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Facts
The assessee, Six Continents Hotels Inc. (SCHI), a US tax resident, received Rs. 28,63,07,265/- from Indian hotels as marketing contribution, IHG Reward Club receipts, reservation contribution, and Holidex Fees for AY 2016-17. The Assessing Officer and CIT(A) treated these receipts as taxable Royalty/Fees for Included Services (FIS) under the Income Tax Act and India-USA DTAA, which the assessee challenged.
Held
The Tribunal, relying on its own previous judgments and a Mumbai Tribunal decision for AY 2012-13 to 2015-16, held that the marketing and reservation contributions are not taxable as Royalty or FIS. It found that the amounts were received with a corresponding obligation, were not unfettered receipts, and upheld the principles of mutuality and judicial precedence. Additionally, it directed the AO to allow TDS credit.
Key Issues
Whether marketing and reservation contributions received by the assessee from Indian hotels are taxable as Royalty or Fees for Included Services (FIS) under the Income Tax Act, 1961, and the India-USA DTAA, applying principles of mutuality and judicial precedence, and whether TDS credit should be granted.
Sections Cited
Section 9(1)(vi) of the Income Tax Act, 1961, Section 199(1) of the Income Tax Act, 1961, Rule 37BA(2) of the Income-tax Rules, 1962, Section 143(3) of the Income Tax Act, 1961, Section 144C(3) of the Income Tax Act, 1961, Article 3(2) of India-USA DTAA, Article 4 of India-USA DTAA, Article 7 of India-USA DTAA, Article 12(3) of India-USA DTAA, Article 12(3)(a) of India-USA DTAA, Article 12(3)(b) of India-USA DTAA, Article 12(4) of India-USA DTAA, Article 12(4)(a) of India-USA DTAA, Article 12(4)(b) of India-USA DTAA
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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & MS. ASTHA CHANDRA
INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”: NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE VICE PRESIDENT AND MS. ASTHA CHANDRA, JUDICIAL MEMBER ITA No. 923/Del/2020 Asstt. Year: 2016-17 Six Continents Hotels Inc. Vs. ACIT DLF Bldg No. 10, 8th Floor, Circle-3(1)(2), Tower B, DLF Cyber City, Ph-II, International Gurgaon-122002 Taxation, State Haryana New Delhi. PAN AAHCS7853B (Appellant) (Respondent)
Assessee by: Shri S.K. Aggarwal, Shri Piyush Gupta & Shri Himanshu Aggarwal, CA Department by: Shri Vizay B. Vasanta, CIT-DR Date of Hearing: 07.03.2024 Date of 10.04.2024 pronouncement:
O R D E R PER ASTHA CHANDRA, JM
The appeal filed by the assessee is directed against the order dated 17.12.2019 of the Ld. Commissioner of Income Tax, (Appeals)-43, New Delhi (“CIT(A)”) pertaining to Assessment Year (“AY”) 2016-17.
The assessee has raised the following grounds:-
“1.1 That on the facts and in the circumstances of the case and in law, the order passed by the CIT(A) confirming the addition to the income made by the Ld. AO in relation to Marketing Contribution, IHG Reward Club (a loyalty program formerly known as Priority Priority Rewards), Reservation Contribution and Holidex (collectively referred to as Marketing and Reservation contribution) amounting to INR 28,63,07,265 is wrong and bad in law.
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1.2 That on the facts and in the circumstances of the case and in law, the CIT(A) has erred in treating the amount received by the Appellant from Hotels in India towards Marketing and Reservation contribution to be in the nature of Royalty under Article 12(3) of India - USA Double Taxation Avoidance Agreement ('DTAA'), following the CIT(A) order for AY 2012-13.
1.3 On the facts and in circumstances of the case and in law, the CIT(A) has erred in not appreciating that the Marketing and Reservation contribution received from Indian hotels is neither taxable as Royalty under section 9(1)(vi) of the Act nor under Article 12(3) of the India-USA DTAA.
1.4 On the facts and in circumstances of the case and in law, the CIT(A) has erred in not appreciating that the action of Id. AO invoking Article 3(2) of the DTAA to draw the meaning of royalty from the provisions of the Act is incorrect, when DTAA specifically provides the meaning of Royalty.
