Pranav B Prem

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that hotel marketing and reservation-related contributions (MRC) received by a United States–based hospitality group from Indian franchisees are not taxable in India as “Fees for Technical Services” (FTS) or royalty under the Income Tax Act, 1961, or the India–U.S. Double Taxation Avoidance Agreement (DTAA). The Division Bench comprising Yogesh Kumar U.S. (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that reimbursements towards the Travel Agent Commission Program (TACP) were not taxable as FTS, noting that the payments were made on behalf of Indian hotels and recovered on a cost-to-cost basis without any income component.

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The assessee, Six Continents Hotels Inc., is a United States–based company forming part of the InterContinental Hotels Group (IHG), which owns several renowned international hotel brands such as Holiday Inn, Holiday Inn Express, and Crowne Plaza. The company licenses these brands to independent Indian hotel operators under franchise arrangements and collects marketing and reservation-related contributions from them to fund global brand promotion, loyalty rewards programs, and centralized booking systems.

During the assessment years 2017–18 and 2018–19, the assessee received ₹33.50 crore and ₹39.31 crore respectively from Indian franchisees towards marketing and reservation contributions. These receipts comprised marketing contributions, loyalty program receipts, reservation contributions, and Holidex fees. The assessee also received ₹8.10 crore during the assessment year 2018–19 as reimbursement receipts, including ₹8.08 crore under the Travel Agent Commission Program (TACP), which represented commissions paid to travel agents on behalf of Indian hotels.

The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) treated these receipts as taxable income, classifying them as Fees for Technical Services under Section 9(1)(vii) of the Act and as Fees for Included Services (FIS) under Article 12(4) of the India–U.S. DTAA. The authorities took the view that the payments involved the rendering of technical or managerial services and were therefore taxable in India.

The Tribunal noted that the matter had earlier been remanded by the Delhi High Court after setting aside the previous ITAT orders for want of a Document Identification Number (DIN). The High Court directed the Tribunal to decide the substantive issue of taxability afresh on merits.

Before the Tribunal, the assessee, represented by Chartered Accountants S.K. Agarwal and Himanshu Agarwal, contended that the receipts represented cost-sharing contributions collected from franchisee hotels for the purpose of global marketing, brand promotion, and centralized reservation systems. It was submitted that the assessee was not rendering any managerial, technical, or consultancy services to the Indian hotels. The assessee also pointed out that the same issue had already been decided in its favour by the ITAT in multiple earlier years, both by the Delhi and Mumbai Benches, and that the tax department had accepted the position in several preceding assessments.

Regarding the Travel Agent Commission Program, the assessee explained that these were pure reimbursements of travel agent commissions paid on behalf of Indian hotels and that the amounts were merely recovered without any profit element.

After examining the record, the Tribunal observed that the issue had consistently been decided in favour of the assessee in earlier years. Referring to its own decision in Assessment Year 2020–21, the Bench reiterated that marketing and reservation-related receipts could not be regarded as managerial, technical, or consultancy services and thus could not be taxed as royalty or FTS under Article 12(4)(a) of the DTAA. It emphasized that the receipts represented a system of pooled contributions from all franchisees used for the group’s global promotional activities and did not involve any technical services being made available to the Indian hotels. On the issue of reimbursements, the Tribunal agreed that the Travel Agent Commission Program payments were made purely on behalf of the Indian hotels and recovered on a cost-to-cost basis. Since the assessee did not earn any income from these transactions, such reimbursements could not be treated as Fees for Technical Services.

In reaching this conclusion, the Bench relied on judicial precedents such as DIT v. Panalfa Autoelektrik Ltd. (Delhi High Court), CIT v. Model Exims (Allahabad High Court), and Le Passage to India Tours & Travels (P.) Ltd. (Delhi ITAT), where it was held that reimbursements or commission payments to foreign entities could not be taxed as technical services under Section 9(1)(vii) of the Act. The Tribunal also dealt with the assessee’s grievance regarding short credit of tax deducted at source, amounting to ₹1.14 crore for AY 2017–18 and ₹84.7 lakh for AY 2018–19. It directed the Assessing Officer to verify the claim and allow the TDS credit in accordance with law.

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In its final decision, the ITAT held that the marketing and reservation-related contributions received by the assessee were not taxable in India either as royalty or as Fees for Technical or Included Services under the Income Tax Act or the India–U.S. DTAA. Similarly, the reimbursements under the Travel Agent Commission Program were found to be non-taxable as they represented cost-to-cost recoveries without any income element. Accordingly, the Tribunal deleted the additions made by the Assessing Officer and partly allowed the appeals for statistical purposes, granting major relief to the assessee on the core issue of non-taxability of hotel marketing, reservation, and reimbursement receipts in India.

Appearance

Counsel For  Appellant: S. K. Agarwal, CA & Sh. Himanshu Agarwal, CA

Counsel For Respondent: Saroj Kumar Dubey, CIT, DR

Cause Title: M/s Six Continents Hotels Inc. Versus ACIT

Case No: ITA No. 373 /Del/2021 (A.Y. 2017-18)

Coram: Yogesh Kumar U.S. (Judicial Member), S. Rifaur Rahman (Accountant Member)