In re FRS Hotel Group(Lux) S.a.r.l. (AAR Delhi)
Issue- 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 read with provisions of Article 12 of the Double Taxation Avoidance Agreement between India and Luxembourg?
Held- 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 considered necessary to be answered.
FULL TEXT OF RULING BY ADVANCE RULING AUTHORITY OF NEW DELHI
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 and provides services in connection with hotel management and including all services that are necessary for hotel operation, such as establishing hotel standards & policies, sales and marketing, centralized reservations, purchasing and certain other services as per the operational requirements of the hotel owners to meet the hotel brand requirements.
1.1 It is stated that M/s. Bengal Ambuja Housing Development Limited (hereinafter referred to “BAHDL / ndian hotel owner ), developed and owns a 5 Star deluxe hotel known as Swissotel Kolkata in Rajarhat Kolkata, and has engaged the Applicant to provide certain services in different phases of hotel development and operation so that the hotel property i.e. Swissotel Kolkata can be developed and operated as per international standards similar to other Swissotel properties across the globe. For this purpose, the Applicant and the BAHDL / Indian hotel owner entered into a Centralized Services Agreement on 1st September, 2009 (in short “CSA) under which the Applicant has agreed to provide BAHDL the following services in relation to Swissotel Kolkata:
(a) Global Reservation Services – to facilitate reservation / booking of rooms, banquets etc. in Indian hotel property;
(b) Centralized Services – miscellaneous support services as required by the Indian hotel owner at its option, including but not limited to global sales & marketing, finance support, human resources support, operations support, and technology support;
(c) Corporate Design & Construction services – for providing advisory services in connection with any capital improvements proposed by the Indian Hotel owner in relation to the hotel property, including refurbishing, maintenance, repairs or other capital improvement etc.; and
(d) Purchasing services –Assistance in purchases of goods, supplies and services as required by the Indian Hotel owner in relation to operation of the Indian hotel commensurate with the brand of the Hotel.
1.2 It is submitted that at the time of filing of application before this Authority, the Applicant sought a ruling based on the provisions of Global Reservation Services and providing assistance in purchases / procurement of goods, supplies or services to the BAHDL/ Indian Hotel Owner as per the Centralized Services Agreement dated 01.09.2009 entered into by the Applicant with BAHDL / Indian Hotel Owner but subsequently 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 application filed before this Authority, the Applicant had annexed only one agreement, i.e. the Centralized Services Agreement dated 01.09.2009. At the time of hearing on the admissibility of this application, the Revenue had urged that the CSA contains references to certain other agreements entered into between the Applicant and BAHDL. It was submitted by the Revenue that in order to bring out the modus operandi of the Applicant and also to determine the taxability of the given transaction, it is essential that the other agreements entered into between the parties with respect to the development, operation and management of the hotel be brought on record.
2.2 Vide order dated 27.07.2011, this Authority called upon the Applicant to file such agreements. Four such agreements (in addition to the CSA, which was filed along with this application) were filed by the Applicant. Accordingly, the following five agreements form part of the record for the purpose of this Ruling:
a) Hotel Management Agreement ( ‘HMA’)
b) Centralized Services Agreement (‘CSA’ )
c) Hotel License Agreement (‘HLA’)
d) Hotel Advsory Agreement (‘HAA’)
e) Technical Servces Agreement (‘TSA’)
3. The Applicant has vehemently argued that the only question raised before this Authority is regarding the taxability of Global Reservation Services (“GRS“) This service is provided under the CSA and therefore reference to any other agreement is wholly unnecessary.
4. The Revenue, on the other hand, submits that there are two categories of agreements HMA, the “Prncipal Agreement lies in the first category, while the other four agreements, which arise from this Principal Agreement constitute “Ancillary Services Agreements. It is the case of the Revenue that no single Agreement can be read in isolation and without context and that it is necessary to go into the provisions of each of these agreements before rendering a Ruling on the question raised in the application.
