2025 (4) TMI 1087 - HC - Income Tax

Income deemed to accrue or arise in India - amounts paid by the Indian hotels for marketing contribution and reservation fees - Royalty or Fees for Included Services - addition u/s 9 (1) (vii) of the Act as well as under Article 12 (4) (a) and Article 12 (4) (b) of the DTAA - HELD THAT - Admittedly the said issue is covered in favour of the Assessee and against the Revenue by several decisions of this court including Sheraton International Inc. 2009 (1) TMI 27 - DELHI HIGH COURT Sheraton International LLC 2023 (5) TMI 1435 - DELHI HIGH COURT Westin Hotel Management 2024 (4) TMI 1250 - DELHI HIGH COURT and Shangri-La International Hotel Management Pte Ltd. 2023 (9) TMI 1683 - DELHI HIGH COURT In the case of Radisson Hotel International Incorporated 2022 (11) TMI 641 - DELHI HIGH COURT this court had referred to the earlier decisions and dismissed the case holding that no substantial questions of law arise for consideration by this court. The present appeal must bear the same fate. No substantial questions of law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the amounts received by the Assessee from Indian hotels towards marketing contribution, priority club receipts, reservation contribution, and Holidex fees constitute "Royalty" or "Fees for Included Services" (FIS) under the Income Tax Act, 1961 (the Act) and the India-USA Double Taxation Avoidance Agreement (DTAA);

(b) Whether the marketing and reservation services provided by the Assessee are ancillary and subsidiary to the grant of a license for the hotel brand and thus taxable as Royalty or Fees for Included Services;

(c) Whether the payments received by the Assessee are taxable under Section 9(1)(vii) of the Act and Article 12(4)(a) and (b) of the DTAA as Fees for Included Services or Royalty;

(d) Whether the "make available" condition under the DTAA applies to these services;

(e) Whether the Revenue's appeal is maintainable in view of the consistent judicial and ITAT decisions in favour of the Assessee for earlier assessment years;

(f) Whether any substantial questions of law arise for consideration before the High Court in the present appeal filed by the Revenue under Section 260A of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Nature of receipts - Royalty or Fees for Included Services

The relevant legal framework includes Section 9(1)(vi) and 9(1)(vii) of the Income Tax Act, which define "Royalty" and "Fees for Included Services" respectively, and the India-USA DTAA, particularly Article 12 which deals with Royalties and Fees for Included Services. The "make available" clause is a key interpretative element under the DTAA to determine whether a payment qualifies as Royalty or Fees for Included Services.

Precedents cited include multiple decisions of this Court and the ITAT, notably Director of Income Tax v. Sheraton International Inc., The Commissioner of Income Tax v. Sheraton International LLC, The Commissioner of Income Tax v. Westin Hotel Management LP, and The Commissioner of Income Tax v. Shangri-La International Hotel Management Pte Ltd. These authorities consistently held that payments for marketing and reservation services ancillary to the license of a brand do not constitute Royalty or Fees for Included Services taxable under the DTAA or the Act.

The Court noted that the Assessee received payments aggregating to Rs. 28.63 crores from Indian hotels for centralized marketing and reservation services. The Assessing Officer initially held these payments taxable as Royalty or Fees for Included Services, contending that the services involved the grant of rights or technical knowledge, skill, or experience under the DTAA.

The CIT(A) upheld the AO's order, concluding that the services were ancillary and subsidiary to the license fee and taxable as Fees for Included Services under Article 12(4)(a) of the DTAA and Section 9(1)(vii) of the Act. However, the ITAT reversed this decision, relying on the Assessee's consistent position in earlier years and prior judicial pronouncements that the payments were not taxable under the relevant provisions.

The Court emphasized that the services provided were ancillary and subsidiary to the brand license and did not involve making available any technical knowledge, skill, or processes required to operate the hotel brand. Hence, the payments could not be characterized as Royalty or Fees for Included Services.

The Court also examined the "make available" condition under the DTAA, which requires that the payer be enabled to use the technology or know-how. It was found that the Assessee did not make available any such technical knowledge or skill through the marketing and reservation services, and thus the payments did not fulfill the criteria for Fees for Included Services.

Issue (c): Taxability under Section 9(1)(vii) of the Act and Article 12(4) of the DTAA

The Court analyzed the statutory provisions and the DTAA clauses relating to Fees for Included Services and Royalty. Section 9(1)(vii) of the Act taxes consideration for services of a technical nature, and Article 12(4) of the DTAA extends the definition of Royalty to include fees for included services ancillary to the grant of rights.

The Court held that the payments received by the Assessee did not fall within these definitions because the services were not technical in nature and did not involve the transfer or making available of technical knowledge, experience, or skill. The services were primarily marketing and reservation related, which are not covered under the definition of Royalty or Fees for Included Services.

Issue (d): Application of "make available" concept

The Court reaffirmed the established principle that for payments to be taxable as Royalty or Fees for Included Services under the DTAA, the payer must be "made available" with technical knowledge or expertise enabling them to use the rights or services independently.

It was found that the Assessee's services did not satisfy this condition. The marketing and reservation services were ancillary and did not confer any technical know-how or processes to the Indian hotels. Therefore, the "make available" requirement was not met, negating the Revenue's claim for taxability under the DTAA.

Issue (e): Maintainability of Revenue's appeal in light of prior decisions

The Court noted that the Assessee's position had been consistently upheld by the ITAT and this Court over many assessment years, including AYs 1997-98, 2002-03 to 2005-06, and 2012-13 to 2015-16. The Revenue had not challenged these earlier decisions, and some appeals purportedly filed were pending before other High Courts.

The Court observed that the Revenue's present appeal was essentially a re-agitation of settled issues and that no new substantial questions of law arose. The Court referred to a recent decision in The Commissioner of Income Tax v. Radisson Hotel International Incorporated, where the Court had dismissed a similar appeal for lack of substantial questions of law.

Issue (f): Whether substantial questions of law arise for consideration

Having examined the factual matrix, legal provisions, and precedents, the Court concluded that no substantial questions of law arose for its consideration in the present appeal. The issue was squarely covered by binding precedents in favour of the Assessee, and the Revenue's appeal was dismissed accordingly.

3. SIGNIFICANT HOLDINGS

The Court held:

"The payments received by the Assessee from Indian hotels for marketing and reservation services are not taxable as Royalty or Fees for Included Services under the Income Tax Act or the India-USA DTAA, as the services are ancillary and subsidiary to the license fee and do not involve making available any technical knowledge, experience, skill, know-how, or processes."

"The 'make available' condition under the DTAA is not satisfied in the present case, and hence the payments cannot be characterized as Fees for Included Services or Royalty."

"The Revenue's appeal is barred by the principle of consistency and prior judicial pronouncements, and no substantial questions of law arise for consideration before this Court."

"Accordingly, the appeal filed by the Revenue under Section 260A of the Income Tax Act is dismissed."