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PER PAWAN SINGH, JUDICIAL MEMBER; 1. These two appeal by assessee are directed against the order of ld. Commissioner of Income Tax (Appeals)-58 [the ld. CIT(A)], Mumbai dated 28.06.2016 & 24.10.2016 for Assessment Year 2011-12 & 2012-13 respectively. In both the appeals, the assessee has raised certain common grounds of appeal, therefore, both the appeals were clubbed, heard together and are decided by common order for the sake of brevity and convenience. The appeal for Assessment Year 2011-12 is treated as lead case. The assessee has raised the following grounds of appeal:
Mum 2016 & 764 Mum 2017-Renaissance Services BV
In holding that the amounts received by the Appellant under the Training and Computer Systems Agreement ('TCSA') on account of conducting core managerial training programs for managerial employees of the Indian hotels qualify as 'fees for technical services' under Article 12(5)(a) of the India- Netherlands tax treaty.
2. In holding that conducting core managerial training programs for managerial employees of the Indian hotels by the Appellant qualify as 'technical or consultancy services' without considering the training material submitted with the CIT(A) vide submission letter dated March 3, 3016; which evidences that the training programs conducted by the Appellant do not qualify as 'technical or consultancy services' under Article 12(5) of the India-Netherlands tax treaty. 3. In holding that the amounts received by the Appellant under the TCSA on account of providing access to the reservation system, property management system and other systems ('Centralized Reservation Facility') to the Indian hotels qualify as 'royalty' under Article 12(4) of the India-Netherlands tax treaty. 4. In stating that merely because the Appellant and another company of the Marriott Group have signed two different agreements with the Indian hotels (ie one for the use of the associated infrastructure of the Appellant and another for the payment of royalty), does not change the true nature of the transaction. 5. In holding that it is a case of splitting of the royalty amount since two different agreements are signed by the Indian hotels with two different companies of the Marriott Group. 6. In holding that the two different agreements were signed by different companies of the Marriott Group to reduce the gross royalty amount earned by the Marriott Group. 7. In not considering that the amounts received by the Appellant under the TCSA are in the nature of business profits as per Article 7 of the India- Netherlands tax treaty and in the absence of a permanent establishment in India as per Article 5 of the India-Netherlands tax treaty, the same cannot be taxed in the hands of the Appellant.
Mum 2016 & 764 Mum 2017-Renaissance Services BV
In placing reliance on the decision of the Mumbai Tribunal in case of Marriott International Inc vs Deputy Director of Income-tax (International Taxation) - 4(1) [(2016)69 taxmann.com 347] and thereby, treating the amounts received by the Appellant for providing Centralized Reservation Facility under the TCSA to the Indian hotels in the nature of 'royalty' under Article 12(4) of the India-Netherlands tax treaty.
The assessee vide application dated 22.10.2018 has raised following additional ground of appeal:
9. On the facts and circumstances of the case and in law, the assessment proceedings have been abated, since the learned assessing officer CAO') has failed to pass the order giving effect to the direction in Commissioner of Income-Tax (Appeals) order within the period of limitation as provided by the Income-Tax Act, 1961.
10. On the facts and in the circumstances of the case, and in law, the AO has erred in adding surcharge and education cess and secondary and higher education cess to the tax on income charged as per the provisions of the double taxation avoidance agreement between India and Netherlands. 3. Brief facts of the case are that the assessee is a company incorporated and tax resident of Netherlands and is a part of Marriott group. The assessee is engaged in conducting training programme and providing access to computer system viz Centralized Reservation System (CRS), Property Management and other system of Marriott chain of hotels. The assessee filed return of income during the relevant Assessment Year on 30.09.2011 declaring income of Rs. Nil. The return of income was selected for scrutiny. During the assessment, the Assessing Officer noted that assessee has shown the following payment from Indian Hotels Owners Association:
Particulars Amount (in Rs) Access to Computer Systems 5,46,47,982 3 Mum 2016 & 764 Mum 2017-Renaissance Services BV
Training Programs 54,19,012 Total 6,00,66,994 4. The Assessing Officer issued show-cause notice dated 15.12.2013 to the assessee to explain as to why the amount received for trading and computer system should not be treated as its income (without specifying its head).
The assessee filed its detailed reply vide reply dated 26.02.2013 as recorded by Assessing Officer in para-4 of the assessment order. After considering the contention of the assessee, the Assessing Officer treated the said payment for conducting training programme as Fees for Technical Purpose (FTS) as per the provisions of section 9(1)(vii) of the I.T. Act and Article 12 of India Netherlands Tax Treaty. The Assessing Officer also treated the payment for the access to the computer system as software royalty under section 9(1)(vi) as well as under Article 12(4) of India Netherlands Tax Treaty. The Assessing Officer further held that payment under training and computer system agreement was not reimbursement in absence of corresponding expenditure detail. On appeal before the ld. CIT(A), the action of Assessing Officer was upheld. However, the ld. CIT(A) treated the payment received for providing access to computer system as “Brand Royalty”. Aggrieved, further the assessee has filed the present appeal before us.
