TMI Blog2023 (3) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be seen, the marketing and reservation activities performed by the assessee are not only distinct and different from the license fee but they are done under two distinct and separate agreements. Therefore, in our view, the marketing and reservation receipts cannot be treated to be ancillary and subsidiary to the license fee. Hence, such fee will not fall under Article 12(4)(a) of the treaty. Similarly, the nature of services rendered does not demonstrate that they are in the nature of managerial, technical or consultancy services. Even if, to some extent they may involve consultancy services, however, there is nothing on record to demonstrate that while rendering the services, the assessee had made available technical knowledge, experience, skill, know-how or processing etc. to bring it within the ambit of FTS under Article 12(4)(b) of the treaty. See Starwood Hotels and Resorts case [ 2022 (7) TMI 781 - ITAT DELHI] , thus we direct the Assessing Officer to delete the additions in both the assessment years. Taxability of reimbursement of expenses as FTS both under the provisions of the Act as well as India-Singapore DTAA - As alleging that the assessee did not provide the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otels. The assessee is the authorized licensee of the Shangri-La brand and related intellectual property for India. The assessee had entered into three separate agreements with third party Indian hotels. The first agreement is for hotel management where the assessee provides management services from outside India to third party Indian hotels. The second agreement is Hotel Marketing and Reservation Services agreement. Under this agreement, the assessee acts as a marketing consultant on third party Indian hotels profits, reservation, marketing and communication services from outside India with the object of attracting international business to the third party Indian hotels. The third agreement is Trade-mark Licensee Agreement under which the assessee, being the licensee of Shangri-La brand, and trade mark and related intellectual property for India grants license for the use of intellectual property, trade mark, brand name etc. In the assessment years under dispute, the assessee earned revenue from third party Indian hotels towards management fee and license fee. In the return of income filed for the impugned assessment years, the assessee offered to income the management fee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anel. 8. We have considered rival submissions and perused material on record. 9. As discussed earlier, under the Hotel Marketing and Reservation Services agreement, the assessee had the following receipts: Marketing receipts frequent guest program receipts, joint advertising co-ordination fund contribution and reservation fee. 10. The marketing receipts are for marketing and promotional services undertaken by the assessee for the promotion of Shangri - La hotel, including, third party Indian Hotels. The services include development of marketing plan and budget and marketing consultancy services rendered outside India. The expenditure incurring towards marketing and promotional activities are primarily aimed at public recognition, promotion of the hotels in source markets outside India to bring international business to Shangri - La Hotels across the world including India. The marketing receipts are utilized for common benefit of all hotels and are expended on general advertising, marketing activities including market intelligence, communication and publicity, production of promotional literature and other sales program. It also includes cost towards salaries of staff wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee are not only distinct and different from the license fee but they are done under two distinct and separate agreements. Therefore, in our view, the marketing and reservation receipts cannot be treated to be ancillary and subsidiary to the license fee. Hence, such fee will not fall under Article 12(4)(a) of the treaty. Similarly, the nature of services rendered does not demonstrate that they are in the nature of managerial, technical or consultancy services. Even if, to some extent they may involve consultancy services, however, there is nothing on record to demonstrate that while rendering the services, the assessee had made available technical knowledge, experience, skill, know-how or processing etc. to bring it within the ambit of FTS under Article 12(4)(b) of the treaty. In any case of the matter, while deciding identical nature of dispute in any case of Starwood Hotels and Resorts Vs. ACIT (supra), the co-ordinate bench 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 has entered into agreements with a number of Indian hotels for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 into fresh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition thereof ; and (b) payments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that are ancillary and subsidiary to 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 que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... predominant object is advertisement, marketing 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantum of fee received by the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 9(1)(vii) read with Explanation 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 inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the predominant object/purpose of the 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 India-US 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this being so as well as considering all 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 Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticles are the components which have been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the right to use any industrial, commercial 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 1 5thi 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant's income from hotel related services provided to hotels in India, as royalty fees for technical services, stands squarely covered by f 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l decided the issue in favour of the assessee 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. 28. For the sake of completeness, we must observe, in course of hearing, learned Departmental Representative has relied upon some judicial precedents to drive home the point that the payment received towards centralized services fee is in the nature of FIS under Article 12(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on International Inc (2009) 178 taxman 84 (Del). He, however, states that the said decision of this Court has not been accepted by the Revenue and an appeal has been preferred against the same, which is pending adjudication before the Supreme Court. 4. The counsel for the Revenue has not brought anything on record to distinguish the facts of present case with the facts involved in Sheraton International Inc. (supra). 5. Admittedly, this Court in Sheraton International Inc. (supra) has decided the issue involved in the present appeals in favour of the Assessee. 6. Though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date. Consequently, in view of the judgments passed by the Supreme Court in Kunhayammed and Others vs. State of Kerala and Another, (2000) 6 SCC 359 and Shree Chamundi Mopeds Ltd. Vs. Church of South India Trust Association CSI Cinod Secretariat, Madras (1992) 3 SCC 1, the present appeals are dismissed being covered by the judgment passed by the learned predecessor Division Bench in Sheraton International Inc. (supra). 7. However, it is clarified that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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