COUNTRY INN & SUITES BY RADISSON, INCORPORATED,FOREIGN COMPANY vs. ACIT, CIRCLE-1(2)(1) INT. TAX., NEW DELHI

PER SAKTIJIT DEY, JM:

Captioned appeals have been filed by different assessees

challenging the taxability of amount received towards centralized

services fee from Indian hotels as Fee for Technical/Included

Services (FTS/FIS). The appeals have reached this stage either

through Dispute Resolution Panel (DRP) or Commissioner of

Income Tax (Appeals) route.

identical except minor variations, for ease of reference, we

propose to take up ITA No.2011/Del/2019, in case of Starwood

Hotels & Resorts Worldwide Inc. as the lead appeal.

ITA No.2011/Del/2019 for AY: 2015-16

assessee is a company incorporated under the laws of United

States of America (USA) and is a tax resident of that country. As

stated by the Assessing Officer, assessee is engaged in the

business of providing hotel related services in several countries

around the world, including India. For this purpose, the assessee

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and group affiliates have entered into three separate agreements

with Indian Hotels. The agreements are of the following nature:

(a) Licence Agreement for grant of right to use trade name;

(b) Operating Services Agreement; and

(c) Centralized Services Agreement either by the assessee itself

or through group concerns.

3.1 It is evident, in respect of services rendered under the

License Agreement and Operating Service Agreement specified in

item (a) and (b) above, amounts received by the group affiliates for

providing such services have been offered to tax in India and has

been accepted by the Revenue. However, insofar as the amount

received under Centralized Services Agreement, under which, the

assessee provides hotel related services, such as, worldwide

publicity, marketing, advertisement services etc., the assessee did

not offer it to tax in India, pleading that such receipts neither

being in the nature of royalty nor fee for technical/included

services, either under section 9(1)(vi) or 9(1)(vii) of the Act or

under Article 12 of India–US Double Taxation Avoidance

Agreement (DTAA), it is not taxable in India. Further, the assessee

claimed, though, the amount received is in the nature of business

income, however, in absence of Permanent Establishment (PE) in

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India, the amount is not taxable. To support its claim before the

Assessing Officer, the assessee relied upon a number of decisions,

including, the decision of the Tribunal and Hon’ble Jurisdictional

High Court in assessee’s own case as well as in case of group

concern, viz., DIT Vs. Sheraton International Inc. (2009) 313 ITR

267 (Del.)

3.2 While dealing with assessee’s claim, the Assessing Officer

observed that against the decision of the Hon’ble High Court, the

Revenue has gone in further appeal before the Hon’ble Supreme

Court and further, similar plea taken by the assessee in the

preceding assessment years was not accepted by the Revenue.

Having so observed, the Assessing Officer held that the amount

received by the assessee for providing hotel related services,

known as centralized services, is in the nature of FTS in terms of

section 9(1)(vii) of the Act. Further, he held that even under India–

USA DTAA, the amount received by the assessee is to be regarded

as fee for included services, hence, taxable in India.

3.3 While coming to such conclusion, the Assessing Officer

observed, the nature of services being rendered by the assessee

has remained same over the years. Though, new agreements

might have been executed by the assessee from time to time. He

6 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

observed, being a member of Sheraton group, the assessee has a

vast knowledge and experience in the field of hotel business.

Therefore, the experience acquired by the assessee is in the

nature of information pertaining to industrial, commercial and

scientific experience. He observed, Sheraton Group is renowned in

the hotel industries all over the world and is the owner of many

permanent brands, namely, Sheraton, Westin, Marriott etc. The

group over the years has standardized many processes, designs,

hotel layouts, room interiors, management etc. which have to be

adhered to while providing services to licensee. He observed,

though, the assessee and group affiliates has entered into

separate agreements for provision of services, however, such

services are provided as a package under one contract and

licensee does not have any option to refuse to take certain kind of

services from the Sheraton Group. He observed, practically, the

various kinds of services provided by the assessee and group

affiliates cannot be separated and are part of a package.

Therefore, they should not be split up and analyzed separately

only for the purpose of taxation.

3.4 Thus, ultimately, the Assessing Officer concluded that the

amount received by the assessee under the Centralized Services

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Agreement for providing hotel related services is in the nature of

FTS/FIS, both under the Act as well as Treaty provisions, hence

taxable in India. While doing so, he gave a categorical finding that

the assessee does not have any PE in India.