The assessee has also raised the additional ground of appeal
. In support of additional ground of appeal, the ld. AR of the assessee submits that no new Mum 2016 & 764 Mum 2017-Renaissance Services BV facts are necessary for bringing on record as all facts are available. The ld. AR of the assessee further submits that at this stage he is not pressing the ground no.9 (part of additional ground).
6. On the other hand, the ld. Departmental Representative (DR) for the revenue submits that Hon’ble Bench may take the decision on additional ground of appeal as per law.
7. Considering the submission of the parties and the fact that no new facts are necessary to be brought on record and that the facts relating to the additional grounds of appeal are emanating from the order of the lower authorities to adjudicate the additional ground. Therefore, the additional grounds of appeal raised by assessee are allowed.
8. On merit, the ld. AR of the assessee submits that Ground No. 1, 2 & 7 of the appeal relates to treating the payment towards training programme as FTS. The ld. AR of the assessee submits that these ground of appeal are covered in favour of assessee by the decision of Tribunal in assessee’s own case for Assessment Year 2009-10 in ITA No. 7195/Mum/2012 dated 08.06.2012.
9. On the other hand, the ld. DR for the revenue strongly supported the order of authorities below.
10. We have considered the rival submission of the parties and have gone through the orders of authorities below and the decision of Tribunal in assessee’s own case for Assessment Year 2009-10. We have noted that on 5 ITA No. 5678 Mum 2016 & 764 Mum 2017-Renaissance Services BV identical grounds of appeal, the Tribunal in assessee’s own case for Assessment Year 2009-10 passed the following order:
“10. We shall now advert to the claim of the assessee that the consideration received for conducting training programs had wrongly been held by the CIT(A) as FTS in its hands. The assessee had assailed the observations of the CIT(A), viz. (i). the training programs conducted by the assesses did “make available” technical knowledge; and (ii) that as the conducting of training programs by the assessee was “ancillary and subsidiary” to the royalty agreement, hence the consideration received therefrom was liable to be assessed as FTS under Article 12(5)(a) of the India-Netherland tax treaty. We find that as per the agreement entered into between the assessee and the Indian Hotels the assessee was to provide (i). certain core-training programs for management level personnel; and (ii). other training for other employees of the above referred Indian Hotels. However, during the year under consideration the assessee had only provided certain core-training programs for management level personnel. We are of the considered view that the claim of the assessee before the lower authorities that as the training services provided to the management level personnel were in the nature of general managerial/leadership training and the same did neither involve ‘make available’ or transfer of any technology to the personnel, had neither been dislodged before the lower authorities, nor anything has been placed on record before us by the ld. D.R, which could persuade us to hold otherwise. We find ourselves to be in agreement with the view taken by the ITAT, Bangalore in the case of ITO Vs. Veeda Clinic Research P. Ltd. (2011) 13 taxmann.com21 (Bang), that in order to successfully invoke the coverage of training fees by ‘make available’ clause in the definition of technical services, the onus is on the revenue authorities to demonstrate that the services do involve transfer of technology. We have further perused the case laws relied upon by the ld. A.R to impress upon us to return a finding that the consideration received by the assessee from providing training services being in the nature of managerial/leadership training, thus could not have been assessed as FTS in the hands of the assessee, as under:
(i). Llyods Register Industrial Services (India) P. Ltd. vs. ACIT (2010) 36 SOT 293 (Mum):
Mum 2016 & 764 Mum 2017-Renaissance Services BV
The Tribunal observed that the expenses incurred by the assessee which was engaged in the business of survey of ships, on the training of its employees who would inspect various mechanical and electrical equipments in the ship and ultimately issued a fitness certificate, could not be held as payments made for technical services. The Tribunal while concluding as hereinabove, observed that the employees by taking training from the Principal company had acquired only inputs to enable them to perform their work with desired state of efficiency. (ii). Ershisanye Construction Group India (P) Ltd. vs. DCIT (2017) 84 taxmann.com 108 (Kol): The Tribunal had observed that payments which were made by a Chinese company in respect of training of Chinese engineers of the assessee in english language would not constitute FTS. (iii). ACIT Vs. PCI Ltd. (2011) 12 taxmann.com 59 (Delhi): The High Court observed that payments made by the assessee to a non- resident party for training its personnel or customers to explain to the proposed buyers the salient features of the products imported by the assessee in India and to impart training to the customers to use the equipments cannot be held to be FTS. (iv). ITO Vs. Veeda Clinic Research P. Ltd. (2011) 13 taxmann.com21 (Bang): Where training services to the employees of the assessee company was general in nature, not involving any transfer of technology, the fees for providing such services was not taxable as FTS as per Article 13 of India-U.K tax treaty. (v). Wockhardt Ltd. Vs. ACIT (2011) 10 taxmann.com 208 (Mum): The services rendered by the employees of a non-resident company being in the nature of sharing management experiences and business strategies could not be termed as technical services. We have deliberated at length on the aforesaid judicial pronouncements in the backdrop of the facts involved in the case of the assessee before us, and are of the considered view that the consideration received by the assessee for the managerial/leadership training provided to the employees of the Indian Hotels cannot be held as FTS.
We have further deliberated on the reliance placed by the CIT(A) on the judgment of the Hon’ble Supreme Court in the case of CBDT Vs. Oberoi Hotels (India) Pvt. Ltd (1998) 231 ITR 148 (SC), wherein it was observed that ‘technical services’ included ‘professional services’. Still further, we find that the A.O also had relied on certain judgments/orders,viz. (i). Intertek Testing Services (2008) 307 ITR 418 (AAR); (ii). G.V.K Industries (1997) 228 ITR 564 (AP); (iii). Continental Construction Ltd. Vs. CIT (1992) 195 ITR 81 (SC); (iv). CBDT Vs. Oberoi Hotels (India) Pvt. Ltd (1998) 231 ITR 148 (SC); and (v). Dean, Goa 7 Mum 2016 & 764 Mum 2017-Renaissance Services BV
Medical College Vs. Dr. Sudhir Kumar Solanki (2001) 7 SCC 645, to support his view that ‘technical services’ included ‘professional services’. We find substantial force in the contention of the ld. A.R that in case training services rendered by the assessee to the Indian Hotels were to be construed as professional services, than the same would fall within the sweep of Article 14 of the India- Netherland tax treaty, which exclusively pertained to “Independent Personal Services” and would automatically be excluded from Article 12 dealing with “Fees for technical services”. Still further, a perusal of Article 14 reveals that the same could be assessed in the contracting state i.e India, subject to satisfaction by the assessee of either of the two conditions therein provided, viz. (a). fixed base for performing of the professional activities in the contracting state; or (b). stay for a period or periods exceeding 183 days in the fiscal year.
We shall now advert to the observations of the CIT(A) that as the Training and Computer systems agreements (for short ‘TCSA’) entered into by the assessee with the Indian Hotels, viz. M/s Viceroy Hotels Ltd., Hyderabad and M/s Chalet Hotels Ltd., Mumbai were an integral part of the licensing/royalty agreement, thus both the agreements were complementary to each other. The CIT(A) was of the view that as the training services rendered by the assessee were “ancillary and subsidiary” to the enjoyment of the rights, property or information pursuant to the royalty agreement, thus the consideration received by the assessee from rendering such services could safely be held as FTS as per Article 12(5)(a) of the India-Netherland tax treaty. We have deliberated at length on Article 12(5)(a) of the tax treaty, which reads as under:
“Article 12(5): For the purposes of this Article, “fees for technical services” means payment 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 4 of this Article is receives; or” We find that for invoking Article 12(5)(a) and holding the consideration received by an assessee from certain “ancillary and subsidiary” technical or consultancy services rendered for the application or enjoyment of the right, property or information as FTS, presupposes receipt by the assessee of a consideration towards royalty as provided in Article 12(4) of the tax treaty. We are of the 8 Mum 2016 & 764 Mum 2017-Renaissance Services BV considered view that as the assessee was not the owner of any brand or trademark for which any royalty would have been received by it under Article 12(4) of the India-Netherland tax treaty, hence the services provided to the Indian Hotels were in the ordinary course of its business, and could not be brought within the sweep of “ancillary and subsidiary” services as provided in Article 12(5)(a) of the India- Netherland tax treaty. We thus, are of a strong conviction that the CIT(A) loosing sight of the fact that as the assessee was not in receipt of any royalty as per Article 12(4) of the India-Netherland tax treaty, hence had failed to appreciate that the training services rendered by it could not have been held to be “ancillary and subsidiary” services under Article 12(5)(a). We thus, are of the view that the consideration received by the assessee for providing training services to the Indian Hotels could not be held as FTS under Article 12(5)(a) of the India- Netherland tax treaty. We are of the considered view that in terms of our aforesaid observations, as neither the training services rendered by the assessee to the Indian Hotels could be held to be technical services, nor the same could have been characterised as “ancillary and subsidiary” services as per Article 12(5)(a), hence the consideration received by the assessee for rendering the training services could not be held as FTS in its hands. We thus, not being persuaded to subscribe to the view taken by the CIT(A) that the consideration received for providing training services to the Indian Hotels was chargeable as FTS in the hands of the assessee, set aside his order. The Ground of appeal No. 2 is allowed in terms of our aforesaid observations.”
