2019 (11) TMI 1675 - AT - Income Tax

Royalty receipt - Income taxable in India or not - existence of PE in India - centralised services fee received by the appellant from rendering various services such as sales and marketing, loyalty programs, reservation service, technological services, operational services and training programs etc to customers in India - fees for technical services amounted to royalty under Article 12 of India US DTAA - HELD THAT - Revenue does not dispute the fact of the Hon ble jurisdictional High Court in assessee s own case reported in Director of Income Tax vs. Sheraton International Inc 2009 (1) TMI 27 - DELHI HIGH COURT took the view that the payments for advertising, publicity and the sales promotion services rendered by the assessee, a company incorporated and tax resident in USA to Indian company, was advisement, publicity and sales promotion keeping in mind the mutual interests and in the context, the use of trademark, trade name etc. and other enumerated services referred to in the agreement with the assessee were incidental to main services and, therefore, the payments received were neither in the nature of royalty under section 9(1)(vi) of the Act, Explanation 2, nor in the nature of Fee for Technical Services (FTS) under section 9(1)(vii) of the Act, Explanation 2, but business income and assessee not having any PE in India such business income was not taxable in India. - Decided against revenue.

Summary

Issues:
1. Taxability of centralised services fee as "Fee for Technical Services" under section 9 of the Income Tax Act and India-US Double Taxation Avoidance Agreement.
2. Applicability of Permanent Establishment (PE) in India for tax liability.

Analysis:

Issue 1: Taxability of centralised services fee as "Fee for Technical Services"
The appeal challenged the order treating the centralised services fee received as Fee for Technical Services (FTS) and bringing it to tax. The Commissioner of Income Tax (Appeals) held that the payments were in the nature of business income, not royalty or FTS. Citing the decision in Director of Income Tax vs. Sheraton International Inc, it was established that payments for services like advertising, publicity, and sales promotion were not FTS or royalty, but business income. The absence of a Permanent Establishment (PE) in India further supported the non-taxability of such receipts. The Tribunal and High Court upheld this view consistently for previous assessment years, leading to the dismissal of the Revenue's appeal.

Issue 2: Applicability of Permanent Establishment (PE)
The absence of a PE in India was crucial in determining the tax liability of the centralised services fee. The consistent view taken by the Tribunal and High Court, based on past judgments, emphasized that since the assessee did not have a PE in India, its business income earned was not taxable in India. This aspect, along with the nature of services provided and the mutual interests involved, reinforced the conclusion that the centralised services fee did not fall under FTS or royalty categories for tax purposes.

In conclusion, the judgment highlighted the significance of the nature of services provided, the absence of a PE in India, and past legal precedents in determining the taxability of centralised services fee. The consistent interpretation of the law by the Tribunal and High Court, based on previous decisions, led to the dismissal of the Revenue's appeal, affirming that the centralised services fee was not taxable as FTS or royalty under the Income Tax Act and the Double Taxation Avoidance Agreement.