3.5 Against the aforesaid decision of the Assessing Officer, the

assessee preferred an appeal before learned Commissioner

(Appeals). While examining the issue, learned Commissioner

(Appeals) picked up one of the hotel related service agreement

between the assessee and Le Meridian Hotel at Kochi and found

that the assessee while providing services under the agreement

has received the following:

3.6 He observed, the primary agreement which enables and sets

off the business of the franchisee is the license agreement, for

which, license fee is paid. Whereas, Centralized Services

Agreement is merely a subsidiary and ancillary agreement to the

main license agreement. He observed, the license fee received

from Indian Hotels is in the nature of royalty and as such has

been offered to tax by the affiliate. Insofar as payment received by

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the assessee under Centralized Serviced Agreement, learned

Commissioner (Appeals) held that since such services are

ancillary and subsidiary to the application or enjoyment of right,

property or information, for which, the payment was received, as

described in Article 12(3) of the India-USA DTAA, it will come

within the expression FIS under Article 12(4)(a) of the Treaty.

Hence, there is no need for complying with the “make available”

clause provided under Article 12(4)(b) of the treaty.

3.7 Thus, he ultimately concluded that since the amount

received by the assessee towards centralized service fee would fall

within Article 12(4)(a) of the Tax Treaty and Article 12(4)(b) would

not be applicable, the “make available” clause would not apply.

For the very same reason, he also distinguished the various

decisions cited before him, including the decision of the Hon’ble

Delhi High Court in assesse’s own case as well as in case of group

companies. Thus, he held that since the Hon’ble Delhi High Court

while deciding the issue in case of Sheraton International Inc.

(supra) has not examined or dealt with the applicability of Article

12(4)(a) of the Treaty, the ratio laid down by Hon’ble Delhi High

Court would not apply. Therefore, deviating from the finding of

the Assessing Officer that the amount received towards

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centralized services is assessable under Article 12(4)(b), learned

Commissioner (Appeals) held that the amount in dispute is

assessable under Article 12(4)(a) of the Tax Treaty. While doing

so, he also referred to Memorandum explaining Article 12(4)(a) of

the Tax Treaty. Thus, ultimately, learned Commissioner (Appeals)

concluded that the amount in dispute is taxable as FIS under

Article 12(4)(a) of the Treaty.

assessee submitted, neither the Assessing Officer nor learned

Commissioner (Appeals) have disputed that the issue has been

decided in favour of the assessee not only by the Tribunal but

also by the Hon’ble Jurisdictional High Court. However, no valid

reason has been provided by them for not following the decision of

the Hon’ble Jurisdictional High Court. To emphasize that the

issue in dispute is squarely covered by the decision of the

Tribunal in case of Sheraton Hotels (supra), learned counsel drew

our attention to the relevant observations of the Bench. He

submitted, learned Commissioner (Appeals) has not provided any

reason why the amount is taxable under section 9(1)(vi) and

9(1)(vii) of the Act but has erroneously concluded that the amount

is taxable under Article 12(4)(a) of the Treaty. He submitted, the

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observation of learned Commissioner (Appeals) that neither the

Tribunal nor the Hon’ble Jurisdictional High Court have

examined the applicability of Article 12(4)(a) of the Tax Treaty, is

completely misleading, as while deciding the issue in case of

Sheraton International Inc. (supra), the Tribunal has examined

applicability of Article 12(4)(a) of the Tax Treaty and held that it

cannot be treated as FIS. He submitted, the departmental

authorities have not disputed the fact that the assessee is not the

owner of trade mark/trade name. He submitted, it is an admitted

factual position that the license fee received by the affiliates

towards trade mark/trade name has been offered for taxation as

royalty. He submitted, the Indian hotels have executed three

different agreements. Whereas, services provided under these

agreements are not overlapping and are related to hotel operation.

He submitted, these agreements were executed with different

parties and there is separate consideration payable. Thus, he

submitted, the issue is squarely covered by the decision of the

Tribunal in case of Sheraton International Inc. (supra).

that centralized service fee is ancillary and subsidiary to the

transaction of grant of license to use the trade mark/trade name,

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learned counsel for the assessee submitted, such conclusion of

learned Commissioner (Appeals) is based merely on presumption.

