TaxTMI 
TaxTMI 
2024 (1) TMI 490
X X X X Extracts X X X X
X X X X Extracts X X X X
....tated, assessee is subsidiary of Accor Asia SA, Belgium and acts as a franchisor and/or owner of participating hotels in the Asia Specific Region including India and has the license to use the brand name Accor and Novotel in the region. The assessee entered into franchise agreement with AAPC India Hotel Management Pvt. Ltd. (AAPC India) and Economic Hotels India Pvt. Ltd. (EHIS) to sub-license the brand names to third party hotels in India. The assessee has also sub licensed certain other Accor Intellectual Property Rights (IPR) to another group entity in India, namely, Accor Advantage Plus Marketing India Ltd. (Accor Advantage India) on a non-exclusive basis for the purpose of selling membership of loyalty program to customers in India. As observed by the Assessing Officer, though, assessee received certain income from its group entities in India, however, it did not file any return of income. Subsequently, the Assessing Officer reopened the assessment under Section 147 of the Act. In response to notice issued under Section 148 of the Act, assessee filed its return of income declaring income of Rs. 10,94,90,750. In the said return of income, assessee offered the amounts received t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom loyalty program, reservation fee, marketing fee and blackberry services cannot and should not be treated as royalty. He has also relied upon number of judicial precedents, as submitted in a separate compilation. Broadly, the propositions canvassed by the learned counsel appearing for the assessee are as under: * Receipts towards loyalty program, reservation fee, marketing fee and blackberry services are not for use or right to use any equipment, process, trade mark etc. * The receipts are not in the nature of FTS as the services rendered are not managerial, technical or consultancy services. * In support, the assessee has relied upon the following decisions: i) DIT vs. Sheraton International Inc. [2009] 178 Taxman 84 (PB 153); ii) CIT(International Taxation) vs. M/s. Starwood Hotels & Resorts Worldwide Inc. [2018] (ITA No.467/2018) and CM APPLN 15049/2018) (PB -504); iii) Starwood Hotels & Resorts Worldwide Inc. & Others vs. ACIT [2022] ITA No.2011/Del/2019 and others (PB -537); iv) Wealth Hotel Management LP [TS-875-HC 2022(DEL] (PB 509); v) CIT vs. ITC Hotels Ltd. [2015] (60 Taxmann.com 346) (PB 174) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cor group entity managing the loyalty program charges the assessee for the points issued by the participating hotels. Such amount is cross-charged by the assessee to AAPC India without any mark-up, which in turn invoices participating hotels. 9. In so far as central reservation services are concerned, through central reservation services the AAPC group provides the guests with a network to make room reservation at the hotels and to undertake other guest relationship activities. The participating Indian Hotels are allowed to update the features in Accor's Central Reservation System including charging rates, hotel descriptions etc. Indian Hotels are connected to the centralized reservation system through internet, wherein hotels are responsible for the purchase and installation of hardware, software and internet connections. The Central Reservation System is maintained outside India and the assessee has not deployed any server data, data centre, portable device or any other equipment in India in relation to the provision of the reservation services. The reservation fee is utilized towards the cost of rendering reservation services, for instance, maintenance needed to ensure that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....departmental authorities have attempted to rope in the receipts as royalty by treating it as ancillary and subsidiary to use or right to use the copy right, trademark/brand name etc., however, on examination of facts it is not found to be so. It is a fact on record that for use or right to use brand name/trade mark, the assessee has received separate consideration which has been offered to tax. Whereas, the receipts from loyalty program, marketing, reservation services, blackberry services etc. are purely for rendition of certain services and not for use or right to use of any copyright or trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. As there is nothing on record to suggest that the services rendered by the assessee have transferred any design or model or plan or secret formula or for any information concerning industrial, commercial or scientific experience. Therefore, in our view, the receipts cannot be treated as royalty under Article 12(3)(a) of the Tax Treaty. Similarly, the fee received cannot be treated as royalty under Article 12(3)(b) as there is no transfer of use or right to us....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing Guest Rooms and Meeting Space reservations for the Hotel through international computerized reservation systems. These services are rendered using internet/telephone. (d) Technological Services 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 inroom 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 towar....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nding (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. 16. 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 propert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tisfied 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 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 impo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 fac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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, 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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' ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) 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 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 assessee company and Indian hotels/clients as well as the nature of relationship between them as reflected ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 learne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 assessee-company 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....peals), 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....chnical 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 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 w....