TMI Blog2019 (12) TMI 1667X X X X Extracts X X X X X X X X Extracts X X X X ..... The place of disposal should not be tested from the angle of 'exclusion of others' but from the perspective of type and duration of business carried on by the taxpayer from such place . The agreement not only provides the assessee with an unrestricted right to access the hotel premises but also the complete control over such premises. This clearly establishes the fact that the hotel premises were at the disposal of the assessee in view of the length and duration of their use by the assessee and the less invasive activities being carried on there from. It can't be denied that the assessee had certain amount of physical space at its disposal in the form of hotel premises. Temporal aspect or the Permanency Test - The operating term of the lease is 20 years. It is not the contention of the assessee that the visits of its employees are occasional . The visits are mandated by a written contract and have been historically going on at a regular basis year after year. Although the appellant claims that the visits are only for a limited period, the truth is that the employees of the assessee have been visiting the premises of AHL year after year. Thus, the visits of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India; enjoyed perquisites from AHL establish that prima facie the office of AHL can be considered as a projection of the assessee in India. Conclusion drawn by the AO that the assessee carries on its business either wholly or partly through the fixed place and accordingly, the business premises of AHL constitute a PE of the assessee within the meaning of Art- 5(1) of DTAA should be confirmed. As regards of existence of PE under Art-5(2)(i), the AO' has clearly proved that contention of the assessee is factually incorrect and the employees have stayed beyond the requisite period thereby establishing PE under Art-5(2)(i) as well. SOA defines that the owner AHL consents to the ownership management, licensing and operation by HISWA (the assessee). The SOA also clearly mentions that the HISWA will have complete control and discretion with regard to all aspects of operations of the hotel. It also mentions that the right of the owner AHL to receive financial returns from the operation of the hotel shall not be deemed to give the owner any right or obligations with respect to the operation or management of the hotel. These clauses clearly prove that the HISWA, the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e clauses of the Strategic Service Agreement and Strategic Oversight Agreements, we hold that the revenue s earned by the assessee are taxable under Article 12 of the DTAA. Determination of the profit, we hereby hold that the taxable profits may be computed in accordance with the provisions of Section 44DA of Indian Income Tax Act and Article 12 of Indo-UAE, DTAA. During the arguments, it was also submitted that the assessee has incurred losses in the assessment year 2008-09. The assessee be given an opportunity of submitting the working of apportionment of revenue, losses etc on financial year basis with respect to the work done in entirety by furnishing the global profits earned by the assesse, so that the profits attributable to the work done by the PE can be determined judiciously. The same may be considered while determining the taxable profits in India in accordance with the provisions of Section 90(2) of Indian Income Tax Act, 1961. Assessee appeal dismissed. - Sh. H.S. Sidhu, Judicial Member And Dr. B.R.R. Kumar, Accountant Member For the Assessee : Sh. Percy Pardhiwala, Adv. For the Revenue : Sh. G. K. Dhall, CIT DR. ORDER PER DR. B. R. R. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitrarily adopting 25 percent of the gross receipts as taxable income attributable to the Appellant s alleged PE in India under Article 7 of the Tax Treaty. 2.2. The Appellant prays that it has incurred large operating losses as depicted by its Audited Financial Statements and therefore, no profit or taxable income is otherwise attributable to the Appellant s alleged PE in India under Article 7 of the Tax Treaty. Therefore, the highly excessive and arbitrary attribution of profits to the alleged PE adopted by the AO and upheld by the DRP be reversed and relief be allowed to the Appellant accordingly. Ground No. 3 - Erroneous alternative taxation of India source income as Royalty under Section 9(1)(vi) of the Income Tax Act, 1962 ( the Act ) and Article 12 of the Tax Treaty 3.1 On the facts and in the circumstances of the case and in law and without prejudice to the alleged PE of the Appellant in India, the AO / DRP erred in equating consultancy services rendered by the Appellant to be in the nature of Royalty under the Tax Treaty and the Act on the contention that its relates to provision of 'know-how, skill, experience, commercial information and inta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... primarily in the Asia Pacific Region. The Assessee has entered into two Strategic Oversight Services Agreements ('SOSA') both dated 4th September 2008 with Asian Hotels Limited, India ('AHL') - one for AHL's Delhi Hotel and one for AHL's Mumbai Hotel. 5. The Assessing Officer held that the Assessee had a PE in India under Article 5(1) and Article 5(2) of the India-UAE Tax Treaty based on the following grounds: (i) The assesse always has a fixed place of business at its disposal throughout the year in the Hotel premises of its Customer in India, including the chambers of MD; (ii) The assessee s expatriates were continually present and are actually operating the Hotels belonging to the owners in each and every manner; (iii) The Assessee provides Central Reservations System (CRS) which constitute place of business. The DRP upheld the action of the Assessing Officer. 6. At the outset, the ld. AR has taken us to the background of the case as under: Brief Background of Hyatt International South West Asia Limited. 