He submitted, while deciding the issue in case of Sheraton

International Inc. (supra), the Tribunal did analyze the nature of

transaction and held that the purpose for rendering centralized

services is to undertake the job of publicity, marketing and

advertisement of hotels and that trade mark/trade name etc. were

made available to the Indian hotel clients as an integral part of

the business arrangement between them. Thus, he submitted,

the availability of trade mark/trade name to the Indian hotels was

merely incidental to carrying out the job of advertisement,

publicity and sales promotion undertaken by the assessee. He

submitted, for applying Article 12(4)(a) it is necessary that the

services should be directly related to the application or enjoyment

of the right, property and information as described in Article

12(3)(a) and (b) and the predominant purpose of the arrangement

under which service fee is paid is the application or enjoyment of

the right, property or information described in Article 12(3)(a)/(b).

He submitted, the expression “ancillary and subsidiary” used in

Article 12(4)(a) must be read with reference to the words

“application or enjoyment of the right, property or information” for

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which royalty was paid. He submitted, in assessee’s case, the

amounts paid towards centralized services are not ancillary and

subsidiary to the payment of license fee. Thus, the receipt cannot

be treated FIS under Article 12(4)(a). He submitted, in the present

case, learned Commissioner (Appeals) has presumed that the

amount received by the assessee towards centralized services are

for use of trade mark, however, the terms of the agreement make

it clear that the payments are not for use of trade mark.

Therefore, unless the services are ancillary and subsidiary to the

application or enjoyment of the right to use the trademark, the

payments will not come within the ambit of Article 12(4)(a) of the

Treaty. He submitted, merely because license fee/royalty is paid

for use of trade name to an affiliate, it does not mean that what is

paid under the centralized services is ancillary and subsidiary to

the application or enjoyment of trade mark/trade name.

Revenue’s case under Article 12(4)(a) would not survive, as, while

deciding assessee’s appeal, the Tribunal has also deliberated on

the applicability of Article 12(4)(a) of the Treaty and held that

since, the payment received by the assessee from Indian hotels

are not in the nature of royalty within the meaning given in Article

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12(3)(a)/(b), it cannot be treated as FIS under Article 12(4)(a) of

the Treaty. Therefore, he submitted, the observation of learned

Commissioner (Appeals) that the decision of the Tribunal and

Hon’ble Delhi High Court in preceding assessment years are

distinguishable since the applicability of Article 12(4)(a) of the

Treaty was not examined, is thoroughly misleading. Learned

counsel submitted, the contention of learned Departmental

Representative that the terms of the agreement considered in the

impugned assessment year are totally different from the case

decided by the Tribunal and Hon’ble Delhi High Court is contrary

to the facts on record as the Assessing Officer himself has

accepted that the nature of services rendered by the assessee has

remained same over the years, even though, new agreements

might have been executed from time to time. He submitted, even

learned Commissioner (Appeals) has not disturbed such factual

finding of the Assessing Officer.

strongly relied upon the observations of the Assessing Officer and

the first appellate authority. Further, he submitted, in case of

Sheraton Hotels Ltd. (supra) decided by the Tribunal and High

Court, the Indian Hotel availing the services has itself created an

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established brand, which was useful to the Sheraton Hotels.

Whereas, in the present case, the Indian Hotel, which availed the

services, has just started the service, hence, has not created its

own brand, which could be useful to the overseas entity. Thus he

submitted, the present assessment year would stand in a different

footing than assessment year 2009-10, wherein, the Tribunal and

Hon’ble High Court has decided the issue in favour of the

assessee. In support, he relied upon the following decisions:

learned Departmental Representative, at this stage, cannot

change the factual position by arguing something which is not the

case of either the Assessing Officer or Commissioner (Appeals).

Further, he submitted, the decision rendered in case of Marriott

International Inc. Vs. CIT (supra) cited by learned Departmental

Representative being clearly distinguishable on facts would not be

applicable. He submitted, in case of Marriott International Inc.

(supra) there is a factual finding of the Tribunal that the entire

arrangement is intended to split consideration for royalty and,

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therefore, consideration paid for services were nothing but a tax

planning to lower the taxes. Further, the interlinkage between the

agreements was established to hold that the royalty payments

were collected with the provisions of sales and other related

services, which were claimed as business receipts. He submitted,

the decision rendered in case of JC Bamford Excavators Ltd.

