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TMI Blog2021 (6) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ABC India which is engaged in the management and operation of hotels in India and provision of technical support services to such hotels. The applicant has entered into two agreements, namely, system fund support services agreement ( SFS ) and reservation system facility agreement ( RSF ) with ABC India effective from April 1, 2019. The applicant has filed the present application on August 25, 2020 pertaining to these two agreements and the following questions have been raised in the application : 1. On the facts and circumstances of the case and in law, whether the 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 mar keting and pursuant to reservation system facility agreement for reservation system facility, would be chargeable to tax in India under the provisions of the Income-tax Act, 1961 ('the Act') and under India-A Double Taxation Avoidance Agreement ('DTAA') ? 2. On the facts and circumstances of the case and in law, whether the amounts received by the applicant from ABC India for provision of marketing, AB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Revenue the 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. This system had continued till March 31, 2019. The applicant had entered into a new arrangement with ABC India in the form of two different agreements with effect from April 1, 2019 : system fund support service agreement (SFS) and reservation system facility agreement (RSF) instead of one composite agreement with the applicant earlier. According to the Revenue that this new arrangement was with an intention to avoid the taxability of the receipts. It was pointed out that even under this new arrangement the applicant would provide similar services as before and the actual nature of transaction was identical. The precise objection of the Revenue on these two issues is as under : In reference to clause (i) of sub-section (2) of section 245R : The applicant has raised the questions related to the taxability of amount received by it from ABC India, a group company, in pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat receipts on account of provision of services in the nature of marketing, frequency marketing programmes, distribution marketing and reservation system services were already held taxable in India as royalty/fee for included services under the Act as well as under India-A DTAA for the assessment year 2012-13 to the assessment year 2016-17. She has drawn our attention to the grounds taken by the applicant before the Commissioner of Income-tax (Appeals) wherein the issues regarding taxability of these receipts under the earlier arrangement was raised. She further submitted that the addition made by the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals) and the issues are now pending before the learned Income-tax Appellate Tribunal. She submitted that as the questions raised in the present application were already pending before the Income-tax Appellate Tribunal, the application may not be admitted. Further, she reiterated the stand of the Revenue that the arrangement by way of two fresh agreements for providing the identical services as already being provided earlier and the receipts of which has been held as taxable by the Department, was nothing but a plo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olio of brands including P , R and T brand standards and brand marks. Under the hotel management agreement the third-party Indian hotels were granted the rights to use ABC's intellectual property directly and this includes the use of the trademarks/brand standards and the associated know-how in their business of operating the hotels under ABC brand standards in consideration of franchisee fees/license fees. The Indian entity of the group, namely, ABC India under the hotel management agreement was designated as manager , obligated to provide hotel management, operation and technical support services to ABC brand hotels in India. The applicant (as an affiliate of ABC AP), was required to provide certain marketing and reservation related services to such third-party Indian hotels. The hotel management agreement referred by learned Commissioner of Income-tax in its report dated December 3, 2020 is a tripartite agreement executed prior to April 1, 2019 between DHI Ltd.-referred to as owner in the hotel management agreement, ABC India referred as manager in the hotel management agreement and ABCAP - referred as licensor in the hotel management agreement. The des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to as new HMA is attached herewith as annexure 1). Under the new hotel management agreement, ABC India undertakes the obligations to provide the full set of services related to management of hotel to the third-party hotels in India including the provisioning of hotel management ser vices, granting right to use the trademark/brand licence, and the procurement and provision of system fund services (which is in relation to marketing and reservation). Thus, with effect from April 1, 2019, under the new hotel management agreement, ABC India is also required to provide marketing and reservation related services to the India hotels, which the applicant (as an affiliate of ABC AP) was earlier obligated to provide. The new business model is between 2 India resident entities (i. e., third-party hotel owners and ABC India). It was adopted with the objective to ensure ease of doing business for the third-party hotel owners, which in-turn will result in growth of ABC brand hotels in India. With the above background and to enable ABC India to fulfil its obligations under the hotel management agreement, it has entered into the following inter-company agreements with the applicant : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trepreneurial role. 3 Contractual obligation for rendering marketing and reservation related services and entity to which fee accrued for such services XYZI (as an affiliate of licensor) was obligated to provide various marketing and reservation related services directly to the Indian hotels. Therefore, the marketing and reservation related fee from India hotels accrued to XYZI. ABC India is obligated to procure and provide marketing and reservation related services to the Indian hotels. Therefore, marketing and reservation related fee from India hotels accrued to ABC India. On a perusal of the above table, it is submitted that the role of ABC India has changed significantly under the new hotel management agreement which was implemented with effect from April 1, 2019. A reference of the above change in business operations of ABC India has also been provided in the audited financial statement of ABC India for the year ending March, 2020, wherein incremental revenues and cost which shall accrue to ABC India with effect from April 1, 2019. Copy of the relevant extract of the audited fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. We have carefully considered the objections of the Revenue, clarification of the applicant and the