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TMI Blog2023 (9) TMI 1470X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the nature of FTS/FIS. Ground is dismissed. - SHRI SAKTIJIT DEY, HON BLE VICE-PRESIDENT AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER For the Assessee : Sh. Amit Arora, CA, Sh. Vishal Missra, CA For the Department : Sh. Vizay B. Vasanta, CIT(DR) ORDER Captioned appeals by the Revenue arise out of two separate orders, both dated 22.03.2023, of learned Commissioner of Income Tax (Appeals)-43, New Delhi, pertaining to assessment years 2018-19 and 2019-20. 2. The only effective ground raised by the Revenue, which is common in both the appeals, reads as under: (i) 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 constitute Fee for Technical Services as defined u/s 9(1)(vii) of the Income Tax Act, 1961 or Fee for included services as defined under Article 12(4)(a) of the Indo-US DTAA. 3. Briefly the facts relating to this issue are, the assessee is a non-resident Limited Liability Partnership ( LLP ) incorporated in United States of America ( USA ) and is a resident of that country. Basically, the assessee is engaged in the business of providing various services to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciding identical issue in assessee s own case in ITA No. 2013/Del/2019 for assessment year 2015-16, the Tribunal, in order dated 29.04.2022, after analyzing in detail the nature and character of receipts has held that they cannot be treated as FTS/FIS, either under the provisions of the Act or under the treaty provisions. The observations of the Coordinate Bench in this regard are 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 has entered into agreements with a number of Indian 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment 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 into fresh agreements. Whereas, learned Commissioner (Appeals), to overcome the decisions rendered 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 cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OYALTIES 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctured 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'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. More ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring 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) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings, 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 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. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 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/cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 services rendered by the assesseecompany 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cited as Director of Income-tax vs. Sheraton International Inc. - (2009) 313 ITR 267 (Del.) as under: Double taxation relief-Agreement between India and USAPayment for advertising, publicity and sales promotion services-Tribunal found as a final fact finding authority that main services rendered by assessee, a company incorporated and tax resident in USA, to Indian company, was advertisement, publicity and sales promotion keeping in mind their mutual interests and in that context, the use of trademark, trade name etc, and other enumerated services referred to in the agreement with the assessee were incidental to main service- Tribunal thus rightly concluded that the payments received were neither in the nature of royalty under s. 9(l)(vi), Expln. 2 not in the nature of fee for technical services under s. 9(1) (vii), Expln. 2, but business income and assessee not having any PE in India such business income was not taxable in India- j There was nothing on record to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4)(a) of the Treaty. In this context, we must observe, after carefully examining the decisions of the Coordinate Bench in case of Marriott 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 opi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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