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TMI Blog2023 (3) TMI 1187X X X X Extracts X X X X X X X X Extracts X X X X ..... has given a categorical finding that it does not come under Article 12(4) of India-Singapore DTAA. As per in the binding judicial precedents rendered in assessee s own case as well as in case of group company, viz, Sheraton International Inc. [ 2009 (1) TMI 27 - DELHI HIGH COURT ] 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 - Assessee appeal allowed. - ITA No.2986/Del/2019,ITA No.4608/Del/2019 - - - Dated:- 11-1-2023 - SHRI G.S. PANNU, PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For the Assessee : Shri S.K. Aggarwal Pityush Gupta, CAs For the Respondent : by Shri Sanjay Kumar, Sr. DR ORDER PER SAKTIJIT DEY, JUDICIAL MEMBER: Captioned appeals by the same assessee arise out of two separate orders of learned Commissioner of Income-Tax (Appeals), New Delhi pertaining to assessment years 2013-14 and 2014-15. ITA No.4608/Del/20 (Asstt.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and/or modify any ground of appeal before or at the time of hearing of the appeal. 3. As could be seen from the grounds raised, the issue in dispute is whether the amount received towards provision of management support services to the Indian subsidiary is in the nature of Fee For Technical Service (FTS) under Article 12(4)(b) of India-Singapore Double Taxation Avoidance Agreement (DTAA). 4. Briefly the facts are, the assessee is a non-resident corporate entity incorporated under the laws of Singapore and a tax resident of Singapore. As stated by the Assessing Officer, the assessee is a part of Inter-Continental Hotels Group (IHG) and primarily engaged in the business of franchise/license operating and manage hotels operating under different hotels of the group in the Asia Pacific Region and headquarter for the Asia Middle East South Africa Region. The assessee is the economic and beneficial owner of hotel brand news including Inter-continental Holiday Inn and Crown Plaza for Asia Specific Region. For permitting the use of the aforesaid brand names, the assessee enters into agreement/arrangements with various hotels within the Asia Specific Region including India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to M/s IHG India to appreciate whether 'make available' condition gets satisfied in delivery of such services by the assessee . As regards the reliance place by the applicant to the meaning of make available in the MOU in India-US DTAC, it may be noted that a Convention is a treaty entered into by two sovereign States relating to rights and duties of subjects or citizens of the respective States in one another's possession. No doubt one can look into the Protocol attached to a treaty between two countries tofind the meaning of an expression used in the treaty, but to refer to a treaty to which two countries are not parties, would not be appropriate. It can at the best have persuasive value . The expression make available only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own. The list of services rendered by the assessee to M/s IHG India, as per schedule 1 of the service agreement between IHG (Asia Pacific) i.e. the assessee company and IHG India, are as under: 1. Operational support Provide advice to and assist local general CMH. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting systems for the AA Region including front and back office systems; Provide support as necessary from the global and regional finance functions and the business service centre . 3. Legal advice Provide advice, counsel and opinions on national and international legal problems connected with the business activity in particular with respect to legal aspects of management contracts, lease , real estate , litigation, form of organizations, taxation, employee relations and industrial property rights, trademark and copyright protection in the countries where participant operates, including the legal management of all affiliates; Provide support, as necessary, from the business reputation and responsibility function. 4. Information Techno logy Advise on and support the implementation of hardware and software systems as well as local area networks in the CMH Hotel (s); Provide IT support, as necessary, to CMH Hotels. 5. Purchasing Co-ordinate international purchasing of furniture, equipment and supplies; Negotiate , execute and implement service agreements and agreed pricing structures with third party suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court of India echoed the fact that management support involve great deal of expertise, skill and technical knowledge .The relevant extracts are reproduced as under: There is no gain saying that running a well equipped modern hotel is no ordinary affair. Once needs a great deal of expertise skill and technical knowledge for the purpose ... 27. In view of the above, there is no doubt that the services rendered by the assessee were in the nature of managerial /technical/consultancy services. 28. The rationale of the Ld. CIT(A)while confirming the order of the Assessing officer is as under: On the basis of the input, advice, assistance and service provided by the assessee company , the decision is taken by IHG India to manage the hotels in India and other parts of South Wes t Asia ( SWA ). I t is also to be remembered that the assessee company is giving services in respect of Personnel Training to the IHG India employees in making use of the inputs, experience, experimentation , assistance and advice rendered by them for taking a better and possible decision in order to achieve the desired objectives/goal. Therefore, in the context of professional man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty hotel owner. For the pre-commencement services, IHG India has this separate design and engineering team of personnel to work with third party hotel owners on design and engineering aspects of the hotels . The team works with the owners of hotels to manage the construction or refurbishment of the hotels, putting in place the pre-commencement processes for the hotels to ensure that the hotels can open on time and on brand. The team provides reviews the design concept, de tailed schematic and activities; related to construction , review and approve the design and drawings, monitor the progress of the projects, conduct ore-opening reviews and inspections, assist In the selection of vendors and materials , and provide necessary guidance and support to other external consultants hired by the owner (viz . architects, interior designers , engineers etc .) . The team may also provide recommendation to the hotel owner on which external consultants may be hired for the project . The guidance provided by the team relate to aspects such as brand standard, engineering , fire safety etc. Some of the key objectives for the design and engineering team are to ensure that the constructed hote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the production of operating and capital budgets at the level of the CMH Hotels, which are consistent with the strategic plan can at best be the managerial consultancy service but not the services made available so that the recipient can use or replicate the such services received from the assessee. 