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TMI Blog2021 (6) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... pertaining to these two agreements and the following questions have been raised in the application : "1. On the facts and circumstances of the case and in law, whether the amounts received by the applicant from ABC India pursuant to system fund support service agreement for provision of marketing, frequency marketing programme ("ABC Rewards"), distribution mar keting and pursuant to reservation system facility agreement for reservation system facility, would be chargeable to tax in India under the provisions of the Income-tax Act, 1961 ('the Act') and under India-A Double Taxation Avoidance Agreement ('DTAA') ? 2. On the facts and circumstances of the case and in law, whether the amounts received by the applicant from ABC India for provision of marketing, ABC rewards, distribution marketing and reservation system facility would be chargeable to tax in India as royalty as per the provisions of section 9(1)(vi) of the Act and under article 12 of India-A DTAA ? 3. On the facts and circumstances of the case and in law, whether the amounts received by the applicant from ABC India for provision of marketing, ABC rewards, distribution marketing and reservation system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e form of two different agreements with effect from April 1, 2019 : system fund support service agreement (SFS) and reservation system facility agreement (RSF) instead of one composite agreement with the applicant earlier. According to the Revenue that this new arrangement was with an intention to avoid the taxability of the receipts. It was pointed out that even under this new arrangement the applicant would provide similar services as before and the actual nature of transaction was identical. The precise objection of the Revenue on these two issues is as under : "In reference to clause (i) of sub-section (2) of section 245R : The applicant has raised the questions related to the taxability of amount received by it from ABC India, a group company, in pursuance to system fund support service agreement for provision of marketing and in pursuance to reservation system facility agreement for reservation system facility. The receipts of the applicant for providing such services has been held taxable in India as royalty/fee for included services under section 9(1)(vi) and 9(1)(vii) of the Income-tax Act, 1961 and also under article 12(3) and 12(4) of the India-A DTAA for the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax (Appeals) wherein the issues regarding taxability of these receipts under the earlier arrangement was raised. She further submitted that the addition made by the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals) and the issues are now pending before the learned Income-tax Appellate Tribunal. She submitted that as the questions raised in the present application were already pending before the Income-tax Appellate Tribunal, the application may not be admitted. Further, she reiterated the stand of the Revenue that the arrangement by way of two fresh agreements for providing the identical services as already being provided earlier and the receipts of which has been held as taxable by the Department, was nothing but a ploy to evade tax. The learned Departmental representative submitted that the only change made under the new arrangement was to bifurcate the agreement into two parts, i. e., SFS and RSF agreement with SFS agreement covering marketing and frequency marketing programme while RSF covering services related to reservation system. Therefore, the change was only in the form and not in substance. According to the Revenue the sole intention of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, ABC India under the hotel management agreement was designated as "manager", obligated to provide hotel management, operation and technical support services to ABC brand hotels in India. The applicant (as an affiliate of ABC AP), was required to provide certain marketing and reservation related services to such third-party Indian hotels. The hotel management agreement referred by learned Commissioner of Income-tax in its report dated December 3, 2020 is a tripartite agreement executed prior to April 1, 2019 between DHI Ltd.-referred to as "owner" in the hotel management agreement, ABC India referred as "manager" in the hotel management agreement and ABCAP - referred as "licensor" in the hotel management agreement. The description of services provided under the aforesaid hotel management agreement to Indian hotels is tabulated below : Sl. No. Name of the party Type of fee Description of service 1 ABCAP designated as "licensor" in the hotel management agreement License fee for use of marks/brand name and associated know-how The granting of ABC's intellectual property rights for the use of ABC brand standards/know-how and brand marks. Accordingly, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India resident entities (i. e., third-party hotel owners and ABC India). It was adopted with the objective to ensure ease of doing business for the third-party hotel owners, which in-turn will result in growth of ABC brand hotels in India. With the above background and to enable ABC India to fulfil its obligations under the hotel management agreement, it has entered into the following inter-company agreements with the applicant : - Licence agreement between ABCAP and ABC India for the right to use ABC's intellectual property ; - System fund support services agreement ("SFS agreement") between the applicant and ABC India ; and - Reservation system facility agreement ("RSF agreement") between the applicant and ABC India. Comparison between Business model before and after April 1, 2019 : Under the new hotel management agreement, your honours may kindly note that there is a change in contractual obligations, as ABC India is required to provide the services under the hotel management agreement. Post the implementation of the new business model, ABC India is responsible for procuring and providing marketing and reservation related services to the India hotels, whereas und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cost which shall accrue to ABC India with effect from April 1, 2019. Copy of the relevant extract of the audited financial statement is attached herewith as annexure 3 for your honour's kind reference. Therefore, the above change in the role of ABC India has affected the role and position of foreign ABC entities (i. e., ABCAP and XYZI) vis-a-vis third-party Indian hotels. Under the new business model with effect from April 1, 2019, ABC India undertakes the primary responsibility under the hotel management agreement to procure and provide marketing and reservation related services to the Indian hotels, whereas previously such obligation falls on XYZI as an affiliate of ABC AP. It is further submitted that XYZI used to invoice directly to the third-party hotels in India previously, in relation to marketing and reservation related services provided by it, whereas ABC India is now the billing entity for aforesaid services to the India hotels. 