TMI Blog2018 (6) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... s 5 and 7 of the India-Luxembourg DTAA as business income and is attributable to the Applicant’s permanent establishment in India. In view of this, the question whether these payments would be characterised as ‘royalty’ or ‘fees for technical services’ becomes wholly academic, and is, therefore, not considered necessary to be answered. - A.A.R. No. 1010 of 2010 - - - Dated:- 24-5-2018 - Mr. R.S. Shukla, In-charge Chairman And Mr. Ashutosh Chandra, Member ( Revenue ) For the Applicant : Mr. Nageswar Rao, Advocate Mr.Purushottam Anand, Adv. Ms. Akanksha Gupta, CA For the Department : Mr. G.C. Srivastava, Advocate Ms. Kavita Pandey, CIT (DR), AAR Mr. Sukh Sagar Syal, CA Mr. Rakesh Goyal, CIT, Kolkata RULING ( By Ashutosh Chandra ) FRS Hotel Group (Lux) S.a.r.l., (now FRHI Hotels Resorts S.a.r.l.), the Applicant, has filed an application under Section 245Q(1) of the Income Tax Act, 1961 (the Act) on 24.11.2010and the same was admitted on 26.07.2012. The Applicant is a Company within the FRHI Group incorporated under the laws of and Duchy of Luxembourg. It is stated that the Applicant is the Principal Operator Company of the FRHI Group outside North America an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly the Applicant has withdrawn to seek ruling on the second question i.e. on taxability of purchase services on the plea that the Applicant does not contemplate to provide such services to the Hotel owner.Further it is stated by the Applicant that the provision of Purchasing Services in the Centralized Service Agreement is a standard clause which the Applicant typically provides in its contracts with hotel owners across the world. The Indian Hotel Owner in the present case does not require such purchasing services. 2. On the above facts, the Applicant is seeking a Ruling of this Authority only on the following question by confining itself to taxability of consideration received for global reservation services: Whether on the facts and circumstances of the case, payments received by the Applicant from the Indian hotel owner for provision of global reservation services ( GRS ) would be chargeable to tax in India as Fees for Technical Services or Royalty under the provisions of section 9(1)(vi) / 9(1)(vii) of the Income tax Act, 1961 ( the Act ) read with provisions of Article 12 of the Double Taxation Avoidance Agreement between India and Luxembourg? 2.1 In its appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by BAHDL to the Applicant. Each of these agreements deals with parts of the overall functioning of the hotel. It would, therefore, be wrong to restrict ourselves to reading just one agreement without going into other agreements. 6. On merits, the Applicant has primarily made submissions as to why the income arising from providing GRS cannot be taxed in India as Royalty or Fees for technical services u/s. 9 of the Act read with Article 12 of the DTAA. 7. However, the Revenue in its counter submissions urged that the primary issue in this case is whether or not the Indian Hotel constituted a Permanent Establishment (PE) in India under Article 5 of the DTAA and the profits attributable to such PE, including the income from GRS ought to be taxed in India as its business profits. It was also submitted that all streams of income, including income from GRS are taxable under the Act as business income, since their business connection and also their source lies in the operation of the hotel in India. 8. In reply, the Applicant reiterated that the question raised in the present application is only whether the income from GRS (arising out of Centralised services agreement) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure cannot be divided into one or the other sub- parts. Proceeding on the assumption that one operation has no bearing on the other would be a highly untenable proposition. 9.3 We also notice that at pages 14 and 15 of the application, where Business Income is discussed, the Applicant has itself stated that: income in respect of reservation services to be rendered by the Applicant to Indian hotel owner under the CSA executed between the Applicant and Indian hotel owner should be considered as business income not liable to tax in India under Article 7 of India-Luxembourg DTAA since these services are rendered entirely from outside India and cannot be attributed to any PE in India. Having taken such a position, we do not find merit in the Applicant s contention that the issue of the existence of PE is not a subject matter of the present application.The question posed before the Authority proceeds on the inherent assumption that there is no PE in India. 