2023 (3) TMI 1443 - HC - Income Tax

Court Rules Misclassification of Service Charges as Royalty; Defers Permanent Establishment Decision for Larger Bench Review.

Hyatt International-Southwest Asia Ltd. Versus Additional Director of Income Tax, Deputy Commissioner of Income Tax, Assistant Director of Income Tax

The HC addressed three primary issues: whether service charges were misclassified as royalty, the existence of a Permanent Establishment in India, and the ... Income taxable in India - PE in India - as per ITAT service charges received by the Appellant under the various SOSA Agreements were taxable as royalty - Whether the Tribunal misdirected itself both in law and on facts in holding that service charges received by the Appellant under the various SOSA Agreements were taxable as royalty? - Whether the Appellant has Permanent Establishment in India within the meaning of the DTAA? - Whether the findings recorded by the Tribunal, in paragraphs 56, 57 and 59 are perverse and contrary to the terms of the Strategic Oversight Services Agreement (SOSA)? - Is Article 7(1) of the DTAA at all applicable to the Appellant, having regard to the fact that it has incurred losses in the relevant financial years? HELD THAT:- In so far as the fourth question is concerned, this Court had, on 16.01.2023, expressed its view that the said question is required to be considered by a larger Bench, considering this Court’s reservation regarding the decision of the coordinate Bench of this Court in the case of Commissioner of Income Tax (International Taxation)-2 v. M/s Nokia Solutions and Networks OY [2022 (12) TMI 700 - DELHI HIGH COURT] Appellant states that, at this stage, the appellant does not wish to press the fourth question as stated above because the appellant’s appeals can be decided on the basis of the first three questions. He, however, reserves the right for pressing the said question at an appropriate stage if the need so arises. This Court considers it apposite to examine the first three questions as set out above in the first instance. Issues involved:The judgment involves the following issues: 1. Misdirection in holding service charges as royalty.2. Existence of Permanent Establishment in India.3. Perversity in Tribunal's findings.4. Applicability of Article 7(1) of the DTAA.Issue 1: Misdirection in holding service charges as royalty:The Court initially framed questions regarding the misconstruction of DTAA provisions and the characterization of service charges as royalty. After hearing the parties, the questions were modified to focus on whether the Tribunal misdirected itself in law and fact by considering service charges as taxable royalty under the SOSA Agreements. The appellant decided not to press the fourth question related to losses, indicating that the case could be decided based on the first three questions.Issue 2: Existence of Permanent Establishment in India:Another question raised was whether the Appellant has a Permanent Establishment in India as per the Double Taxation Avoidance Agreement. The Court agreed to examine this issue along with the other questions raised in the appeal.Issue 3: Perversity in Tribunal's findings:The Court also considered whether the Tribunal's findings were perverse and contrary to the terms of the Strategic Oversight Services Agreement. The appellant reserved the right to press the question related to the applicability of Article 7(1) of the DTAA at a later stage if necessary.Separate Judgment:Regarding the applicability of Article 7(1) of the DTAA, the Court expressed the view that the question needed to be considered by a larger Bench due to reservations regarding a previous decision. The appellant agreed not to press this question immediately, focusing instead on the first three questions. The Court scheduled further proceedings for April 20, 2023, after partially hearing arguments on the initial three questions.