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TMI Blog2024 (2) TMI 830X X X X Extracts X X X X X X X X Extracts X X X X ..... (7) TMI 781 - ITAT DELHI ] for AY 2015-16 held that the impugned receipts in the hands of the assessee cannot be treated as FTS/FIS either under the provisions of the Act or under the India- USA DTAA. 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. Appeal of the Revenue is dismissed. - Shamim Yahya, Accountant Member And Ms. Astha Chandra, Judicial Member For the Assessee : Shri Amit Arora, Shri Vishal Misra, CA For the Department : Shri Vizay B. Vasanta, CIT-DR ORDER PER ASTHA CHANDRA, JM The appeal filed by the Revenue is directed against the order dated 19.05.2023 of the Ld. Commissioner of Income Tax (Appeals) 43 , New Delhi ( CIT(A) ) pertaining to the Assessment Year ( AY ) 2021-22. 2. The solitary ground raised by the Revenue is as under:- 1 Whether the Ld. CIT(A) has erred in law in holding that the entire payments received by the assessee from its Indian customers on account of Centralized Services did not cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing his findings in para 5.1 to 5.6 of his appellate order which is reproduced hereunder:- 5.1 I have examined the facts at hand. I have perused the submission of the appellant company. It is pertinent to mention here that the primary issue under consideration was decided by the undersigned in the case of group concem M/SW International Inc. for the A.Y 2017-2018 in appeal no 105:32/2019-20. Relevant extract of the order is as under: 5.1 The contentions of the appellant have been considered and the order dated 19:02:2020 passed by AO and the orders of Hon'ble Delhi High Court for AY 2000-01 in case of Sheraton international Inc (group-concern) have also been perused. The grounds in appeal relate to payment received for centralised services as the same were not offered to tax since such payment does not qualify as FIS/FIS in terms of section 9 of the Act as well as article 12 of the India USA-DIAA. 5.2 The appellant had filed its return of income on October 31, 2017 declaring income of Rs. 1.45.07.352 and claiming a refund of Rs. 41,19.320. Further, the appellant had revised its return of income on March 20.2019 declaring income of Rs. 1,45.07.352 and claiming as refund of Rs. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA no. 50 to 55 /DEL/2006 dated 4.10.2006. It is observed that the appeals of the revenue have been dismissed by the Delhi High Court vide order dated 30.01.2009 where in the High Court held that the Tribunal had rightly concluded that the payments received were in nature of business income and not in nature of Royalty or fees for technical services. Further, it was accepted by the AO that appellant did not have a permanent establishment in India and hence the business income could not be brought to fox under Article 7 of India-USA DTAA. 5.8 Thus, following the orders of higher judicial authorities, the action of the assessing officer in bringing to fax the business receipts of the appellant in India is not acceptable. Therefore, the grounds number 2 3 are allowed. 5.2 The issues raised by the appellant company has been decided by the Hon'ble Delhi High Court vide order dated 02-08-2019 in ITA No. 713/2019 in the case of M/s Starwood Hotel Resorts Worldwide inc, a group concern wherein the Hon'ble High Court has held as under: 2. The question urged for consideration is whether the centralized services rendered by the Assessee would amount to technical services in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotel (supra), we are of the view that it is clearly distinguishable on facts. On a reading of the decision, it is very much clear that after examining the agreements entered into with the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra). 7. However, it is clarified that the order passed in the present appeals shall abide by the final decision of the Supreme Court in the Civil Appeal No.3094/2010. 5.5 As the issue of taxability of the appellant's income from hotel related services provided to various hotels in India as royalty/fees for technical service stands squarely covered by the judgement of the Hon'ble Delhi High Court in appellant's group company and its own case. It is observed that the appeals of the revenue have been dismissed by the Hon'ble Delhi High Court vide order dated 04-11-2022 wherein the Hon'ble High Court held that the tribunal had rightly concluded that the payments received were in nature of business income and not in nature of Royalty or fees for technical services. In my considered opinion, the AO has erred in not following the decision of Hon'ble High Court in the matter of Sheraton International Inc. (supra). Further, it was accepted by the AO that appellant did not have a permanent establishment in India and hence the business income could not be brought to fax under Article 7 of India-USA DTAA. 5.6 Thus, following the orders of higher judicial authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an hotels for providing hotel related services. As expressed by the Assessing Officer himself in the assessment order, the assessee provides hotel related services, inter alia, worldwide publicity, marketing and advertisement 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 IFHReservation 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 Meetin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the Tribunal and Hon ble Jurisdictional High Court in case of Sheraton International Inc. (supra) proceeded on a completely different angle 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 trademark nor has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Enterprises) or if the person providing the service is doing so in connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 to the facts of the present appeal. Even if one agrees with learned Commissioner (Appeals) that the License Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 hotels/clients was in the nature of royalty or fees for included services as per the DTAA between India and America, reliance thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-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 services relating to advertising, publicity and sales promotion including reservations of the Indian hotels worldwide in mutual interest can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son 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 business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 always be present and where such services are inextricably linked with manufacture, installation, sale or supply, they cannot be evaluated for the purpose of FTS. It is only where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady 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 desirable nor possible to apportion any portion of the consideration received by the assessee-company from the Indian hotels/clients towards use of trademark, trade name etc. by the Indian hot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 past years. It is relevant to observe, while deciding the issue in assessment year 2010-11, the Tribunal in ITA No.202/Del./2016, dated 28.09.2017, has held as under: 5. We have heard the ld. Authorized Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 that the revenue received by the assessee for providing centralized services is not in the nature of Fee for Technical Services (FTS) u/s 9( I )(vi) Explanation 2, but it is a business income. Since the assessee is not having any PE in India, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greements 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. 6. Notably, the aforesaid decision of the Coordinate Bench has been affirmed by the Hon ble Jurisdictional High Court while deciding Revenue s appeal in judgment dated 4th November, 2022 in ITA 435/2022. The observations of the Hon ble Delhi High Court in the judgment are as under: 4. The counsel for the Revenue has not brought anything on record to distinguish the facts of present ..... X X X X Extracts X X X X X X X X Extracts X X X X
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