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2024 (4) TMI 1250 - HC - Income TaxIncome deemed to accrue or arise in India - payments received by the Assessee from its Indian Customers on account of Centralized Services viz. sales and marketing loyalty programs reservation service technological service operational services and training programs/human resources - Fee for Technical Services as defined under section 9(1)(vii) of the Income Tax Act 1961 or Fee for included services as defined under Articles 12(4) (a) of the Indo US DTAA - HELD THAT - Undisputedly and on going through the records we find that the question which stands posited would have to be answered against the appellant bearing in mind the judgment rendered by the Court in Director of Income-tax vs. Sheraton International Inc 2009 (1) TMI 27 - DELHI HIGH COURT held 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 DTAA. 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 DTAA business income received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. Decided in favour of assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal question considered by the Court was whether the Income Tax Appellate Tribunal (ITAT) erred in law by holding that the entire payments received by the Assessee from its Indian customers for centralized services-namely sales and marketing, loyalty programs, reservation service, technological service, operational services, and training programs/human resources-did not constitute "Fee for Technical Services" as defined under section 9(1)(vii) of the Income Tax Act, 1961, or "Fee for Included Services" as defined under Article 12(4)(a) of the Indo-US Double Taxation Avoidance Agreement (DTAA). 2. ISSUE-WISE DETAILED ANALYSIS Issue: Whether payments received for centralized services qualify as Fee for Technical Services (FTS) under domestic law and DTAA, thereby attracting tax liability in India. Relevant legal framework and precedents: The Court primarily relied on the Income Tax Act, 1961 (Section 9(1)(vii)) defining Fee for Technical Services, and the Indo-US DTAA Article 12(4)(a) concerning Fee for Included Services. The pivotal precedent considered was the judgment in Director of Income-tax vs. Sheraton International Inc., where the Delhi High Court had examined a similar question regarding the nature of payments received for services rendered. Court's interpretation and reasoning: In Sheraton International, the Tribunal had found that the main service rendered was advertisement, publicity, and sales promotion, with the use of trademark or brand name being incidental. Consequently, the payments were held not to be royalty or FTS under the Income Tax Act or DTAA but rather business income. The Court upheld this view, emphasizing that the payments were not for the use of technical knowledge or expertise as contemplated under the definition of FTS. The Court further noted that the assessee did not have a permanent establishment in India under Article 7 of the DTAA, thus business income could not be taxed in India. Key evidence and findings: The Tribunal's factual findings indicated no evidence that the agreement was a colorable device to disguise payments for trademark or brand use as service fees. The services rendered were primarily promotional and operational, not technical services that would attract FTS classification. Application of law to facts: Applying the legal definitions and the factual matrix, the Court concluded that the payments did not fall within the scope of FTS or royalty. Since the payments were business income without a permanent establishment in India, they were not taxable in India under the DTAA. Treatment of competing arguments: The appellant contended that the payments constituted FTS under the Income Tax Act and DTAA, thereby attracting tax liability. The Court rejected this, relying on the Sheraton International precedent and the absence of any evidence to challenge the factual findings of the Tribunal. The Court emphasized the principle that appellate courts must respect Tribunal's factual findings unless shown to be perverse. Conclusions: The Court found no error in the ITAT's conclusion that the payments were not FTS. No substantial question of law arose warranting interference. The appeal was accordingly dismissed. 3. SIGNIFICANT HOLDINGS The Court preserved the following crucial legal reasoning verbatim from Sheraton International: "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 DTAA. 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 DTAA 'business income' received by the assessee cannot be brought to tax in India." Further, the Court reiterated the principle from K. Ravindranathan Nair vs CIT that factual findings of the Tribunal are final and can only be challenged if shown to be perverse: "A decision on fact of the Tribunal can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal on facts is perverse, in the sense that it is such as could not reasonably have been arrived at on the material placed before the Tribunal." Core principles established include:
Final determination on the issue was that the ITAT did not err in law in holding that the payments received were not Fee for Technical Services and thus not taxable in India. The appeal was dismissed accordingly.
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