2022 (10) TMI 108 - AT - Income Tax

Income accrued in India - Centralized services fee received by the appellant for rendering various marketing, advertisement other services to customers in India - whether taxable as Fees for Technical Services (FTS) in terms of Section 9 of the Income Tax Act, 1961 as well as Article 12 of the India US Double Taxation Avoidance Agreement (DTAA) - HELD THAT - As decided in own case 2019 (10) TMI 1447 - ITAT DELHI main service rendered by the assessee to its clients-hotels was advertisement, publicity and sales promotion keeping in mind their mutual interest and, in that context, the use of trademark, trade name or the stylized 'S' or other enumerated services referred to in the agreement with the assessee were incidental to the said main service, it rightly concluded, in our view, that the payments received were neither in the nature of royalty under section 9(1)(vi) read with Explanation 2 or in the nature of fee for technical services under section 9(1)(vii) read with Explanation 2 or taxable under article 12 of the D TAA. The payments received were thus, rightly held by the Tribunal, to be in the nature of business income. And since the assessee admittedly does not have a permanent establishment under the article 7 of the D TAA 'business income' received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. Appeal of assessee allowed.

Issues Involved:
1. Legality of the CIT(A)'s order.
2. Addition of Rs. 20,13,09,505 towards Centralized Services fees.
3. Classification of fees as ancillary to the license fee.
4. Application of Section 9(1)(i) of the Income Tax Act.
5. Attribution of profits to Indian operations.
6. Levy of interest under Sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Legality of the CIT(A)'s Order:
The assessee contended that the CIT(A)'s order was contrary to the facts, law, and the principle of Stare decisis, making it "bad in law." The tribunal agreed that the CIT(A) erred in distinguishing the decisions of the Hon'ble High Court and ITAT in the assessee's own case, violating principles of judicial discipline.

2. Addition of Rs. 20,13,09,505 towards Centralized Services Fees:
The CIT(A) upheld the addition made by the Assessing Officer (AO), treating the fees received for Sales & Marketing charges, Reservation charges, Loyalty programs, and other centralized services rendered outside India as taxable. However, the tribunal noted that this issue was already settled in favor of the assessee by previous ITAT and High Court decisions.

3. Classification of Fees as Ancillary to the License Fee:
The CIT(A) treated the fees received for centralized services as ancillary and subsidiary to the license fee. The tribunal referred to previous judgments which held that the main purpose of the agreement was to promote business through worldwide publicity, marketing, and advertisement, and not merely to use the trade mark, brand name, or stylized "S". Hence, these fees were not in the nature of royalty or fees for technical services.

4. Application of Section 9(1)(i) of the Income Tax Act:
The CIT(A) held that the income arose through a business connection in India under Section 9(1)(i) without giving the assessee a chance to present its case. The tribunal found this approach violated the principles of natural justice. The previous judgments clarified that the payments were business profits, not taxable under Article 12 of the DTAA, as the assessee did not have a permanent establishment in India.

5. Attribution of Profits to Indian Operations:
The CIT(A) arbitrarily attributed 50% of the profits to Indian operations, which the tribunal found unreasonable. According to the tribunal, only income reasonably attributable to operations carried out in India should be taxable. The tribunal reiterated that all operations of the assessee were carried out outside India, and thus, the CIT(A)'s attribution was incorrect.

6. Levy of Interest under Sections 234B and 234C:
The CIT(A) did not delete the interest levied under Sections 234B and 234C, treating it as consequential. The tribunal, following the settled issue by the High Court, decided in favor of the assessee, implying that the interest levied was not justified.

Conclusion:
The tribunal set aside the orders of the authorities below and decided the issues in favor of the assessee, applying the same rationale to appeals for AYs 2014-15 and 2015-16. All appeals filed by the assessee were allowed, following the judicial discipline and previous decisions by the Hon'ble High Court and ITAT. The order was pronounced in the open court on September 23, 2022.

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