11. Considering the decision of Tribunal in assessee’s own case for Assessment Year 2009-10, when no material change in the facts is brought to our notice, therefore, respectfully following the order of Tribunal, we are of the view that the payments received programme cannot be treated as FTS as clearly held by the Tribunal, hence, the Ground No.1 2 & 7 of the appeal are allowed in favour of assessee.
12. Ground No. 3,4,5,6 & 8 relates to treating the payment for providing access to computer system as ‘Royalty’ in term of the Act and India-Netherlands 9 Mum 2016 & 764 Mum 2017-Renaissance Services BV tax treaty as well as under section 9(1)(vi) of the Income tax Act. The ld. AR of the assessee submits that in appeal for Assessment Year 2009-10, the Tribunal held that payment for providing ‘access to computer system cannot be taxed as ‘FTS’, wherein it was held that the common facilities provided to the Indian Hotels by the assessee were common facilities provided to the members of the Marriot Chain of Hotels across the world by the assessee, and were not tailor made services to suit their specific requirement, thus, the said facilities could not be construed as “technical services”.
In relation to the stand of the revenue that TSCA being integral to the license / Royalty agreement, providing access to computer system were “ancillary and subsidiary” to the enjoyment of the right, property or information pursuant to the royalty agreement, the Tribunal rejected the contention of the department in para 14 of the order. 14. For the stand of the revenue to tax the receipt as “Royalty’. The ld AR for the assessee submits that the revenue has not filed any appeal against the stand of the AO that the payments for access to computer system qualifies as royalty when the ld CIT (A) had concluded that system qualifies as FTS.
Thus, the Tribunal refrained from dealing with the contention of the assessee that the payment received for access to computer system could not be treated in the nature of royalty. Mum 2016 & 764 Mum 2017-Renaissance Services BV
The ld AR for the assessee further submits that during the period of assessment year under consideration, the AO took the view that the payment received for access to computers system qualify as “software royalty’, whereas the ld CIT(A) concluded that such payments qualify as “ Brand Royalty”. The ld. AR for the assessee submits that these services cannot qualify as “software royalty” as well as “brand Royalty”. The said receipt cannot qualify as ‘Software Royalty’ as the amount is received towards access to computer software /systems that it is access to a copyrighted article and there is no transfer of copyright or use of copyright itself, and hence cannot be taxed as royalty. Centralized reservation system, property management systems, and other systems are standard facilities, which the assessee provides to Marriot Chain of hotels. Use of such computer systems is non-exclusive, non-transferable and the assessee has the right to modify it. In order to treat the consideration received by assessee as royalty, it has to be established that payer, by making such payment, obtained, all or any of the copyright of such work. Distinction has to be made between the acquisition of a ‘copyrighted right’ and a ‘copyrighted article’. In the impugned cases, right to use the copyright has not been transferred, but it is a standard service which is offered by the assessee to the hotel owners. This does not give rise to any royalty income but instead would be in the nature of business income of the assessee. In Mum 2016 & 764 Mum 2017-Renaissance Services BV support of his submission the learned AR of the assessee relied upon the following decision:
Sr. Case Law Citation No. 1 DIT Vs Infrasoft Ltd. [2014] 220 Taxmann 273 (Del HC) 2 DDIT v. Shell Information Technology [2017] 80 yaxman.com 64 International BV (Mum) 3 ADIT v. First Advantage (P.) Ltd. [2017] 163 ITD 165 (Mum) [2016] 71 taxmann.com 213 4 ADIT v. Baan Global BV (Mum) 5 DDIT v. Reliance Industries Ltd. [2016} 159 ITD 208(Mum) 6 DCIT v. Atmel R & D India (P.) Ltd. [2016] 74 Taxmann.com 106 (Chennai) 7 Kotak Mahindra Old Mutual Insurance 3820 & Ltd. vs. JCIT 3821/Mum/2014, Mumbai ITAT, dated 24.05.2017 8 Bharat Bijlee Ltd. vs. ACIT ITA No.5326-5329/Mum/2014 Mumbai ITAT, dated 03.11.2017 Colgate Palmolive Marketing SDN BHD 9 ITA No. 2130/Mum/2004 v. JDIT 10 Mc Kinsey Knowledge Centre India (P.) [2018] 92 taxmann.com 226 Ltd. v. ITO (Delhi-Trib.) 11 DDIT v. Reliance Communication Ltd. [2018] 90 taxmann.com 358 (Mumbai-Trib.) 12 ITO v. Cadila Healthcare Ltd. [2017] 77 taxmann.com 309 (Ahmedabad-Trib.) 13 Visteon Technical & Services Centre (P.) [2017] 81 taxmann.com 390 Ltd. v. DCIT (Chennai-Trib.) 14 American Chemical Society v. DCIT ITA No. 6811/Mum/2017 Mum 2016 & 764 Mum 2017-Renaissance Services BV
It was further submitted that when right to assess a system is only for internal use of business and user/company cannot commercially exploit it, the same would not fall within the definition of royalty.
Further, the said receipt also cannot qualify as brand Royalty as the amount is received merely toward SS 2 computer software /systems and such payments are clearly not at all related to the Marriot brand. Further the assessing officer while distinguishing the case of Six Continents hotels inc versus DCIT [2011 ] 11 taxmann.com 332 (Mum ) relied by the assessee held that “the assessee does not promote an international brand and is purely providing right to use of systems and related services along with training to the Indian Hotels”. Thus, it is undisputed even by the revenue that in relation to services provided under the TCSA, the assessee does not undertake any brand -related activity. Therefore, any receipt to be characterized as royalty should be for the use or right to use of an intellectual property. It has to be given the meaning as per Income tax Act 1962, and the applicable Double Taxation Avoidance Agreement. Each and every business payment cannot be treated as royalty. Hence such receipt cannot be correct characterized as ‘Brand Royalty’. The learned CIT(A) while holding that payment received to assess to computer system qualifies as ‘ brand Royalty’ has relied on the decision of Marriot International Inc versus DDIT (2016) 69 taxmann.com 347 (Mumbai tribunal ). The learned AR for assessee submits that CIT (A) has wrongly relied on the aforesaid 13 Mum 2016 & 764 Mum 2017-Renaissance Services BV decision as the said decision is clearly distinguishable from the assessee’s case. In the said case the subject agreement for Marriot International was international sales and marketing agreement, executed by merit international with respect to hotel owners. In the said agreement with training in computer system agreement was executed by assessee with the respective hotel owners. Further, Meriat International rendered predominantly includes international advertising, marketing, promotion and sales program. Other services include service in relation to frequent travel program and assessed original vision system. The services predominantly include providing non-technical training and access to computer system.
Training rendered comprise of soft skill development leadership, the management communication etc. Systems comprise of a standardize regeneration system, property management system and other systems. The assessing officer in assessment year 2011-12 has acknowledged that assessee does not undertake any sales or marketing activity in para 3.3.4 of the order. The learned AR also distinguished the said case on various other points and would submit that the facts of the said decision are not applicable on the present case. The learned AR further submits that the decisions of hotel industry which are directly applicable to the facts of the present case, wherein it was held that fees for reservation systems cannot be treated as royalty (i) DIT Versus Shelton international INC 313 ITR 263 (Delhi ) 14 Mum 2016 & 764 Mum 2017-Renaissance Services BV (ii) Bass International Holding NV Vs JCIT (ITA No. 4341/ Mum/ 2002. (iii) Six Continents Hotel Inc Versus DCIT 11 taxmann.com 332 (Mum).
On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld DR for the revenue further submits that lower authorities have discussed the issues elaborately while treating the receipt of payment on account of royalty.
We have considered the submission of both the parties and perused the order of lower authorities. During the assessment the assessing officer apart from treating the treated the payment received for providing access to the computer software as FTS also treated as “ software royalty” under section 9(1)(vi) as well as under Article 12(4) of India-Netherland tax treaty. The assessing officer concluded that for providing the right to use the system developed by assessee or its affiliates specifically for the Indian Hotels and also providing technical services for the maintenance and use of such system, which is ancillary and subsidiary to the application or enjoyment of the right to use the computer reservation system, which is covered under the provisions of Article 12(4) read with 12(5) (a) of India –Netherlands Tax Treaty. And the payments also falls under section 9(1)(vi) of Income – tax Act. The ld CIT(A) confirmed the action of the assessing officer holding that the assessee is providing specialized reservation / property management / other system to the Indian Hotels. The system have been specially design and developed for Marriott Group for use of Renaissance ITA No. 5678 Mum 2016 & 764 Mum 2017-Renaissance Services BV Chain of hotels or MEA Chain of services Apartment and from the standard developed with the Mariette Trademark. The service agreement mandates that the system standard require that the hotel owner setup the facilities at their own cost and use the system as a part of the agreement and it is not open to the hotel owner to discontinue this system and continue with licensing agreement. The right to use system farms a part of the royalty agreement as TSCA is dependent on royalty agreement and cannot be entered into unless the licensing agreement has been completed. The claim of the assessee that the amount remitted to it by the hotel owner is a reimbursement is not taxable was also repudiated by ld CIT(A).
We have noted that the payment received on account of computer reservation system (CRS) is FTC has already been decided by Tribunal in appeal for AY 2009-10, that the same is cannot be treated as FTS. The relevant part of the order is extracted below:
13. ---- we have perused the facts of the case before us and after deliberating on the same in the backdrop of aforesaid judicial precedents are of the considered view that the assess to CRS, property management system and other systems provided to the Indian hotels by the assessee were common facilities provided to the members of the Marriot chain of hotels across the board by the assessee, and what not tailor made services to suit their specific requirements, thus the said facility could not be construed as “technical services
The other contention of the revenue that TCSA being integral part of the license /royalty agreement, providing access to computer systems were “ancillary and subsidiary” to the enjoyments of the rights, property or Mum 2016 & 764 Mum 2017-Renaissance Services BV information pursuant to the Royalty agreement were also rejected by tribunal in its order for assessment year 2009-10. Where further noted that the the revenue has not filed appeal against the claim of assessing officer for assessment year 2009-10 that the payments access to computer system qualify as royalty, when CIT appeal said concluded that the same qualifies as FTS. In our view the tribunal had refrain from dealing with the contention of the assessee that payment received or access to computer system could not be treated in the nature of royalty. However, during the year under consideration i.e. assessment year 2011-12, the assessing officer concluded that payment received for access to computer system qualifies as software royalty, however the learned CIT(A) concluded that such payments qualifies as brand royalty. The case of assessee throughout the proceeding either before assessing officer, landed Commissioner (appeals) as well as before the tribunal that the said receipt cannot qualify as software royalty as the amount is received to RSS to computer software/system to a copyrighted article and there is no transfer of copyright or use of copyright itself and hence cannot be taxed as royalty. Centralized regeneration system, property management system and other systems are standard facilities. In our view in order to create the consideration received by assessee as royalty, it is to be established that the payer by making such payment, obtains any of the copyrights of such work. Further, while dealing such issue, the distance and has to be made between the acquisition of a 17 ITA No. 5678 Mum 2016 & 764 Mum 2017-Renaissance Services BV copyright right and a copyrighted article. In our view, in the present case, the copyright has not been transferred, rather the assessee has allowed to use standard services to the Hotel owners, which does not give rise to any royalty income, but in estate would be in the nature of business income.
The Hon’ble Delhi High Court in DIT vs. Infrasoft Ltd. (supra) also held that when they right transfer is not the right to use the copyright but it is limited to right to use the copyrighted material and the same does not give rise to Royalty Income and would be business income. It was also held that consideration received by assessee on grant of licence for use of software is not Royalty within the meaning of Article 12(13) of India-US Tax Treaty.
The decision relied by ld. DR in Samsung Electronics (supra) has been distinguished by Hon’ble Delhi High Court in DIT vs. Infrasoft Ltd. (supra). The relevant part of decision of Hon’ble Delhi Court is extracted below:
“98. We are not in agreement with the decision of the Karnataka High Court in the case of Samsung Electronics Co. Ltd (supra) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is Mum 2016 & 764 Mum 2017-Renaissance Services BV qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in Nokia Networks OY (supra) as not amounting to acquiring a copyright in the software.”
Further, in our view the said receipt also cannot qualify as brand royalty at the same amount is received merely access to computer software/system and such payment are clearly not related to Marriott brand. The assessing officer relied upon the order of Tribunal Six continents Hotel Inc (supra) wherein it has been held that, when, the assessee does not promote any international brand and is purely providing right to use of system and related services along with training to the Indian hotels. It is not in dispute that in relation to the services provided under the TCSA, the assessee does not undertake any brand -related activity. Therefore, any receipt to be characterised as royalty should be for the use or right to use of any intellectual property. It has to be given the meaning as per the Income tax Act and the applicable double taxation avoidance agreement. In our view each and every business receipt cannot be treated as royalty receipt.