1. Hyatt International South West Asia Limited ( the Company' / the Assessee ) is a Company incorporated un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vation of the Assessing Officer that there is continuous presence of the assessee through its employees is factually incorrect. It was argued that the assessee had no fixed business at its disposal throughout the year for the hotel provisions including chambers of M.D. The employees have stayed and performed their obligation under SOSA with AHL and the same is noted from the details of the stay, which is less than 9 months. 8. The ld.AR explained in detail about Article 5 of India UAE DTAA, which has been mandated by Protocol dated 26.03.2007. Articles 5(1) and 5(2) are as under: Article 5 Permanent Establishment 1. For the purposes of this Agreement, the term permanent establishment mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment includes especially; (a). a place of management; (b). a branch; (c). an office; (d). a factory (e). a workshop; (f). a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g). a farm or plantation (h). a building, site or construction or assemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. (This para is replaced by protocol dated 26th March 2007. The protocol is given at the end.) 4. In so far as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the methods of apportionment adopted shall, however, be such that the result shall be in accordance with the principle contained in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He argued that none of the employees stayed for more than nine months. The details of the job description of various employees for rendering Assistance to India Hotel owners and the details of services rendered in India are as under: Sr. No Name of the Employee Designation Job Description 1 Peter Fulton Managing Director Overseeing the operations of hotels per agreement Assistance in meeting the standards of operation, profitability, legal and financial fiduciary requirements Overseeing administrative duties, client relationship and budgets, resources utilization and reporting of information. Supervising the implementation of the Corporate Hotel Actions Guidance on maintaining Brand Standards and compliances with management contracts and agreements 2 N Ravichandran Director of Finance Assisting the operations of the finance department and local compliances Assistance with respect to the use of technology in the hotels and safeguard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite details have already been furnished before you in the past. In connection with the additional details/clarification required, we are happy to enclose/provide our replies enumerated as below: 1. During the subject assessment year under consideration, the Company is in receipt of the management fees from Asian Hotels Limited. 2. A brief submission explaining as to why the receipts in the hands of the Company by way of management fees should not be chargeable to tax in India is enclosed as Annexure 3 3. The Company has not raised any bill on Indian customers/Hotels Owners against the use of its name. 4. Copy of the Double Taxation Avoidance Agreement entered into between India and United Arab Emirates ( UAE ) is enclosed as Annexure 4 Trust the same meets your requirements. We would be happy to submit any further details / information that may be required. For Hyatt International South West Asia Limited Sd/- Peter Fulton Authorized Signatory 15. The assesse has further brought to our notice the submissions made before the revenue authorities as to why the receipt should not be taxable in India as fee for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which reads as under: Article 22 Other Income 1. Subject to the provisions of paragraph 2, items of income of a resident of a contracting state, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement, shall be taxable only in that Contracting State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the order Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 17. He also relied on models and judgments of OECD Model Convention and commentary and also judgment of CIT vs. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP), Motorola Inc. v. DCIT (2005) 95 ITD 269 (Del SB) and Clifford ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sence of any specific Article in the Tax Treaty on Fees for Technical Services (FTS) , our business income is not taxable in India under Article 7 of the Tax Treaty. ix.) We have received the Department s letter dated 23 December 2011 (Annexure 2) wherein it is alleged that there appears that the assessee company has a permanent establishment in India in different forms. Therefore, profits attributable to PE are taxable under the law. You are therefore requested to please give a working of profit attributable to the PE, along company supporting evidences. x.) Subsequently, our discussions suggests that the forms of Permanent Establishment ( PE envisaged in the Department s letter relates to fixed place PE under Article 5(1) and Service PE under Article 5(2)(i) of the Tax Treaty. Even otherwise, any other forms of PE under Article 5(1) or 5(2) (e.g. a place of management, branch, factory, etc.) or under Article 5(4) - Dependant Agent PE have no relevance to the facts of our case. xi.) Our submissions on non-constitution of our PE in India under Article 5(1) and under Article 5(2)(i) of the Tax Treaty are entailed in paragraph 2 below. xii.) Without prejudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ample cited in the OECD commentary, which suggest that regular presence of employees in the Other Contracting State constitutes PE only on satisfaction of the disposal test: A second example is that of an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company (e.g. a newly acquired subsidiary) in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters of the other company will constitute a permanent establishment of his employer, provided that the office is at his disposal for a sufficiently long period of time so as to constitute a fixed place of business vi.) As per paragraph 4.6 of the OECD MC, the words through which stipulate that the business activities need to be carried on a particular location that is at the disposal of the enterprise for that purpose. vii.) We also invite