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2022 (7) TMI 781 - AT - Income TaxIncome accrued in India - whether the amount received by the assessee for various services, commonly known as centralized services, will fall within the ambit of FIS under Article 12(4)(a) of the Treaty? - HELD THAT - As Tribunal has examined the applicability of Article 12(4)(a) of the Treaty qua the payment received but has categorically held that it cannot be treated as FIS under Article 12(4)(a) of the Treaty. Undisputedly, the aforesaid observations of the Coordinate Bench have been upheld in case of DIT Vs. Sheraton International Inc 2009 (1) TMI 27 - DELHI HIGH COURT In view of the aforesaid, the observations 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, 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. As in assessee s own case as well as in case of group company, viz, Sheraton International Inc. we have no hesitation in holding that the fee received by the assessee under the Centralized Services Agreement cannot be treated as FIS either under Article 12(4)(a) or 12(4)(b) of the India US Tax Treaty. As a natural corollary, it can only be treated as business income of the assessee. Hence, in absence of a PE in India, it will not be taxable. For the sake of completeness, we must observe, in course of hearing, learned Departmental Representative has relied upon some judicial precedents to drive home the point that the payment received towards centralized services fee is in the nature of FIS under Article 12(4)(a) of the Treaty. In this context, we must observe, after carefully examining the decisions of the Coordinate Bench in case of Marriott Hotel 2015 (1) TMI 659 - ITAT MUMBAI we are of the view that it is clearly distinguishable on facts. On a reading of the decision, it is very much clear that after examining the agreements entered into with the Indian hotels, the Bench has recorded a finding of fact that the agreements are interrelated/interlinked in essence that they refer to each other. Further, the Bench has observed that for all practical purposes, the clients (Indian hotels) have construed all the agreements as a single agreement for the purpose to promote brand. Thus, in this factual context, the Bench has concluded that the assessee has split up the royalty received 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. 2019 (12) TMI 769 - ITAT DELHI 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. - Decided in favour of assessee. Royalty/license fee for license to use the brand name - departmental authorities have treated it as FIS under Article 12(4)(a) of the India US Tax Treaty - HELD THAT - Merely because the grant of license to use brand name and provision of centralized services are contained in a single agreement, it cannot be said that centralized services, which includes marketing, promotion, reservation and other allied services flow out of grant of license to make them ancillary and subsidiary to grant of license. Even, the quantum of service fee received if compared to the royalty income, would not make it ancillary and subsidiary so as to make it FIS under article 12(4(a) of the treaty. In our view, service fee received by the assessees would clearly fit in to the illustration given in example 2 of MoU to India-USA DTAA. Therefore, after in depth analysis of the relevant facts arising in these appeals, the agreement between the assessees and the Indian hotels and other materials on record, we are of the view that our reasoning given in case of Starwood Hotels Resorts Worldwide Inc.(above) in the earlier part of the order, would equally apply to these appeals, as well, as it cannot be said that the payment received towards centralized service fee is ancillary and subsidiary to the license fee. Accordingly, we delete the additions. - Decided in favour of assessee.
Issues Involved:
1. Taxability of the amount received towards centralized services fee from Indian hotels as Fee for Technical/Included Services (FTS/FIS). 2. Applicability of Article 12(4)(a) and 12(4)(b) of the India–US Double Taxation Avoidance Agreement (DTAA). 3. Whether the services provided under the Centralized Services Agreement are ancillary and subsidiary to the License Agreement for the use of the trade name. Detailed Analysis: 1. Taxability of the Amount Received Towards Centralized Services Fee: The core issue revolves around whether the amount received by the assessee under the Centralized Services Agreement for providing hotel-related services, such as worldwide publicity, marketing, advertisement services, etc., is taxable in India as Fee for Technical/Included Services (FTS/FIS). The assessee argued that these receipts are neither in the nature of royalty nor FTS/FIS under section 9(1)(vi) or 9(1)(vii) of the Act or under Article 12 of the India–US DTAA and claimed that the amount is business income not taxable in India due to the absence of a Permanent Establishment (PE). The Assessing Officer (AO) disagreed, concluding that the amount received for providing hotel-related services is in the nature of FTS under section 9(1)(vii) of the Act and under the India–US DTAA, hence taxable in India. The AO's decision was based on the nature of services being rendered and the standardized processes and designs that the Sheraton Group adheres to while providing services. 2. Applicability of Article 12(4)(a) and 12(4)(b) of the India–US DTAA: The Commissioner (Appeals) deviated from the AO's finding by concluding that the amount received under the Centralized Services Agreement is assessable under Article 12(4)(a) of the DTAA, rather than Article 12(4)(b). The Commissioner (Appeals) reasoned that the services provided under the Centralized Services Agreement are ancillary and subsidiary to the License Agreement for the use of the trade name, thus falling within Article 12(4)(a) and not requiring the "make available" clause under Article 12(4)(b). The assessee contested this conclusion, arguing that the services provided under the Centralized Services Agreement are distinct from the License Agreement and are not ancillary or subsidiary to the use of the trade name. The assessee emphasized that the predominant purpose of the Centralized Services Agreement is marketing, publicity, and advertisement, not the application or enjoyment of the right to use the trade name. 3. Relationship Between Centralized Services Agreement and License Agreement: The Tribunal analyzed whether the services provided under the Centralized Services Agreement are ancillary and subsidiary to the License Agreement. It was noted that the Tribunal in the case of Sheraton International Inc. had previously examined similar agreements and concluded that the services provided were primarily for marketing, publicity, and advertisement, and any use of the trade name was incidental to these services. The Tribunal observed that the services under the Centralized Services Agreement, such as sales and marketing, loyalty programs, reservation services, technological services, operational services, and training programs, are not directly related to the application or enjoyment of the right to use the trademark. Therefore, the payments received for these services cannot be considered as FIS under Article 12(4)(a) of the DTAA. Conclusion: The Tribunal concluded that the fee received by the assessee under the Centralized Services Agreement cannot be treated as FIS under Article 12(4)(a) or 12(4)(b) of the India–US DTAA. The services provided are primarily for marketing and promotion, not ancillary or subsidiary to the License Agreement. Consequently, the amount is considered business income, and in the absence of a PE in India, it is not taxable. The Tribunal directed the AO to delete the addition. Separate Judgments Delivered: The Tribunal's decision applied uniformly to all the appeals, including ITA No. 2011/Del/2019, ITA No. 2012/Del/2019, ITA No. 2013/Del/2019, ITA No. 2015/Del/2019, ITA No. 9265/Del/2019, and ITA No. 9689/Del/2019, with the factual positions being identical or similar across the cases.
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