TaxTMI 
TaxTMI 
2024 (2) TMI 830
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....e to add, amend, modify or alter any grounds of appeal at the time of or before the hearing of the appeal." 3. Briefly stated the assessee is a company incorporated in USA and it carries on the business of providing various hotel related services in several countries across the world. The assessee is a tax resident of USA in terms of the provisions of Double Taxation Avoidance Agreement between India and USA ("India-USA DTAA"). The assessee has entered into agreements with various Indian hotel owners for providing worldwide marketing, advertising and other services to the hotels covered by the agreement through its worldwide system of sales, advertising, promotion, public relations and reservations, in the usual course of its business to some hotels owned/managed by the Indian companies. All such services are provided from outside India. For AY 2021-22 the assessee filed its return of income on 12.03.2022 declaring income of Rs. 16,35,190/- and claimed a refund of Rs. 1,52,17,620/- on account of TDS. Revenues receiving from various hotel owners for providing various Centralized Services outside India were claimed to be "not taxable" in India both under provisions of section 9 of....
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....imed to be non-taxable in India under Provisions of section & of Income Tax Act 1961, as well as Article 12 of India-USA DIAA. 5.3 The AO had finally completed assessment at an income of Rs. 5, 19.90,763 after treating the centralised fees including loyalty program, reservation fees and sales in marketing fees. technological service, operation services, training program, human resource fees of 374.83.411 as taxable. 5.4 in support of lax position, the appellant has placed reliance on specific provisions of the Act, specific provisions of India USA DTAA and principle laid down by various judicial precedents, including judicial Delhi Tribunal and Delhi High Court Decisions in case of group entities of the appellant rendering similar services namely Sheraton International Inc and Starwood Hotels and Resorts Worldwide inc. The AO disregarding the detailed factual and legal submissions made by the appellant has held that the said amount were taxable as FTS/FIS in terms of Article 12 of the DTAA as well as under the Act. 5.5 The issues raised by the AO in the assessment proceedings is based on similar facts and circumstances which have been decided in favour of....
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....ouble Taxation Avoidance Agreement. 3. The Tribunal in the impugned order relied upon a decision of this Court in Director of Income Tax v. Sheraton International Inc (2009) 178 taxman 84 (Del) which answers the question in favour of Assessee and against the Revenue." 5.3 The issues raised by the appellant company has been decided by the Hon ble ITAT vide its order dated 29-04-2022 in ITA No. 2012/DEL/2019 in the case of appellant's own case wherein the Hon'ble ITAT has reversed the order passed by my predecessor for the A.Y 2015-2016. Relevant extract of the order of Hon'ble ITAT are as under: 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 favo....
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....e Assessing Officer to delete the addition. 5.4 The above order of Hon'ble ITAT has been affirmed by the Hon'ble Delly on Court in ITA No: 435/2022 vide its order dated 04-11-2022 wherein the appeal filed by the revenue has been dismissed. Relevant extract of the order of Hon'ble High Court ore as under: "1. Present Income Tax Appeals have been Med challenging the common order dated 29th April, 2022 passed by the income Tax Appellate Tribunal (TAT) in ITA. No. 2013/Del./2019 for Assessment Year ('AY') 2015-16 and ITA No. 2012/Del /2019 for AY 2015-16. 2. Learned Counsel for the Appellant states that the ITAT has erred in holding that the entire payments received by the Assessee from the 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(1) (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 As....
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.... 5.6 Thus, following the orders of higher judicial authorities, the action of the assessing officer in bringing to tax the business receipts of the appellant in India is not acceptable." 4. Aggrieved, the Revenue is in appeal before the Tribunal. 5. At the outset, the Ld. AR submitted that the impugned issue has been squarely covered by the order(s) of the Tribunal for previous AYs and Hon'ble Delhi High Court in assessee's own case for AY 2015-16 and in the case of assessee's group company. The Ld. CIT(DR) fairly conceded to the submissions of the Ld. AR. 6. We have heard the Ld. Representative of the parties and perused the records. We find that the impugned issue has been dealt in detail by the Ld. CIT(A) who has duly taken a note of the fact that the impugned issue of taxability of the assessee's income from hotel related services provided to various hotels in India as royalty/FTS stands squarely covered by the decision of the Hon'ble Delhi High Court in assessee's own case as well as its group company wherein the Hon'ble Delhi High Court has held that payment received by the assessee were in the nature of business income which is not taxable in the absence of....
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.... of fee for enjoying the program. (c) Distribution of Reservation Services The assessee provides reservation services, such as, offering, booking, modifying and communicating 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 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 course....
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....ee 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 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 ....
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....d 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 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, desig....
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....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 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 subsidiar....
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....;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 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 ....
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....ng 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, 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 over....
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.... 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 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....
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....ade 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 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 dra....
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....nology, 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 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 cla....
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.... 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 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 indep....
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....y 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 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/cli....
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.... 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 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, t....
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....sessee 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 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 ....
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.... into different segments. However, in the appeals before us, there are no such findings by the departmental authorities which can demonstrate that for all practical purposes the License Fee Agreement and Centralized Services Agreement are to be construed as one agreement and has been so understood by the Indian clients. The case of JC Bamford Excavators Ltd. (supra) is also factually distinguishable. Therefore, in our considered opinion, the decisions cited by learned Departmental Representative would be of no help to advance the case of the Revenue. 29. In view of the aforesaid, we direct the Assessing Officer to delete the addition." 6. Notably, the aforesaid decision of the Coordinate Bench has been affirmed by the Hon'ble Jurisdictional High Court while deciding Revenue's appeal in judgment dated 4th November, 2022 in ITA 435/2022. The observations of the Hon'ble Delhi High Court in the judgment are as under: "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) ....