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2023 (6) TMI 344 - AT - Income TaxIncome deemed to accrue or arise in India - taxability or otherwise of the fee received from Indian franchise hotels towards centralized services as fees for technical services (FTS)/fees for included services (FIS) under Article 12(4)(a) of India-USA DTAA - Assessee is a non-resident corporate entities incorporated in USA in the business of operating, managing and franchising hotels and resorts in countries across the globe - HELD THAT - Revenue Authorities have treated the fees received from provision of centralised services as FTS/FIS under Article 12(4)(a) of India-USA treaty on the reasoning that the services rendered are ancillary and incidental to license to use brand name/trademark, resulting in royalty income. If we examine the relevant facts, it will be demonstrable that the income earned from centralised services far exceeds the royalty income. The centralised services income, by a reasonable measure, outstrips the royalty income. Thus, rather than centralised service income being ancillary and incidental to royalty income, in reality, it is a reverse situation. In such a scenario, it cannot be said that centralised service income, being ancillary and incidental to royalty income, would fall under Article 12(4)(a) of the Tax Treaty. We hold that the receipts from centralised service income are not taxable as FTS/FIS under Article 12(4)(a) of India-USA DTAA. Accordingly, we direct the AO to delete the additions.Appeal of assessee allowed.
Issues Involved:
1. Taxability of fees received from Indian franchise hotels for centralized services as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under Article 12(4)(a) of the India-USA Double Taxation Avoidance Agreement (DTAA). Summary: Issue 1: Taxability of Fees for Centralized Services The appeals were filed by two non-resident corporate entities from the USA, challenging the final assessment orders for the assessment years 2018-19 and 2019-20. The primary issue was whether the fees received from Indian franchise hotels for centralized services should be taxed as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under Article 12(4)(a) of the India-USA DTAA. The assessees had two types of income: (i) Royalty income for the license to use the brand name/trademark, and (ii) Fees for providing centralized services to maintain uniform hospitality standards. While the royalty income was offered to tax in India, the assessees claimed that the fees for centralized services were exempt from taxation in India, arguing that these fees were not in the nature of FIS. The Assessing Officer and the Dispute Resolution Panel (DRP) held that the fees for centralized services were ancillary and incidental to the use of the brand name/trademark and thus taxable under Article 12(4)(a) of the India-USA DTAA. However, the Tribunal found that the issue was covered by previous decisions, including the case of Sheraton International Inc. vs. DDIT, where it was held that receipts from centralized services were not in the nature of FTS/FIS. The Tribunal noted that the assessees provided services such as marketing, loyalty programs, reservation services, technological services, operational services, and training programs under separate agreements from the license agreements. The Tribunal concluded that these services were not ancillary and subsidiary to the license to use the brand name/trademark. The Tribunal emphasized that the predominant purpose of the centralized services was to promote the hotel business through worldwide publicity, marketing, and advertisement, which were not related to the use of the brand name/trademark. Thus, the centralized services fee could not be considered FIS under Article 12(4)(a) of the DTAA. The Tribunal also highlighted that the income from centralized services far exceeded the royalty income, further supporting the view that the centralized services were not ancillary and subsidiary to the royalty income. Conclusion: The Tribunal held that the receipts from centralized services were not taxable as FTS/FIS under Article 12(4)(a) of the India-USA DTAA and directed the Assessing Officer to delete the additions. The appeals were allowed in favor of the assessees.
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