6. It was submitted by the learned authorised representative that the issues pending before the Income-tax authorities were in respect of arrangement prior to April 1, 2019 and that the issues arising from the revised arrangement vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy pending before the Income-tax authority and, therefore, the bar under clause (i) of the proviso to section 245R(2) was attracted. The questions raised in the present application are in respect of the amounts received by the applicant from ABC India for the services rendered under SFS and RSF. These questions relate to provision of marketing, frequency marketing programmes (ABC rewards) and distribution marketing under SFS and reservation system facility under RSF. The present agreements were effective from April 1, 2019 and the first year in which these services as per new agreements would be subject to examination by the Department is the assessment year 2020-21. However, the proceedings pending before the Department are for earlier assessment years. The contention of the Revenue is that identical services were provided under the earlier agreements. Therefore, we have to first examine the nature of services provided in the old tripartite agreement as well as in the new agreements in order to find out whether the services for which payments are contemplated under SFS and RSF were being rendered in the old agreement. Services under SFS and RSF 9. It is found from SFS service ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be required that meets ABCI's obligations to those hotels. In return, ABCI will pay facility charges to XYZI." 11. It is thus evident that the applicant was already providing reservation system facility to ABC system hotels under hotel management agreement of ABC India with Indian hotels. As per the RSF agreement dated April 1, 2019, the applicant had agreed to continue the provision of reservation system facility to ABC system hotels on behalf of the ABC India. The effective date for RSF agreement was identical with that of SFS agreement. In essence, the reservation system facility being provided by the applicant to Indian hotels under hotel management agreement prior to RSF agreement was continued. The only change was in the nature of collection of facility charges for RSF services. Clause 3.1 of the agreement stipulated that ABC India shall pay XYZI fee of an amount equal to 95 per cent. of the technology facility fee payable by each ABC system hotel under hotel management agreement in respect of each calendar month. As in the case of SFS services, the reservation system facility under RSF was to be provided by the applicant not to ABC India but to Indian hotels under hote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights to the domain names and other identifications or elements used in electronic commerce as may be designated from time to time by manager's affiliates in accordance with manager's specifications to be part of the system ; (c) access to the reservation system, frequency marketing program, property management system, sales and catering system and information technology system operated in accordance with specifications established by manager from time to time ; (d) distribution of advertising, publicity and other marketing programs and materials ; (e) support from ABC's global sales force for wholesale accounts and third-party intermediates ; (f) the furnishing of training programs and materials ; (g) confidential or proprietary information relating to standards, specifications and policies for construction, furnishing, operation, appearance and service of the hotel ; (h) other reasonable requirements as stated or referred to in this agreement and from time to time in the brand standards or in other written communications from manager to owner ; and (i) programs for inspecting the hotel, measuring and assessing service and consumer opinion, (emphasis su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem in this bipartite agreement is exactly identical with the provision of access to reservation system in the earlier tripartite agreements as reproduced above. Further, the nature of system fund activities under the two agreements is also found to be identical. 15. The payment for all these services was in the form of contribution to systems fund which the owner was obliged to discharge. Clause 10.1 of the agreement stipulated that "For the duration of the term, owner shall pay the licensor, or if directed by licensor, its affiliates, the system contribution". As stated by the applicant the services in respect of system funds were provided by the applicant directly to the respective Indian hotels. It was also mentioned in the agreement that manager, licensor and their affiliates derive neither income nor profit from the system fund contributions. 16. In view of the above facts, it is crystal clear that the nature of services rendered by the applicant to Indian hotels under earlier tripartite hotel management agreement was identical with the nature of services as contemplated in the SFS and RSF agreements with ABC India. It is relevant to consider that the applicant was not a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w hotel management agreement and there was a change in contractual obligations post implementation of the new business model. It is submitted that ABC India was responsible for procuring and providing marketing and reservation related services to the India hotels, whereas under the former business model, XYZI (as an affiliate) was obliged to provide the aforesaid services directly to the Indian hotels under the hotel management agreement. We have considered the submission of the applicant. There was a change in role of ABC in the new model in respect of provision of right to use trademark/brands. But we do not find any change in the role of ABC India so far as providing marketing and reservation related services to the Indian hotels are concerned. In the tripartite arrangement also it was the primary responsibility of ABC India to procure and provide marketing and reservation related services to the Indian hotels. As already mentioned earlier these services were provided in the old model by XYZI as an affiliate and in the new model also it is being provided by XYZI as a sub-contractor. The services have been provided by XYZI to the Indian hotels directly in both the models. So we d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erience, skill know-now, or processes etc." 20. As informed by the Revenue the additions made by the Assessing Officer were confirmed by the Commissioner of Income-tax (Appeals) and the issues are now pending before the learned Income-tax Appellate Tribunal and this fact has not been disputed by the applicant. It is found that the questions raised in the present application are in respect of the issues which were already pending before the Income-tax authority in different years. Therefore, the bar under clause (i) of the proviso to section 245R(2) is found squarely attracted in this case. 21. The applicant has relied upon the ruling of this authority in the case of L. S. Cables (supra) and submitted that pendency of similar matter in respect of a transaction with different entity was no bar to seek advance ruling in respect of another transaction. The reliance of the applicant on this ruling is found to be misplaced. In the present case, the issues pending before the Department were not in respect of different entity, but in respect of the applicant's own case in the earlier years. Further, the issue to be considered here is not in respect of any transaction but about the na ..... X X X X Extracts X X X X X X X X Extracts X X X X
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