TaxTMI 
TaxTMI 
2023 (12) TMI 90
X X X X Extracts X X X X
X X X X Extracts X X X X
....circumstances of the case and in law, the Ld. AO and the Hon'ble DRP have erred in treating the amount received by the Appellant from InterContinental Hotels Group (India) Pvt. Ltd. (THG India') towards provision of Management Support Service to be in the nature of Fee for Technical Services ('FTS') under Article 12 of India-Singapore Double Taxation Avoidance Agreement ('DTAA'/'Treaty'). 1.3 That on the facts and in the circumstances of the case and in law, the Ld. AO and the Hon'ble DRP have erred in holding that the consideration against Management Support Service received by the Appellant from IHG India is taxable as FTS under Article 12(4)(a) of India-Singapore Treaty. 1.4 That on the facts and in the circumstances of the case and in law, the Ld. AO and the Hon'ble DRP have erred in holding that the consideration received by the Appellant from IHG India against rendition of Management Support Service is 'ancillary and subsidiary' to the license fee received by it from the Indian Hotels for granting them right to use the brands, which were beneficially held by the Appellant. 1.5 That on the facts and in the circumstances of the case and in law, the Ld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....els in accordance with brand standards, maintaining the qualification available with regard to the international hotel business and its management techniques and Coordinating the managerial plan and actions, advising local general CMH Hotel management on trends and changes in the hotel business in general and provide advice on the production of operating and capital budgets at the level of the CMH Hotels, which are consistent with the strategic plan can at best be the managerial consultancy service but not the services made available so that the recipient can use or replicate the such services received from the assessee." ITA No. 2986 & 4608/Del/2019 15. Thus, we have to examine whether the services rendered by the assessee under Management Support Service Agreement are ancillary and subsidiary to the license granted for user of brand name, charges received from which are in the nature of royalty. For this purpose, first, we have to see Article 12(4)(a) of the treaty, which reads as under: (a) "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." ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ated 29.04.2022 in the context of the applicability of Article 12(4)(a) of the DTAA. 18. Having carefully perused the aforesaid decision, we find, while dealing with an identical issue, the Bench has held as under: "12. Therefore, the only issue which arises for our consideration is, whether the amount received by the assessee for various services, commonly known as centralized services, will fall within the ambit of FIS under Article 12(4)(a) of the Treaty. For holding the payment received by the assessee to be in the nature of FIS under Article 12(4)(a), learned Commissioner (Appeals) has attempted to link the Centralized Services Agreement entered into by the assessee with License Agreement entered into by the Indian Hotels with group affiliates for grant of right to use trade name. It is a fact on record, under License Agreement for grant of right to use trade name, the Indian hotels have paid license fee to the affiliates. The affiliates have also offered such license fee as royalty income. There is no dispute that the license fee paid to the affiliates have been taxed in India. It is the reasoning of learned Commissioner (Appeals) that since the services ren....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reasons: (i) Centralized Services Agreement is actually a subsidiary and ancillary agreement of the license agreement. (ii) Primary agreement which enables and sets off of the business of the franchisee is the License Agreement for which license fee is paid and such license fee is taxable as royalty advance of the affiliates which receives the license fee. (iii) There is no need for satisfying 'the make available' clause under Article 12(4)(a) of the Treaty. In case of Sheraton International Inc. neither the Tribunal nor the Hon'ble Jurisdictional High Court to examine the implication and applicability of Article 12(4)(a) of the Tax Treaty. 15. Learned Commissioner (Appeals) has observed that the five determinative factors for classification of the consideration received as FIS under of paragraph 12(4)(a) of the treaty, as, explained in the Memorandum of Understanding (MoU) to India- US Treaty are clearly satisfied, as, the predominant factor in relation to the clients is the grant of license to use the name, which gave rise to royalty and all other payments and agreements flow from the License Agreement. 17. For better appreciation, it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xperience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." 19. As discussed earlier, even learned Commissioner (Appeals) does not dispute the fact that Article 12(4)(b) would not apply to the centralized fee received by the assessee as the 'make available' condition is not satisfied. Therefore, to overcome this deficiency, learned Commissioner (Appeal) has made an attempt to invoke the provision of Article 12(4)(a) of the Treaty. A reading of Article 12(4)(a) would make it clear that the payment received for rendering any technical or consultancy services would come within the ambit of FIS, if such services are ancillary and subsidiary to the application and enjoyment of the right, property or information for which the payment described in Article 12(3) is received. So, the conditions to be satisfied to be regarded as FIS under Article 12(4)(a) are, services for which the payment was received must be ancillary and subsidiary to the application or enjoyment of the right, property or information for which the payment in the nature of royalty under Article 12(3) is received. 