2019 (12) TMI 1667 - AT - Income Tax

Foreign company established permanent establishment through hotel management agreements despite intermittent stays under India-UAE Tax Treaty Article 5

ITAT Delhi held that a foreign company had a permanent establishment (PE) in India under Article 5(1) of the India-UAE Tax Treaty. The appellant argued it ... Income taxable in India - Alleged Permanent Establishment in India of the Appellant u/a 5(1) and 5(2)(i) of the India UAE Tax Treaty - as primarily argued that as per Article 5(1), the Permanent Establishment means a fixed place of business in which the business is carried out and in the case of assessee they did not have any fixed place of business, but were present intermittently for execution of the contracts and not stayed more than nine months in any particular year - whether 'at the disposal” denotes an absolute legal right/control over a place /room/cabin/space or it connotes only the right to access and use such place? - HELD THAT:- 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 the employees are NOT sporadic or one off affairs and there is a continuity and repetitiveness to it. To quote from Hon'ble Supreme Court in the case of Formula One World Championships [2017 (4) TMI 1109 - SUPREME COURT] 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 presence year after year. Considering the purpose for which such visits are necessitated, terms of contract as well as the period spent as per the statement enclosed to this submission, the visits are definitely not a 'one-off'/ 'temporary'/ 'occasional'/ 'ephemeral'/ 'fleeting'/'sporadic' ones. Accordingly, considering the permanency, consistency and frequency of such visits, the temporal aspect of the disposal test is also satisfied. Whether it can be said that the business of enterprise is being wholly or partly being carried on through such place? - The term 'business' is not fully or exhaustively defined; accordingly, it has the meaning that it has under the domestic law of the state applying the tax treaty, plus professional and independent services, as explicitly provided for in article 3(l)(h) of the OECD Model. Coming to the nature of business of the assessee, it describes its role is 'to increase the efficiency and effectiveness of the services provided by the Hyatt Group to the Hotel Owners in South Asia and Gulf Co-operation counsel region.' Assessee had a place of business at the premises of AHL from where it can ensure and control that not only the hotel is run and managed to its satisfaction, but also the other associated processes towards the maintenance 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. 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 is totally involved in the maintenance and operations of running the hotel even allowing the owner a very minimal role. This also clearly establishes that the hotel premises were at the disposal of the assessee in view of the length and duration of the use of the premises. Even taking into consideration, the permanency test and the temporal aspects detailed by the Hon’ble Supreme Court in the case of Formula One World Championships prove that the assessee has got fixed place of business and can be considered having a permanent establishment in view of Article 5(1) of the DTAA. Permanent establishment it has been examined whether the assessee has got PE in relation to Article 5(1) or Article 5(2) of the DTAA. Article 5(2)(i) stipulates a PE in case of the furnishing of services including consultancy services provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any 12 months period. Thus, the period of stay stipulated only in relation to invocation of Article 5(2) but not with regard to Article 5(1) of DTAA. Thus, we hold that based on the DTAA of Indo-UAE under Article 5(1), the assessee is having a permanent establishment in India. 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. The operations such as guest admission, charges for rooms, operating of bank account, overseeing, implementation and administration of the same on day to day account, recruiting, interviewing, hiring, establishing Hyatt operating standards, establishing purchasing policies with regard to selection of goods, supplies, food, beverages including vermin extermination, security, garbage removal are all managed and operated by the assessee. All these operations are controlled through the General Manager who in turn reports to the assessee in all aspects. Based on the 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. Issues Involved:1. Alleged Permanent Establishment (PE) in India under the India-UAE Tax Treaty.2. Profits attributed to the alleged PE in India.3. Alternative taxation of India source income as 'Royalty.'4. Calculation errors in income attributable to the alleged PE and related tax issues.Issue-wise Detailed Analysis:1. Alleged Permanent Establishment in India:The assessee argued that it did not have a PE in India under Article 5(1) and 5(2)(i) of the India-UAE Tax Treaty. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) concluded that the assessee had a PE based on:- The assessee had a fixed place of business at its disposal in the hotel premises of its customer in India.- The expatriates of the assessee were continually present in India, operating the hotels.- The provision of a Central Reservation System (CRS) constituted a place of business.The Tribunal found that the assessee had a PE in India as it met the criteria under Article 5(1) of the India-UAE DTAA. The assessee's employees were present for 158 days, and the hotel premises were at the disposal of the assessee. The Tribunal referred to OECD commentary and judicial precedents, including the Supreme Court's decision in Formula One World Championships Ltd., to conclude that the premises were at the disposal of the assessee, constituting a fixed place PE.2. Profits Attributed to the Alleged PE:The AO/DRP attributed 25% of the gross receipts as taxable income to the alleged PE in India under Article 7 of the Tax Treaty. The assessee argued that it incurred operating losses as depicted by its audited financial statements, and no profit or taxable income should be attributed to the PE.The Tribunal held that the taxable profits should be computed in accordance with Section 44DA of the Indian Income Tax Act and Article 12 of the Indo-UAE DTAA. The assessee was given an opportunity to submit the working of apportionment of revenue and losses on a financial year basis to determine the profits attributable to the PE.3. Alternative Taxation of India Source Income as 'Royalty':The AO/DRP equated the consultancy services rendered by the assessee to 'Royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12 of the Tax Treaty, arguing that it related to the provision of 'know-how, skill, experience, commercial information, and intangibles.'The Tribunal held that the revenue earned by the assessee is taxable under Article 12 of the DTAA. The Tribunal examined the clauses of the Strategic Service Agreement and Strategic Oversight Agreements, concluding that the assessee was into full-fledged operation and management of the hotel, not merely providing consultancy services.4. Calculation Errors in Income Attributable and Taxation of the Alleged PE:The assessee argued that the AO erred in computing the taxable income of the alleged PE at gross income instead of business profits attributed at 25%. The AO also erred in denying credit for TDS and levying interest under Section 234B of the Act.The Tribunal directed that the taxable profits be computed in accordance with the provisions of Section 44DA of the Indian Income Tax Act and Article 12 of the Indo-UAE DTAA. The assessee was allowed to submit the working of apportionment of revenue and losses to determine the profits attributable to the PE.Conclusion:The appeals of the assessee were dismissed. The Tribunal upheld the AO/DRP's conclusion that the assessee had a PE in India under Article 5(1) of the India-UAE DTAA. The taxable profits were to be computed in accordance with Section 44DA of the Indian Income Tax Act and Article 12 of the Indo-UAE DTAA. The assessee was given an opportunity to submit the working of apportionment of revenue and losses for a judicious determination of the profits attributable to the PE.