(supra) would not be applicable was also rendered in a different

factual context, hence, would not be applicable. Thus, in

conclusion, learned counsel for the assessee submitted, the issue

is squarely covered by the decisions of the Tribunal in assessee’s

own case as well in case of Sheraton International Inc. (supra),

which has been confirmed by Hon’ble Delhi High Court. Further,

he relied upon a decision of the coordinate Bench in case of

Spencer Stuart International BV vs. ACIT, [2018] 94

taxmann.com 380 (Mumbai-trib).

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

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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 under the

aforesaid categories are as under:

(a) Sales and Marketing

Assessee will undertake marketing of hotels outside India.

(b) Loyalty Programs

Various Loyalty Programs, such as, Starwood Preferred

Planner (“SPP”), Star Choice, Team HOT, Starwood Preferred

Guest (“SPG”) and IFH-Reservation Mystery Shopper

Program are under taken by the assessee, for which, the

Indian Hotel has to pay certain amount of fee for enjoying

the program.

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(c) Distribution of Reservation Services

The assessee provides reservation services, such as, offering,

booking, modifying and communicating Guest Rooms and

Meeting Space reservations for the Hotel through

international computerized reservation systems. These

services are rendered using internet/telephone.

(d) Technological Services

Under this category, assessee provides Network Support

Services (“NSS”) and Starwood Portal Services (“SPS”) to

provide connectivity of hotels to Technology Centre. While

Network Support Services supports day to day operations of

Wide Area Network (WAN), email and remote access.

Starwood Hotel Service acts as a tool for knowledge sharing

and access to business content.

(e) Operation Services

Under this category, guests are offered a number of ways to

get access to key information on their stay experience,

including in-room video, internet and paper. It is intended to

maximize the independent collection of data and facilitate

customer services and service complaint resolution.

(f) Human Resources/Training Courses

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The assessee conducts training courses directed at various

levels of hotel personnel to assist in employee development

and to enhance guest satisfaction.

received by the 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.

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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.

is, whether the amount received by the assessee for various

services, commonly known as centralized services, will fall within

the ambit of FIS under Article 12(4)(a) of the Treaty. For holding

the payment received by the assessee to be in the nature of FIS

under Article 12(4)(a), learned Commissioner (Appeals) has

attempted to link the Centralized Services Agreement entered into

by the assessee with License Agreement entered into by the

Indian Hotels with group affiliates for grant of right to use trade

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name. It is a fact on record, under License Agreement for grant of

right to use trade name, the Indian hotels have paid license fee to

the affiliates. The affiliates have also offered such license fee as

royalty income. There is no dispute that the license fee paid to the

affiliates have been taxed in India. It is the reasoning of learned

Commissioner (Appeals) that since the services rendered by the

assessee under Centralized Services Agreement is ancillary and

subsidiary to the License Agreement for grant of right to use trade

name, the amount received by the assessee in pursuance to

Centralized Services Agreement has to be treated as FIS under

Article 12(4)(a) of the Tax Treaty.

of centralized service fee as FIS under Article 12(4) came up for

consideration before the Coordinate Bench in case of Sheraton

International Inc. (supra) in assessment years 1995-96, 1996-97,

1999-2000 and 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

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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 promotional effort

undertaking by each of the entity.

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(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 available’

clause under Article 12(4)(a) of the Treaty. In case of

Sheraton International Inc. neither the Tribunal nor

the Hon’ble Jurisdictional High Court to examine the

implication and applicability of Article 12(4)(a) of the

Tax Treaty.

determinative factors for classification of the consideration

received as FIS under of paragraph 12(4)(a) of the treaty, as,

explained in the Memorandum of Understanding (MoU) to India–

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US Treaty are clearly satisfied, as, the predominant factor in

relation to the clients is the grant of license to use the name,

which gave rise to royalty and all other payments and agreements

flow from the License Agreement.

provisions contained under Article 12(4)(a), which in turn, refers

to Article 12(3) of the Tax Treaty. Article 12(3) of the Tax Treaty

readS as under:

“USA ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 1. ………….. 2…………… 3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio 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.”

defines the term ‘Royalty”. It is quite obvious that the payment

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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 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.”