attention to the Commentary of Klaus Vogel in his book Double Taxation Convention which sugg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st as outlined in (a) above is not fulfilled. xiv.) Further, the term fixed in the expression fixed place of business postulates a link between the place of business and a specific geographical point. As regards the question whether the place of business can be considered fixed , it should be examined vis-a-vis a specific geographical point as well as certain degree of permanency. xv.) Per Paragraph 6 of the OECD Model Convention and Commentary, a place of business should exist with some degree of permanency i.e. it should not be purely of a temporary nature. The OECD MC has quoted the experience of the Member Countries that PE has been construed not to exist where business has been carried out through a place of business maintained for less than six months. xvi.) With respect to above principle, we invite attention to the decision of the Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP) which has held that a Permanent Establishment is a virtual projection of the foreign enterprise of one Country into the soil of the other Country. The requirement is that place should exist for some reasonable period sufficient to establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inue for a period of more than six months in order to constitute a permanent establishment Since a categorical finding of fact has been given by the appellate authority that the contract was for less than six months, it becomes absolutely clear that the assessee did not have a permanent establishment in India as per article 5(3). Article 5(3) provides a specific provision which covers the provision of article 5(2). The specific provision would prevail over the general provision. 19. He also argued on the issue that the assessee cannot be even considered as Service PE under Article 5(2)(i) of the Tax Treaty due to the following reasons: i.) As per Article 5(2) of the India- UAE tax treaty, PE includes specially (a) place of management; (b) a branch; (c) an office; (d) a factory;(e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources (g) a farm or plantation; (h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ; (i) - see point (iv) below. ii.) A Place of Management unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the number of days for Service PE is as per Calendar days regardless of the number of individuals performing such services during that day. This principle has also been upheld by the Mumbai Tribunal in Clifford Chance, United Kingdom v. DCIT [2002] 82 ITD 106 (MUM.) albeit in the context of Article 15 - Independent Personal Services wherein it was held that a similar rule is to be applied. viii.) In fact, we are currently compiling details of time spent on individual and separate projects (Mumbai and Delhi) and each of the same would be far below the threshold of 9 months stipulated by the Tax Treaty. ix.) Attention is also invited to the decision of the Hyderabad Tribunal in the case of ACIT v. Viceroy Hotels Ltd [2011] 11 taxmann.com 216 (Hyd) wherein in the context of India- Thailand Tax Treaty, the Tribunal has held that since the number of days presence in India was below the prescribed threshold of Service PE of 183 days, no Service PE of the Foreign Company was constituted and in absence of any FTS article in the Tax Treaty, the income of the foreign company was not taxable in India. x.) In view of above, we submit that we do not constitute PE under Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace of business The term Place of business covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used space in a customs depot(e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. As noted above, the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the premises/place were available to the assessee for entire duration from which it had carried out its activities for performing its obligation under the strategic oversight agreements. A number of judicial precedents of commentaries have resulted in foundation of the principle that if a fixed place of business is available to the assessee and is at its disposal through which the assessee carries out its business fully or partly, then it would constitute a fixed place of business PE of the assessee. 11. In addition to the above, it is seen that the assessee has also been providing central reservation system (CRS) services, to the Hotel which in itself constitutes fixed place of business (PE). 22. In addition, it is also noticed that the assessee has a PE in terms of Article 5(1) (i) which states that:- (i) the furnishing of services including consultancy services by an enterprise of a contracting state, provided that such activity continue for the same project or completed project for a period aggregating 9 months within 12 months period. 23. The assessee admits that it is rendering consultancy service but claims that its employees did not stay in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know- How ), subject to the provisions of Article IV. below. Owner hereby confirms, acknowledges and agrees that the Know-How and any expertise arising there from or relating thereto shall be used only in connection with the Hotel and shall be provided to Service Provider by Owner solely for such purpose. Any use of the Know-How outside the context set forth herein, shall be deemed a default by Owner, subject to the immediate termination of this Agreement by Strategic Services Provider, solely at its discretion. Particular areas of such knowledge, skills, experience, operation and management information and associated technologies that comprise the Know-How furnished under this Agreement are generally described in Appendix I, which forms an integral part of this Agreement. 