1.5 On the facts and circumstances of the case, the CIT(A) has erred in not quashing the assessment order, wherein the Id. AO concluded that the Marketing and Reservation contribution is taxable as Royalty under the Act and DTAA based on incorrect assertions.
1.6 On the facts and in circumstances of the case and in law, the CIT(A) has erred in treating Marketing and Reservation contribution as Fee for Technical Services ('FTS") under Article 12 of India - USA DTAA
1.7 On the facts and in circumstances of the case and in law, the CIT(A) has erred in holding that Marketing and Reservation contribution received by the Appellant is taxable as FTS under Article 12(4)(a) of India-US DTAA.
1.8 On the facts and in circumstances of the case and in law, the CIT(A) has erred in holding that Marketing and Reservation contribution is 'ancillary and subsidiary' to the license fee received by the affiliate entity for granting the rights to use the brands to the Indian Hotels.
1.9 On the facts and in circumstances of the case and in law, the CIT(A) while treating Marketing and Reservation contribution as FTS under Article 12(4)(a) of the India-US Treaty, has failed to appreciate that Marketing and Reservation contribution is received by the Appellant, whereas license fee is received by other group entity.
1.10 On the facts and in circumstances of the case and in law, the CIT(A) has erred in not appreciating that the Marketing and Reservation contribution received from Indian hotels cannot be held taxable as Fee for Included Services ('FIS')
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under Article 12(4) of the DTAA, as held by the Id. AO without appreciating that:
The said services are neither technical nor consultancy in nature;
The said services are not ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is received by the Appellant
The said services do not make available any technical knowledge, experience, know-how, or processes etc.
1.11 On the facts and in circumstances of the case and in law, the CIT(A) has erred in concluding that the amount of Marketing Contribution, Priority Club receipts and Reservation Contribution received from Indian hotels are taxable in India without appreciating that:
The amount is not in the nature of income and cannot be subjected to tax on principles of mutuality;
The amount is paid by Indian Hotels specifically towards defraying costs associated with advertising, promotion, publicity, market research and for reservation and related activities for the benefit of the said Indian hotels;
Marketing and Reservation contribution received from Indian hotels are not in the nature of an unfettered receipts in the hands of the Appellant;
1.12 On the facts and in circumstances of the case and in law, the CIT(A) has erred in holding that the principles of Mutuality are not applicable in case of the Appellant in relation to Marketing Contribution, Priority Club receipts and Reservation Contribution received from Indian hotels by stating that:
That the amount is recovered from Indian Hotels as a fixed percentage, therefore the same partakes the character of license fee;
The amount is inseparable and interlinked to the sales of the India Hotels and expenditure against such receipts results in increasing in the value of the brand, which in-turn result into increase in revenue of the India Hotels.
1.13 On the facts and in circumstances of the case, the CIT(A) has erred in not following the binding decision of the jurisdictional Hon'ble Mumbai ITAT in
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Appellant's own case which has decided the matter in favour of the Appellant on identical facts. The CIT(A) has further erred in arriving at his conclusion in his order by relying on the decision of Hon'ble Mumbai ITAT in case of Marriott International Inc. (ITA No. 1996 & 1997/Mum/2011/ ITA No. 1451/ Mum/2013/ITA No. 1452/ Mum/2013/ ITA No. 1270 Mum/ 2013) which has not specifically overruled the Hon'ble Mumbai ITAT decision in Appellant's own case, stating that the same is a later decision and closer to the facts of the Appellant.
That on the facts and in the circumstances of the case and in law, the CIT(A) erred in not specifically directing the Id. AO to grant short credit of TDS by INR 1,03,59,525 as per the provisions of section 199(1) of the Act read with Rule 37BA(2) of the Income-tax Rules, 1962.”