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

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rendering any technical or consultancy services would come

within the ambit of FIS, if such services are ancillary and

subsidiary to the application and enjoyment of the right, property

or information for which the payment described in Article 12(3) is

received. So, the conditions to be satisfied to be regarded as FIS

under Article 12(4)(a) are, services for which the payment was

received must be ancillary and subsidiary to the application or

enjoyment of the right, property or information for which the

payment in the nature of royalty under Article 12(3) is received.

assessee is neither the owner of the trademark nor has received

any payment as a consideration for the use of, or right to use of

trademark in terms of Article 12(3)(a). The 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

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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 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 :

27 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

factors/parameters to qualify as FIS under Article 12(4)(a), it can

be seen, most of the determinative factors/parameters do 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

28 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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 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).

both the services are interlinked, however, the predominant

29 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

purpose of the arrangement is provision of cleaning services,

hence, will not be ancillary or subsidiary to the rental of

monitoring machine. Hence, the cleaning services are not to be

regarded as FIS under Article 12(4)(a) of the Tax Treaty.

case. The aforesaid illustration to some extent can be made

applicable to the facts of the present appeal. Even if one agrees

with learned Commissioner (Appeals) that the License Agreement

and Centralized Services Agreement are related to each other and

the Centralized Services Agreement actually flows out of the

License Agreement but still the issue which requires examination

is, whether the Centralized Services Agreement is ancillary or

subsidiary to the License Agreement. In our view, the answer to

the aforesaid question would be in the negative. Clearly,

predominant purpose of the Centralized Service Agreement and

the overall arrangement between the parties is to provide

advertisement, marketing and promotion of the hotel business.

Even, the quantum of fees received under both the agreements

would demonstrate the aforesaid fact.

against the license fee of Rs.6,05,43,227/- received by the

30 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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:

31 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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 these additional grounds are purely legal and all the facts relevant to consider and adjudicate the same are on record, we. however, find no merits in the objection raised by the learned, counsel for the assessee and admitting the additional grounds raised by the Revenue, we now proceed to consider and decide the issues raised in these additional grounds also on merits. In support of the Revenue’s case that the impugned amount received by the assessee from the Indian hotels/clients was in the nature of ‘royalty’ or ‘fees for included services’ as per the DTAA between India and America, reliance thus has been placed by it mainly on the provisions of Articles 12(3)(a) as well as 12(4)(r/) and 12(4)( b). Article 12(3){b) being specifically applicable only to payments received for the use of or the right to use of any equipment of industrial, commercial or scientific nature, in any case, is not applicable to the facts of the present case. It is, therefore, relevant to consider as to whether the payment received by the assessee from the Indian hotels/clients was in the nature of "royalties" or "fees for included services" 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).

32 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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. Moreover the rationale behind providing such use at no cost has been explained on behalf of the assessee which is found to be satisfactory by us for the detailed reasons given in the foregoing portion of this order. Having regard to all these aspects, we have come to a conclusion that the various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the services relating to advertising, publicity and sales promotion including reservations of the Indian hotels worldwide in mutual interest cannot be relied upon by picking and choosing the same in isolation so as to say that part of the consideration received by the assessee, as attributable to the said services, was in the nature of ‘royalties’ or ‘fees for included services’. Such an approach adopted by the Revenue authorities, in our opinion, was neither permissible in law nor practicable in the facts of the case and the conclusion drawn by them on the basis of such approach to cover the said services taken individually or in isolation divorced 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.

33 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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 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 these services are technical in nature.

34 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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.

35 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

assessee-company, the same were neither independent of nor separable from the said job undertaken by the assessee in relation to publicity, advertisement and sales promotion of the hotel business worldwide.

36 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

relevant terms and conditions of the agreements and this is the way in which both the sides had apparently understood and acted upon such arrangement. It was thus neither desirable nor possible to apportion any portion of the consideration received by the assessee- company from the Indian hotels/clients towards use of trademark, trade name etc. by the Indian hotels/clients. Having regard to all these facts and circumstances of the case borne out from the record including especially the relevant agreements between the parties, we find it difficult to accept the stand taken by the Revenue that the payments received by the assessee-company from the Indian hotels/clients in pursuance of the said agreements or any part was in the nature of royalties within the meaning of Article 12(3)(a).

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

37 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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 under Article 12(4)(b) due to failure of

‘make available’ condition, has made an unsuccessful attempt to

bring it within the ambit of Article 12(4)(a) of the Treaty and in the

processes has misrepresented certain facts.

taxability of centralized services fee as FIS is a recurring issue

between the assessee and the Revenue from the past years. It is

relevant to observe, while deciding the issue in assessment year

2010-11, the Tribunal in ITA No.202/Del./2016, dated

28.09.2017, has held as under:

“5. We have heard the ld. Authorized Representative of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

38 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

“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, 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.

