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TMI Blog2022 (7) TMI 781X X X X Extracts X X X X X X X X Extracts X X X X ..... n International Inc [ 2009 (1) TMI 27 - DELHI HIGH COURT] In view of the aforesaid, the observations of learned Commissioner (Appeals) that the applicability of Article 12(4)(a) was never examined has to be rejected at the threshold. In fact, we are constrained to observe, Commissioner (Appeals), being conscious of the fact that the centralized service fee received by the assessee cannot be treated as FIS under Article 12(4)(b) due to failure of make available condition, has made an unsuccessful attempt to bring it within the ambit of Article 12(4)(a) of the Treaty and in the processes has misrepresented certain facts. As in assessee s own case as well as in case of group company, viz, Sheraton International Inc. we have no hesitation in holding that the 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. For the sake of completeness, we must observe, in course of hearing, learned Departmental Representative has relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after in depth analysis of the relevant facts arising in these appeals, the agreement between the assessees and the Indian hotels and other materials on record, we are of the view that our reasoning given in case of Starwood Hotels Resorts Worldwide Inc.(above) in the earlier part of the order, would equally apply to these appeals, as well, as it cannot be said that the payment received towards centralized service fee is ancillary and subsidiary to the license fee. Accordingly, we delete the additions. - Decided in favour of assessee. - ITA No.2011/Del/2019 And ITA No.2012/Del/2019 And ITA No.2013/Del/2019 And ITA No.2015/Del/2019 And ITA No.9265/Del/2019 And ITA No.9689/Del/2019 - - - Dated:- 29-4-2022 - Shri G.S. Pannu, Hon ble President And Shri Saktijit Dey, Judicial Member For the Assessee : Sh. Tarandeep Singh, Advocate And Sh. Pradip Dinodia, FCA For the Department : Sh. Sanjay Kumar, Sr. DR ORDER PER SAKTIJIT DEY, JM: Captioned appeals have been filed by different assesses challenging the taxability of amount received towards centralized services fee from Indian hotels as Fee for Technical/Included Services (FTS/FIS). The appeals have reache ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el.) 3.2 While dealing with assessee s claim, the Assessing Officer observed that against the decision of the Hon ble High Court, the Revenue has gone in further appeal before the Hon ble Supreme Court and further, similar plea taken by the assessee in the preceding assessment years was not accepted by the Revenue. Having so observed, the Assessing Officer held that the amount received by the assessee for providing hotel related services, known as centralized services, is in the nature of FTS in terms of section 9(1)(vii) of the Act. Further, he held that even under India USA DTAA, the amount received by the assessee is to be regarded as fee for included services, hence, taxable in India. 3.3 While coming to such conclusion, the Assessing Officer observed, the nature of services being rendered by the assessee has remained same over the years. Though, new agreements might have been executed by the assessee from time to time. He observed, being a member of Sheraton group, the assessee has a vast knowledge and experience in the field of hotel business. Therefore, the experience acquired by the assessee is in the nature of information pertaining to industrial, commercial and sci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and ancillary agreement to the main license agreement. He observed, the license fee received from Indian Hotels is in the nature of royalty and as such has been offered to tax by the affiliate. Insofar as payment received by the assessee under Centralized Serviced Agreement, learned Commissioner (Appeals) held that since such services are ancillary and subsidiary to the application or enjoyment of right, property or information, for which, the payment was received, as described in Article 12(3) of the India-USA DTAA, it will come within the expression FIS under Article 12(4)(a) of the Treaty. Hence, there is no need for complying with the make available clause provided under Article 12(4)(b) of the treaty. 3.7 Thus, he ultimately concluded that since the amount received by the assessee towards centralized service fee would fall within Article 12(4)(a) of the Tax Treaty and Article 12(4)(b) would not be applicable, the make available clause would not apply. For the very same reason, he also distinguished the various decisions cited before him, including the decision of the Hon ble Delhi High Court in assesse s own case as well as in case of group companies. Thus, he held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xecuted three different agreements. Whereas, services provided under these agreements are not overlapping and are related to hotel operation. He submitted, these agreements were executed with different parties and there is separate consideration payable. Thus, he submitted, the issue is squarely covered by the decision of the Tribunal in case of Sheraton International Inc. (supra). 5. As regards the finding of learned Commissioner (Appeals) that centralized service fee is ancillary and subsidiary to the transaction of grant of license to use the trade mark/trade name, learned counsel for the assessee submitted, such conclusion of learned Commissioner (Appeals) is based merely on presumption. He submitted, while deciding the issue in case of Sheraton International Inc. (supra), the Tribunal did analyze the nature of transaction and held that the purpose for rendering centralized services is to undertake the job of publicity, marketing and advertisement of hotels and that trade mark/trade name etc. were made available to the Indian hotel clients as an integral part of the business arrangement between them. Thus, he submitted, the availability of trade mark/trade name to the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was not examined, is thoroughly misleading. Learned counsel submitted, the contention of learned Departmental Representative that the terms of the agreement considered in the impugned assessment year are totally different from the case decided by the Tribunal and Hon ble Delhi High Court is contrary to the facts on record as the Assessing Officer himself has accepted that the nature of services rendered by the assessee has remained same over the years, even though, new agreements might have been executed from time to time. He submitted, even learned Commissioner (Appeals) has not disturbed such factual finding of the Assessing Officer. 