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TMI Blog2024 (1) TMI 490X X X X Extracts X X X X X X X X Extracts X X X X ..... , Belgium and acts as a franchisor and/or owner of participating hotels in the Asia Specific Region including India and has the license to use the brand name Accor and Novotel in the region. The assessee entered into franchise agreement with AAPC India Hotel Management Pvt. Ltd. (AAPC India) and Economic Hotels India Pvt. Ltd. (EHIS) to sub-license the brand names to third party hotels in India. The assessee has also sub licensed certain other Accor Intellectual Property Rights (IPR) to another group entity in India, namely, Accor Advantage Plus Marketing India Ltd. (Accor Advantage India) on a non-exclusive basis for the purpose of selling membership of loyalty program to customers in India. As observed by the Assessing Officer, though, assessee received certain income from its group entities in India, however, it did not file any return of income. Subsequently, the Assessing Officer reopened the assessment under Section 147 of the Act. In response to notice issued under Section 148 of the Act, assessee filed its return of income declaring income of Rs. 10,94,90,750. In the said return of income, assessee offered the amounts received towards franchise, license fee etc. as royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and blackberry services cannot and should not be treated as royalty. He has also relied upon number of judicial precedents, as submitted in a separate compilation. Broadly, the propositions canvassed by the learned counsel appearing for the assessee are as under: * Receipts towards loyalty program, reservation fee, marketing fee and blackberry services are not for use or right to use any equipment, process, trade mark etc. * The receipts are not in the nature of FTS as the services rendered are not managerial, technical or consultancy services. * In support, the assessee has relied upon the following decisions: i) DIT vs. Sheraton International Inc. [2009] 178 Taxman 84 (PB 153); ii) CIT(International Taxation) vs. M/s. Starwood Hotels & Resorts Worldwide Inc. [2018] (ITA No.467/2018) and CM APPLN 15049/2018) (PB -504); iii) Starwood Hotels & Resorts Worldwide Inc. & Others vs. ACIT [2022] ITA No.2011/Del/2019 and others (PB -537); iv) Wealth Hotel Management LP [TS-875-HC 2022(DEL] (PB 509); v) CIT vs. ITC Hotels Ltd. [2015] (60 Taxmann.com 346) (PB 174) vi) Sangri-La International Hotel Management Pte. Ltd. vs. ACIT [2023] ITA Nos. 2254 & 2255/Del/2022 (PB 670 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to AAPC India without any mark-up, which in turn invoices participating hotels. 9. In so far as central reservation services are concerned, through central reservation services the AAPC group provides the guests with a network to make room reservation at the hotels and to undertake other guest relationship activities. The participating Indian Hotels are allowed to update the features in Accor's Central Reservation System including charging rates, hotel descriptions etc. Indian Hotels are connected to the centralized reservation system through internet, wherein hotels are responsible for the purchase and installation of hardware, software and internet connections. The Central Reservation System is maintained outside India and the assessee has not deployed any server data, data centre, portable device or any other equipment in India in relation to the provision of the reservation services. The reservation fee is utilized towards the cost of rendering reservation services, for instance, maintenance needed to ensure that the system is upgraded to enhance functionality and runs optimally and safely. 10. So far as marketing services are concerned, the Indian Group entity Accor Advant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d name etc., however, on examination of facts it is not found to be so. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Support Services ("NSS") and Starwood Portal Services ("SPS") to provide connectivity of hotels to Technology Centre. While Network Support Services supports day to day operations of Wide Area Network (WAN), email and remote access. Starwood Hotel Service acts as a tool for knowledge sharing and access to business content. (e) Operation Services Under this category, guests are offered a number of ways to get access to key information on their stay experience, including inroom video, internet and paper. It is intended to maximize the independent collection of data and facilitate customer services and service complaint resolution. (f) Human Resources/Training Courses. The assessee conducts training courses directed at various levels of hotel personnel to assist in employee development and to enhance guest satisfaction. 10. When the Assessing Officer intended to treat the amount received by the assessee towards centralized services as fee for included services under Article 12(4)(b) of the Tax Treaty, the assessee had relied upon the decision of the Sheraton International Inc. (supra) rendered by the Tribunal and the decision of Hon'ble Delhi High court in DCIT Vs. Sheraton In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered by the assessee under Centralized Services Agreement is ancillary and subsidiary to the License Agreement for grant of right to use trade name, the amount received by the assessee in pursuance to Centralized Services Agreement has to be treated as FIS under Article 12(4)(a) of the Tax Treaty. 13. It is relevant to observe, identical issue relating to taxability of centralized service fee as FIS under Article 12(4) came up for consideration before the Coordinate Bench in case of Sheraton International Inc. (supra) in assessment years 1995-96, 1996-97, 1999-2000 and 2000-01. After analyzing the terms of Centralized Services Agreement, which is more or less identical to the agreement entered into by the present assessee, the Tribunal observed that the assessee is basically providing the Indian hotels services for publicity, marketing and reservation. The main purpose/intention of the association between the assessee and the Indian hotels was to promote the hotel business in their mutual business interest through worldwide publicity, marketing and advertisement. The various facilities as well as services provided were merely the means to attain this main objective. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under Article 12(4)(a), which in turn, refers to Article 12(3) of the Tax Treaty. Article 12(3) of the Tax Treaty reads as under: "USA ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 1. .............. 2. ............... 3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of trademark in terms of Article 12(3)(a). The payment was received by the group affiliates under a distinct and separate license agreement. Whereas, the assessee provided centralized services relating to marketing, advertisement, promotion etc. under a distinct and separate agreement. So, when the assessee is not the owner of the property, there is no question of allowing a third party to use or right to use of the property. That being the case, the services for which payments are received cannot be considered to be ancillary and subsidiary to the application or enjoyment of the right of property or information for which royalty has been paid. Further, the MoU to India - USA Tax Treaty while explaining the import of Article 12(4)(a) has laid down the following parameters: "Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or (b) is received. Thus, paragraph 4(a) includes a technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer and recipient of the royalties]. To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a royalty payment under paragraph 3 is made, such services shall be considered "included services" only to the extent that they are described in paragraph 4(b)." 21. If one critically examines the determinative factors/parameters to qualify as FIS under Article 12(4)(a), it can be seen, most of the determinative factors/parameters do not apply to the centralized service fee received by the assessee. This is so, because, the services rendered by the assessee do not facilitate the use of trade name/trademark. Rather, as has been held by the Coordinate Bench in case of Sheraton International Inc. (supra) and affirmed by the Hon'ble Jurisdictional High Court, the predominant object is advertisement, marketing and promotion of the hotels. The assessee does not provide such services in ordinary course of business arrangement involving royalty as described under Article 12(4)(a). The amount received by the assessee towards centralized services cannot be considered to be insubstantial and certainl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices Agreement are related to each other and the Centralized Services Agreement actually flows out of the License Agreement but still the issue which requires examination is, whether the Centralized Services Agreement is ancillary or subsidiary to the License Agreement. In our view, the answer to the aforesaid question would be in the negative. Clearly, predominant purpose of the Centralized Service Agreement and the overall arrangement between the parties is to provide advertisement, marketing and promotion of the hotel business. Even, the quantum of fees received under both the agreements would demonstrate the aforesaid fact. 24. As could be seen from the materials placed on record, as against the license fee of Rs. 6,05,43,227/- received by the affiliates, the assessee has received centralized services fee of Rs. 6,93,56,315/-. Therefore, the quantum of fee received by the assessee in no way makes it ancillary and subsidiary to the licence fee received by the group affiliates. Further, the observations of learned Commissioner (Appeals) that in case of Sheraton International Inc. (supra) neither the Tribunal nor the Hon'ble Jurisdictional High Court have examined the taxabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been placed by it mainly on the provisions of Articles 12(3)(a) as well as 12(4)(r/) and 12(4)( b). Article 12(3){b) being specifically applicable only to payments received for the use of or the right to use of any equipment of industrial, commercial or scientific nature, in any case, is not applicable to the facts of the present case. It is, therefore, relevant to consider as to whether the payment received by the assessee from the Indian hotels/clients was in the nature of "royalties" or "fees for included services" within the meaning given in Article 12(3)(a), 12(4)(a) or 12(4){b) of the DTAA between India and USA or "fees for technical services" within the meaning given in Explanation 2 to section 9(1){vii). 73. In order to decide this issue relating to the applicability of Article 12(3)(a), 12(4)( a) or 12(4)(b) of the DTAA or the provisions of section 9(1)(vii) read with Explanation 2 to the payment received or receivable by the assessee from the Indian hotels/clients in pursuance of the agreements entered into with them, it is necessary to appreciate the exact nature of services rendered by the assessee as is evident from the said agreements. In this regard, it is necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be relied upon by picking and choosing the same in isolation so as to say that part of the consideration received by the assessee, as attributable to the said services, was in the nature of 'royalties' or 'fees for included services'. Such an approach adopted by the Revenue authorities, in our opinion, was neither permissible in law nor practicable in the facts of the case and the conclusion drawn by them on the basis of such approach to cover the said services taken individually or in isolation divorced from the main intention within the meaning of 'royalties' or 'technical services' as defined in Explanation 2 to section 9( 1)(v/) or to section 9(l)(v») and/or that of "royalties" or "fees for included services" as defined in Article 12(3) and 12(4) of the DTAA between India and USA was neither well-founded nor justified. 