Briefly stated, the assessee company (“SCHI”) is incorporated in USA 3. and is a tax resident of USA under the provisions of Article 4 of India-USA DTAA. It e-filed its return for AY 2016-17 on 29.09.2016 declaring income of Rs. 13,11,790/-. Later on return was revised on 28.03.2018 declaring the same income. The case was selected for scrutiny. Statutory notices were issued/served upon the assessee. The Ld. Assessing Officer (“AO”) found that during the year the assessee received a sum of Rs. 28,63,07,265/- by way of marketing contribution (Rs. 9,39,39,599/-); Priority Club receipts (Rs. 9,84,77,567/-); Reservation Contribution (Rs. 5,03,12,004/-) and Holidex Fees (Rs. 4,35,78,095/-) from various hotels which it did not offer to tax. The Ld. AO issued show cause notice dated 18.12.2018 requiring the assessee to give reasons why assessment be not completed like earlier years. The assessee filed reply vide letter dated 20.12.2018, the major contentions of which have been summed up by the Ld. AO as under:-
“(i) The assessee has drawn reference to its litigation history for AY 1997- 98 to AY 2011-12.
(ii) The assessee has contended that marketing contribution is based on an agred percentage of gross room revenue. The same is associated with general advertising, marketing activities, publicity, production of promotion material and various sales programmes.
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(iii) The assessee has contended that the reservation contribution received by the assessee is utilized to provide a global network which assists the customers to make room reservations. This network consists of multiple reservations/call centers etc. which are deployed to provide customer service.
(iv) The assessee has also explained the concept and working of the system fund. Further it has also tried to justify by applying its commercial justification for collection of this money and its application thereof. The assessee has relied upon the 'Principle of Mutuality' in order to contend that the said receipts are not chargeable to tax.
(v) The assessee has also contended that the receipts on account of marketing contribution IHG reward club receipts, reservation contribution and Holidex fees is not in the nature of FIS as per Article 12(4) and 12(4)(b) of the India-USA DTAA. The assessee has mainly contended that the services which are obtained by Indian Hotels form it are on a year on year basis as a result of which it should be inferred that such services do not make available any knowledge, experience, skill, know how or process etc.
(vi) The assessee has also contended that the receipts on account of marketing contribution IHG reward club receipts, reservation contribution and Holidex fees is not in the nature of FTS u/s 9(1)(vii) of the Income Tax Act, 1961.
(vii) The assessee has also contended that the receipts on account of marketing contribution IHG reward club receipts, reservation contribution and Holidex fees is not in the nature of FIS under Article 12(3) of the India-USA DTAA.
(viii) The assessee has further contended that the undersigned should follow the order of Hon'ble ITAT which has been accepted by the Revenue authority in earlier year.”
3.1 The Ld. AO following assessment orders for earlier AY 2012-13 to AY 2015-16 held that the entire receipt of Rs. 28,63,07,265/- is taxable as Royalty/Fees for Included Services (“FIS”) under Article 12(3)(a) and 12(3)(b) of Double Taxation Avoidance Agreement between India and USA (“India- USA DTAA”) relying on the decision dated 14.01.2015 of Mumbai Tribunal in Marriot International Inc. vs. DDIT(2016) 69 taxmann.com 347. According to the Ld. AO the receipts is ancillary and subsidiary to royalty received by
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the group entity for the use of brand name and taxable as FIS under Article 12(4)(a) of India-USA DTAA. Without prejudice to the above, the Ld. AO held further that the receipt is also taxable as FIS under Article 12(4)(b) as it meets the requirement of ‘make available’ condition. The Ld. AO completed the assessment accordingly on 12.02.2019 under section 143(3) r.w. section 144C(3) of the Income Tax Act, 1961 (the “Act”).
Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) who concurred with the findings of the Ld. AO in holding that the receipts is taxable as Royalty and FIS under Article 12(4)(a) of India-USA DTAA. He however, disagreed with the view of the Ld. AO to the extent that the impugned receipts meet the requirement of ‘make available’ condition. The Ld. CIT(A) observed that the facts of AY 2016-17 are substantively the same as in AY 2012-13. He reproduced the order of Ld. CIT(A) for AY 2016- 17 in his appellate order observing that the CIT(A)’s decision for AY 2012-13 clearly applies in AY 2016-17. This has brought the assessee before the Tribunal and Ground No. 1.1 to 1.13 relate thereto.