25. Against the arguments of the ld.AR, Shri Gopal Dhal, the departmental Representative primarily argued that the interpretation that the minimum required period of nine months is applicable only with regard to Article 5(2), but there is no stipulation of minimum period of stay as per as Article 5(1) is concerned. Disputing the arguments of the ld. AR, he submitted a chart showing that the employees of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year aggregate to 158 days and this cannot be construed to satisfy the degree of permanency test for constituting Fixed Place PE under Article 5(1) of the DTAA. /Para-xix of submission to the AO, PB-99) 26. The claim of the assessee that it didn't have a place at its 'disposal' is also examined in the following paragraphs on the basis of the facts of the case and from the perspective of the Hon'ble Supreme Court in the case of Formula One World Championships Ltd. (394 ITR 80)(FOWC) and eFunds IT Solutions (86 Taxmann.com 240)(e-Fund). It has been observed by Hon'ble Supreme Court in the case of FOWC (Supra) and further reconfirmed in the case of e-Fund (Supra): OECD commentary on Model Tax Convention mentions that a general definition of the term 'PE' brings out its essential characteristics, i.e. a distinct situs' 1, a fixed place of business . This definition] therefore, contains the following conditions: - the existence of a place of business , i.e. a facility such as premises or, in certain I instances, machinery or equipment. - this place of business must be fixed , i.e. it must be established at a distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. In that case it was held that the principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. 28. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes: With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with dis-organised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. - The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English, or by English legal precedent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness activity that the taxpayer carries on. It is therefore not necessary that the taxpayer is able to exclude others from entering or using POB. This approach and methodology was confirmed by Hon'ble Supreme Court when it held: In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are (as in the case of Showa), and the more they allow a parallel use of the same POB by other persons (i.e. employees of MSL), the lower are the requirements under the control test. 30. The Hon'ble Supreme Court further went on to reconfirm the above approach i.e. Intensity of Control rather than Exclusive, Rigid Absolute Control when it recognized that there are, however, a number of traditional PEs (like a small workshop of 10 or 12sq. meters or a room where the taxpayer runs a noisy machine) which by their nature require an exclusive use of POB by one taxpayer and/or his personnel. Moreover, this approach is also in conformity to and consistent with the approach expounded by H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (P.244) The above observations show that the power to effectively control a location and the permanence of the business activities are interconnected issues. If an enterprise is able to exert a significant level of control over the place, the duration of an activity is less important in order to create a PE. In other words, if the effective control over a location is evident (e.g. in the case of a legal right to use a place), a relatively short time period will be enough to create a PE. On the other hand, if the activity is performed over a rather long time span, no distinctive right to use or access a place is required under the commentary in order to constitute a PE. In such a case a (low) degree of control over a place appears to be sufficient. Obviously, the Working Party considers the period of presence in the country to be more important than the effective power over a specific place. It even seems that the condition of effective power to use a place is not required when the period of activity is long enough. This view is further supported by the fact that the Term effective power to use a location cannot be found in the first version of the Discussion Drafts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not be out of context to highlight the fact that the temporal aspect of this concept has been largely diluted in view of the decision of Hon'ble Supreme Court in the case of Formula One World Championships (Supra). While elaborating the concept, the Hon'ble Supreme Court held- 41 The High Court was also conscious of the fact that such an access or right to access was not permanent in the sense of its being everlasting. However, having regard to the model of commercial transactions, such an access for a period up to six weeks at a time during the F-l Championship season was sufficient for the purposes of Article 5(1) of DTAA. Further, as the tenure of RPC was five years, it meant that such an access for the period in question was of repetitive nature. 35. The Hon'ble Supreme Court once again reiterated the above by observing that 68 (iii) The appellants are trying to trivialize the issue by harping on the fact that duration of the event was three days and, therefore, control, if at all, would be for that period only. 36. The Hon'ble Supreme Court accordingly proceeded to affirm the decision of Hon'ble High Court by observing as under- 70) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral or fleeting, or sporadic. The fact that RPC-2011's tenure is of five years, meant that there was a repetition; furthermore, FOWC was entitled even in the event of a termination, to two years' payment of the assured consideration of US$ 40 million (Clause 24 of the RPC). Having regard to the OECD commentary and Klaus Vogel's commentary on the general principles applicable that as long as the presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business, it is hereby held that the circuit itself constituted a fixed place of business. 