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AAR Rules:Indian hotel to

constitute Fixed Place PE for foreign

service provider due to degree of

‘control’

Noida I New Delhi I Gurgaon | Mumbai | Dehradun | SingaporeJune, 2018 – Volume 85

Authority for Advance Rulings* goes beyond express questions askedin Advance Ruling application and rules that Indian hotel constitutesFixed Place Permanent Establishment (“PE”) for Luxembourg basedhotel service provider, which provides sales & marketing, reservationand many other services in relation to development, operation &management of Indian hotel under different agreements.

Accordingly, the Authority rules that payments received by Applicantfrom the Indian hotel owner, attributable to such PE, would subject toincome tax in India as ‘business Income’ under Article 7 of India-Luxembourg DTAA.

AAR Rules that Indian hotel would constitute FIXED PLACE PE FOROVERSEAS SERVICES PROVIDER

Brief Facts:

FRS Hotel Group (Lux) S.a.r.l (Now FRHI Hotels and Resorts S.a.r.l)(‘Applicant’) is a company incorporated in and under laws of theGrand Duchy of Luxembourg.

The applicant is the principal operator company of the FRHI Groupoutside North America and provides services in connection withhotel management and including all services that are necessary forhotel operations.

That M/s Bengal Ambuja Housing Development Limited (‘BAHDL’),develops and owns as 5 Star deluxe hotel and has engaged theApplicant to provide various services for development, operation &management of the Hotel.

_____________________________________*Advance Ruling in case of FRS Hotel Group (Lux) S.a.r.l. (AAR 1010 of 2010) dated 24th May 2018

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The Applicant entered into various agreements with BAHDL forproviding different services in connection with development, operation& management of the Hotel, namely: Hotel Management Agreement (HMA) Centralized Services Agreement (CSA) Hotel license Agreement (HLA) Hotel advisory Agreement (HAA) Technical Services Agreement (TSA)

Under the CSA, Applicant provided following services to BAHDL: Global Reservation Services Centralized services Corporate Design and construction services Purchasing services

Applicant filed application for Advance Ruling in respect of taxability ofits revenues from “Global Reservation Services” proposed to berendered under the CSA, raising the following question:

Whether payments received by the Applicant from the Indianhotel owner for provision of GRS (Global reservation services),would be chargeable to tax in India as Fees for TechnicalServices (“FTS”) or as ‘Royalty’ under Income Tax Act, 1961(“Act” or “domestic income tax laws”) or under India-Luxembourg DTAA?

Assessee’s Contentions:

The only question raised is regarding the taxability of income fromGlobal Reservation Services. This service is provided under the CSA andtherefore reference to any other agreement is wholly unnecessary andwholly inappropriate and beyond scope of questions asked in theapplication for Advance Ruling.

The issue involved in present application is regarding taxability ofpayments received by Applicant from Indian hotel as “Royalty” or “FTS”and not the existence of PE.

Income arising from providing GRS cannot be taxed in India as Royaltyor FTS under provisions of domestic Indian income tax laws read withIndia-Luxembourg DTAA.

The activities performed by the Applicant have been done in thecapacity of agents of BAHDL, and therefore it can not be said to becarrying out its own business in India through Indian hotel, so toconstitute a Fixed Place PE.

Revenue’s Contentions:

CSA contains reference to other agreements entered into between theApplicant and BAHDL and no single Agreement can be read in isolationand without context and that it is necessary to go into the provisionsof each of these agreements before rendering a Ruling on the questionraised in the application.

In order to bring out the modus operandi of the Applicant and also todetermine the taxability of the given transaction, it is essential that theother agreements entered into between the parties with respect tothe development, operation and management of the hotel be broughton record and considered while pronouncing a ruling on questionsraised in the Application.

The primary issue is not the classification of income as either Royaltyor FTS, rather it is whether or not India hotel constituted a PE, and theincome thus arising would be ‘business Income’ under the DTAA. Tosettle the question of taxability of revenues, adjudication on issueabout establishment/ constitution of PE is necessary.

Having regard to the entire facts of case and all agreements consideredtogether, the Applicant exercises high degree of exclusive control,

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discretion and authority over operations of Indian hotel and thereforeit constitutes PE in India.

