2023 (3) TMI 198 - AT - Income Tax

Income deemed to accrue or arise in India - Fee For Technical Services (FTS) under Article 12 of the India-Singapore Double Taxation Avoidance Agreement (DTAA) and section 9(1)(vii) of the Act - addition of marketing receipts, frequent guest program receipts, general advertising, coordination fund contribution and reservation fees etc. - assessee is a non-resident corporate entity incorporated under the Laws of Singapore and a tax resident of Singapore - HELD THAT - From the nature of activities carried on by the assessee, it is found to be in the nature of centralized marketing and reservation related activities to have a wide geographical coverage and to improve the visibility amongst prospective customers. The centralized reservation allows a customer or a third party travel intermediary anywhere in the world to access the availability status, the room rates to make booking easily. Thus, as could be seen, the marketing and reservation activities performed by the assessee are not only distinct and different from the license fee but they are done under two distinct and separate agreements. Therefore, in our view, the marketing and reservation receipts cannot be treated to be ancillary and subsidiary to the license fee. Hence, such fee will not fall under Article 12(4)(a) of the treaty. Similarly, the nature of services rendered does not demonstrate that they are in the nature of managerial, technical or consultancy services. Even if, to some extent they may involve consultancy services, however, there is nothing on record to demonstrate that while rendering the services, the assessee had made available technical knowledge, experience, skill, know-how or processing etc. to bring it within the ambit of FTS under Article 12(4)(b) of the treaty. See Starwood Hotels and Resorts case 2022 (7) TMI 781 - ITAT DELHI , thus we direct the Assessing Officer to delete the additions in both the assessment years. Taxability of reimbursement of expenses as FTS both under the provisions of the Act as well as India-Singapore DTAA - As alleging that the assessee did not provide the break up of reimbursement and copy of bank statement the Assessing Officer treated the reimbursement of expenses as FTS - HELD THAT - As could be seen from the nature of services, these are routine services without involving any technical or strategic expertise or involvement of any advisory services. Further, these services are neither ancillary and subsidiary to royalty nor there is anything on record to demonstrate that while rendering such services, the assessee had made available any technical knowledge, know-how, skill etc. to the third party Indian hotels. It is further observed that the recipients are receiving such services on a continuous basis from year to year, which shows that the recipients are not capable of independently performing such services without the aid and assistance of the assessee. Thus, in our considered opinion, the reimbursement of cost received by the assessee, cannot be treated as FTS under Article 12(4) of the India-Singapore DTAA, at least, based on the facts involved in the impugned assessment years. Therefore, we direct the Assessing Officer to delete the additions. Short grant of TDS - HELD THAT - Having considered the submissions of the parties, we direct the Assessing Officer to factually verify assessee s claim and allow credit of TDS in accordance with law.

Summary

Issues Involved:
1. Addition of marketing receipts, frequent guest program receipts, general advertising, coordination fund contribution, and reservation fees as Fee For Technical Services (FTS) under Article 12 of the India-Singapore DTAA and Section 9(1)(vii) of the Income-Tax Act.
2. Taxability of reimbursement of expenses as FTS under the provisions of the Act and India-Singapore DTAA.
3. Short grant of TDS for assessment year 2019-20.

Detailed Analysis:

1. Addition of Marketing Receipts and Other Fees as FTS:
The primary issue in the appeals was whether the marketing receipts, frequent guest program receipts, general advertising, coordination fund contribution, and reservation fees should be classified as Fee For Technical Services (FTS) under Article 12 of the India-Singapore DTAA and Section 9(1)(vii) of the Income-Tax Act. The assessee, a non-resident corporate entity from Singapore, argued that these receipts were business receipts not taxable in India due to the absence of a Permanent Establishment (PE) in India. The Assessing Officer (AO) disagreed, treating these receipts as FTS, arguing they were ancillary to the trademark license agreement and thus taxable under Article 12(4)(a) of the DTAA.

The Tribunal examined the nature of the receipts and services provided, concluding that the marketing and reservation activities were distinct from the license fee and did not qualify as FTS under Article 12(4)(a) or 12(4)(b) of the DTAA. The Tribunal referenced the case of Sheraton International Inc., where similar services were deemed not to constitute FTS. The Tribunal emphasized that the services did not make available technical knowledge, experience, skill, or know-how, which is a requirement under Article 12(4)(b).

The Tribunal also rejected the AO's argument that the centralized services agreement was ancillary to the license agreement. They concluded that the predominant purpose of the centralized services was to provide advertisement, marketing, and promotion of the hotel business, which was not ancillary to the license agreement. The Tribunal directed the AO to delete the addition, reaffirming that the receipts were business income not taxable in India due to the absence of a PE.

2. Taxability of Reimbursement of Expenses as FTS:
The second issue involved the taxability of reimbursement of expenses as FTS. The AO treated these reimbursements as FTS due to the lack of detailed breakup and supporting documents. The Tribunal found that the reimbursements were for routine services like courier charges, media monitoring, email campaigns, and translation services, which did not involve technical or strategic expertise. These services were neither ancillary to royalty nor did they make available technical knowledge or skill. The Tribunal directed the AO to delete the additions, concluding that the reimbursements could not be treated as FTS under Article 12(4) of the DTAA.

3. Short Grant of TDS for Assessment Year 2019-20:
The final issue was the short grant of TDS for the assessment year 2019-20. The Tribunal directed the AO to verify the assessee's claim and allow the credit of TDS in accordance with the law.

Conclusion:
The Tribunal ruled in favor of the assessee on all major issues, directing the AO to delete the additions related to marketing receipts and reimbursements, and to verify and grant the correct TDS credit for the assessment year 2019-20. The Tribunal's decisions were heavily influenced by precedents, particularly the case of Sheraton International Inc., and the interpretation of the DTAA provisions.