71) A stand at a trade fair, occupied regularly for three weeks a year, through which an enterprise obtained contracts for a significant part of its annual sales, was held to constitute a PE. Likewise, a temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months was held to constitute a PE. 72) The High Court has also referred to some of the judgments, which are of relevance. We would like to take note of those judgments as we had agreed with the conclusions of the High Court on this issue: In Universal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of our company travelled to India and they stay in India for the purpose of rendering services aggregates to 158 days (Para-vii of submission to the AO, PB-95) and The stay of our employees in India did not exceed 9 months in any twelve months period as stipulated under Article 5(2)(i) of the DTAA ('Para-viii of submission to the AO, PB-95). Thus, as can be seen, the assessee's contentions are primarily centered around the existence of PE under Art-5(2)(i) only. No substantive arguments have been advanced denying the existence of PE under Art-5(1) of the DTAA. What is more important in this context is not only the number of days, but the presence almost throughout the year and year after years. Thus, to quote from Hon'ble Supreme Court in the case of Formula One World Championships, the appellants are trying to trivialize the issue by harping on the fact that duration of the event was three days and, therefore, control, if at all, would be for that period only the presence is neither ephemeral or fleeting, or sporadic . The indicator is not the presence of the employees for short periods in one year, it's about the continuity and repetitiveness of such presenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotel [p.25] Art-VII vii. Sec-2 Provision of chain marketing, services, reservation services, gold passport services etc.[p.26-27] The AO in his order, as well as in my oral submissions during the course of hearing, have brought out how, the essence of the agreement between the assessee and AHL and the overwhelming and controlling power it allows to the assessee ensures the assessee achieve the above goal. The agreement allows and provides absolute control to the assessee over the day to day management, administration, finance and all other spheres of activity of the hotel, which is the source from which the assessee also earns its income. The assessee itself accepts that During the F.Y. 2008-09 relevant to A.Y. 2009-10, various personnel/employees of our company travelled to India and they stay in India for the purpose of rendering services (which is the business and the source of income of the assessee) aggregates to 158 days; fPara-vii of submission to the AO, PB-95) It is not the contention of the assessee that no business is being run from the place. What is contended is that the period is less than the stipulated limits. 40. This Hon'ble Tribunal in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance of standards and quality as well as the exploitation of its commercial rights are being carried on. The AHL thus, afford a live connection amounting to business connection. For the very same reason, AHL also constitute a permanent establishment of the assessee in India because the assessee virtually projects itself in India, through it. Coupled with this, the fact that the salaries of the employees were paid by the assessee and the employees also came and worked in the office of AHL in India; enjoyed perquisites from AHL establish that prima facie the office of AHL can be considered as a projection of the assessee in India. In view of the above, the conclusion drawn by the AO that the assessee carries on its business either wholly or partly through the fixed place and accordingly, the business premises of AHL constitute a PE of the assessee within the meaning of Art- 5(1) of DTAA should be confirmed. 42. As regards of existence of PE under Art-5(2)(i), the AO in para-5.2 [p.6-7] of his order has clearly proved that contention of the assessee is factually incorrect and the employees have stayed beyond the requisite period thereby establishing PE under Art-5(2)(i) as well. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t its own expense, constructed, furnished and equipped the Hotel, such that the Hotel would be in conformity with the standards consistent with Hyatt Regency hotels in effect from time to time (collectively, Hyatt Design Standards ). Section 3. Hotel. Subject to the terms and conditions of the Technical Services Agreement, the Hotel shall consist of: (a) the Site; (b) a hotel building or buildings, completely air conditioned, with (1) areas and facilities including, without limitation, the following: (A) approximately five hundred twenty four (524) guest rooms and suites, each with bathroom, (B) restaurants, bars and banquet, a ballroom, meeting and other public rooms, (C) commercial space for the sale of merchandise, goods or services, (D) garage or other parking space for guests and employees, (E) storage and service support areas, (F) offices for employees, (G) health (fitness and spa) and business centers, and (H) recreational facilities and areas; (2) appropriate millwork and all installations and building systems necessary for the operation of the building(s) for hotel purposes (including, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, concession or other agreement. Owner shall keep and maintain said lease, concession or other agreement in fill force and effect throughout the Operating Term), subject to Section 2 of Article XVI, free and clear of any liens, encumbrances. covenants, charges, burdens or claims, except (a) any that do not materially and adversely affect Strategic Services Provider s performance of services for the benefit of the Hotel pursuant to this Agreement and (b) mortgages or other encumbrances that provide that this Agreement shall not be subject to forfeiture or termination, except only in accordance with the provisions of this Agreement, notwithstanding a default under such mortgage or other encumbrance. Notwithstanding the generality of the foregoing, in the event that Owner shall desire, through banks or other lenders, to finance the construction of the Hotel, or refinance the Hotel, or use the Hotel as collateral in connection with any of Owner s or its affiliate s borrowing for non-Hotel purposes, Owner shall first secure from any such lenders a non-disturbance and attornment agreement acceptable to Strategic Services Provider. Such agreement would provide that the lender or lender ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hotel or the twentieth (20th) anniversary of the date of record, as applicable. As used in this Agreement, Operating Term shall mean and include the initial operating term as aforesaid and any extension thereof. Section 2. Extension. Provided Service Provider is not in default under the terms of this Agreement and upon the mutual agreement of Owner and Service Provider, subject to the approval of the relevant Indian governmental authorities, the Operating Term, may be extended for one (1) period of ten (10) years. If the term is so extended, the Operating Term also shall mean the period of time by which the term of this Agreement is extended pursuant to this Section. Section 3. Government Approval. The effectiveness of this Agreement shall be subject to the approvals, if required, of the relevant departments of the various ministries and departments of the Government of India. Strategic Services Provider shall obtain, and Owner shall cooperate in obtaining, the required approvals of this Agreement In connection with such required approvals, Strategic Services Provider shall diligently pursue attainment of same and shall at all times, keep Owner info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gic Services Provider (or its holding or subsidiary companies, and any of its and their affiliates or group companies) for this purpose from time to time, and (ii) pass a resolution, in the form set out in Part II of Schedule A to this Agreement, of its directors at a board meeting or by circulation conveying its irrevocable and unconditional noobjection in this regard in favor of Strategic Services Provider, its holding or subsidiary companies, and any of its and their affiliates or group companies, and shall provide a certified copy of such resolution to Strategic Services Provider. ARTICLE III Operation of the Hotel Section 1. Standards of Operation. The Hotel shall be operated consistent with the standards comparable to those generally prevailing in international, Hyatt Regency hotels operated by H.I. and its subsidiaries and affiliates, and Strategic Services Provider shall provide, from time to time, strategic plans, policies, processes, guidelines and parameters such that the Hotel can be operated in a manner that is customary and usual to such an operation (collectively, Hyatt Operating Standards and, insofar as feasible and in Strategic Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in formulating and establishing the overall general and strategic plan with regard to all aspects of the operation of the Hotel, including, without limitation, branding, marketing, product development, and day-to-day on-site operations, as more particularly set forth in Section 3 below, and subject always to the last paragraph of Section 3. Nothing herein shall constitute or be construed to be or to create a partnership or joint venture between the Owner and Strategic Services Provider, and the right of Owner to receive financial returns from the operation of the Hotel shall not be deemed to give Owner any rights or obligations with respect to the operation or management of the Hotel other than as expressly set forth in this Agreement. Section 3. Oversight and Strategic Planning Services. Without limiting the generality of the foregoing, during the Operating Term, Strategic Services Provider shall, in consideration of the Strategic Fees and subject to reimbursement of its expenses as hereinafter provided, formulate and establish the overall strategic plans, policies, processes, guidelines and parameters, from time to time, all in accordance with the Hyatt Operating St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and centralized reservations services as provided for in Section 2 of Article VII: (f) making available its own and its affiliated companies' personnel for the purpose of reviewing all plans and specifications for future alterations of the premises, and advising with reference to the design of replacement Furnishings and Equipment and the quantities required, and in general for the purpose of addressing operational problems and improving operations; and (g) establishing such other policies and consulting cm the implementation of the same as are necessary, customary and usual in the operation of a hotel in accordance with the Hyatt Operating Standards. In furtherance of the oversight and strategic planning services to be provided for the benefit of the Hotel pursuant to this Section 3. Strategic Services Provider shall provide to the Owner and the Hotel employees, for exclusive use in the operation of the Hotel, the proprietary, written knowledge, skills, experience, operational and management information and associated technologies related to the operation of international, luxury full service hotels which Strategic Services Provider, H.I. and their affil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegic Services Provider, in advance. Throughout the Operating Term, Strategic Services Provider shall keep Owner, through the General Manager, apprised of any and all improvements made with respect to the Know-How. These improvements shall be considered an integral part of the Know-How being provided hereunder and are therefore subject to the terms and conditions of this Agreement Strategic Services Provider shall provide to the General Manager, with such improvements to the Know-How free of any additional charge (other than the fees set forth herein). Owner acknowledges and agrees that throughout the Operating Term and upon the termination or expiration of this Agreement, ownership rights to the Know-How shall remain with Strategic Services Provider and its applicable affiliates. Strategic Services Provider will have no obligation, and will not be expected to assign any of its employees to India on a permanent basis. If and when the need arises, Strategic Services Provider may elect, in its sole and absolute discretion, to assign to India one or more of its employees or the employees of its affiliates (including any H.I.