74. On the other hand, the predominant object/purpose of the integrated business arrangement/between the assessee-company and its Indian clients/hotels as reflected in the relevant agreements so also as understood by both the sides was that of providing the services in relation to marketing, publicity and sales promotion and even the payments in que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. must remain with the person utilizing the services even after the rendering of the services has come to an end. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience, skill etc. 77. As already observed, a close reading of the relevant agreements especially the payment clause, the predominant nature of the services rendered, the integrated arrangement between assessee company and Indian hotels/clients as well as the nature of relationship between them as reflected in the relevant agreements so also as understood by both the sides leaves no doubt that the entire consideration was paid by the Indian hotels/clients to the assessee company for the services rendered in relation to advertisement, publicity and sales promotion of the hotel business worldwide and this being so as well as considering all the facts of the case including especially the fact that other services to be rendered by the assessee as enumerated in the various Articles of the relevant agreements were merely ancillary or auxiliary in nature being incidental to the integral job undertaken by the assessee to provide the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of FTS. It is only where services are separable and independent that the FTS will be assessable. In the present case, the services sought to be treated as 'fees for technical services' or 'fees for included services' were of ancillary or auxiliary in nature and being integral part of the job undertaken by the assessee-company, the same were neither independent of nor separable from the said job undertaken by the assessee in relation to publicity, advertisement and sales promotion of the hotel business worldwide. 79. Before us, the learned Special Counsel for the Revenue has referred to some of the Articles of the agreements between the assessee and the Indian hotels/clients to submit that the drawings, designs, documents, systems and other facilities agreed to be provided by the assessee to the Indian hotels/clients in terms of the said Articles are the components which have been provided/supplied in the process of rendering of the services in relation to advertisement, marketing and sales promotion. He has contended that since the same come within the purview of one or the other clauses contained in Explanation 2 to section 9(1 )(vi) and (vii) as well as Article 12(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f trademark, trade name etc. by the Indian hotels/clients. Having regard to all these facts and circumstances of the case borne out from the record including especially the relevant agreements between the parties, we find it difficult to accept the stand taken by the Revenue that the payments received by the assessee-company from the Indian hotels/clients in pursuance of the said agreements or any part was in the nature of royalties within the meaning of Article 12(3)(a). 81. As regards Article 12(3)(b) covering the payments received as consideration for the use of or the right to use any industrial, commercial or scientific equipment, we have already noted that neither the Revenue has invoked the provisions of this Article in the assessee's case nor the same otherwise also is applicable to the facts of the present case since there was no such use or the right to use any industrial, commercial or scientific equipment. This takes us to Article 12(4)(a) of the DTAA which covers only the "payments made for rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held as under: "5. We have heard the ld. Authorized Representative of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 6. Ld. DR for the revenue relied upon the order of the AO. However, the ld. AR for the assessee relied upon the order passed by the ld. CIT (A). 7. For the sake of ready reference, the findings returned by the ld. CIT(A) allowing the appeal is reproduced as under "8. I have carefully considered the above submissions, and the contentions of the appellant. I have also perused the assessment order and the orders of the Hon'ble ITAT and the Hon'ble Delhi High Court for the A Vs. 1995-96 to 2000-2001 in the case of Sheraton International Inc (group concern). The issue of taxability of the appellant's income from hotel related services provided to hotels in India, as royalty fees for technical services, stands squarely covered by of the judgment of the ITAT, Delhi in the case of Sheraton International Inc. at ITA Nos. 50 to 55/Del/2006 dated | 04.10.2006, It is also observed that the appeals of the Revenue have been dismissed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a business income. Since the assessee is not having any PE in India, its business income earned is not taxable in India. under:- 10. So, in view of what has been discussed above, we find no illegality or perversity in the impugned order passed by the Id. CIT (A), hence present appeal filed by the Revenue is hereby dismissed." 26. The aforesaid decision was upheld by the Hon'ble Jurisdictional High Court while dismissing Revenue's Appeal. The same view was reiterated by the Tribunal while deciding assessee's appeal in assessment year 2011-12 in ITA No. 203/Del/2016, dated 18.12.2018. It is relevant to observe, the aforesaid decisions of the Coordinate Bench have been upheld by the Hon'ble Jurisdictional High Court while dismissing Revenue's appeals. Identical is the factual position in assessment year 2013- 14, wherein, the Tribunal decided the issue in favour of the assessee in ITA No. 5144/Del/2016, dated 18.11.2019 and the Hon'ble Jurisdictional High Court has upheld the decision of the Tribunal. 27. Thus, keeping in view our detailed reasoning, hereinabove, and the ratio laid down in the binding judicial precedents rendered in assessee's own case as well as in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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