“Double taxation relief-Agreement between India and USA- Payment 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

39 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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 that the agreement was a colourable device- Such findings of fact having not been challenged as perverse, no substantial question of law arose out of the order of the Tribunal”

Jurisdictional High Court while dismissing Revenue’s Appeal. The

same view 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

40 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

Hon’ble Jurisdictional High Court has upheld the decision of the

Tribunal.

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.

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 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

41 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

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 opinion, the decisions cited by

learned Departmental Representative would be of no help to

advance the case of the Revenue.

delete the addition.

42 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

ITA No. 2012/Del/2019 for AY : 2015-16 ITA No. 2013/Del/2019 for AY : 2015-16 ITA No.2015/Del/2019 for AY : 2015-16 30. The factual position in these appeals are, more or less,

identical to ITA No. 2011/Del/2019 decided in the earlier part of

the order. Hence, our decision therein would apply mutatis

mutandis to all these appeals. Accordingly, additions are deleted.

ITA No.9265/Del/2019 for AY : 2016-17 ITA No.9689/Del/2019 for AY : 2016-17

footing, as, in contrast to the other assesses, in the present case,

the assessees have entered into a single agreement with the

Indian hotel owners to operate hotels in India under their

respective brand names. The agreements also provide for

rendering of hotel related services by the assessees, such as,

marketing, reservation and allied services. The assessees have

received royalty/license fee for license to use the brand name

which has been offered to tax in India. Insofar as, fee received for

marketing, reservation and allied services, the assessees have

claimed it as business income, hence, not taxable in India in

absence of a PE. However, the departmental authorities have

treated it as FIS under Article 12(4)(a) of the India–US Tax Treaty.

43 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

assessee and Shri Sanjay Kumar, learned Departmental

Representative. Though, the only differentiating factor in these

appeals is, the assessees have entered into a single agreement for

license to use brand name and provision of centralized services,

however, all other facts relating to centralized service fee are

identical to the facts involved in the appeals related to other

assessees dealt by us in earlier part of the order. In fact, while

disposing of the objections of the assessee in the impugned

assessment year, learned DRP has followed its directions in

assessment year 2015-16. In assessment year 2015-16, though,

learned DRP has agreed that the nature of service fee received by

the assessees is identical to the receipts in case of Sheraton

International Inc., however, the ratio laid down in case of

Sheraton International Inc. (supra) was not applied only for the

reason that the applicability of Article 12(4)(a) was not examined

in case of Sheraton International Inc. (supra). We have already

deliberated how the aforesaid finding of the departmental

authorities are thoroughly misconceived and not borne out from

the materials on record. We have noticed, observations of the

Tribunal in case of Sheraton International Inc. (supra) reproduced

44 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

in the earlier part of the order would clearly reveal that the

applicability of Article 12(4)(a) of the treaty to the centralized

service fee was examined and discarded. Therefore, the basic

premises on which the departmental authorities have not applied

the decision of Sheraton International Inc. (supra) are flawed.

Merely because the grant of license to use brand name and

provision of centralized services are contained in a single

agreement, it cannot be said that centralized services, which

includes marketing, promotion, reservation and other allied

services flow out of grant of license to make them ancillary and

subsidiary to grant of license. Even, the quantum of service fee

received if compared to the royalty income, would not make it

ancillary and subsidiary so as to make it FIS under article 12(4(a)

of the treaty. In our view, service fee received by the assessees

would clearly fit in to the illustration given in example 2 of MoU to

India-USA DTAA.

in these appeals, the agreement between the assessees and the

Indian hotels and other materials on record, we are of the view

that our reasoning given in case of Starwood Hotels & Resorts

Worldwide Inc. in ITA No.2011/Del/2019, in the earlier part of

45 ITA Nos. 2011/Del/2019; 2012/Del/2019; 2013/Del/2019; 2015/Del/2019; 9265/Del/2019 & 9689/Del/2019

the order, would equally apply to these appeals, as well, as it

cannot be said that the payment received towards centralized

service fee is ancillary and subsidiary to the license fee.

Accordingly, we delete the additions.

Order pronounced in the open court on 29th April, 2022

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER

Dated: 29th April, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi