2019 (8) TMI 1797 - AT - Income Tax

Income accrued or deemed to accrue in India - Treating the payment towards training programme as FTS - India- Netherland tax treaty - HELD THAT - As the assessee was not the owner of any brand or trademark for which any royalty would have been received by it under Article 12(4) of the India-Netherland tax treaty, hence the services provided to the Indian Hotels were in the ordinary course of its business, and could not be brought within the sweep of ancillary and subsidiary services as provided in Article 12(5)(a) of the India- Netherland tax treaty. We thus, are of a strong conviction that the CIT(A) loosing sight of the fact that as the assessee was not in receipt of any royalty as per Article 12(4) of the India-Netherland tax treaty, hence had failed to appreciate that the training services rendered by it could not have been held to be ancillary and subsidiary services under Article 12(5)(a). We thus, are of the view that the consideration received by the assessee for providing training services to the Indian Hotels could not be held as FTS under Article 12(5)(a) of the India- Netherland tax treaty. We are of the considered view that in terms of our aforesaid observations, as neither the training services rendered by the assessee to the Indian Hotels could be held to be technical services, nor the same could have been characterised as ancillary and subsidiary services as per Article 12(5)(a), hence the consideration received by the assessee for rendering the training services could not be held as FTS in its hands. As decided in own case 2018 (6) TMI 605 - ITAT MUMBAI we are of the view that the payments received programme cannot be treated as FTS as clearly held by the Tribunal, hence, the Ground No.1 2 7 of the appeal are allowed in favour of assessee. Treating the payment for providing access to computer system as Royalty in term of the Act and India-Netherlands tax treaty - AO concluded that for providing the right to use the system developed by assessee or its affiliates specifically for the Indian Hotels and also providing technical services for the maintenance and use of such system, which is ancillary and subsidiary to the application or enjoyment of the right to use the computer reservation system, which is covered under the provisions of Article 12(4) read with 12(5) (a) of India Netherlands Tax Treaty - HELD THAT - While using computer software, which is copyrighted article and there is no transfer of copyright or use of copyright itself particularly when there is no transfer of a patent, invention, model, design, secret formula or process or trade mark or similar property or imparting of any information concerning thereof. As decided in ow case for AY 2009-10 2018 (6) TMI 605 - ITAT MUMBAI as the access to CRS, Property Management System and Other Systems provided to the Indian Hotels by the assessee were common facilities provided to the members of the Marriott chain of hotels across the world by the assessee, and were not tailor made services to suit their specific requirements, thus the said facility could not be construed as technical services -as providing of access to CRS, Property Management Services and Other services could neither be held to be technical services, nor the same in terms of our aforesaid observations could have been characterised as ancillary and subsidiary services under Article 12(5)(a), hence the consideration received by the assessee for rendering the said services/facility could not be held as FTS in its hands. We thus, set aside the order of the CIT(A) holding that the consideration received by the assessee for providing of access to CRS, Property Management Services and Other Systems was chargeable as FTS in the hands of the assessee. - Decided in favour of assessee. Addition of surcharge on education, secondary higher education cess - assessee submits that India- Netherlands tax treaty prescribes a cap of 10% on rate of tax, which would prevail over provision of domestic income tax and thus, rate of tax cannot be enhanced to include surcharge or education cess or secondary and higher education cess - HELD THAT - This ground of appeal is also covered by the decision of Tribunal in assessee s own case for Assessment Year 2009-10 2018 (6) TMI 605 - ITAT MUMBAI the of rate of tax provided in the tax treaty cannot be enhanced by including surcharge and education cess separately, is covered by an order of a coordinate bench of the Tribunal in the case of Capgemini SA 2016 (7) TMI 712 - ITAT MUMBAI We thus, in terms of our aforesaid observations direct the A.O not to enhance the rate of tax provided in the tax treaty by including surcharge and education cess separately - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of amounts received under the Training and Computer Systems Agreement (TCSA) as 'fees for technical services' (FTS) or 'royalty' under the India-Netherlands tax treaty.
2. Consideration of training programs as 'technical or consultancy services.'
3. Classification of amounts received for providing access to centralized reservation facilities as 'royalty.'
4. Nature of transactions involving two different agreements with Marriott Group companies.
5. Allegations of splitting the royalty amount to reduce gross royalty.
6. Classification of amounts received under TCSA as business profits under Article 7 of the India-Netherlands tax treaty.
7. Applicability of surcharge and education cess under the double taxation avoidance agreement.
8. Additional grounds of appeal regarding the abatement of assessment proceedings.

Detailed Analysis:

1. Classification of Amounts Received Under TCSA as 'Fees for Technical Services' (FTS):
The Tribunal analyzed whether the amounts received for conducting core managerial training programs for managerial employees of Indian hotels qualify as 'fees for technical services' under Article 12(5)(a) of the India-Netherlands tax treaty. The Tribunal referred to its decision in the assessee’s own case for Assessment Year 2009-10, where it was held that the training services provided were in the nature of general managerial/leadership training and did not involve the transfer of technology. Therefore, the payments for these training programs could not be classified as FTS.

2. Consideration of Training Programs as 'Technical or Consultancy Services':
The Tribunal noted that the training services did not "make available" technical knowledge and were not ancillary and subsidiary to any royalty agreement. The Tribunal cited various judicial precedents to support the view that managerial/leadership training services do not qualify as 'technical or consultancy services' under the tax treaty. Consequently, the payments for these training programs could not be treated as FTS.

3. Classification of Amounts Received for Providing Access to Centralized Reservation Facilities as 'Royalty':
The Tribunal examined whether the amounts received for providing access to the reservation system, property management system, and other systems qualify as 'royalty' under Article 12(4) of the India-Netherlands tax treaty. The Tribunal referred to its earlier decision, where it was held that such services are standard facilities provided to the members of the Marriott chain of hotels and do not constitute 'technical services.' The Tribunal further noted that the payments could not be classified as 'software royalty' or 'brand royalty' since there was no transfer of copyright or use of the Marriott brand.

4. Nature of Transactions Involving Two Different Agreements with Marriott Group Companies:
The Tribunal addressed the issue of whether the existence of two different agreements with Marriott Group companies alters the nature of the transactions. The Tribunal concluded that the agreements were independent and did not change the nature of the transactions. The payments received under the TCSA were for standard services and could not be classified as 'royalty.'

5. Allegations of Splitting the Royalty Amount to Reduce Gross Royalty:
The Tribunal rejected the revenue's contention that the two different agreements were signed to reduce the gross royalty amount earned by the Marriott Group. The Tribunal found no evidence to support the allegation of splitting the royalty amount and concluded that the payments were for standard services provided under the TCSA.

6. Classification of Amounts Received Under TCSA as Business Profits:
The Tribunal held that the amounts received under the TCSA are in the nature of business profits as per Article 7 of the India-Netherlands tax treaty. Since the assessee did not have a permanent establishment in India as per Article 5 of the tax treaty, the payments could not be taxed in India.

7. Applicability of Surcharge and Education Cess:
The Tribunal addressed the issue of whether the surcharge and education cess should be added to the tax on income charged as per the double taxation avoidance agreement. The Tribunal referred to its earlier decision, where it was held that the tax rate provided in the tax treaty cannot be enhanced by including surcharge and education cess separately. Therefore, the Tribunal directed the Assessing Officer not to enhance the rate of tax by including surcharge and education cess.

8. Additional Grounds of Appeal Regarding Abatement of Assessment Proceedings:
The Tribunal considered the additional ground of appeal regarding the abatement of assessment proceedings due to the failure of the Assessing Officer to pass the order within the period of limitation. However, this ground was not pressed by the assessee and was dismissed.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for both Assessment Years 2011-12 and 2012-13, holding that the payments received under the TCSA could not be classified as 'fees for technical services' or 'royalty.' The Tribunal also directed the Assessing Officer not to include surcharge and education cess in the tax rate as per the double taxation avoidance agreement.