-branded hotel) on an occasional basis only. Furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced by any member of the H.I. Group, or (ii) in conjunction therewith (including, without limitation, insurance premiums, advertising, business promotion, training and internal auditing programs, social benefits of the H.I. Group for which employees of the Hotel may be eligible, attendance of such employees at meetings and seminars conducted by members of the H.I. Group, and the Chain Marketing Services provided for in accordance with Section 2 of Article VIP, and (b) irrespective of whether such funds shall be paid to any third party or to any member of the H.I. Group or any other hotels operated or serviced by any member of the H.I. Group. If any member of the H.I. Group or any hotel operated or serviced by any member of the H.I. Group shall advance its own funds as aforesaid, it shall be entitled to prompt reimbursement therefor by the Hotel, and Owner shall ensure that they are promptly paid out of the Operating Bank Accounts. Notwithstanding the preceding, neither Strategic Services Provider nor any other member of the H.I. Group shall have any obligation to advance funds hereunder. In addition to the other items described in this Section, Strategic Services Provider sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable to Strategic Services Provider (or other member of the H.I. Group), or there shall be imposed upon such reimbursements any bank charges or other charges, then the amount of such reimbursements shall be increased by such amount as shall be necessary such that Strategic Services Provider (or other member of the H.I. Group) shall receive the same amount of reimbursements it would have been entitled to receive had such taxes, bank charges CM- other charges not been applicable or assessed. Owner hereby agrees and shall ensure that the amount of such reimbursements shall be withdrawn from the Operating Bank Accounts of the Hotel, utilizing such United States Dollars or other currency freely convertible into United States Dollars that may be available in such Operating Bank Accounts, or Rupee, converted to United States Dollars. If exchange control regulations of India delay the conversion of such amounts into United States Dollars, Strategic Services Provider (or other member of the H.I. Group) may elect to receive and retain such amounts in Rupee during the period of such delay, but such election shall not constitute a waiver of the right of Strategic Services Provider (or other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or threatened infringement of the Trademarks or the Know-How, whether by reason of imitation or otherwise; (b) any allegation or complaint made by any third party that the use by Owner of the Trademarks or the Know-How hereunder may cause deception or confusion to the public or otherwise infringe any third party's intellectual property rights; or (c) any other form of charge or claim to which the Trademarks or the Know-How may be subject, provided, however, that Owner shall not make any admissions in respect of such matters other than to Strategic Services Provider, and provided further that Owner shall in every case furnish Strategic Services Provider with all information in its possession relating to such charges or claims. H.I. and Strategic Services Provider shall have the right to take any and all actions relating to the Trademarks and the Know-How. In the event that H.I. or Strategic Services Provider commences litigation with respect to the Trademarks or the Know-How, H.I. or Strategic Services Provider, as applicable, shall (i) reimburse Owner for all reasonable costs incurred by Owner in providing any requested assistance to H.I. or Strategic Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rategic Fee payment all Incentive Strategic Fee payments previously made to Strategic Services Provider during such fiscal year. For purposes of this Agreement, (i) Room Revenue shall mean all revenues and income of any kind derived from the rental of guest rooms and suites of the Hotel including any undistributed service charges relating thereto or arising therefrom) and the proceeds of use and occupancy (business interruption) insurance actually received (after deducting any necessary expenses in connection with the adjustment or collection thereof, (ii) Revenue shall mean the sum of Room Revalue and all other revenues and income of any kind derived directly or indirectly from the operation of the Hotel including, without limitation, service charges collected from guests and not distributed to employees and rental or other payments from lessees or concessionaires (but not the gross receipts of such lessees or concessionaires) and any other proceeds (after deducting therefrom necessary expenses in connection with the adjustment or collection thereof) of use and occupancy (business interruption) insurance actually received and (iii) Gross Operating Profit shall be the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o income taxes, are levied upon the Strategic Fees by India, or any state, local or municipal governmental authorities, or any agency or instrumentality thereof, such taxes shall be borne and paid exclusively by Owner. Each party also agrees to extend all support to the other party in connection with the foregoing and will comply in all respects with such laws, regulations and the orders relating to the foregoing. Section 3. Year-end Adjustment If, for any fiscal year, the Strategic Fees payable to Strategic Services Provider under Section 1 of this Article in accordance with the profit and loss statement certified by the independent public accountant shall be less than the preliminary installments paid in accordance with Section 1 above, Strategic Services Provider shall repay the difference within thirty (30) days after receipt by Owner of said profit and loss statement. If, however, the Strategic Fees due in accordance with the profit and loss statement certified by the independent public accountant shall be more than the monthly payments paid in accordance with Section 1 of this Article, then Owner shall ensure that such difference be paid to Strategic Services Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t operation of the Hotel pursuant