In any case, income arising to Applicant from providing GlobalReservation Services:

Involves providing ‘Managerial’ as well as technical’ services,therefore in the nature of FTS both under the domestic incometax laws read with India-Luxembourg DTAA; and

also involve “use of an Industrial or commercial equipment”and therefore subject payments are in the nature of ‘Royalty”

AAR’s Ruling:

At the outset, the Hon’ble AAR, drawing reference to the Rule 12 ofAAR (Procedure) Rules, 1996 held that Authority at its discretion mayconsider all aspects of the questions set forth as may be necessary topronounce a ruling on the substance of the questions posed for itsconsideration. The Authority further held that though a specificquestion on constitution of PE was not raised in the Application,however in order to understand and pronounce a ruling on thesubstance of question posed for its consideration, it is important todetermine, whether Applicant constituted PE in India or not.

Thus, drawing reference to Rule 12, the Authority travelled beyondthe specific questions asked in the Application filed by the Applicant.

The Authority further held that through other agreements executedalongwith and co-terminus with the CSA, some very vital aspects ofdevelopment, operations and management of the hotel have beenhanded over by the BAHDL to the Applicant. Each of theseagreements deals with the parts of the overall functioning of thehotel. Hence, the AAR held that they should not restrict themselvesto reading just one agreement without going into other agreements.

Accordingly, Hon’ble AAR held that present Application does call for anadjudication on the issue of the existence of a PE and the questionposed before the Authority could not be approached, without firstdeliberating on the existence of a PE in India.

The Hon’ble AAR also held that the five agreements entered intobetween the Applicant the Indian hotel owner cannot be viewed on astandalone basis. The activity of the Applicant is an integrated one andit cannot be split into one or the other. On perusal of all theagreements, it emerges that the different agreements are a part of thewholesome arrangement.

After examining terms of all the Agreements, which were co-terminusto each other, the Hon’ble AAR further held that the Indian Hotelsatisfies all the 3 conditions mentioned in the Hon’ble SupremeCourt’s Judgment in case of Formula One World Championship Ltd. v.CIT (394 ITR 80), namely:

i. There is no doubt that the Indian hotel is a “fixed place”.

ii. That, from the different agreements mentioned, it is evidentthat final decision making power with regard to the HotelManagement are with the Applicant and BAHDL is to takeadvice and has to work under the advice of Applicant. Further,the Applicant exercises exclusive authority over operation &management of Indian hotel, so it is evident that Fixed Place isat the disposal of the non-resident Applicant.

iii. That the Applicant has taken over the operations andmanagement of the India Hotel by entering into differentagreements and has earned income from it and hence,Applicant is carrying on its business (wholly or partly) throughsuch fixed place.

Since, it satisfies all the conditions for a fixed place PE, the hotel willconstitute a fixed place PE of the Applicant in India.

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That, since all the final decisions in respect of all theimportant functions relating to the operations andmanagement of the hotel is in the hands of Applicant,there exists a Principal to principal Agreement and notPrincipal-Agent Relationship.

The payment received by the Applicant from the Indianhotel owner from provision of Global ReservationServices (GRS) would be chargeable to tax undersection 9(1)(i) read with article 5 and 7 of India-Luxembourg DTAA as ‘Business Income’ and isattributable to the Applicant’s permanentestablishment in India.

In view of the above, that is considered as being‘Business Income’ under DTAA, characterization of thisIncome as either Royalty or FTS becomes academic andis not considered necessary to be answered.

NANGIA’S TAKE:

In this ruling, considering overall facts of the case, theHon’ble AAR has examined the transaction more fromperspective of substance over form. While deciding theissue, Hon’ble AAR has given so much importance to theoverall arrangement that it even travelled beyond thescope of express questions raised before it and held thatApplicant constitutes Fixed Place PE in India on account ofexclusive authority and control exercised over hotelproperty owned by Indian hotel owner. This ruling alsoemphasizes that Indian courts and Indian tax authoritiesdo not want to view a transaction from a narrowperspective but from a broader overall perspective. Thetaxpayers, while arranging their affairs, need to take thisaspect into cognizance.