7. Shri Sanjay Kumar, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and the first appellate authority. Further, he submitted, in case of Sheraton Hotels Ltd. (supra) decided by the Tribunal and High Court, the Indian Hotel availing the services has itself created an established brand, which was useful to the Sheraton Hotels. Whereas, in the present case, the Indian Hotel, which availed the services, has just started the service, hence, has not created its own brand, which could be useful to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertisement services through its system of sales, advertisement, promotion, public relation and reservations. Under the centralized services agreement, the assessee was required to provide the following services: (a) Sales and marketing (b) Loyalty programmes (c) Reservation service (e) Operational service (f) Training programmes. 9.1 The specific services provided by the assessee under the aforesaid categories are as under: (a) Sales and Marketing Assessee will undertake marketing of hotels outside India. (b) Loyalty Programs Various Loyalty Programs, such as, Starwood Preferred Planner ( SPP ), Star Choice, Team HOT, Starwood Preferred Guest ( SPG ) and IFH-Reservation Mystery Shopper Program are under taken by the assessee, for which, the Indian Hotel has to pay certain amount of fee for enjoying the program. (c) Distribution of Reservation Services The assessee provides reservation services, such as, offering, booking, modifying and communicating Guest Rooms and Meeting Space reservations for the Hotel through international computerized reservation systems. These services are rendered using internet/telephone. (d) Technological Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gle by holding that the payment received has to be treated as FIS under Article 12(4)(a) of the Treaty. Hence, there is no requirement of fulfilling the make available condition. Admittedly, against the aforesaid reasoning of learned first appellate authority, the Revenue has not come in appeal. 12. Therefore, the only issue which arises for our consideration is, whether the amount received by the assessee for various services, commonly known as centralized services, will fall within the ambit of FIS under Article 12(4)(a) of the Treaty. For holding the payment received by the assessee to be in the nature of FIS under Article 12(4)(a), learned Commissioner (Appeals) has attempted to link the Centralized Services Agreement entered into by the assessee with License Agreement entered into by the Indian Hotels with group affiliates for grant of right to use trade name. It is a fact on record, under License Agreement for grant of right to use trade name, the Indian hotels have paid license fee to the affiliates. The affiliates have also offered such license fee as royalty income. There is no dispute that the license fee paid to the affiliates have been taxed in India. It is the rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 12(4)(a) of the Treaty is because of the following reasons: (i) Centralized Services Agreement is actually a subsidiary and ancillary agreement of the license agreement. (ii) Primary agreement which enables and sets off of the business of the franchisee is the License Agreement for which license fee is paid and such license fee is taxable as royalty advance of the affiliates which receives the license fee. (iii) There is no need for satisfying the make available clause under Article 12(4)(a) of the Treaty. In case of Sheraton International Inc. neither the Tribunal nor the Hon ble Jurisdictional High Court to examine the implication and applicability of Article 12(4)(a) of the Tax Treaty. 15. Learned Commissioner (Appeals) has observed that the five determinative factors for classification of the consideration received as FIS under of paragraph 12(4)(a) of the treaty, as, explained in the Memorandum of Understanding (MoU) to India US Treaty are clearly satisfied, as, the predominant factor in relation to the clients is the grant of license to use the name, which gave rise to royalty and all other payments and agreements flow from the License Agreement. 17. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the development and transfer of a technical plan or technical design. 19. As discussed earlier, even learned Commissioner (Appeals) does not dispute the fact that Article 12(4)(b) would not apply to the centralized fee received by the assessee as the make available condition is not satisfied. Therefore, to overcome this deficiency, learned Commissioner (Appeal) has made an attempt to invoke the provision of Article 12(4)(a) of the Treaty. A reading of Article 12(4)(a) would make it clear that the payment received for rendering any technical or consultancy services would come within the ambit of FIS, if such services are ancillary and subsidiary to the application and enjoyment of the right, property or information for which the payment described in Article 12(3) is received. So, the conditions to be satisfied to be regarded as FIS under Article 12(4)(a) are, services for which the payment was received must be ancillary and subsidiary to the application or enjoyment of the right, property or information for which the payment in the nature of royalty under Article 12(3) is received. 