2021 (6) TMI 479 - AAR - Income Tax

Advance ruling application u/s 245R - Income taxable in India - Services under SFS - System fund support services agreement and RSF - Reservation system facility agreement - amounts received by the applicant from ABC India pursuant to system fund support service agreement for provision of marketing, frequency marketing programme ( ABC Rewards ), distribution marketing and pursuant to reservation system facility agreement for reservation system facility - applicant was providing various services to Indian hotels relating to hotel management, marketing and reservation related services under the hotel management agreement and the consideration received in respect of such services were held taxable in India as royalty/fee for included services - HELD THAT - The payment for all these services was in the form of contribution to systems fund which the owner was obliged to discharge. Clause 10.1 of the agreement stipulated that For the duration of the term, owner shall pay the licensor, or if directed by licensor, its affiliates, the system contribution . As stated by the applicant the services in respect of system funds were provided by the applicant directly to the respective Indian hotels. It was also mentioned in the agreement that manager, licensor and their affiliates derive neither income nor profit from the system fund contributions. In view of the above facts, it is crystal clear that the nature of services rendered by the applicant to Indian hotels under earlier tripartite hotel management agreement was identical with the nature of services as contemplated in the SFS and RSF agreements with ABC India. It is relevant to consider that the applicant was not a signatory to the tripartite agreements entered into prior to April 1, 2019 and the applicant was also not a signatory to the bipartite agreement between ABC India and Indian hotel owner entered into after April 1, 2019. Prior to April 1, 2019 the applicant was providing the services to Indian hotels as an affiliate for which it was receiving the payments directly. The same arrangement continued even after April 1, 2019 and the applicant was providing services to Indian hotels as an affiliate/sub-contractor. The only difference was in the mode of payment of fee for these services. While the payment was being received by the applicant from the hotel owner directly under the previous arrangement, the payment after SFS and RSF was to be routed through ABC India. The precise reason for the change of this model was to attribute the intragroup costs associated with such intra-group profits as mentioned in clause (H) of SFS. As informed by the Revenue the additions made by the Assessing Officer were confirmed by the Commissioner of Income-tax (Appeals) and the issues are now pending before the learned Income-tax Appellate Tribunal and this fact has not been disputed by the applicant. It is found that the questions raised in the present application are in respect of the issues which were already pending before the Income-tax authority in different years. Therefore, the bar under clause (i) of the proviso to section 245R(2) is found squarely attracted in this case. In the present case, the issues pending before the Department were not in respect of different entity, but in respect of the applicant's own case in the earlier years. Further, the issue to be considered here is not in respect of any transaction but about the nature of services rendered. As already mentioned earlier the nature of services rendered by the applicant prior to April 1, 2019 were identical with the services contemplated in SFS and RSF, which is also evident from the questions as raised by the applicant before the appellate authorities. It is found that the issues involved in the questions raised in the present application filed before us were already pending before the Income-tax authority and the bar in terms of clause (i) of the proviso to section 245R(2) is found attracted in this case. Therefore, the application is not admitted and consequently rejected.

Summary

Issues Involved:
1. Taxability of amounts received by the applicant from ABC India under SFS and RSF agreements.
2. Classification of received amounts as royalty under Section 9(1)(vi) of the Act and Article 12 of India-A DTAA.
3. Classification of received amounts as fee for technical services (FTS) under Section 9(1)(vii) of the Act and Article 12 of India-A DTAA.
4. Requirement for ABC India to withhold taxes under Section 195 of the Act.

Issue-wise Detailed Analysis:

1. Taxability of Amounts Received:
The applicant, XYZ Inc., entered into two agreements with ABC India, namely the "system fund support services agreement" (SFS) and the "reservation system facility agreement" (RSF) effective from April 1, 2019. The primary question was whether the amounts received under these agreements would be chargeable to tax in India under the Income-tax Act, 1961, and the India-A Double Taxation Avoidance Agreement (DTAA).

The Revenue argued that the services provided under the new agreements were identical to those provided under previous agreements, which were already held taxable in India as royalty/fee for included services. The applicant contended that there was a significant change in the business model effective April 1, 2019, affecting the role of ABC India and the nature of services provided.

2. Classification as Royalty:
The Revenue contended that the amounts received for marketing, ABC rewards, distribution marketing, and reservation system facilities should be classified as royalty under Section 9(1)(vi) of the Act and Article 12 of the India-A DTAA. They argued that the services provided under the new agreements were essentially the same as those previously provided under the tripartite hotel management agreement, which were already held taxable as royalty.

The applicant argued that the new business model involved different contractual obligations and that ABC India now undertook a greater entrepreneurial role, including the provision of marketing and reservation services.

3. Classification as Fee for Technical Services (FTS):
The Revenue also argued that the amounts received should be classified as fee for technical services (FTS) under Section 9(1)(vii) of the Act and Article 12 of the India-A DTAA. They pointed out that the services provided by the applicant included technical and consultancy services, which were taxable as FTS.

The applicant contended that the services provided were neither technical nor consultancy in nature and did not make available any technical knowledge, experience, skill, or know-how.

4. Requirement for ABC India to Withhold Taxes:
The final issue was whether ABC India was required to withhold taxes on the amounts paid to the applicant under Section 195 of the Act. The Revenue's position was that since the amounts were taxable as royalty or FTS, ABC India was obligated to withhold taxes.

The applicant argued that the amounts were not taxable in India and therefore, ABC India was not required to withhold taxes.

Ruling:
The Authority for Advance Rulings (AAR) examined the nature of services provided under both the old and new agreements. It was found that the services rendered under the new agreements (SFS and RSF) were identical to those provided under the previous tripartite agreements. The only change was in the mode of payment, with the applicant now receiving payments through ABC India instead of directly from the hotel owners.

The AAR concluded that the issues raised in the present application were already pending before the Income-tax authorities for earlier assessment years. Therefore, the application was not maintainable under clause (i) of the proviso to Section 245R(2) of the Income-tax Act, 1961, which prohibits the AAR from allowing an application if the question raised is already pending before any Income-tax authority or Appellate Tribunal.

The AAR did not consider the objection regarding clause (iii) of the proviso to Section 245R(2) (transactions designed for avoidance of tax) as the application was already rejected under clause (i).

Conclusion:
The application was rejected on the grounds that the issues involved were already pending before the Income-tax authorities, thereby attracting the bar under clause (i) of the proviso to Section 245R(2) of the Income-tax Act, 1961.