9.4 We must emphasize that a treaty, like any other agreement, must be read and given effect to as a whole. An isolated reading of some paragraphs while ignoring others would, in our opinion, lead to absurd and highly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place PE arises on the fulfillment of the following three conditions- i) Existence of a fixed place. ii) The fixed place being at the disposal of the non-resident. iii) The non-resident carrying on its business (wholly or partly) through such fixed place. 10.2 There is no doubt that the Indian hotel, Swissotel Kolkata is a fixed place. Whether such fixed place is at the disposal of the Applicant, the Revenue has highlighted various clauses from the Agreements. 10.3 In the principal agreement, i.e. the Hotel Management Agreement , the Applicant is referred to as the Operator and BAHDL is referred to as the Owner . Some of the relevant clauses are as under: Owner desires to obtain the benefit of Operator s expertise in connection with the day to day operation and management of the Hotel, all upon and subject to the terms and conditions set forth in this Agreement. (Recital B) Subject to section 2.2, the initial Operating Term of this agreement shall be the period commencing on the Opening Date and ending on the tenth 10th year anniversary of the Opening Date (the Initial operating term ). (Clause 2.1) Operator and Owner may agree t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Owner shall afford (and shall cause the general contractor to afford) all consultants engaged by operator reasonable access to the construction site so that operator may perform its duties under this section 3.12. g) Marketing- Operator and its affiliates shall develop a marketing plan for the promotion and marketing of the name and facilities of the hotel during the pre- opening period. (Clause 3.12) (a) Except as set forth in section 5.3(b) below, Owner shall have the right to consult with operator with respect to the hiring, initially and with respect to any replacement, of the following hotel staff positions (the Core Executive Staff), provided, however, that the final decision as to any hiring, termination, transfer or replacement shall be that of operator (i) General manager, (ii) Comptroller/Chief Financial Officer, and (iii) Director of Sales and Marketing. Operator may change or replace the Hotel Staff at any time. Owner acknowledges further that the Brand Parent Company shall be entitled to offer positions at any of the operator hotels to all members of the hotel staff, including the core executive staff. b) Owner shall have the right to refuse Opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll notify the Operator in writing of its intention to sell its right, title and interest in the Hotel and the operator shall be at liberty to make an offer to purchase such right, title and interest. (Clause 17.3) 10.4 In the Centralized Services Agreement , the Applicant is referred to as the Advisor and BAHDL is referred to as the Owner . The following clauses have been highlighted to show that the Hotel was at the disposal of the Applicant and that it exercised significant complete control over its operation. Owner desires to obtain the benefit of Advisors expertise in advising and providing services to Owner with respect to sales and marketing, reservations and purchasing, and certain other aspects of the Hotel and Adviser has agreed to provide such expertise and services, all from Advisor s home offices and with staff situated outside of the Jurisdiction and upon and subject to the terms and conditions set forth in this Agreement. (Recital B) The term of this agreement (the Term ) shall be co-terminus with the Operating Term of the Hotel management agreement (including any extensions thereof) unless sooner terminated pursuant to the terms hereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the procuring party for such goods, supplies and services plus any purchasing fee charged by such procuring party and described in the annual budget ( purchasing fee ) (c) Advisor (or the brand parent company or any affiliate, as applicable) may retain rebates, sponsorship fees, discounts and similar considerations on hotel purchases made by a procuring party that is either a corporate Department of advisor of the brand parent company or an affiliate of the brand parent company, provided that all hotel purchases with respect to which such considerations are made nevertheless satisfy the compatible aggregate cost test and any discounts or rebates given to the hotel and solely in connection with the purchase made by the hotel shall be retained by the hotel for the benefit of owner. (Clause 6.1) Notwithstanding any other provision in this agreement, the owner shall be entitled to transfer its right, title and interest in the hotel either directly or indirectly so long as such transfer is made (i) to a qualified person, (ii) that agrees to take over the rights and obligations of this agreement, and (iii) that is not a competitor to the advisor; provided however, the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r design specifications. 