No ‘Royalty’ on Service Fees Paid under Regional Service Agreement: ITAT Dismisses Revenue’s Appeal [Read Order]
Income was not Taxable in India as Assessee did not have a Permanent Establishment (PE) in India as per Article 5 of the DTAA
The Income Tax Appellate Tribunal (ITAT) Bench at Mumbai held that payments received by the assessee (Singapore-based entity) from its Indian affiliate under a Regional Service Agreement (RSA) cannot be classified as ‘royalty’ either under Section 9(1)(vi) of the Income Tax Act, 1961 or under Article 12 of the India-Singapore Double Taxation AvoidanceAgreement (DTAA).
The Bench dismissed multiple appeals filed by the Revenue for Assessment Years 2017-18 to 2020-21, affirming the findings of the CIT(A)-55, Mumbai, and ruled that such payments were in the nature of business profits, not taxable in India in the absence of a Permanent Establishment (PE).
The assessee, BCD Travel Asia Pacific Pte. Ltd., incorporated and tax-resident in Singapore, functions as the Asia-Pacific Regional Headquarters (APAC HQ) of the global BCD Travel Group, engaged in business travel management. The assessee provides a suite of managerial, administrative, operational and technical support services to its subsidiaries and affiliates, including BCD Travel India Pvt. Ltd., under a Regional Service Agreement effective from January 1, 2016.
Under the agreement, the assessee recovers the cost of providing services on a cost-pooling mechanism with a nominal markup. The Assessing Officer (AO), however, treated such receipts as ‘royalty’, holding that they represented payments for imparting or making available “information concerning industrial, commercial or scientific experience”, taxable under Section 9(1)(vi) of the Act and Article 12(4) of the DTAA.
On appeal, the CIT(A) observed that the AO had mechanically invoked the ‘royalty’ clause without appreciating the true nature of the arrangement. After a detailed examination of the Regional Service Agreement, the OECD Commentary, and judicial precedents, the CIT(A) concluded that the assessee merely provided managerial and administrative support services, and there was no transfer or imparting of any proprietary or confidential know-how.
All such services were operational and recurring in nature, executed by the assessee’s regional personnel using their own systems and resources, without imparting any independent rights or knowledge to BCD India.
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Relying on judicial precedents such as Van Oord Dredging & Marine Contractors BV v. DCIT and GECF Asia Ltd. v. DIT, the CIT(A) held that where the foreign entity merely applies its expertise to perform services, without transferring any know-how capable of independent use by the recipient, the consideration cannot be treated as ‘royalty’.
The Tribunal comprising Amit Shukla (Judicial Member) and Girish Agrawal (Accountant Member) endorsed the CIT(A)’s detailed findings, observing that the core issue revolved around whether the assessee had merely applied its regional experience in rendering services or had imparted any information concerning industrial, commercial, or scientific experience.
Referring to the OECD Model Commentary, the Bench explained that “royalty” arises only when information or experience is transferred such that the recipient can use it independently thereafter. Where the provider uses its expertise to render ongoing services, the payment represents consideration for services and not for transfer of know-how.
The Tribunal remarked that the Regional Service Agreement represented an “applied service model”, where the assessee continuously performed managerial, technical and administrative functions throughout the year. Further, these activities were integral to the group’s Asia-Pacific operations, but did not involve any alienation or transfer of proprietary knowledge.
The ITAT further noted that the payments were based on actual costs incurred, periodically reconciled and allocated among participating entities. Such cost-sharing arrangements, the Tribunal held, were inconsistent with the commercial nature of royalty, which typically correlates with the exploitation of an intangible asset.
After considering the contractual terms, OECD guidance, and judicial precedents, the ITAT held that the receipts under the Regional Service Agreement represented consideration for managerial and administrative services, falling within Article 7 (Business Profits) of the India-Singapore DTAA.
The Bench observed that “the defining element of ‘royalty’ is the alienation or imparting of information. The assessee here has neither alienated nor imparted any such corpus; it has merely employed its regional experience and professional acumen to execute ongoing managerial and administrative obligations.”
The Tribunal also emphasized the principle of consistency, noting that in earlier assessment years the Department had accepted the same arrangement as non-taxable service income. The absence of any change in facts or law precluded a different conclusion in subsequent years.
The cross-objections filed by the assessee challenging the validity of the assessment order on limitation grounds and levy of interest under Section 234D, were dismissed as infructuous as no taxable income was found to arise in India.
Accordingly, the Revenue’s appeals were dismissed, and the CIT(A)’s order was upheld in entirety.
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