2024 (1) TMI 490 - AT - Income Tax

Accrual of income in India - PE in India or not? - royalty income both under the provisions of the Act as well as under Indian-Singapore Double Taxation Avoidance Agreement (DTAA) - taxability of reimbursement as business fee for technical service (FTS) - assessee is a non-resident corporate entity incorporated in Singapore - HELD THAT - It is a fact on record that for use or right to use brand name/trade mark, the assessee has received separate consideration which has been offered to tax. Whereas, the receipts from loyalty program, marketing, reservation services, blackberry services etc. are purely for rendition of certain services and not for use or right to use of any copyright or trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. As there is nothing on record to suggest that the services rendered by the assessee have transferred any design or model or plan or secret formula or for any information concerning industrial, commercial or scientific experience. Therefore, in our view, the receipts cannot be treated as royalty under Article 12(3)(a) of the Tax Treaty. Similarly, the fee received cannot be treated as royalty under Article 12(3)(b) as there is no transfer of use or right to use any industrial or commercial or scientific equipments. In any case of the matter, the fees received are purely for certain services, therefore, in our view, they cannot be treated as royalty. At this stage, we must observe, the services rendered by the assessee are merely for facilitating the sale and promotional operation of the entity and are not required to facilitate the application of the brand license. Pertinently, while considering taxability of similar nature of services as royalty/FTS, Hon ble jurisdictional High Court in the case of DIT Vs. Sheraton International Inc. 2009 (1) TMI 27 - DELHI HIGH COURT has upheld the decision of the Tribunal holding that the receipts are neither in the nature of royalty nor FTS. As decided in Starwood Hotels Worldwide Inc. 2022 (7) TMI 781 - ITAT DELHI fee received by the assessee under the Centralized Services Agreement cannot be treated as FIS either under Article 12(4)(a) or 12(4)(b) of the India US Tax Treaty. As a natural corollary, it can only be treated as business income of the assessee. Hence, in absence of a PE in India, it will not be taxable. Thus to conclude the amount in dispute, in our view, cannot be qualified as Royalty . Accordingly, we direct the Assessing Officer to delete the addition. Appeal of assessee allowed.

Summary

Issues Involved:
1. Taxability of Rs. 11,27,56,000 as royalty income under the Income-Tax Act and the India-Singapore DTAA.
2. Taxability of Rs. 64,548 as business fee for technical services (FTS).

Summary of Judgment:

1. Taxability of Rs. 11,27,56,000 as Royalty Income:

The assessee, a non-resident corporate entity incorporated in Singapore, entered into franchise agreements to sublicense brand names and other IPRs to group entities in India. The core issue was whether the income received from these activities should be taxed as royalty under the Income-Tax Act and the India-Singapore DTAA. The assessee had declared this income as royalty in its return. However, the Assessing Officer issued a show cause notice arguing that the receipts from loyalty programs, reservation fees, marketing fees, and blackberry services should also be treated as royalty. The assessee contended that these receipts were neither royalty nor FTS but business income. The Assessing Officer, supported by the DRP, treated these receipts as royalty, leading to the final assessment order.

2. Taxability of Rs. 64,548 as Business Fee for Technical Services (FTS):

The subsidiary issue involved the taxability of Rs. 64,548 received as a business fee for technical services. The assessee argued that the services provided were not managerial, technical, or consultancy services and thus should not be treated as FTS.

Detailed Judgment:

Nature of Services Rendered:

The Tribunal examined the nature of services provided by the assessee, which included loyalty programs, central reservation services, marketing services, and blackberry services. These services were provided from outside India, with no employees of the assessee visiting India. The Tribunal noted that these services were distinct from the license fee charged under the franchise agreement and were aimed at enhancing geographical coverage and visibility among prospective customers.

Royalty vs. Business Income:

The Tribunal held that the services rendered were not ancillary and subsidiary to the use of the brand name or trademark. The receipts from loyalty programs, marketing, reservation services, and blackberry services were for certain services and not for the use of any copyright, trademark, or industrial, commercial, or scientific experience. Therefore, these receipts could not be treated as royalty under Article 12(3) of the India-Singapore DTAA.

Precedents and Judicial Decisions:

The Tribunal relied on several judicial precedents, including decisions in cases like DIT vs. Sheraton International Inc. and Starwood Hotels & Resorts Worldwide Inc., which held that similar receipts were neither in the nature of royalty nor FTS. The Tribunal noted that the services provided were for facilitating the sale and promotional operations and not for facilitating the application of the brand license.

Conclusion:

The Tribunal concluded that the receipts from loyalty programs, marketing, reservation services, and blackberry services could not be treated as royalty or FTS. These receipts were business income, and in the absence of a Permanent Establishment (PE) in India, they were not taxable in India. The Tribunal directed the Assessing Officer to delete the addition.

Result:
The appeal was allowed, and the addition was deleted.