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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 ..... 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 Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income. Further, certain fees received towards training imparting training in relation to central reservation, integral property management system, information technology related services etc. were offered to tax as FTS. However, the fee received towards reservation services, marketing services, loyalty program, blackberry services were not offered to tax in India pleading that they are neither in the nature of royalty nor FTS but simply business income. 4. The Assessing Officer, however, issued a show cause notice calling upon the assessee to explain why reservation fee and receipts from loyalty program should not be treated as royalty. He further called upon the assessee to explain as to why the receipts from marketing fee and blackberry services should not be treated as FTS. In response to the show cause notice issued by the Assessing Officer, assessee furnished a detailed reply stating that the receipts from the stated services neith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hers (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); vii) ITO vs. Asian Hotels North Ltd. [2022] (ITA No. 210/Del/2016) (PB 182); viii) ACIT vs. Starwood M International Inc. [2021] ITA No. 5191/Del/2017 (PB 517); ix) DCIT vs. Westin Hotel Management LP [2020] ITA No. 5146/Del/2016) (PB 505); x) DCIT vs. Sheraton Overseas Management [2019] ITA No. 5142/Del/2016] (PB 512); xi) Renaissance Services BV vs. DDIT [2018] 94 taxxman.com 465 (PB 703); xii) DDIT vs. M/s. Marriott International Licensing B.V. [2013] (ITA No. 416/Mum/2008) (PB -204). 6. Learned Departmental Representative, on the other hand, strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals). 7. We have considered rival submissions and perused the material available on record. We have also applied our mind to decisions relied upon. 8. Before we proceed to decide the nature of receipts, whether royalty or not, it is necessary to examine the exact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Advantage India sells membership of Accor Advantage Plus Club a benefit program of the group. As part of the arrangement, the assessee receives marketing fee from Accor Advantage India in relation to the sale of membership in the club. In lieu of the fee, assessee provides support to Accor Advantage India by providing information related to telemarketing, reviewing the promotional material to participating hotels etc. 11. So far as blackberry services are concerned, it provides information on smart phones regarding room availability, including, news about hotels, special offers etc. It allows users to search for bookings, make modification to the bookings and manage loyalty club membership. 12. The facts on record reveal that all these services are provided by the assessee from outside India and no employees of the assessee ever visit India for providing such services. Thus, on conspectus of facts available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. 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. 15. 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) 313 ITR 267 (Del) has upheld the decision of the Tribunal holding that the receipts are neither in the nature of royalty nor FTS. In case of Starwood Hotels Worldwide Inc. Vs. ACIT ( ITA No. No. 2011/Del/2019 dated 29.04.2022), the Co-ordinate Bench, while considering identical nature of dispute, has held as under: 9. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. The facts on record reveal that the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived 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 International Inc. (supra) to canvass that the issue is squarely covered by the decision of the Tribunal and High Court, hence, the amount received cannot be treated as FIS under Article 12(4)(b). It is quite evident, the Assessing Officer, though, accepted the fact that the decisions relied upon by the assessee are in its favour, however, following the decision taken in the past assessment years and also observing that the Revenue has preferred SLP before the Hon ble Supreme Court against the decision of the Hon ble High Court in case of Sheraton Hotel. (supra), the Assessing Officer concluded that the payment received is in the nature of FIS under Article 12(4)(b) of the Tax Treaty. 11. Interestingly, while reaching such conclusion, the Assessing Officer has recorded a factual finding that there is no change in the nature of services over the years, though, the assessee has entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 Tribunal observed, the main job undertaken by the assessee is promoting hotel business by worldwide publicity, marketing and advertisement and any other services provided are in the nature of ancillary and auxiliary to the main job. The Tribunal observed that the rationale behind providing the use of trade mark/trade name was not only going to help and assist the assessee in rendering its services relating to publicity, advertisement and business promotion of the Indian hotels, but such use was also going to help the assessee in advertising its other hotels worldwide and to promote their business as the Indian Hotels, in terms with the agreement, will take steps to recommend and promote Sheraton Inn/Hotels worldwide and to make every reasonable effort to encourage the use of same by all of its customers and guest. Thus, the intention behind entering into agreement was to benefit from mutual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments 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 Article 8. 18. As could be seen from the opening sentence of the Article, it defines the term Royalty . It is quite obvious that the payment made by the Indian hotels to one of the group affiliates towards use of trademark has been treated as royalty and there is no dispute to the aforesaid factual position as the concerned group affiliates have offered the amount to tax as royalty. Article 12(4) of the Tax Treaty defines FIS as under: USA ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 1. .. 2. 3. .. .. 4. For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for which a royalty is received under a licence or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). It is understood that, in order for a service fee to be considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) or (b) is received, the service must be related to the application or enjoyment of the right, property, or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payments are made must be the application or enjoyment of the right, property, or information described in paragraph 3. The question of whether the service is relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 certainly not part of combined payment of services rendered and license fee. The payments for centralized services and royalty are not under a single contract and cannot be said to be related contracts. Thus, many of the determinative factors mentioned in the MoU to India- USA treaty are absent to constitute the centralized service fee as FIS under Article 12(4)(a). In this regard, the following example given in the MOU to India US Tax Treaty would be of much relevance: Example. 