The Ld. AR submitted that the issue of taxability of the impugned receipt is covered in favour of the assessee by the orders of the Tribunal in its own case for AY 1997-98, AY 2003-04, AY 2004-05, AY 2005-06 which have been accepted by the Revenue as no appeal against them were filed before the Hon’ble High Court. He further pointed out that in the assessment orders for AY 2006-07 to AY 2011-12 the Ld. AO/DRP have held that the impugned receipt is not taxable as ‘Royalty’/FIS following the aforesaid orders of the Tribunal. The Ld. AR brought to our notice that Mumbai Tribunal in order dated 09.02.2024 for AY 2012-13 to AY 2015-16 again held that the said receipts is not taxable as Royalty/FIS under India-USA DTAA and deleted the additions made in the orders of assessment. A copy thereof was submitted. The Ld. AR placed reliance on the decision of Hon’ble Delhi High Court in CIT vs. Starwood Hotel and Resorts Worldwide Inc. in ITA No. 456/2022 rendered on 16.11.2022 a copy of which is placed on record
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wherein decision in DIT v. Sheraton International Inc. (2009) 178 Taxman 84 (Del) has been relied upon.
The Ld. CIT-DR conceded that it is a covered matter and that the facts are identical to those pertaining to earlier AYs.
We have considered the submission of the parties and perused the records. It is revealed from the decision of Mumbai Tribunal in the assessee’s own case in ITA No. 3662/Mum/2019; ITA Nos. 6655, 6656 and 6657/Mum/2019 dated 08.02.2024 for AY 2012-13 to 2015-16 that the Tribunal took up the appeal for AY 2012-13 as the lead case and noticed the nature of various receipts under the head “Marketing Contribution and Reservation Fees” and thereafter recorded the observation and findings in para 9-13 which we produce hereunder:-
“9. It is the claim of the assessee that the aforesaid fund contributed by the member hotels is used solely for the purpose of incurring marketing and advertisement expenditure worldwide and for maintaining the Reservation system. It is further the plea of the assessee that the money received on account of Marketing Contribution and Reservation Fees was received with a corresponding obligation to use it for the agreed purposes. The assessee has also placed on record the Statement of Revenue and Expenses along with the report of the Independent Auditor, forming part of the paper book from pages 179-194, wherein it is stated that the fund is obligated to expend assessment proceeds on behalf of the hotels and the fund’s objective is to be self-funded each year. In the aforesaid report, it is further stated that primarily due to the timing of revenue and expenses, the fund may spent in any fiscal year, an amount greater or less than the aggregate fees and contributions collected in that year.
We find that the taxability of similar receipts came up for consideration before the coordinate bench of the Tribunal in assessee’s own case in Bass International Holdings NV v/s JCIT, in ITA No.4341/Mum./2002, for the assessment year 1997-98. Vide order dated 12/05/2006 the coordinate bench of the Tribunal held that money was received by the assessee, on account of Marketing and Reservation fees, with a corresponding obligation to use it for the agreed purposes and it was not an unfettered receipt in the hands of the assessee and therefore it was a kind of a trust money received in fiduciary capacity. It was further held that the receipt cannot be termed as a consideration for the use of any intellectual property asset of the company, even though the receipt may have been incidental to the same. Accordingly, the coordinate bench came to the conclusion that the receipt is not taxable as a Royalty or Fees for Technical Services and therefore is not taxable in the hands of the assessee in the absence of any PE in India. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as under:-
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“7. We find that the assessee has produced the financial statements of the Holiday Inn Worldwide Systems Fund and independent auditors report thereon by Deloitte & Touche LLP. These evidences clearly show that the moneys received on account of marketing and reservation where for the agreed purposes and it was not an unfettered receipt in the of the assussee it was a kind of trust money and received capacity. We have also noted, as evident from the significant accounting policies reproduced earlier in this order, that in the past, a part of collections for marketing and reservation fees was refunded to the participating properties on the basis of certain assessments. In the light of these facts the marketing and reservation contributions received by the company cannot be viewed as income of the assessee. These contributions having been made by the participating hotels mandatorily does not affect the determination of the character of receipts. This receipt cannot be termed as a consideration for use of any of the intellectual property asset of the company or for the fees for technical services even though this receipt may have been incidental to the same. Unless it is a consideration of such a nature it cannot in our understanding be taxed as royalty or fees for technical services. Since the assessee company does not have any PE in India, there is no question of business profits under Article 7 either in the light of these discussions, we are of the considered opinion that the CIT(A) was indeed not justified in holding that the amount of Rs 4,80,876 received by the assessee as marketing contribution was taxable in the hands of the assessee. We direct the Assessing Officer to delete the addition. The assessee gets relief accordingly.”