20. In the facts of the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the clearly predominant purpose of the arrangement is such application or Payment must be determined by reference to the facts and circumstances of each case. Facts which may be relevant to such determination (although not necessarily controlling) include: 1. The extent to 'which the services in question facilitate the effective application or enjoyment of the right, property, or information described in paragraph 3; 2. The extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3 ; 3. Whether the amount paid for the services (or which would be paid by parties operating at arm's length) is an insubstantial portion of the combined payments for the services and the right, property, or information described in paragraph 3; 4. Whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract (or a set of related contracts); and 5. Whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 [for this purpose, persons are....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company leases the Indian company a piece of equipment which allows the Indian company to measure the level of bacterial deposits on its machinery in order for it to known when cleaning is required. Are the payments for the services fees for included services? Analysis: In this example, the provision of cleaning services by the U.S. company and the rental of the monitoring equipment are related to each other. However, the clearly predominant purpose of the arrangement is the provision of cleaning services. Thus, although the cleaning services might be considered technical services, they are not "ancillary and subsidiary" to the rental of the monitoring equipment. Accordingly, the cleaning services are not "included services" within the meaning of paragraph 4(a). 22. As could be seen from the aforesaid illustration, though, both the services are interlinked, however, the predominant purpose of the arrangement is provision of cleaning services, hence, will not be ancillary or subsidiary to the rental of monitoring machine. Hence, the cleaning services are not to be regarded as FIS under Article 12(4)(a) of the Tax Treaty. 23. The factual position,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d Article 12(3)(a). At the time of hearing before us, the learned Special Counsel for the Revenue Shri Y.K. Kapur has sought to rely, by way of raising the additional grounds in the appeals filed by the Revenue, Article 12(4)(a) to support the Revenue's case that the amount in question being in the nature of 'fees for included services' was liable to tax in India also. The learned counsel for the assessee has raised a strong objection for admission of these additional grounds stating that neither the Assessing Officer nor the learned CIT(A) having applied Article 12(4)(a) of the DTAA in their orders passed in the assessee's case, the Revenue cannot rely on the said Articles to support its case at this stage during the course of appellate proceedings before the Tribunal. Keeping in view that the issues sought to be raised by the Revenue in these additional grounds are purely legal and all the facts relevant to consider and adjudicate the same are on record, we. however, find no merits in the objection raised by the learned, counsel for the assessee and admitting the additional grounds raised by the Revenue, we now proceed to consider and decide the issues raised in these additio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....various Articles of the agreements to be rendered by the assessee- company were merely ancillary or auxiliary to this main objective/intention. This precisely was the sum and substance of the agreement if the same is read as a whole and thus, it was a case in which the assessee company had undertaken to provide services in connection with advertising, publicity and sales promotion including reservations for the Indian hotels/clients. Even the payment was entirely made as expressly stipulated in the agreement for these services and this is the way in which the entire arrangement was not only made but was also understood by both the sides. Even the use of trademark, trade names etc. of the assessee-company by the Indian hotel /clients was an integral part of this arrangement and such use was allowed at no cost as expressly provided in the relevant agreements. Moreover the rationale behind providing such use at no cost has been explained on behalf of the assessee which is found to be satisfactory by us for the detailed reasons given in the foregoing portion of this order. Having regard to all these aspects, we have come to a conclusion that the various services rendered by the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Indo-American DTAA as well as that of India-Singapore DTAA. It was held by the Tribunal that the nature of services being rendered by the assessee company such as business strategy, marketing and sales strategy etc. were materially different and they were not of technical in nature which would enable the person acquiring the services to apply the technology contained therein. Explaining further, it was also observed by the Tribunal that so far as the provisions of India-Singapore DTAA as well as the provisions of Indo-American DTAA are concerned, payments for services which are non-technical in nature or, in other words, payment for services not containing any technology, are required to be treated as outside the scope of 'fees for technical services'. It was further held by the Tribunal that the scope of 'fees for technical services' under Article 12(4)(b ) does not cover consultancy services unless these services are technical in nature. 