The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has recently while granting relief to Shagri-LA held that payment of management fee to third party Indian hotels are not Fee for Technical Service (FTS) as per Double Taxation Avoidance Agreement (DTAA).
Assessee Shangri-La International Hotel Management Pte. Ltd is a non-resident corporate entity incorporated under the Laws of Singapore and a tax resident of Singapore and is engaged in the business of rendering management consultancy and other related services to hotels. The assessee is the authorized licensee of the ‘Shangri-La’ brand and related intellectual property for India.
The assessee had entered into three separate agreements with third party Indian hotels.
In the assessment years under dispute, the assessee earned revenue from third party Indian hotels towards management fee and license fee. In the return of income filed for the impugned assessment years, the assessee offered to income the management fee as FTS and the license fee as royalty in terms of Article 12 of India-Singapore DTAA, on gross basis.
While the assessment proceedings AO found that due to the absence of permanent establishment the assessee did not offer the income which they earn from service providing through marketing and reservation receipts outside India.
Assessing officer was not convinced with the submission of the assessee and brought the entire receipts to tax by treating it as FTS .
S.K. Agarwal, counsel for the revenue submitted that receipts from marketing and reservation services are in the nature of FTS under Section 9(1)(vii) of the Income Tax Act the receipts are for services ancillary and subsidiary to the trademark license agreement for use of trade mark and brand name, which is in the nature of royalty, will fall within the ambit of FTS under Article 12(4)(a) of the India-Singapore DTAA.
Gangadhar Panda counsel for the assessee submitted that marketing and reservation receipts are for service provided from outside India and are in the nature of business receipts. Therefore, in absence of a Permanent Establishment (PE) in India, they are not taxable.
After considering the contentions of the both parties the division bench of the ITAT comprising G.S. Pannu, (President) and Saktijit Dey, (Judicial Member) determined that, “marketing and reservation activities performed by the assessee are not only distinct and different from the license fee but they are done under two distinct and separate agreements. Therefore, the marketing and reservation receipts could not be treated to be ancillary and subsidiary to the license fee. Hence, such fee will not fall under Article 12(4)(a) of the treaty. Similarly, the nature of services rendered does not demonstrate that they are in the nature of managerial, technical or consultancy services.
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