TMI Blog2006 (11) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... International Hotel Licensing Company Investments SARL which is a Luxembourg company. The applicant is in the business of promoting enterprises and is conducting international advertising, marketing and sales programs# for Marriott chain of hotels to promote them in the foreign markets. Marriott is a leading worldwide hospitality group. In 2005 different Marriott group entities entered into various agreements with Unitech Hospitality Ltd., an Indian company, (referred to in this ruling as "the owner") in connection with the setting up of an Indian hotel to be constructed, furnished and equipped in Noida (Uttar Pradesh), India. The applicant also entered into an agreement with the Owner called "International Marketing Program Participation Agreement" (hereinafter referred to as "the IMPPA") on 6.9.2005. The IMPPA provides that the owner would participate in the marketing business promotion programs and that the applicant would provide, inter alia, advertising space in magazines, newspapers and other printed media and electronic media which would be conducted by it outside India. However, it is made clear that the applicant would not conduct any specific marketing activity for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a source, whether the payment by a resident in India to the applicant will amount to earning of an income from a source in India u/s 9(1)(i) of the Act? Whether the payment made by the owner is under arms' length principle particularly in the context that similar agreements have been entered into by and between IHLC and other Marriott group member hotels. It is submitted that under the IMPPA the applicant has to provide advertising space in magazines, newspapers and other printed media, advertising slots on radio, television and other electronic media; marketing promotional and public relations campaign. The expenditure for these activities is aimed not for the benefit of the Indian hotel but for the Marriott group as a whole. It is seen from the samples of the advertisement furnished by the applicant that the main emphasis is on the brand i.e. Renaissance Hotels Resorts, JW Marriott. The samples are so few in number that they do not bring out the actual nature of services rendered by the applicant. It is noted that the advertisements carry copyright of Marriott International Inc. and the connection between it and the applicant is not clear; whether the advertisements h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdination agreement as referred to in item (F) of clause 3.01, Article-III of the agreement dated 6.9.2005 and Technical service agreement as referred to in item A.3 of clause 5.18 of Article-V of the agreement dated 6.9.2005. On the basis of the above submissions, it is pleaded that the amounts received by the applicant from the owner would be taxable in India. 3. The applicant filed a fairly lengthy rejoinder to the comments of the Commissioner refuting that the applicant has business connection in India and disputing that payments under the IMPPA constitute royalty or FTS. It is reiterated that the payments are reimbursement as claimed in the application. In regard to the documents referred to above, the applicant declined to produce the same on the ground that they are not relevant for determination of tax liability of the applicant in respect of payments to be made under the IMPPA. 4. Mr. Nishith Desai, learned counsel appearing for the applicant, has submitted that there is no Double Taxation Avoidance Agreement between the Republic of India and Grand Duchy of Luxembourg and that the tax liability of the applicant, for the purpose of the question, has to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness promotion activities and therefore the plea of reimbursement is inconsistent with carrying on of the business; that the payments are in the nature of royalty or at any rate FTS as defined in explanation 2 to Section 9(1)(vii) of the Act; when a guest stays in the hotel in India as a result of the services of the applicant, it would be deemed that the services are utilized in India and merely because the guest is a foreigner it cannot be said that the income does not accrue or arise in India. His further contention is that there is business connection between the applicant and the owner within the meaning of section 9(1)(i) of the Act; he points out that the IMPPA was entered into in India, the hotel business of the owner is in India, the payments are received in India as per clause (B) of article 1.04 thereof and there is also continuity in regard to the payments as the said agreement is intended for 25 years and is extendable for a further period of 10 years. He has emphasized that advertisements could not be said to be outside India, samples of advertisement show that they are in Indian magazines of Jet Airways and Air Sahara and that they relate to specific Indian hot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt. He has invited our attention to various clauses of the IMPPA to show that services are being provided by the applicant for which owner is liable to make payment @ 1.5% of the gross revenue (net of taxes) for each accounting period and 3.4% of gross room revenues under special scheme of Courtyard System and these amounts have no nexus with the actual expenses incurred by the applicant and therefore the payments cannot be treated as reimbursement of expenses. 7. We have considered the rival contentions carefully. It would be apt to notice here the meaning of the word "reimburse". The meaning ascribed to the word 'reimburse' in "The New Shorter Oxford English dictionary"6 is: "repay (a sum of money spent); repay or recompense (a person), In the Black's Law Dictionary the word 'reimburse' is defined to mean: "to pay back, make restoration, to repay that expended, to indemnify or make whole" Keeping this meaning in mind we shall refer to the relevant recitals in the IMPPA to resolve the controversy with regard to the nature of consideration paid by the owner to the applicant. Para 1.01 (A) to (E) of the IMPPA says, inter alia, that any advertising, marketing, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foregoing. Any advertising, marketing, promotion, or sales services generated directly by the hotel shall not be part of the international advertising, marketing, promotion, and sales program. The meaning of Courtyard system is as follows:- "All hotels operated under the name Courtyard Hotel in the United States and Canada are referred to as Courtyard Hotels. Courtyard Hotels located outside of the United States and Canada are collectively referred to as Courtyard International Hotels". The expression "special services and programs" is ascribed the meaning as detailed in section 1.02 of Article - I of the agreement. The said section reads as follows:- 1.02 Special Services and Programs "IHLC shall provide or cause one or more of its Affiliates to provide on a central or regional basis to the Hotel and other Hotels in the Courtyard System special services and special programs other than those described in Section 1.01 which services and programs are intended to benefit the Courtyard System ("Special Services and Programs"), and IHLC may require the Hotel to participate in such Special Services and Programs. As of the Effective Date, these Special Services and Program ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the classification of the expenses, noted in clauses (a) to (m) furnish a fairly good picture of services provided by the applicant. In effect what the applicant would be providing is services both within and outside India in the form of advertising, marketing promotion, sales program and special services and other programs for the brand of Marriott hotels and other group of hotels. Marriott's award-winning guest loyalty program, Marriott Rewards, has over 2400 participating hotels and 21 million members*. No service will be provided individually to the hotel of the owner and that all the beneficiaries of the services are not contributors. From the above details, it becomes evident that there is no direct nexus between the owners of the hotel and the costs and expenses of providing the said services. The owner will get the benefit, if any, being one of the members of Marriott chain hotels. Even if after adjustment the payments in the form of contributions equal to the total costs and expenses incurred by the applicant, for the reasons noted above, we find it difficult to accept that they would amount to reimbursement of costs and expenses. 