2011 (5) TMI 577 - AT - Income Tax

DTAA - Fee for Included Services( FIS ) - License fees of trademark - ssessee maintains a separate fund wherein it receives the marketing and reservation contribution from the hotels worldwide (including hotels in India) - the identical issue of taxability of marketing and reservation contribution fees received by the assessee from the Indian hotels has already been considered by the Tribunal in assessee s own case in A.Y.1997-98 and the Tribunal vide order dated 12-5-2006 in ITA No. 4341/M/2002 held that marketing and reservation fees received by the assessee was with a corresponding obligation to use it for the agreed purposes and it was not an unfettered receipt in the hands of the assessee - Held that the marketing and reservation charges are not Royalty or FIS and they are in the nature of business income and since the assessee does not have a PE in India, the same are not taxable in India - Decided in the favour of assessee

Issues:
Taxability of marketing and reservation contribution received by the assessee from Indian hotel owners under Article 12(4) of the Indo-US Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

Issue 1: Taxability of Marketing and Reservation Contribution
The primary issue in this case is whether the marketing and reservation contribution received by the assessee from Indian hotel owners is considered "Fee for Included Services" (FIS) under Article 12(4) of the DTAA and therefore taxable in India. The assessee, a non-resident company incorporated in the USA, owns trademarks and service marks operating under the name 'Holiday Inn'. The Indian hotels, as per license agreements, pay fees to the assessee for using the trademark. Additionally, the assessee receives marketing and reservation contributions from hotels worldwide, including India, to cover common marketing expenses and provide centralized reservation facilities to franchisee hotels. The AO assessed the amount as Royalty, which was confirmed by the CIT(A), leading to the appeals before the Tribunal.

Issue 2: Nature of Marketing and Reservation Contributions
The assessee explained that marketing contributions are payments made by franchisee hotels towards common marketing expenses incurred by the assessee to promote its worldwide chain of hotels under the 'Holiday Inn' brand. These contributions ensure no duplication of expenses, maintain global standards, and eliminate the need for individual marketing efforts. The reservation system provides online centralized booking facilities for franchisee hotels and customers, increasing the customer base for all hotels under the 'Holiday Inn' chain. The assessee incurs costs to maintain and operate the reservation system, recovering them through reservation fees.

Issue 3: Legal Precedents and Tax Treatment
In the return of income, the assessee argued that marketing and reservation contributions are not chargeable to tax as they are not income but akin to expense reimbursements. The contributions do not involve the transfer of technical knowledge or processes. Additionally, without a Permanent Establishment in India, such contributions cannot be taxed as business profits. The Tribunal referred to previous decisions in the assessee's case, where it was held that such contributions were not unfettered receipts and were to be used for agreed purposes, not constituting income. The Tribunal also noted that without a PE in India, the contributions could not be taxed as business profits under the DTAA.

Conclusion:
After considering the arguments and precedents, the Tribunal held that the marketing and reservation charges are not Royalty or FIS but constitute business income. Since the assessee does not have a PE in India, the contributions are not taxable in India. Therefore, the appeals by the assessee were allowed, and the addition of the marketing and reservation charges as taxable income was deleted.

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