Where further noted that ld. CIT-(A) while holding that payment received to access to computer system qualifies as brand royalty relied upon the decision of Marriott International Inc (MII) Vs DDIT (2016) 69 taxmann.com 347 (Mum Trib). In our view this decision in the case of Marriott International Inc Vs DDIT (supra) based on different set of facts. 19 Mum 2016 & 764 Mum 2017-Renaissance Services BV In the said case MII executed ‘International Sales Agreement’ with respective hotels; however, the assessee in the present case executed agreement for ‘training and computer system agreement’. The services rendered in the case of MII were entirely different. In case of MII the services rendered were predominantly include international advertising, marketing and sales promotion. Other services include services in relation to frequent travelers and assess to regeneration system. In case of assessee services rendered predominantly include providing non-technical training and access to computer system. Training rendered in case of assessee comprise of soft skills, development of leadership, team management, system comprise of standardized regeneration system, property management system and other system. We have noted that this fact is accepted by assessing officer in assessment year for 2011-12. Further in case of MII the receipt is from hotel owner comprise; contribution and fees as percentage of gross revenue of respective hotels, reimbursement of cost is allocated to the hotels on fair and equitable basis. However in case of assessee receipt from hotel owner comprise; training receipt recovered based on a number of entity of the hotels participating in training, caused providing assessed to system are located to the respective hotel owner on fair and reasonable basis. Further in case of MII the services entail promotion of Marriott brand as whole and do not envisage promoting or advertising any specific individual hotel property. However in case of 20 ITA No. 5678 Mum 2016 & 764 Mum 2017-Renaissance Services BV assessee services rendered are directly relatable to each individual hotel property.
In view of aforesaid factual and legal discussion, we are of the view that while using computer software, which is copyrighted article and there is no transfer of copyright or use of copyright itself particularly when there is no transfer of a patent, invention, model, design, secret formula or process or trade mark or similar property or imparting of any information concerning thereof.
Further we have noted that on remaining contention raised by lower authorities, the Tribunal in assessee’s own case for Assessment Year 2009- 10 on similar set of fact passed the following order:
“13. We shall now advert to the assailing of the order of the CIT(A) by the assessee, on the ground that he had erred in holding that the amounts received by the assessee for providing access to the international CRS, Property Management Systems and Other Systems was ancillary and subsidiary to the enjoyment of the right “Marriott” and hence, taxable as FTS under the India-Netherland tax treaty, as well as under the Act. We find that since inception, it has been the claim of the assessee that as the providing of access to CRS, Property Management Systems and Other Systems to the Indian Hotels, were standard facilities/services, thus they could not be characterised as ‘technical services’ and the consideration received in lieu thereof be subjected to tax as FTS receipts. We find from a perusal of the agreement entered into between the assessee and the Indian Hotels that the assessee had made available the CRS, Property Management Systems and Other Systems for use by the Indian Hotels in their business. We find that the ld. A.R in support of his contention that the consideration received by an assessee for granting license to use its copyrighted software for the licensees own business purpose only, could not be brought to tax as royalty, had relied on the judgment Mum 2016 & 764 Mum 2017-Renaissance Services BV of the Hon’ble High Court of Delhi in the case of DIT Vs. Infrasoft Ltd. (2013) 39 taxmann.com88 (Delhi) and host of other judicial pronouncements. However, as the CIT(A) had concluded that the consideration received by the assessee from the Indian Hotels for providing access to CRS, Property Management Systems and Other Systems was FTS in the hands of the assessee, hence we refrain from referring to and dealing with the contentions advanced by the ld. A.R in support of his claim that the same could not be held as royalty. We find that the High Court of Delhi in the case of DIT Vs. Sheraton International Inc.(2009) 313 ITR 267 (Del) had observed that consideration received by the assessee for providing access to reservation system could not be brought to tax as FTS in the hands of the assessee. We further find that the Hon’ble Supreme Court in the case of CIT vs. Kotak Securities Ltd. (2016) 383 ITR 1 (SC) had in the backdrop of the facts involved in the case before it, had observed that services made available by Bombay Stock Exchange [BSE Online Trading (BOLT) System] for which transaction charges were paid by members of BSE were for common services that every member of Stock Exchange was necessarily required to avail of to carry out trading in securities in Stock Exchange, thus such services did not amount to ‘technical services’ provided by Stock Exchange, as the same were not services which were specifically sought for by the user or consumer. The Hon’ble Apex Court following the aforesaid view, had thereafter observed in the case of CIT (IT)-1 Vs. A.P Moller Maersk A S (2017) 392 ITR 186 (SC), that where the assessee, a foreign shipping company had set up a telecommunication system in order to enable its agents across globe including India to perform their role more effectively, the payment received for providing such facility was not taxable as fee for technical services. We have perused the facts of the case before us and after deliberating on the same in the backdrop of the aforesaid judicial pronouncements are of the considered view that as the access to CRS, Property Management System and Other Systems provided to the Indian Hotels by the assessee were common facilities provided to the members of the Marriott chain of hotels across the world by the assessee, and were not tailor made services to suit their specific requirements, thus the said facility could not be construed as ‘technical services’.