We find that similar findings were rendered by the coordinate bench of the Tribunal in assessee’s own case in Six Continents Hotel Inc. v/s DCIT, in ITAs No. 3618 and 3619/Mum./2008, vide order dated 11/05/2011, for the assessment years 2003-04 and 2004-05. Similarly was held in the assessment year 2005-06 by the coordinate bench of the Tribunal in ITA No. 5914/Mum./2009, vide order dated 30/03/2011. We find that in other assessment years, i.e. assessment year 2002-03, 2006- 07, 2007-08, 2008-09 to 2011-12, the AO/learned DRP treated the Marketing Contribution and Reservation Fees as not taxable in India.
It is evident from the record that in the year under consideration, the AO as well as the learned CIT(A) deviated from the settled position in the case of the assessee on the basis of the subsequent decision of the coordinate bench of the Tribunal in Marriott International Inc (supra). At the outset, it is pertinent to note that it is undisputed that the facts of the present case are similar to the preceding years, wherein the similar addition was either not made by the AO/learned DRP or the same was deleted by the coordinate bench. This fact is further corroborated by the sample agreement dated 26/11/2009, forming part of the paper book from pages 41-110, under which one of the Indian hotels has paid Marketing Contribution and Reservation Fees to the assessee in addition to, separate and distinct from the license fee which is payable specifically for the use of the brand. Further, the Marketing Contribution and Reservation Fees are found to be with a corresponding obligation to use it for the agreed purposes and it was held to be not an unfettered receipt in the hands of the assessee, which fact has also been substantiated by the Independent Auditor in its report as noted above. However, from the perusal of the aforesaid decision, relied upon by the lower authorities, we find that the aforesaid aspects did not arise in the facts of that case. Therefore, we are of the considered view that the conclusion reached by the coordinate bench in the aforesaid decision is based on the peculiar facts of that case. Further, in the present case, it is also undisputed that the orders passed by the coordinate bench in assessee’s own case have been accepted by the Revenue and no appeal has been filed against the same before the Hon’ble High Court. Therefore, in view of the above, we find no
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merits in the reliance placed by the lower authorities on the aforesaid decision in Marriott International Inc (supra).
Accordingly, respectfully following the judicial precedence in assessee’s own case, the Marketing Contribution and Reservation Fees received by the assessee are not Royalty and therefore, the impugned addition is deleted. Further, since the Revenue is not in an appeal against the findings of the learned CIT(A) that the issue of taxation as Fees for Included Services or nontaxation as reimbursement of expenses does not arise, therefore we are not expressing any opinion on the same. As a result, grounds no.1.1 to 1.9 raised in assessee’s appeal are allowed.”
7.1 The decision (supra) of Mumbai Tribunal for AY 2012-13 applied mutatis mutandis to the appeals for AY 2013-14, 2014-15 and 2015-16.
7.2 Respectfully following the decision (supra) of Mumbai Tribunal in the assessee’s own case for the preceding AY(s) 2012-13 to 2015-16, admittedly the facts being similar in AY 2016-17 under consideration, we decide the assessee’s Ground No. 1.1 to 1.13 in its favour.
Ground No. 2 relates to denial of TDS credit. We direct the Ld. AO to allow TDS credit after due verification and in accordance with law.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 10th April, 2024.
sd/- sd/- (G.S. PANNU) (ASTHA CHANDRA) VICE PRESIDENT JUDICIAL MEMBER Dated: 10/04/2024 Veena Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR
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ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order