76. In the case of Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791. Mumbai Bench of ITAT held that the normal, plain and grammatical meaning of the language employed using the expressions 'making available' and 'making use of' is that the mer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the assessee to enable it to execute the job undertaken by it to render services in relation to advertisement, marketing and sales promotion of hotel business worldwide and such supply was merely incidental to the performance of integrated business arrangement which included mainly rendering services in relation to advertisement, publicity and sales promotion of hotel business. The payment made by the Indian hotels/clients to the assessee-company on account of such job or any part thereof, therefore, cannot be attributed to the use of a patent, invention, model, design, secret formula or process or trademark or similar property or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. The decision of Hon'ble Madras High Court in the case of Nayveli Lignite Corpn. Ltd. (supra) and that of Hon'ble Andhra Pradesh High Court in the case of Klayman Porcelains Ltd. (supra) fully support this view. Even the decision of Authority for Advance Ruling in the case of Rotem Co. In re |2005| 279 1TR 165 ^ (AAR - New Delhi) is to the similar effect wherein after discussing the various judicial pronouncements, it was held that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pursuance of the relevant agreements expressly for rendering the services in relation to advertisement, publicity and sales promotion and it was neither possible nor practicable nor permissible to apportion the said consideration as sought to be done by the Revenue authorities. 80. As regards the applicability of Article 12(3)(a) of the DTAA, we have already held that its trademark, trade name etc. were made available by the assessee company to the Indian hotels/clients as an integral part of the business arrangement between them and the same, therefore, was merely incidental to carry out the job of advertisement, publicity and sales promotion undertaken by the assessee-company. Moreover, the said use was allowed for mutual benefit and the exact benefits derived by the assessee- company from such use have already been discussed by us. As expressly provided in the relevant agreements, it was agreed that no cost is to be paid by the Indian hotels/clients to the assessee-company for such use and the entire payment/consideration was on account of the services rendered in relation to advertisement, publicity etc. This was the arrangement between the parties as is evident from t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be applied to cover any of the services rendered by the assessee company to the Indian hotels/clients in the present case." 24. Thus, on a reading of the aforesaid observations of the Coordinate Bench, it becomes very much clear that not only the Tribunal has examined the applicability of Article 12(4)(a) of the Treaty qua the payment received but has categorically held that it cannot be treated as FIS under Article 12(4)(a) of the Treaty. Undisputedly, the aforesaid observations of the Coordinate Bench have been upheld by the Hon'ble Jurisdictional High Court in case of DIT Vs. Sheraton International Inc (supra). In view of the aforesaid, the observations of learned Commissioner (Appeals) that the applicability of Article 12(4)(a) was never examined has to be rejected at the threshold. In fact, we are constrained to observe, learned Commissioner (Appeals), being conscious of the fact that the centralized service fee received by the assessee cannot be treated as FIS under Article 12(4)(b) due to failure of 'make available' condition, has made an unsuccessful attempt to bring it within the ambit of Article 12(4)(a) of the Treaty and in the processes has misrepresented certa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has also been set at rest by the Hon'ble Delhi High Court in case cited as Director of Income-tax vs. Sheraton International Inc. - (2009) 313 ITR 267 (Del.) as under: "Double taxation relief-Agreement between India and USA Payment for advertising, publicity and sales promotion services-Tribunal found as a final fact finding authority that main services rendered by assessee, a company incorporated and tax resident in USA, to Indian company, was advertisement, publicity and sales promotion keeping in mind their mutual interests and in that context, the use of trademark, trade name etc, and other enumerated services referred to in the agreement with the assessee were incidental to main service- Tribunal thus rightly concluded that the payments received were neither in the nature of royalty under s. 9(l)(vi), Expln. 2 not in the nature of fee for technical services under s. 9(1) (vii), Expln. 2, but business income and assessee not having any PE in India such business income was not taxable in India- j There was nothing on record to show that the agreement was a colourable device- Such findings of fact having not been challenged as perverse, no substantial question of law....