8. We shall now advert to the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon fund to enable it to defray a part of the expenses of the project carried out by DECTA on behalf of the company in question and that the contribution received/receivable to recover part of the expenses of the technical assistance provided by the applicant therein under the provisions of the Aid programme to the companies assisted by it in India, was not income of the applicant and was not chargeable to tax. For the reasons already noted above this case also will be no help to the petitioner. In the case of CIT v/s Industrial Engineering Projects Pvt. Ltd. (Supra 4), the assessee had an agreement with a foreign company whereby some services were to be rendered by the latter to the former on payment of consideration of Rs. 1,20,000/- per year and that certain costs and expenses incurred by the assessee would be reimbursed. The controversy centered round the claim of the assessee for reimbursement of expenses only. The Income-tax Appellate Tribunal, on interpretation of the agreement and on considering the facts of the case, found that the assessee received no sums in excess of the expenses incurred by it on behalf of the foreign company under the agreement and that the reim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any and the companies in the group were equivalent to the expenses incurred by it in providing the services and there was no profit element, it would be a case of quid pro quo for the services and not reimbursement of expenses; that, therefore, payments of fees had to be made by the Indian company only after withholding tax under section 195. The contention that the primary object of the applicant is not to make profit but to enable the owner to attract foreign tourists from all over the world as the cost of international marketing and promotion activities would be impossible for an owner alone to incur and that in fact the applicant is not earning any profit is in our view not well founded. It is worthwhile mentioning that the IMPPA has the characteristics of a business contract. In clause 4 of annexure II and clause 2 of annexure III to the application the description of the applicant is that it is in the business of promoting enterprises and conducting international advertising, marketing and sales programs for Marriott chain of hotels. It has been emphasized that the applicant has no profit motive and as a fact also it is not earning any profit. For a receipt to be income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the payments in question shall be deemed to accrue or arise in India because the applicant has business connection in India as also a source of income in India. It would be necessary to read the explanation 2 to Section 9(1)(i) of the Act which defines the expression 'business connection' and reads as follows:- Explanation 2 of Section 9(1)(i) of the Act. For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident-has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by , or subject to the same common control, as that non-resident; Provided that such business connection shall not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two contributing to the earning of income by the non-resident in his trading activity. The following observation of the Hon'ble Supreme Court is relevant for the present discussion:- "A relation to be a "business connection" must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the Act of a non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub-section (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise to the income would be deemed to accrue or arise in the taxable territories. If, however, all the operations are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part the operations carried out in the taxable territories". It was held : "The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, is 25 years which is extendable for a further period of 10 years. Thus the third requirement is also satisfied. The pleas of the applicant that it conducts international marketing and business promotion activities outside India in the normal course of business and that it has no form of presence in India nor is the owner an agent of the applicant and that no activity of the owner result in any earning of the income of the applicant have no merit both on facts and in law. The existence of business connection is sufficient to attract the provision of Section 9(1)(i) of the Act to the amounts in question and further question as to whether the applicant has also a source of income in India is unnecessary but in as much as both the parties have devoted a part of the discussion on the latter question we would like to touch on this aspect as well. In support of the contention that the applicant has a source of income in India, the case of the revenue is that source means a profit making apparatus and the hotel of the owner is therefore the source of income and as the payments are made for utilization of services of the applicant there is source of income for the applicant in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that what is being paid by way of contributions is nothing but "royalties" within the meaning of explanation 2 to Section 9(1)(vi) of the Act. We are not impressed by this plea. The applicant sought ruling of the Authority with reference to the payments made by the owner in connection with the marketing and business promotion activities (under the IMPPA), therefore, any amount payable by virtue of other agreements to others or even the applicant would be irrelevant for the purpose of this application. The last point, which needs to be dealt with, is whether payments made by the owner to the applicant under the IMPPA constitute 'FTS' under section 9(1)(vii) of the Act. The relevant portion of the said provision reads as under:- Income deemed to accrue or arise in India Section - 9 (1) The following incomes shall be deemed to accrue or arise in India:- (i) to (vi) x x x x x x (vii) income by way of fees for technical services payable by- the Government; or a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt or consideration which would be income of the recipient chargeable under the head 'Salaries'. The exceptions to the definition of FTS are admittedly not attracted in this case. The short question, therefore, would be whether payments made by the owner to the applicant are for rendering of any managerial, technical or consultancy services. The applicant relied on the decision of a learned single Judge of Madras High Court13 in support of the plea that the service provided by the applicant would not amount to technical service. In that case the petitioner was engaged in the business of providing cellular telephone service to the subscriber. The Chief Commissioner of Income-tax issued a direction to treat the payment made to the petitioner by the subscriber as fees for technical services. That direction was assailed in the writ petition before the court. Allowing the writ petition the learned judge held that the expression "technical service" was required to be understood in the context in which it was used, therefore fees for technical services could only be meant to cover such things technical as were capable or being provided by way of service for a fee and that the type of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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