to the Hyatt Operating Standards and the performance by Strategic Services Provider of its obligations hereunder. Section 2. Chain Marketing Services, Reservation Services and Gold Passport Strategic Services Provider shall, in the operation of the Hotel and for the benefit of its guests, provide or cause its affiliates, Hyatt Chain Services Limited ( HCSL ) and International Reservations Limited ( IRL ) or other affiliates of Strategic Services Provider, to provide the following services outside of India, to the extent appropriate and furnished to other hotels operated by Strategic Services Provider and its affiliates. HCSL shall provide convention, business and sales promotion services (including, without limitation, the maintenance and staffing of H.I. s home office sales force and regional sales offices in various parts of the world), publicity, public relations, and all other group benefits, services and facilities including, without limitation, institutional advertising programs (which exclude advertising programs in which only selected H.I. hotels participate in by mutual agreement, the cost of which programs are allocated amon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and reservation services shall be payable in the manner set forth in the last paragraph of Section 6 of Article III of this Agreement. Quoting from the agreement different clauses pertaining to 28 years lease to work from hotel, day-to-day operation etc., they have to management bank account. Thus, the disposal test is satisfied. 46. Regarding temporal test, since the agreement is for 20 years, relying on page No. 178, he argued that the assessee had got PE. The premises were at the disposal of the assessee throughout the period and the employees go occasionally cannot be accepted. He argued that even if section 5.2(i) is also applicable, the employees of the assessee have stayed for more than 9 months, the Revenues had to be taxed in India. It was also argued that as per page No. 6 para 11 of the assessment order, the agreement is not for a project, but for running, maintaining and managing of the hotel. 47. Rebutting the arguments of the Revenue, the ld. AR argued reiterating that the ld. DR was wrong in interpreting Article 3 of section 1 of the agreement page 18. It is argued that the ld. DR was also wrong to say that the control of the hotel is in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re different, therefore, ratio of the aforementioned cases does not apply. 53. The ld. DR argued that the reply of the assessee that it does not have a PE in India is not acceptable in view of the scope of activities undertaken by it as per terms of the agreement with the Hotels. The MD and the other key management personnel of the Hotel are employees of the assessee company. They were present at the Hotels in every month of the years for actually managing the day to day operations of the assessee to achieve the stated objective of conforming to International Hyatt Standards. 54. In terms of Article 5(1), a PE is said to exist in the other contracting stage when an enterprise of one of the contracting state has a fixed place of business in India, in that other contracting state, through which business is carried out wholly or partly. 55. Heard the arguments of both the parties and perused the material available on record. 56. We find that from the concurrent reading of the Strategic Oversight Agreements (SOA), the assessee has been technically operating the hotel belonging to the owners namely, Asian Hotels Ltd. (AHL) through the employees who are recruited by them. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the functional criteria (carrying on the business through that place) as mentioned in the OECD principles with relation to the existence and determination of PE as held by the Mumbai Tribunal in the case of Air Lines Rotables Vs JDIT 131 TTJ 385 have been found to be met by the assessee before us, so as to treat them as having a PE in India. Though, it was argued that the assessee has got no right to use the premises and no premises of AHL was at their disposal, we find on going to the agreements and the work executed, that the premises of AHL was very much at the disposal of the assessee for carrying on their business. Thus, we find that the assessee has met the twin criterion of existence of a fixed place of business and carrying out of business from such fixed place of business as enunciated of the judgment of Hon ble Supreme Court in the case of Morgan Stanley Co. 292 ITR 416 (SC). The claim of the assessee that they did not have a place at their disposal cannot be accepted in view of the judgment of Hon ble Supreme Court in the case of Formula One World Championships Ltd. 394 ITR 80, in the case of Azadi Bachao Andolan and also E-funds IT Solutions 86 Taxman 240. The facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is having a permanent establishment in India. 59. Further, various clauses of SOA such as the AHL cannot unreasonably withheld or delay the appointment of GM and appointment of employees as full time members of executive staff goes to prove the extent of control and management of HISWA in the affairs of the running of the business. The agreement provides absolute control to the assessee over the day to day management administration, finance and all other sphere of the running of the hotel including opening and operating of the bank accounts. Thus, it cannot be held that the assessee is only giving consultancy services to the hotel. Further, Section 2 pertaining to the control of strategic planning of the operation indicates that strategic service provider will have complete control and discretion in formulating and establishing the overall general and strategic plan with regard to branding, marketing, product development, day to day onsite operations. Such clauses which accord the assessee, HISWA complete control and discretion even at the exclusion of the AHL can only lead to a conclusion that the assessee is into full fledged operation and management of the hotel. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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