We shall now advert to the observations of the CIT(A) that as the consideration received by the assessee on account of providing access to CRS, 22 Mum 2016 & 764 Mum 2017-Renaissance Services BV
Property Management Systems and Other Systems facility was ancillary and subsidiary to the enjoyment of the right to use the brand “Marriott”, thus the same would be taxable as FTS under Article 12(5)(a) of the India-Netherlands tax treaty. We are of the considered view that as observed by us hereinabove, invoking of Article 12(5)(a) and holding the consideration received by an assessee from certain “ancillary and subsidiary” technical or consultancy services rendered for the application or enjoyment of the right, property or information as FTS, itself presupposes receipt by the assessee of a consideration towards royalty as provided in Article 12(4) of the tax treaty. We are of the considered view that now when the assessee was not the owner of any brand or trademark for which any royalty would have been received by it under Article 12(4) of the India- Netherland tax treaty, hence the services of providing access to CRS, Property Management System and Other Systems to the Indian Hotels were provided by it in the ordinary course of its business and could not be brought within the sweep of “ancillary and subsidiary” services under Article 12(5)(a) of the tax treaty. We thus, are of a strong conviction that the CIT(A) loosing sight of the fact that as the assessee had neither granted any right of enjoyment of the brand “Marriott” to the Indian Hotels and thus was not in receipt of any royalty as provided in Article 12(4) of the India-Netherland tax treaty, thus the consideration received by it from the Indian Hotels for providing access to CRS, Property Management System and Other Systems, could not have been brought within the sweep of “ancillary and subsidiary” services under Article 12(5)(a). We thus, in terms of our aforesaid observations are of the considered view that as providing of access to CRS, Property Management Services and Other services could neither be held to be technical services, nor the same in terms of our aforesaid observations could have been characterised as “ancillary and subsidiary” services under Article 12(5)(a), hence the consideration received by the assessee for rendering the said services/facility could not be held as FTS in its hands. We thus, set aside the order of the CIT(A) holding that the consideration received by the assessee for providing of access to CRS, Property Management Services and Other Systems was chargeable as FTS in the hands of the assessee. The Ground of appeal No. 3 is allowed in terms of our aforesaid observations.”
Mum 2016 & 764 Mum 2017-Renaissance Services BV
Considering the decision of Tribunal in assessee’s own case for Assessment Year 2009-10 on similar set of fact, and our aforesaid detailed discussions on the issues, these grounds of appeal are allowed in favour of assessee.
28. Ground No. 9 was not pressed by ld. AR for the assessee, therefore dismissed.
Ground No.10 (additional ground) relates to adding of surcharge on education, secondary & higher education cess. The ld. AR for the assessee submits that India- Netherlands tax treaty prescribes a cap of 10% on rate of tax, which would prevail over provision of domestic income tax and thus, rate of tax cannot be enhanced to include surcharge or education cess or secondary and higher education cess. The ld. AR of the assessee further submits that this ground of appeal
is also covered by the decision of Tribunal for Assessment Year 2009-10.
30. On the other hand, the ld. DR for the revenue supported the order of lower authorities.
31. We have considered the submission of both the parties and also find that this ground of appeal is also covered by the decision of Tribunal in assessee’s own case for Assessment Year 2009-10 wherein the following order was passed.
“17. We shall now advert to the claim of the assessee that the A.O had erred in raising the ‘tax rate’ provided in the India-Netherland tax treaty by a further amount of surcharge, education cess and secondary and higher education cess. The ld. A.R in support of his aforesaid contention had drawn our attention 24 Mum 2016 & 764 Mum 2017-Renaissance Services BV to certain judicial pronouncements. We find that the issue that the of rate of tax provided in the tax treaty cannot be enhanced by including surcharge and education cess separately, is covered by an order of a coordinate bench of the Tribunal in the case of Capgemini SA vs. DCIT (Intl. Taxation)-2(10(1), Mumbai (2016) 160 ITD 13 (Mum). We thus, in terms of our aforesaid observations direct the A.O not to enhance the rate of tax provided in the tax treaty by including surcharge and education cess separately. The Ground of appeal No.7 is allowed.”
Considering the decision of Tribunal in assessee’s own case on identical ground of appeal
for Assessment Year 2009-10 wherein on similar set of fact, the ground no. 10. (additional ground) is allowed in favour of assessee. ITA No. 764/Mum/2017 for A.Y. 2012-13
As we have noted that assessee has raised identical grounds of appeal except variation of figures of addition/disallowances. Considering the fact that there is no change in the facts for the year under consideration.
Therefore, respectfully following the decision of Tribunal for Assessment Year 2011-12, the appeal for the year under consideration is also allowed.
In the result, both the appeal filed by assessee is allowed.
Order pronounced in the open court on 09/08/2019.
Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 09.08.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 25 Mum 2016 & 764 Mum 2017-Renaissance Services BV