RADISSON HOTEL INTERNATIONAL INCORPORATED,USA vs. ACIT, CIRCLE 3(1)(1), INTERNATIONAL TAXATION, NEW DELHI

PER SAKTIJIT DEY, J.M.:

(i). Royalty income for extending license to use the brand name and trademark; (ii). Fee for providing centralised services to maintain uniform hospitality standard. Under the second category, following services are provided :

(a). Marketing contribution fee; (b). Club Carlson (customer loyalty programme); (c). Reservation charges; (d). Third party reservations; (e). CHWIT/Technology fee; (f). Miscellaneous things

5. Before us, learned counsel appearing for the assessees submitted that the issue is squarely covered by various decisions of the Tribunal and the Hon’ble High Court in assessees’ own case as well as in cases of other assessees also. In this context, he drew our attention to the relevant orders of the Tribunal and Hon’ble jurisdictional High Court.

Thus, he submitted since, the issue is squarely covered in favour of the assessee, the additions may be deleted.

“9. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. The facts on record reveal that the assessee has entered into agreements with a number of Indian hotels for providing hotel related services. As expressed by the Assessing Officer himself in the assessment order, the assessee provides hotel related 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. (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 The assessee conducts training courses directed at various levels of hotel personnel to assist in employee development and to enhance guest satisfaction.

10. When the Assessing Officer intended to treat the amount 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.

11. Interestingly, while reaching such conclusion, the Assessing Officer has recorded a factual finding that there is no change in the nature of services over the years, though, the assessee has entered into fresh 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.

13. It is relevant to observe, identical issue relating to taxability 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 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 trademark/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.

(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.

(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, trademark, 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.”

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 :

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).

24. As could be seen from the materials placed on record, as against the license fee of Rs.6,05,43,227/- received by the affiliates, the assessee has received centralized services fee of Rs.6,93,56,315/-. Therefore, the quantum of fee received by the assessee in no way makes it ancillary and subsidiary to the licence fee received by the group affiliates. Further, the observations of learned Commissioner (Appeals) that in case of Sheraton International Inc. (supra) neither the Tribunal nor the Hon’ble Jurisdictional High Court have examined the taxability of centralized services fee in the context of Article 12(4)(a) of the Tax Treaty, is totally incorrect and misleading statement. If one reads the decision of the Tribunal in case of Sheraton International Inc. (supra), it would be very much clear that before the Tribunal an additional ground was raised by the Revenue regarding applicability of Article 12(4)(a) of India–US Tax Treaty to the centralized service fee received. However, after in depth examination of the issue, the Tribunal has held as under: 72. It appears from the orders of the authorities below passed in the present case that while treating the amount in question received by the assessee from Indian hotels/clients as ‘royalty’ and/or ‘fees for included services’ the Assessing Officer relied on Article 12(3) and 12(4){b) of the lndo-American DTAA besides the provisions of section 9(l)(v«) of the Income- tax Act, 1961 whereas the learned CIT(A) applied Article 12(3)(a). At the time of hearing before us, the learned Special Counsel for the Revenue Shri Y.K. Kapur has sought to rely, by way of raising the additional grounds in the appeals filed by the Revenue, Article 12(4)(a) to support the Revenue’s case that the amount in question being in the nature of ‘fees for included services' was liable to tax in India also. The learned counsel for the assessee has raised a strong objection for admission of these additional 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).

advertising and sales including reservations of the Indian hotels worldwide. The main intention/purpose of the said arrangement was to promote the hotel business worldwide in the mutual interest of both the sides and the 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.

etc. as mentioned in the relevant Articles of the agreements on which much emphasis has been laid by the learned Special Counsel for the Revenue was made by the assessee to enable it to execute the job undertaken by it to render services in relation to advertisement, marketing and sales promotion of hotel business worldwide and such supply was merely incidental to the performance of integrated business arrangement which included mainly rendering services in relation to advertisement, publicity and sales promotion of hotel business. The payment made by the Indian hotels/clients to the assessee-company on account of such job or any part thereof, therefore, cannot be attributed to the use of a patent, invention, model, design, secret formula or process or trademark or similar property or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. The decision of Hon’ble Madras High Court in the case of Nayveli Lignite Corpn. Ltd. (supra) and that of Hon’ble Andhra Pradesh High Court in the case of Klayman Porcelains Ltd. (supra) fully support this view. Even the decision of Authority for Advance Ruling in the case of Rotem Co. In re |2005| 279 1TR 165 ^ (AAR - New Delhi) is to the similar effect wherein after discussing the various judicial pronouncements, it was held that the principle which emerges from the various decisions is that in a contract for manufacture, installation, sale or supply of goods, the element of services will always be present and where such services are inextricably linked with manufacture, installation, sale or supply, they cannot be evaluated for the purpose of FTS. It is only where services are separable and independent that the FTS will be assessable. In the present case, the services sought to be treated as ‘fees for technical services’ or ‘fees for included services’ were of ancillary or auxiliary in nature and being integral part of the job undertaken by the 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.