31. With regard to accounting support the Bench has posed a pertinent question as to why not the accounting support given be treated as the technical knowledge made available . It was answered that the accounting support given was in relation to the preparation of balance sheet and modalities and to advice production of reports regarding the budgets from time to time and the services are rendered repeatatively based on the requirements of the clients and hence it cannot be treated as a service which was made available to be applied independently and in times to come . We, after going through the type of services rendered, hereby concur with the explanation given by the ld. AR. 32. Similarly, the services rendered in connection with training recruitment and manpower specification, we find that there is neither technology transfer , knowledge transfer nor transfer of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) while treating Management Support Service taxable as FTS under Article 12(4)(a) of the India Singapore Treaty, has failed to appreciate that the consideration against rendition of Management Support Service is received from IHG India, whereas consideration against right to use the Hotel brand name (i.e. license fee) is received from India Hotels, under different contracts. 1.7 That on the facts and in the circumstances of the case and in law, the CIT(A) has erred in holding that Management Support Agreement and Hotel Management Agreement are interrelated. 1.8 That on the facts and in the circumstances of the case and in law, the CIT(A) failed to appreciate that merely because the services are managerial, technical and consultancy in nature, the same will not ipso-facto result into FTS under Article 12 of India- Singapore DTAA, unless the services results into making available technical knowledge, experience, skill, know-how or processes, which enables the service recipient to apply the technology contained therein. 1.9 That on the facts and in the circumstances of the case and in law, the CIT(A) has erred in upholding the observation of the Ld. AO that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h section 9(1)(vii) of the Act. 13. We have considered elaborate submissions made by the learned counsel appearing for the assessee and learned Departmental Representative. At the outset, we must observe, the facts relating to the issue in dispute are identical to the preceding assessment years, as, the same agreements, both, relating to license to use brand name and provision of management services are continuing from earlier years. In fact, as stated by us earlier, the approach adopted by the Assessing Officer in bringing to tax Management Support Service Charges as FTS under Article 12(4)(b) of the treaty is similar to assessment year 2013-14. 14. However, while deciding the issue in appeal, learned Commissioner (Appeals) had concluded that the amount received by the assessee towards the provisions of Management Support Services are in the nature of the FTS under Article 12(4)(a) as it is ancillary and subsidiary to the royalty income received from license to use brand names by various hotels in India. 15. Thus, we have to examine whether the services rendered by the assessee under Management Support Service Agreement are ancillary and subsidiary to the license granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench as aforesaid, will also apply mutatis-mutandis to this appeal. However, for the sake of completeness, we must observe, in course of hearing learned counsel for the assessee has brought to our notice a decision of the Co-ordinate Bench in case of Starwood Hotels Resorts Worldwide Inc. vs CIT Ors. In ITA No.2011/Del/2019 order dated 29.04.2022 in the context of the applicability of Article 12(4)(a) of the DTAA. 18. Having carefully perused the aforesaid decision, we find, while dealing with an identical issue, the Bench has held as under: 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 gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was to benefit from mutual promotional effort undertaking by each of the entity. 14. It is quite evident, the basis for learned Commissioner (Appeals) to conclude that the fee received by the assessee for centralized services is in the nature of FIS under Article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of 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 recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , property, or information described in paragraph 3. The question of whether the service is related to the application or enjoyment of right, property, or information described in paragraph 3 and whether the clearly predominant purpose of the arrangement is such application or Payment 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); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... U.S. company enters in to a contract with the Indian company under which the former will clean the latter's machinery on a regular basis. As part of the arrangement, the U.S. company leases the Indian company a piece of equipment which allows the Indian company to measure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(3) and 12(4){b) of the lndo-American DTAA besides the provisions of section 9(l)(v ) of the Income-tax Act, 1961 whereas the learned CIT(A) applied Article 12(3)(a). At the time of hearing before us, the learned Special Counsel for the Revenue Shri Y.K. Kapur has sought to rely, 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said arrangement was to promote the hotel business worldwide in the mutual interest of both the sides and the other services enumerated in the various Articles of the agreements to be rendered by the assessee company were merely ancillary or auxiliary to this main objective/intention. 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 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered by the assessee-company being non-technical services could not be covered by the scope of Article 12(4)(6) of the Indo-American DTAA as well as that of India- Singapore DTAA. It was held by the Tribunal that the nature of services being rendered by the assessee company 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 sofar 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, pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Articles of the agreements on which much emphasis has been laid by the learned Special Counsel for the Revenue was made by the assessee to enable it to execute the job undertaken by it to render services in relation to advertisement, marketing and sales promotion of hotel business worldwide 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioning. ln the present case also, the entire price was paid by the Indian hotels/clients to the assessee-company in pursuance of the relevant agreements expressly for rendering the services in relation to advertisement, publicity and sales promotion and it was neither possible nor practicable 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 ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en In paragraph 3(a) or 3(b) of Article 12. It, therefore, follows that paragraph 4(a) of Article 12 also cannot be applied to cover any of the services rendered by the assessee company to the Indian hotels/clients in the present case. 24. Thus, on a reading of the aforesaid observations 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 attemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleted. Thus, the appellant succeeds in grounds 1 to 4. 8. The issue in controversy has also been set at rest by the Hon'ble Delhi High Court in case cited as Director of Income-tax vs. Sheraton International Inc. - (2009) 313 ITR 267 (Del.) as under: Double taxation relief-Agreement between India and USA Payment 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 Indiaj There was nothing on record to show that the agreement was a colourable device- Such f ..... 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