2023 (6) TMI 1480 - AT - Income Tax

Income deemed to accrue or arise in India - payments received by the assessee from its Indian customers on account of Centralized Services viz. sales and marketing reservation fee centralized services fee and loyalty programs - 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. HELD THAT - The issue is squarely covered in favour of the assessee by the judgement of Hon ble Delhi High Court 2019 (8) TMI 1755 - DELHI HIGH COURT thus deleted the impugned addition. Decided in favour of assessee.

Summary

The core legal questions considered in this appeal are:

1. Whether the payments received by the assessee from Indian customers for centralized services-such as sales and marketing, reservation fees, centralized services fees, and loyalty programs-constitute "Fee for Technical Services" (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961, or "Fee for Included Services" (FIS) under Article 12(4)(a) of the India-US Double Taxation Avoidance Agreement (DTAA).

2. Whether the Commissioner of Income Tax (Appeals) erred by dismissing the Revenue's appeal relying on the decision of the Delhi High Court in the Sheraton International Inc. case, despite the Department filing a Special Leave Petition (SLP) before the Supreme Court challenging that decision.

Issue 1: Taxability of Centralized Services Payments as FTS/FIS

Legal Framework and Precedents: The primary legal provisions under consideration are Section 9(1)(vii) of the Income Tax Act, 1961, which defines Fee for Technical Services, and Article 12(4)(a) of the India-US DTAA, which governs the taxability of fees for included services. The relevant judicial precedents include the Delhi High Court's judgment in Director of Income Tax v. Sheraton International Inc. (2009), and decisions of the Income Tax Appellate Tribunal (ITAT) in cases involving group entities such as Starwood Hotels & Resorts Worldwide Inc. and W International Inc.

Court's Interpretation and Reasoning: The Court examined the nature of the payments received by the assessee under the Centralized Services Agreement. It noted that these payments were for services such as worldwide publicity, marketing, advertising, public relations, and reservations provided to Indian hotels by the foreign entity. The Court relied heavily on the earlier decisions of the Delhi High Court and ITAT, which consistently held that such centralized services fees do not qualify as FTS or FIS under the Act or the DTAA.

The Court emphasized that the payments were in the nature of business income rather than fees for technical services. It was also noted that the assessee did not have a permanent establishment (PE) in India, which is a critical factor under Article 7 of the DTAA for taxing business income. Since no PE existed, the business income could not be subjected to Indian tax.

Key Evidence and Findings: The agreements between the assessee and Indian hotels were scrutinized. Unlike other cases where multiple agreements were interlinked to constitute a single arrangement (e.g., Marriott Hotels), in this case, there was no finding that the License Fee Agreement and Centralized Services Agreement were to be construed as one. The payments were not split to disguise royalty payments but were genuine business receipts for centralized services.

Application of Law to Facts: Applying the legal framework and precedents, the Court found that the payments did not fall within the ambit of FTS or FIS. The absence of a PE meant that the income was not taxable under the DTAA. The Court rejected the Revenue's contention that these payments should be treated as FTS/FIS, noting that the Revenue's reliance on certain precedents was misplaced due to factual distinctions.

Treatment of Competing Arguments: The Revenue argued that the payments should be taxable as FTS/FIS and relied on the Sheraton International Inc. decision being under challenge before the Supreme Court. However, the Court observed that judicial discipline requires adherence to binding precedents unless and until they are overruled. The Revenue's attempt to disregard the Delhi High Court decision on the ground of the pending SLP was rejected. The Court also distinguished the Revenue's cited precedents on factual grounds, finding them inapplicable.

Conclusions: The Court upheld the CIT(A)'s order deleting the additions made by the Assessing Officer. It held that the centralized services fees received by the assessee do not constitute Fee for Technical Services or Fee for Included Services and are not taxable in India in the absence of a PE.

Issue 2: Reliance on the Sheraton International Inc. Decision Despite Pending SLP

Legal Framework and Precedents: The principle of judicial discipline mandates that lower authorities follow binding decisions of higher courts unless they are stayed or overruled. The Sheraton International Inc. decision by the Delhi High Court is a binding precedent for the jurisdiction.

Court's Interpretation and Reasoning: The Court noted that the Assessing Officer ignored the binding Delhi High Court decision on the ground that the Department had filed an SLP against it. The Court held that the mere filing of an SLP does not render the High Court decision non-binding. Until the Supreme Court overturns the decision, it must be followed.

Key Evidence and Findings: The CIT(A) and ITAT relied on the Sheraton International Inc. decision and subsequent affirmations by the Delhi High Court in related group company cases. The Revenue did not dispute the binding nature of these precedents but sought to circumvent them citing the pending SLP.

Application of Law to Facts: The Court applied the principle of judicial discipline and held that the Assessing Officer was not justified in ignoring the binding High Court decision. It was held that the Revenue's reliance on the pending SLP was misplaced and did not warrant deviation from established law.

Treatment of Competing Arguments: The Revenue's argument that the decision was under challenge was dismissed as lacking legal merit. The Court underscored the importance of respecting judicial precedents to maintain consistency and certainty in tax law.

Conclusions: The Court affirmed the CIT(A)'s reliance on the Sheraton International Inc. decision and dismissed the Revenue's appeal on this ground.

Significant Holdings:

"The payments received were in nature of business income and not in nature of Royalty or fees for technical services."

"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 India-USA DTAA."

"The Assessing Officer had failed to follow the principles of judicial discipline by disregarding the binding decision of the Hon'ble Delhi High Court on the ground that the said order was under challenge before the Hon'ble Supreme Court."

"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 and can only be treated as business income."

"In absence of a permanent establishment in India, such business income is not taxable in India."

"Decisions cited by the Departmental Representative were factually distinguishable and hence of no help to advance the case of the Revenue."

Final determinations:

1. The payments received by the assessee for centralized services do not constitute Fee for Technical Services or Fee for Included Services under the Income Tax Act or India-US DTAA.

2. The income from such payments is business income and not taxable in India in the absence of a permanent establishment.

3. The Assessing Officer's addition of Rs. 39,68,09,190/- on account of centralized fees was not sustainable.

4. The reliance on the Sheraton International Inc. decision by the CIT(A) and ITAT was correct and binding, notwithstanding the pending SLP before the Supreme Court.

5. The appeal filed by the Revenue was dismissed, affirming the order of the CIT(A).