20. In the facts of the present appeal, undisputedly, the assessee is neither the owner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be determined by reference to the facts and circumstances of each case. Facts which may be relevant to such determination (although not necessarily controlling) include : 1. The extent to which the services in question facilitate the effective application or enjoyment of the right, property, or information described in paragraph 3 ; 2. The extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3 ; 3. Whether the amount paid for the services (or which would be paid by parties operating at arm's length) is an insubstantial portion of the combined payments for the services and the right, property, or information described in paragraph 3 ; 4. Whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract (or a set of related contracts); and 5. Whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 [for this purpose, persons are considered related if their relationship is described in Article 9 (Associated Enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure the level of bacterial deposits on its machinery in order for it to known when cleaning is required. Are the payments for the services fees for included services? Analysis : In this example, the provision of cleaning services by the U.S. company and the rental of the monitoring equipment are related to each other. However, the clearly predominant purpose of the arrangement is the provision of cleaning services. Thus, although the cleaning services might be considered technical services, they are not ancillary and subsidiary to the rental of the monitoring equipment. Accordingly, the cleaning services are not included services within the meaning of paragraph 4(a). 22. As could be seen from the aforesaid illustration, though, both the services are interlinked, however, the predominant purpose of the arrangement is provision of cleaning services, hence, will not be ancillary or subsidiary to the rental of monitoring machine. Hence, the cleaning services are not to be regarded as FIS under Article 12(4)(a) of the Tax Treaty. 23. The factual position, in a way, is quite similar in the present case. The aforesaid illustration to some extent can be made applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , by way of raising the additional grounds in the appeals filed by the Revenue, Article 12(4)(a) to support the Revenue s case that the amount in question being in the nature of fees for included services' was liable to tax in India also. The learned counsel for the assessee has raised a strong objection for admission of these additional grounds stating that neither the Assessing Officer nor the learned CIT(A) having applied Article 12(4)(a) of the DTAA in their orders passed in the assessee s case, the Revenue cannot rely on the said Articles to support its case at this stage during the course of appellate proceedings before the Tribunal. Keeping in view that the issues sought to be raised by the Revenue in these additional grounds are purely legal and all the facts relevant to consider and adjudicate the same are on record, we. however, find no merits in the objection raised by the learned, counsel for the assessee and admitting the additional grounds raised by the Revenue, we now proceed to consider and decide the issues raised in these additional grounds also on merits. In support of the Revenue s case that the impugned amount received by the assessee from the Indian hotel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion. This precisely was the sum and substance of the agreement if the same is read as a whole and thus, it was a case in which the assessee-company had undertaken to provide services in connection with advertising, publicity and sales promotion including reservations for the Indian hotels/clients. Even the payment was entirely made as expressly stipulated in the agreement for these services and this is the way in which the entire arrangement was not only made but was also understood by both the sides. Even the use of trademark, trade names etc. of the assessee-company by the Indian hotel /clients was an integral part of this arrangement and such use was allowed at no cost as expressly provided in the relevant agreements. Moreover the rationale behind providing such use at no cost has been explained on behalf of the assessee which is found to be satisfactory by us for the detailed reasons given in the foregoing portion of this order. Having regard to all these aspects, we have come to a conclusion that the various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such as business strategy, marketing and sales strategy etc. were materially different and they were not of technical in nature which would enable the person acquiring the services to apply the technology contained therein. Explaining further, it was also observed by the Tribunal that so far as the provisions of India-Singapore DTAA as well as the provisions of Indo-American DTAA are concerned, payments for services which are non-technical in nature or, in other words, payment for services not containing any technology, are required to be treated as outside the scope of fees for technical services . It was further held by the Tribunal that the scope of fees for technical services under Article 12(4)(b ) does not cover consultancy services unless these services are technical in nature. 76. In the case of Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791. Mumbai Bench of ITAT held that the normal, plain and grammatical meaning of the language employed using the expressions making available and making use of is that the mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge etc. by himself in his busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dwide and such supply was merely incidental to the performance of integrated business arrangement which included mainly rendering services in relation to advertisement, publicity and sales promotion of hotel business. The payment made by the Indian hotels/clients to the assessee-company on account of such job or any part thereof, therefore, cannot be attributed to the use of a patent, invention, model, design, secret formula or process or trademark or similar property or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. The decision of Hon ble Madras High Court in the case of Nayveli Lignite Corpn. Ltd. (supra) and that of Hon ble Andhra Pradesh High Court in the case of Klayman Porcelains Ltd. (supra) fully support this view. Even the decision of Authority for Advance Ruling in the case of Rotem Co. In re |2005| 279 1TR 165 ^ (AAR - New Delhi) is to the similar effect wherein after discussing the various judicial pronouncements, it was held that the principle which emerges from the various decisions is that in a contract for manufacture, installation, sale or supply of goods, the element of services will alw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cticable nor permissible to apportion the said consideration as sought to be done by the Revenue authorities. 