5. At this juncture, it is necessary to deal with this issue raised by the Applicant. The terms of these five agreements were extensively read out by both the parties. While we shall deal with these agreements in the later part of this order, at this stage, it would suffice to say that through these agreements, some very vital aspects of development, operation and management of the hotel have been handed over 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 ther “business connectionand 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) can be taxed as “roya ty or “fees fotechnical sevices under the Act and the DTAA. Therefore, any arguments on the existence of PE are not to be adjudicated upon or even considered in the present proceedings. It has further been submitted that the Ruling is sought only on the provisions of the Centralised services agreement and any reference to any other agreement will be wholly inappropriate.
9. Before proceeding any further on the merits of the issue, it is necessary to first deal with this preliminary issue as to whether this Authority would be justified to give a Ruling on the existence of PE in the present application when the question is limited to the taxability of one single stream of income by way of royalty or Fee for technical services.
9.1 The powers of the Authority in dealing with the questions posed before
it, are contained in Rule 12 of the Authority for Advance Rulings (Procedure) Rules 1996. This Rule provides:
‘Rule 12- Questions contained in the application.
12. The Applicant shall not, except by leave of the Authority, urge or be heard in support of any additional question not set forth in the application, but in deciding the application the Authority shall at its discretion consider all aspects of the questions set forth as may be necessary to pronounce a ruling on the substance of the questions posed for its consideration.”
The aforesaid Rule is self-explanatory and explicit and it does indicate that the Authority has not only the power but the duty to look at “all aspects of the questions set forth“ which would enab e to it pronounce a ruling “on the substance of the questions posed for its consideration“
9.2 This Authority was formed with the idea of providing certainty and finality to the taxation aspects of the issues raised before it. If the contention of the Applicant is accepted and for a certain stream of income, a Ruling is given without having any regard to other business operations and streams of income based only on certain provisions of the Act and the DTAA, while leaving the other provisions open for regular assessment by the Income tax department, the whole exercise of approaching the Authority and getting conclusive orders will be rendered futile. It is needless to overemphasize the fact that such a compartmentalized approach would be highly unjustified as business operations by their very nature 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 untenable inferences and conclusions.
9.5 Lastly, we must also highlight that Article 12 of the India-Luxembourg DTAA, on which the Applicant seeks a Ruling, itself provides in para 4 that where the right, property or information in respect of which royalty or fees for technical services is paid is ‘effectvely connected’ to a PEthen the provisions of Article 7 will apply. We, therefore, have no hesitation in holding that the present application does call for an adjudication on the issue of the existence of a PE.We cannot approach the question posed before us without first deliberating on the existence or otherwise of a PE in India.
9.6 We must also point out that the five agreements which form part of the record cannot be viewed on a standalone basis. The activity of the Applicant is an integrated one and it cannot be split into one or the other. We have perused and extracted, in detail, the terms of these agreements in the subsequent portion of this order. On such perusal, it emerges that the different agreements are a part of the wholesome arrangement. The Applicant has performed different functions in regard to the operation and management of the hotel in each of these agreements. It is referred to by different names such as ‘Operator’, ‘Advisor’, Licensor’ and ‘Consultant’ in different agreements but viewed in totality the end result is one, i.e. operation and management of all vital aspects of the hotel. Further, these agreements contain references to each other at several places and are co-terminus with each other as well. Therefore, the Applicant“s contention that the Ruling has to be restricted only to the Centralised services agreement is devoid of merit.
10. On the merits of the issue of PE, counsels for both sides have extensively read out the terms of the agreements to highlight their respective views regarding the existence or otherwise of a PE. Before coming to the relevant terms of the agreements, it would be prudent to take note of the conditions, the satisfaction whereof leads to the creation of a fixed place PE, under the terms of the relevant DTAA.
10.1 In view of the model commentaries, leading commentaries by eminent authors on the subject and judicial precedents, including the judgment of the Hon“ble Supreme Court in the case of Formula One Word Championship Ltd.
v. CIT (394 ITR 80), it is now well settled that a fixed 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 Kolkatas 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 s referred to as the ‘Owner. Some of the relevant clauses are as under:
