TMI Blog2023 (12) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment was received by the group affiliates under a distinct and separate license agreement. Whereas, the assessee provided centralized services relating to marketing, advertisement, promotion etc. under a distinct and separate agreement. So, when the assessee is not the owner of the property, there is no question of allowing a third party to use or right to use of the property. That being the case, the services for which payments are received cannot be considered to be ancillary and subsidiary to the application or enjoyment of the right of property or information for which royalty has been paid. Thus 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. Appeal of assessee allowed. - Dr. B. R. R. Kumar, Accountant Member And Sh. Yogesh Kumar US, Judicial Member For the Assessee : Sh. S. K. Aggarwal, CA And Sh. Himanshu Aggarwal, CA For the Revenue : Sh. Anshuman Pattnai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat merely because the services are managerial, technical and consultancy in nature, the same will not ispo-facto result into FTS under Article 12 of India-Singapore DTAA, unless the services results into making available technical knowledge, experience, skill, know-how or processes, which enables the service recipient to apply the technology contained therein. 1.7 That on the facts and in the circumstances of the case and in law, the Ld. AO and the Hon ble DRP have erred in holding that the Management Support Services 'make available' technology, knowledge, skill, experience to the recipient, ignoring the explicit language of Article 12(4)(b) of the DTAA which provides that the recipient should be in a position to apply the technology contained in the services. 1.8 That on the facts and in the circumstances of the case and in law, the Ld. AO and the Hon ble DRP have failed to appreciate that the support services provided by the Appellant are required by IHG India on an on-going basis and hence the technology, experience etc., cannot be said to be made available by the Appellant to IHG India. 3. The issue of Management Support Charges/FTS and the issue of mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not connected or dependent upon each other. It is also relevant to observe, while the license agreements for user of brand name are with various third party hotels in India, the agreement for provision of Management Support Services is with the Indian subsidiary. Therefore, it cannot be said that the amount received from provision of Management Support Services is ancillary and subsidiary to the license agreement. It is further relevant to observe, in the year under consideration, the assessee had received more income from provision of Management Support Services than royalty. In that sense also, Management Support Services cannot be considered to be ancillary and subsidiary to the license agreement. These aspects could have been clarified by the assessee, had learned Commissioner (Appeals) given an inkling that he intends to apply Article 12(4)(a) of the treaty to bring to tax the Management Support Services fee. 17. Be that as it may, the nature and character of Management Support Services fee received by the assessee in the impugned assessment year is no different from similar fee received in assessment year 2013-14. After threadbare analysis of Management Support Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2000-01. After analyzing the terms of Centralized Services Agreement, which is more or less identical to the agreement entered into by the present assessee, the Tribunal observed that the assessee is basically providing the Indian hotels services for publicity, marketing and reservation. The main purpose/intention of the 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition 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. .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application or enjoyment of the right of property or information for which royalty has been paid. Further, the MoU to India USA Tax Treaty while explaining the import of Article 12(4)(a) has laid down the following parameters: Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services 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 mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not apply to the centralized service fee received by the assessee. This is so, because, the services rendered by the assessee do not facilitate the use of trade name/trademark. Rather, as has been held by the Coordinate Bench in case of Sheraton International Inc. (supra) and affirmed by the Hon ble Jurisdictional High Court, the 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 produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the hotel business. Even, the quantum of fees received under both the agreements would demonstrate the aforesaid fact. 24. As could be seen from the materials placed on record, as against the license fee of Rs. 6,05,43,227/- received by the affiliates, the assessee has received centralized services fee of Rs. 6,93,56,315/-. Therefore, the 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices within the meaning given in Article 12(3)(a), 12(4)(a) or 12(4){b) of the DTAA between India and USA or fees for technical services within the meaning given in Explanation 2 to section 9(1){vii). 73. In order to decide this issue relating to the applicability of Article 12(3)(a), 12(4)( a) or 12(4)(b) of the DTAA or the provisions of 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the main intention within the meaning of royalties or technical services as defined in Explanation 2 to section 9( 1)(v/) or to section 9(l)(v ) and/or that of royalties or fees for included services as defined in Article 12(3) and 12(4) of the DTAA between India and USA was neither well-founded nor justified. 74. On the other hand, 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 technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as the nature of relationship between them as reflected in the relevant agreements so also as understood by both the sides leaves no doubt that the entire consideration was paid by the Indian hotels/clients to the assessee company for the services rendered in relation to advertisement, publicity and sales promotion of the hotel business worldwide and 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 env ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otel business worldwide. 79. Before us, the learned Special Counsel for the Revenue has referred to some of the Articles of the agreements between the assessee and the Indian hotels/clients to submit that the drawings, designs, documents, systems and other facilities agreed to be provided by the assessee to the Indian hotels/clients in terms of the said Articles 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 12(3)(b) covering the payments received as consideration for the use of or the right to use any industrial, commercial or scientific equipment, we have already noted that neither the Revenue has invoked the provisions of this Article in the assessee s case nor the same otherwise also is applicable to the facts of the present case since there was no such use 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal is reproduced as under: 8. I have carefully considered the above submissions, and the contentions of the appellant. I have also perused the assessment order and the orders of the Hon'ble ITAT and the Hon'ble Delhi High Court for the A Vs. 1995-96 to 2000-2001 in the case of Sheraton International Inc (group concern). The issue of taxability of the appellant'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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew was reiterated by the Tribunal while deciding assessee s appeal in assessment year 2011-12 in ITA No. 203/Del/2016, dated 18.12.2018. It is relevant to observe, the aforesaid decisions of the Coordinate Bench have been upheld by the Hon ble Jurisdictional High Court while dismissing Revenue s appeals. Identical is the factual position in assessment year 2013- 14, wherein, the Tribunal 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. 19. In our view, the ratio laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X
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