5) Technology The consultant shall provide a direction on all low voltage cabling design, including data, telephone and Internet. The consultant shall further provide the owner with specifications and standards on all rooms related to information technology, including the computer, phone system, wiring closets. The consultant shall provide the owner with specifications and standards for applications including: Property Management Systems; accounting system; conference and catering system; F B point-of-sale system; Time and attendance; and email. The consultant shall provide a specifications and standards for hardware, including: wide area network connectivity; Internet access; local area network; telephone system. 8) Construction observations and deficiencies Consultant shall visit the project site at intervals appropriate to the stage of construction for observation of the progress and quality of the work and consultation regarding proposed solutions to design conflicts that may affect operation, and monitor installation of furniture, Fixtures and equipment, operating supplies and operating equipment. Owner shall pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Applicant. The extent of the Applicant s absolute control over the management and operation of the hotel, can best be appreciated from clause 12.5 of the Agreement, which states that the owner is barred from even contacting directly any of the hotel staff. Furthermore, the owner has bound itself to the terms of this agreement for a period of 10 years extendable by another 40 years. (Hotel management agreement) 10.9 Some of the core functions of the operation of the hotel such as sales and marketing, reservation etc. have also been outsourced to the Applicant. For providing such services, the hotel owner has undertaken to cooperate with the Applicant to arrange for visas, licenses, authorisations for the Applicant, its consultants, employees etc. to carry out such services at the hotel premises. As regards purchasing services, the Applicant has undertaken to designate a suitable vendor who would supply goods and services for the operation and management of the hotel. With regard to these services as well, the Applicant has been given complete autonomy with no interference from the owner. (Centralized services agreement) 10.10 The Applicant has further undertaken to advis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotel management agreement , the Applicant has received 0.5% of the Total Revenues of the Hotel for each year (clause 9.1). Under the Centralised services agreement , the Applicant has received 1.50% of the Total Revenues of the Hotel as centralized sales and market fee, 0.25% of the total revenues as current accounting MIS charges and 1% of total cost of any refurbishing, maintenance, repairs or capital improvement which has been reviewed and approved by the Applicant (clause 5.3 and 5.5). Under the Technical services agreement , the Applicant has received a lump sum amount of USD 25,000 (clause 3). Under the Hotel advisory agreement , the Applicant is entitled to receive a basic fee of 1% of total revenue for the first three years which will be increased to 1.25% after the third year. Additionally, the Applicant is also entitled to an additional fee of 8% of Gross operating profit of each year (clause 7.1). Finally, under the Hotel license agreement , the Applicant is entitled to 0.5% of the Total revenues. 10.15 It is, therefore, apparent that the Applicant has taken over the operation and management of the Indian hotel by entering into different agreements and has earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds that the income is for the use of an industrial or commercial equipment and the income therefore is also in the nature of royalty . 10.19 We have considered the arguments of bothsides. Since in the present case, we have held that the income of the Applicant is attributable to the fixed place PE in India, the question whether it can be characterised as royalty or fees for technical services becomes wholly academic. Even if the income is characterised as either of these two, by virtue of para 4 of Article 12, the income would still be taxable as business profits under Article 7. 11. In view of the foregoing, the question raised before us for a Ruling is answered as under: The payments received by the Applicant from the Indian hotel owner for provision of global reservation services ( GRS ) would be chargeable to tax in India under section 9(1)(i) read with Articles 5 and 7 of the India-Luxembourg DTAA as business income and is attributable to the Applicant s permanent establishment in India. In view of this, the question whether these payments would be characterised as royalty or fees for technical services becomes wholly academic, and is, therefore, not con ..... 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