TaxTMI 
2023 (3) TMI 198
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....orated under the Laws of Singapore and a tax resident of Singapore. As stated, assessee is engaged in the business of rendering management consultancy and other related services to hotels. The assessee is the authorized licensee of the 'Shangri-La' brand and related intellectual property for India. The assessee had entered into three separate agreements with third party Indian hotels. The first agreement is for hotel management where the assessee provides management services from outside India to third party Indian hotels. The second agreement is Hotel Marketing and Reservation Services agreement. Under this agreement, the assessee acts as a marketing consultant on third party Indian hotels' profits, reservation, marketing and communication services from outside India with the object of attracting international business to the third party Indian hotels. The third agreement is Trade-mark Licensee Agreement under which the assessee, being the licensee of 'Shangri-La' brand, and trade mark and related intellectual property for India grants license for the use of intellectual property, trade mark, brand name etc. In the assessment years under dispute, the assessee earned revenue from t....
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....t the issue is covered by the decisions, cited by learned counsel for the assessee, however, he relied upon the observations of the Assessing Officer and learned Dispute Resolution Panel. 8. We have considered rival submissions and perused material on record. 9. As discussed earlier, under the Hotel Marketing and Reservation Services agreement, the assessee had the following receipts: Marketing receipts frequent guest program receipts, joint advertising co-ordination fund contribution and reservation fee. 10. The marketing receipts are for marketing and promotional services undertaken by the assessee for the promotion of Shangri - La hotel, including, third party Indian Hotels. The services include development of marketing plan and budget and marketing consultancy services rendered outside India. The expenditure incurring towards marketing and promotional activities are primarily aimed at public recognition, promotion of the hotels in source markets outside India to bring international business to Shangri - La Hotels across the world including India. The marketing receipts are utilized for common benefit of all hotels and are expended on general advertising, marke....
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....vel intermediary anywhere in the world to access the availability status, the room rates to make booking easily. Thus, as could be seen, the marketing and reservation activities performed by the assessee are not only distinct and different from the license fee but they are done under two distinct and separate agreements. Therefore, in our view, the marketing and reservation receipts cannot be treated to be ancillary and subsidiary to the license fee. Hence, such fee will not fall under Article 12(4)(a) of the treaty. Similarly, the nature of services rendered does not demonstrate that they are in the nature of managerial, technical or consultancy services. Even if, to some extent they may involve consultancy services, however, there is nothing on record to demonstrate that while rendering the services, the assessee had made available technical knowledge, experience, skill, know-how or processing etc. to bring it within the ambit of FTS under Article 12(4)(b) of the treaty. In any case of the matter, while deciding identical nature of dispute in any case of Starwood Hotels and Resorts Vs. ACIT (supra), the co-ordinate bench has held as under: "9. We have considered rival su....
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....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) rendered by the Tribunal and the decision of Hon'ble Delhi High court in DCIT Vs. Sheraton International Inc. (supra) to canvass that the issue is squarely covered by the decision of the Tribunal and High Court, hence, the amount received cannot be treated as FIS under Article 12(4)(b). It is quite evident, the Assessing Officer, though, accepted the fact that the decisions relied upon by the assessee are in its favour, however, following the decision taken in the past assessment years and also observing that the Revenue has preferred SLP before the Hon'ble Supreme Court against the decision of the Hon'ble High Court in case of Sheraton Hotel. (supra), the Assessing Officer concluded that the payment received is in the na....
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....f 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 facilities as well as services provided were merely the means to attain this main objective. The Tribunal observed, the main job undertaken by the assessee is promoting hotel business by worldwide publicity, marketing and advertisement and any other services provided are in the nature of ancillary and auxiliary to the main job. The Tribunal observed that the rationale behind providing the use of trade mark/trade name was not only going to help and assist the assessee in rendering its services relating to publicity, advertisement and business promotion of the Indian hotels, but such use was also going to help the assessee in advertising its other hotels worldwide and to promote their business as the Indian Hotel....
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....tion 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 than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8." 18. As could be seen from the opening sentence of the Article, it defines the term 'Royalty". It is quite obvious that the payment made by the Indian hotels to one of the group affiliates towards use of trademark has been treated as royalty and there is no dispute to the aforesaid factual position as the concerned group affiliates have offered the amount to tax as royalty. Article 12(4) of the Tax Treaty defines FIS as under: "USA ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 1. ..............
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.... 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 which a payment described in paragraph 3(a) or (b) is received. Thus, paragraph 4(a) includes a technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a licence or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). It is understood that, in order for a service fee to be considered "ancillary and subsidiary" to the application or enjoyment of some right, property, or infor....
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.... 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 hotels. The assessee does not provide such services in ordinary course of business arrangement involving royalty as described under Article 12(4)(a). The amount received by the assessee towards centralized services cannot be considered to be insubstantial and certainly not part of combined payment of services rendered and license fee. The payments for centralized services and royalty are not under a single contract and cannot be said to be related contracts. Thus, many of the determinative factors mentioned in the MoU to India-USA treaty are absent to constitute the centralized service fee as FIS under Article 12(4)(a). In this regard, the following ex....