80. As regards the applicability of Article 12(3)(a) of the DTAA, we have already held that its trademark, trade name etc. were made available by the assessee-company to the Indian hotels/clients as an integral part of the business arrangement between them and the same, therefore, was merely incidental to carry out the job of advertisement, publicity and sales promotion undertaken by the assessee-company. Moreover, the said use was allowed for mutual benefit and the exact benefits derived by the assessee- company from such use have already been discussed by us. As expressly provided in the relevant agreements, it was agreed that no cost is to be paid by the Indian hotels/clients to the assessee-company for such use and the entire payment/consideration was on account of the services rendered in relation to advertisement, publicity etc. This was the arrangement between the parties as is evident from the relevant terms and conditions of the agreements and this is the way in which both the sides had apparently understood and acted upon such arrangement. It was thus neither ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Coordinate Bench, it becomes very much clear that not only the Tribunal has examined the applicability of Article 12(4)(a) of the Treaty qua the payment received but has categorically held that it cannot be treated as FIS under Article 12(4)(a) of the Treaty. Undisputedly, the aforesaid observations of the Coordinate Bench have been upheld by the Hon ble Jurisdictional High Court in case of DIT Vs. Sheraton International Inc (supra). In view of the aforesaid, the observations of learned Commissioner (Appeals) that the applicability of Article 12(4)(a) was never examined has to be rejected at the threshold. In fact, we are constrained to observe, learned Commissioner (Appeals), being conscious of the fact that the centralized service fee received by the assessee cannot be treated as FIS under Article 12(4)(b) due to failure of make available condition, has made an unsuccessful attempt to bring it within the ambit of Article 12(4)(a) of the Treaty and in the processes has misrepresented certain facts. 25. Be that as it may, the fact on record reveal that the taxability of centralized services fee as FIS is a recurring issue between the assessee and the Revenue from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween India and USAPayment for advertising, publicity and sales promotion services-Tribunal found as a final fact finding authority that main services rendered by assessee, a company incorporated and tax resident in USA, to Indian company, was advertisement, publicity and sales promotion keeping in mind their mutual interests and in that context, the use of trademark, trade name etc, and other enumerated services referred to in the agreement with the assessee were incidental to main service- Tribunal thus rightly concluded that the payments received were neither in the nature of royalty under s. 9(l)(vi), Expln. 2 not in the nature of fee for technical services under s. 9(1) (vii), Expln. 2, but business income and assessee not having any PE in India such business income was not taxable in India- j There was nothing on record to show that the agreement was a colourable device- Such findings of fact having not been challenged as perverse, no substantial question of law arose out of the order of the Tribunal 9. So, following the decision rendered by Hon ble Delhi High Court in case of Director of Income-tax vs. Sheraton International Inc. (supra), we are of the considered view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian hotels, the Bench has recorded a finding of fact that the agreements are interrelated/interlinked in essence that they refer to each other. Further, the Bench has observed that for all practical purposes, the clients (Indian hotels) have construed all the agreements as a single agreement for the purpose to promote brand. Thus, in this factual context, the Bench has concluded that the assessee has split up the royalty received into different segments. However, in the appeals before us, there are no such findings by the departmental authorities which can demonstrate that for all practical purposes the License Fee Agreement and Centralized Services Agreement are to be construed as one agreement and has been so understood by the Indian clients. The case of JC Bamford Excavators Ltd. (supra) is also factually distinguishable. Therefore, in our considered opinion, the decisions cited by learned Departmental Representative would be of no help to advance the case of the Revenue. 29. In view of the aforesaid, we direct the Assessing Officer to delete the addition. ITA No. 2012/Del/2019 for AY : 2015-16 ITA No. 2013/Del/2019 for AY : 2015-16 ITA No.2015/Del/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterials on record. We have noticed, observations of the Tribunal in case of Sheraton International Inc. (supra) reproduced in the earlier part of the order would clearly reveal that the applicability of Article 12(4)(a) of the treaty to the centralized service fee was examined and discarded. Therefore, the basic premises on which the departmental authorities have not applied the decision of Sheraton International Inc. (supra) are flawed. Merely because the grant of license to use brand name and provision of centralized services are contained in a single agreement, it cannot be said that centralized services, which includes marketing, promotion, reservation and other allied services flow out of grant of license to make them ancillary and subsidiary to grant of license. Even, the quantum of service fee received if compared to the royalty income, would not make it ancillary and subsidiary so as to make it FIS under article 12(4(a) of the treaty. In our view, service fee received by the assessees would clearly fit in to the illustration given in example 2 of MoU to India-USA DTAA. 33. Therefore, after in depth analysis of the relevant facts arising in these appeals, the agreement b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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