2 Facts: An Indian manufacturing company produces a product that must be manufactured under sterile conditions using machinery that must be kept completely free of bacterial or other harmful deposits. A U.S. company has developed a special cleaning process for removing such deposits from that type of machinery. The U.S. company enters in to a contract with the Indian company under which the former will clean the latter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 taxability of centralized services fee in the context of Article 12(4)(a) of the Tax Treaty, is totally incorrect and misleading statement. If one reads the decision of the Tribunal in case of Sheraton International Inc. (supra), it would be very much clear that before the Tribunal an additional ground was raised by the Revenue regarding applicability of Article 12(4)(a) of India US Tax Treaty to the centralized service fee received. However, after in depth examination of the issue, the Tribunal has held as under: 72. It appears from the orders of the authorities below passed in the present case that while treating the amount in question received by the assessee from Indian hotels/clients as royalty and/or fees for included services the Assessing Officer relied on Article 12(3) and 12(4){b) of the lndo-American DTAA besides the provisions of section 9(l)(v ) of the Income-tax Act, 1961 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 necessary to read the said agreements as a whole as held in the various judicial pronouncements discussed above so as to ascertain the exact nature of services as well as the relationship between the two parties. We have already done this exercise in the context of issue relating to applicability of section 9(1)(vi) read with Explanation 2 and after examining and analyzing all the relevant clauses and articles of the said agreements in detail, we have come to a conclusion that the arrangement between the assessee company and the Indian hotels/clients was in the nature of integrated business arrangement predominantly for rendering the services in connection with publicity, advertising and sales including reservations of the Indian hotels worldwide. The main intention/purpose of the said arrangement was to promote the hotel business worldwide in the mutual interest of both the sides and the other se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 question were entirely made by the Indian hotels/clients to the assessee-company for such services as expressly provided in the relevant agreements. 75. In the case of Dy. CAT v. Boston Consulting Group Pte Ltd. [2005] 94 ITD 3 1 (Mum.) the assessee was a foreign company receiving income by providing strategy consultancy services such as marketing and sales strategy, business strategy and portfolio strategy to its clients in India and the said income was sought to be held as in the nature of fees for technical services within the meaning given in relevant Articles of the DTAA between India and Singapore and after comparing the scope of Article 12(4)(/?) of IndiaUS Treaty with that of the same Article of the India-Singapore Tax Treaty, it was held by the Tribunal that the services rendered by the assessee-company being non-technical services could not be covered by the scope of Article 12(4)(6) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 services in relation to advertisement, publicity and sales promotion of the hotel business worldwide, it is very difficult to accept the stand of the Revenue that the amount so paid by the India hotels/clients to the assessee-company or any part thereof was paid for the use of a patent, invention, model, design, secret I formula or process or trademark or similar property or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as envisaged in Article 12(3)(a), 12(4)(a) or 12(4)(b) of the DTAA or in section 9(1)(vii) read with Explanation 2. 78. The supply of drawings, design, documents, information etc. such as fire safety system, computer reservation system etc. as mentioned in the relevant Articles of the agreements on which much emphasis has been laid by the learned Special Counsel for the Revenue was made by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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) and 12(4) of the DTAA between India and USA, the payment/consideration attributable to the same should be apportioned so as to bring the same to tax in India. In this regard, it is observed that a similar contention was raised before the Hon ble Delhi High Court on behalf of the Revenue in the case of Mitsui Engg. Ship Building Co. Ltd. (supra). The same, however, was rejected by the Hon ble Jurisdictional High Court holding that it was not possible to apportion the consideration for design on the one part and engineering, manufacturing, shop testing etc. on the other since the price paid by the assessee to the supplier was a total contract price which covered all the stages involved in the supply of machinery from the stage of design to the stage of commissioning. ln the present case also, the entire price was paid by the Indian hotels/clients to the assessee-company in pursuance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial 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 described in paragraph 3 is received. As clarified and explained in the Memorandum of Understanding dated 15th May, 1989, paragraph 4(a) of Article 12 thus includes technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a license or sale as described in paragraph 3(a) as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). In this regard, we have already held that the payments received by the assessee in the present case from the Indian hotels/clients were not in the nature of royalties within the meaning given 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices 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 the Delhi High Court vide order dated 30.01.2009, therein the Hon'ble High Court held that the Tribunal had rightly concluded that the payments received were in the nature of business income, and not in nature of royal or fees for technical services. It was accepted by the Ld. Assessing Officer that the appellant did not have a permanent establishment in India, and hence the business income could not be brought to tax under Article 7 of the India- USA DTAA, Moreover, no question of taw had arisen for their consideration, as these are findings of fact by the Tribunal. Therefore, respectfully following the orders of the higher judicial authorities, the bringing to tax of the business receipts of the appellant in India, is 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 cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 group company, viz, Sheraton International Inc., cited before us, 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. 16. It is relevant to observe that the aforesaid decision of the Coordinate Bench has been upheld by the Hon'ble jurisdictional High Court. Thus, as per the ratio laid down in the judicial decisions, cited supra, the amount in dispute, in our view, cannot be qualified as Royalty . Accordingly, we direct the Assessing Officer to delete the addition. 17. In the result, the appeal is allowed. Pronounced in the open court on 29.12.2023. - - TaxTMI - TMIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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