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....rly, 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 assessee in no way makes it ancillary and subsidiary to the licence fee received by the group affiliates. Further, the observations of learned Commissioner (Appeals) that in case of Sheraton International Inc. (supra) neither the Tribunal nor the Hon'ble Jurisdictional High Court have examined the taxability of centralized services fee in the context of Article 12(4)(a) of the Tax Treaty, is totally incorrect and misleading statement. If one reads the decision of the Tribunal in case of Sheraton International Inc. (supra), it would be very much clear that before the Tribunal an additional ground was raised by the Revenue regarding applicability of....
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....t 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) read with Explanation 2 to the payment received or receivable by the assessee from the Indian hotels/clients in pursuance of the agreements entered into with them, it is necessary to appreciate the exact nature of services rendered by the assessee as is evident from the said agreements. In this regard, it is necessary to read the said agreements as a whole as held in the various judicial pronouncements discussed above so as to ascertain the exact nature of services as well as the relationship between the two parties. We have already done this exercise in the context of issue relating to applicability of section 9(1)(vi) read with Explanation ....
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....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 predominant object/purpose of the integrated business arrangement/between the assessee-company and its Indian clients/hotels as reflected in the relevant agreements so also as understood by both the sides was that of providing the services in relation to marketing, publicity and sales promotion and even the payments in question were entirely made by the Indian hotels/clients to the assessee-company for such services as expressly provided in the relevant agreements. 75. In the case of Dy. CAT v. Boston Consulting Group Pte Ltd. [2005] 94 ITD 3 1 (Mum.) the assessee was a foreign company receiving income by providing strategy consultanc....
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...., a close reading of the relevant agreements especially the payment clause, the predominant nature of the services rendered, the integrated arrangement between assessee-company 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 assessee-company for the services rendered in relation to advertisement, publicity and sales promotion of the hotel business worldwide and this being so as well as considering all the facts of the case including especially the fact that other services to be rendered by the assessee as enumerated in the various Articles of the relevant agreements were merely ancillary or auxiliary in nature being incidental to the integral job undertaken by the assessee to provide the services in relation to advertisement, publicity and sales promotion of the hotel business worldwide, it is very difficult to accept the stand of the Revenue that the amount so paid by the India hotels/clients to the assessee-company or any part thereof was paid for the use of a patent, invention, mode....
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....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 terms of the said Articles are the components which have been provided/supplied in the process of rendering of the services in relation to advertisement, marketing and sales promotion. He has contended that since the same come within the purview of one or the other clauses contained in Explanation 2 to section 9(1 )(vi) and (vii) as well as Article 12(3) and 12(4) of the DTAA between India and USA, the payment/consideration attributable to the same should be apportioned so as to bring the same to tax in India. In this regard, it is observed that a similar contention was raised before the Hon'ble Delhi High Court on behalf of the Revenue ....
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....he 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 since there was no such use or the right to use any industrial, commercial or scientific equipment. This takes us to Article 12(4)(a) of the DTAA which covers only the "payments made for rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received. As clarified and explained in the Memorandum of Understanding dated 1 5thi May, 1989, paragraph 4(a) of Article 12 thus includes technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an inta....
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.... 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 (group concern). The issue of taxability of the appellant's income from hotel related services provided to hotels in India, as royalty fees for technical services, stands squarely covered by f the judgment of the ITAT, Delhi in the case of Sheraton International Inc. at ITA Nos. 50 to 55/Del/2006 dated | 04.10.2006, It is also observed that the appeals of the Revenue have been dismissed by the Delhi High Court vide order dated 30.01.2009, therein the Hon'ble High Court held that the Tribunal had rightly concluded that the payments received were in the nature of business income, and not in nature of royal or fees ....
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....ty 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. Identical is the factual position in assessment year 2013-14, wherein, the Tribunal decided the issue in favour of the assessee in ITA No. 5144/Del/2016, dated 18.11.2019 and the Hon'ble Jurisdictional High Court has upheld the decision of the Tribunal. 27. Thus, keeping in view our detailed reasoning, hereinabove, and the ratio laid down in the binding judicial precedents rendered in assessee's own case as well as in case of group company, viz, Sheraton International Inc., cited before us, we have no hesitation in holding that the fee received by the assessee under the Centralized Services Agreement cannot be tre....
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....d Counsel for the Appellant states that the ITAT has erred in holding that the entire payments received by the Assessee from its Indian Customers on account of Centralized Services viz. sales and marketing, loyalty programs, reservation service, technological service, operational services and training programs/human resources do not constitute 'Fee for Technical Services' as defined under Section 9(l)(vii) of the Income Tax Act, 1961 or 'Fee for included services' as defined under Articles 12(4) (a) of the Indo- US DTAA. 3. He states that the ITAT has allowed the appeals of the Assessees following the judgement of this Court in Director of Income Tax v. Sheraton International Inc (2009) 178 taxman 84 (Del). He, however, states that the said decision of this Court has not been accepted by the Revenue and an appeal has been preferred against the same, which is pending adjudication before the Supreme Court. 4. The counsel for the Revenue has not brought anything on record to distinguish the facts of present case with the facts involved in Sheraton International Inc. (supra). 5. Admittedly, this Court in Sheraton International Inc. (supra) has decided the....