materials on record. As per the provisions of section 245R(2) of the Act the application cannot be allowed if the following conditions as stipulated in the proviso to that section are satisfied : Provided that the Authority shall not allow the application where the question raised in the application,- (i) is already pending before any Income-tax authority or Appel late Tribunal except in the case of a resident applicant falling in sub- clause (iii) of clause (b) of section 245N or any court ; (ii) involves determination of fair market value of any property ; (iii) relates to a transaction or issue which is designed prima facie for the avoidance of Income-tax except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of section 245N or in the case of an applicant falling in sub-clause (iiia) of clause (b) of section 245N 8. The first objection of the Revenue is that the issues raised in the present application were already pending before the Income-tax authority and, therefore, the bar under clause (i) of the proviso to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BC rewards under SFS were to be provided by the applicant not to ABC India but to Indian hotels under the hotel management agreement with the effective date from the agreement between ABC India and the respective hotel. 10. As regarding RSF agreement, it was acknowledged that XYZI was providing reservation system facilities to ABC system hotels under hotel management agreement which is evident from the following covenant : (a) XYZI owns the reservation system and provides the reservation system facility to ABC system hotels. Such reservation system facility is currently provided by XYZI to ABC system hotels under contracts known to the parties as hotel management agreements (HMA) or other corresponding agreements. (b) ABCI is an affiliate of XYZI and conducts hotel management business in the territory. Such business requires ABCI to provide, or procure the provision of, reservation system facility to ABC system hotels. (c) For the purpose of achieving efficiency in operation and management, ABCI will provide or procure reservation system facility to ABC system hotels, as may be required that meets ABCI's obligations to those hotels. In return, ABCI will pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for all day-to-day management and control of the hotel. Further, clause 3.8 of the tripartite agreement required the manager to procure the benefits of access to the system and system services, solely owned by the manager's affiliates. The relevant clause regarding procurement of access to the system is found to be as under : Manager to procure access to the system Manager shall during the term procure that owner is provided with the benefits of access to the system and system services. The system is solely owned by the manager's affiliates and is designated to be associated with hotels operating under the brand or to contribute to such identification or association and all elements which identify or reflect the quality standards and business practices of such hotels including as specified in this agreement or as designated from time to time by manager ( System ). The system at present includes, but is not limited to : (a) the copyrights, trademarks and similar intellectual property rights made available by manager's affiliates to owners of hotels operating under the system ; (b) all rights to the domain names and other identifications or elem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm of this agreement the services associated with the reservation system shall be available to the hotel on the terms set out in this Schedule. (d) In consideration of the owner's compliance with its obligations under the agreement, hotel shall be provided with the services of the reservation system which shall be activated on the commencement date either by the hotel's information technology personnel following instructions from manager or by one of manager's or its affiliated personnel. (e) Manager shall also provide the hotel personnel with access to the operating manual for access to the reservation system. Upon termination or suspension of the reservation system, owner shall return the operating manual to the manager. Owner agrees that the operating manual is at all times the property of the owner of the reservation system. 14. The applicant has provided a copy of the hotel management agreement dated October 8, 2019 (after the effective date of SFS and RSF) in respect of QB between the owner of the hotel and ABC India as manager of the hotel. It is found that the clause for providing access to reservation system in this bipartite agreement is exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r tripartite agreement with each hotel owner for providing licence to brands. In the revised model, the role of ABCAP has been done away with, as ABC India was granted non-exclusive licence for the right to use ABC brand system. So far as services regarding system fund and reservation systems are concerned the role of ABC India was identical in both the earlier tripartite agreements and the subsequent bipartite agreement. There was no change in the model so far as the services rendered by the applicant is concerned. The same were being rendered by the applicant directly to the Indian hotels prior to as well as after April 1, 2019. The only change was in the manner of receipt for payments for the services rendered by the applicant, which has no impact on deciding the issue of pendency. The contention of the applicant that the change in the model has resulted in incremental revenue is also not relevant to decide the issue before us. What is relevant is the nature of services being rendered by the applicant under the two models, which are found to be identical. 18. The applicant has contended that the role of ABC India has changed significantly under the new hotel management agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant. II. On the facts and in the circumstances of the case and in law, the Assessing Officer has erred in treating the MRC received from Indian hotels taxable as royalty under section 9(1)(vi) of the Act. III. On the facts and in the circumstances of the case and in law, the learned Assessing Officer has erred in treating the MRC contribution received from Indian hotels as royalty taxable under article 12(3) of the India-A DTAA on the basis that the definition of royalty under the DTAA is part material to the definition of royalty under the Act. IV. On the facts and in the circumstances of the case and in law, the learned Assessing Officer has erred in treating the MRC contribution received from Indian hotels as taxable as fee for included ser vices (FIS) also under article 12(4) of the DTAA without appreciating that : (a) The said services are neither technical nor-consultancy in nature. (b) The said services are not ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is received by the applicant ; and (c) The said services do not make available any technical know ledge, experience, skil ..... 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