hotels/clients in terms of the said Articles are the components which have been provided/supplied in the process of rendering of the services in relation to advertisement, marketing and sales promotion. He has contended that since the same come within the purview of one or the other clauses contained in Explanation 2 to section 9(1 )(vi) and (vii) as well as Article 12(3) and 12(4) of the DTAA between India and USA, the payment/consideration attributable to the same should be apportioned so as to bring the same to tax in India. In this regard, it is observed that a similar contention was raised before the Hon’ble Delhi High Court on behalf of the Revenue in the case of Mitsui Engg. & Ship Building Co. Ltd. (supra). The same, however, was rejected by the Hon’ble Jurisdictional High Court holding that it was not possible to apportion the consideration for design on the one part and engineering, manufacturing, shop testing etc. on the other since the price paid by the assessee to the supplier was a total contract price which covered all the stages involved in the supply of machinery from the stage of design to the stage of commissioning. ln the present case also, the entire price was paid by the Indian hotels/clients to the assessee-company in pursuance of the relevant agreements expressly for rendering the services in relation to advertisement, publicity and sales promotion and it was neither possible nor practicable nor permissible to apportion the said consideration as sought to be done by the Revenue authorities.

6. Ld. DR for the revenue relied upon the order of the AO. However, the ld. AR for the assessee relied upon the order passed by the ld. CIT (A).

7. For the sake of ready reference, the findings returned by the ld. CIT(A) allowing the appeal is reproduced as under “8. I have carefully considered the above submissions, and the contentions of the appellant. I have also perused the assessment order and the orders of the Hon'ble ITAT and the Hon'ble Delhi High Court for the A Vs. 1995-96 to 2000-2001 in the case of Sheraton International Inc (group concern). The issue of taxability of the appellant's income from hotel related services provided to hotels in India, as royalty fees for technical services, stands squarely covered by f the judgment of the ITAT, Delhi in the case of Sheraton International Inc. at to 55/Del/2006 dated | 04.10.2006, It is also observed that the appeals of the Revenue have been dismissed by the Delhi High Court vide order dated 30.01.2009, therein the Hon'ble High Court held that the Tribunal had rightly concluded that the payments received were in the nature of business income, and not in nature of royal or fees for technical services. It was accepted by the Ld. Assessing Officer that the appellant did not have a permanent establishment in India, and hence the business income could not be brought to tax under Article 7 of the India- USA DTAA, Moreover, no question of taw had arisen for their consideration, as these are findings of fact by the Tribunal. Therefore, respectfully following the orders of the higher judicial authorities, the bringing to tax of the business receipts of the appellant in India, is deleted. Thus, the appellant succeeds in grounds 1 to 4.

8. The issue in controversy has also been set at rest by the Hon'ble Delhi High Court in case cited as Director of Income- tax vs. Sheraton International Inc. - (2009) 313 ITR 267 (Del.) as under:

“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 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”

9. So, following the decision rendered by Hon’ble Delhi High Court in case of Director of Income-tax vs. Sheraton International Inc. (supra), we are of the considered view that the revenue received by the assessee for providing centralized services is not in the nature of Fee for Technical Services (FTS) u/s 9( I )(vi) Explanation 2, but it is a business income. Since the assessee is not having any PE in India, its business income earned is not taxable in India. under:-

10. So, in view of what has been discussed above, we find no illegality or perversity in the impugned order passed by the Id. CIT (A), hence present appeal filed by the Revenue is hereby dismissed.” 26. The aforesaid decision was upheld by the Hon’ble 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 dated 18.12.2018. It is relevant to observe, the aforesaid decisions of the Coordinate Bench have been upheld by the Hon’ble Jurisdictional High Court while dismissing Revenue’s appeals. Identical is the factual position in assessment year 2013-14, wherein, the Tribunal decided the issue in favour of the assessee in ITA No. 5144/Del/2016, dated 18.11.2019 and the Hon’ble Jurisdictional High Court has upheld the decision of the Tribunal. 27. Thus, keeping in view our detailed reasoning, hereinabove, and the ratio laid down in the binding judicial precedents rendered in assessee’s own case as well as in case of group company, viz, Sheraton International Inc., cited before us, we have no hesitation in holding that the fee received by the assessee under the Centralized Services Agreement cannot be treated as FIS either under Article 12(4)(a) or 12(4)(b) of the India–US Tax Treaty. As a natural corollary, it can only be treated as business income of the assessee. Hence, in absence of a PE in India, it will not be taxable.

“31. The present appeals stand in a slightly different factual 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.

Assessment Name of the Royalty income Centralised Service year assessee (Rs.) income (Rs.) 2018-19 Radisson 11,93,23,993 17,14,36,352 2019-20 Radisson 12,03,86,875 22,94,72,647 2019-20 Country Inn 2,00,00,261 3,52,77,122

12. In view of our detailed analysis above, we hold that the receipts from centralised service income are not taxable as FTS/FIS under Article 12(4)(a) of India-USA DTAA. Accordingly, we direct the Assessing Officer to delete the additions.

Order pronounced in the open court on 31/05/2023