AI Drafter 
TaxTMI 
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2024 (1) TMI 220
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....e with Ms Easha Kadian, Advocate. JUDGMENT VIBHU BAKHRU, J. INTRODUCTION 1. Hyatt International Southwest Asia Ltd. (hereafter 'the Assessee') is a company incorporated under the Companies Law, Dubai International Financial Centre (DIFC) Law No. 3 of 2006 in the United Arab Emirates (hereafter 'UAE'). It is a tax resident of the UAE under Article 4 of the Agreement between Government of India and the UAE for Avoidance of Double Taxation (hereafter 'the DTAA'). 2. The Assessee has filed the present appeals under Section 260A of the Income Tax Act, 1961 (hereafter 'the Act') impugning the orders passed by the Income Tax Appellate Tribunal (hereafter 'the Tribunal') in the respective appeals preferred by the Assessee against the orders passed by the Assessing Officer (hereafter 'the AO') under Section 143(3) of the Act read with Section 144C of the Act in respect of the Assessment Years 2009-2010 to 2017-2018. 3. The appeals against the order dated 21.11.2012 passed by the AO in respect of the Assessment Year 2009-10; order dated 28.11.2013 in respect of Assessment Year 2010-11; order dated 28.01.2015 in respect of Assessment Year 2011-12; and order dated 18.12.2015 ....
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.... both in law and on facts in holding that service charges received by the Appellant under the various SOSA Agreements were taxable as royalty? (ii) Whether the Appellant has Permanent Establishment in India within the meaning of the Double Taxation Avoidance Agreement? (iii) 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)? (iv) 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?" FACTUAL CONTEXT 9. This Court shall consider the facts relating to the assessment for the Assessment Year 2009-10 which is the subject matter of ITA No. 216/2020 for the purpose of addressing the aforesaid questions. 10. The aforesaid questions arise in the context of the following facts. On 04.09.2008, the Assessee entered into two Strategic Oversight Services Agreements (hereafter 'the SOSA') with Asian Hotels Limited, India. One in respect of a hotel (Hyatt Regency, Delhi - hereafter 'the Hotel') owned by Asian Hotels Limited, in Delhi, and the other in ....
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....ad stayed in India during the relevant period for an aggregate period of 158 days (one hundred and fifty-eight days). The Assessee also provided the job description of its employees who had visited India during the relevant period. ASSESSMENT ORDER 16. The AO furnished a draft assessment order dated 28.12.2011 holding that the Assessee was "actually operating the hotels belonging to the owners in each and every manner". The AO held that there was continuous presence of the Assessee through its employees or other personnel throughout the year. The AO concluded that apart from operating the Hotel, the Assessee also provided its proprietary, written knowledge, skill, experience, operational and management information and associated technologies etc. and therefore, its receipts constituted 'royalties' as defined in Section 9(1)(vi) of the Act and Article 12 of the DTAA. 17. The AO held that the Assessee's activities constituted (i) business connection under Section 9(1)(i) of the Act; (ii) PE under Article 5 of the DTAA; (iii) royalties and FTS under Section 9(1)(vi)/(vii) of the Act; and, (iv) royalties under Article 12 of the DTAA. The AO did not accept that the Assessee did....
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....ncome attributable to the Assessee's alleged PE in India. 19.3 Third, that the payment of Rs.8,51,41,569/- received from the Owner under the SOSA was primarily for consultancy services and the AO had erred in treating the same as 'royalty' under the DTAA on an erroneous assumption that it relates to the provisions of Know-how, skill, experience, commercial information and other intangibles. 19.4 Fourth, that the AO had erred in not granting an opportunity to the Assessee to clarify as to why the fees for consultancy services did not constitute payment for intangibles to be categorized as royalty. 20. The DRP rejected the aforesaid objections. Thereafter, on 21.11.2012, the AO passed the Final Assessment Order. TRIBUNAL'S ORDER 21. The Assessee appealed the Assessment Order dated 21.11.2012 before the Tribunal. The Tribunal examined the terms of the SOSA and rejected the Assessee's contention that it did not have a PE in India. 22. The Tribunal held that the amounts received by the Assessee were royalties. 23. The Tribunal referred to the decision of the Supreme Court in the case of Formula One World Championship Limited. v. Commissioner of Income Tax, Internati....
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....y in the premises of the contracting party in order to ensure that both the parties comply with their obligations to the contract for a long period of time will constitute a permanent establishment. As long as, the premises is at the disposal of the assessee and having the right to use the premises for the purpose of the assessee's business on behalf of the party to the agreement can constitute a fixed place PE. We also find that the physical criteria (existence of a geographical location), subject to criteria (right to use the place) and 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 Linese Rotables Vs. DIT 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 ass....
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....ether 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 DAA. Thus, we hold that based on the DAA of Indo-UAE under Article 5(1), the assessee 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 th....
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....ts received by the Assessee were taxable as royalty and whether the Assessee had a PE in India, were required to be determined on a careful reading of the SOSA and the terms of the DTAA. 26. He submitted that the Tribunal had grossly erred in proceeding on the basis that the Assessee had "complete control and discretion with respect to all aspects or operations of the hotel" and that "was totally involved in the maintenance and operation of running hotels even allowing the owner a very minimal role". He contended that the said conclusion disregards and ignores a crucial fact that the Owner had simultaneously while entering into the SOSA with the Assessee also entered into a Hotel Operation Service Agreement (hereafter 'HOSA') with Hyatt India Consultancy Pvt. Ltd. (hereafter 'Hyatt India') whereby Hyatt India had agreed to provide day-to-day management assistance and render technical assistance for the operation of the Hotel. He submitted that the SOSA could not be read in isolation and was required to be read in conjunction with the HOSA. This would clearly establish that the Assessee was not in control of the day-to-day management, administration, finance and other aspects of ....
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....could not reject or defy any guidelines or directions issued by the Assessee in respect of running the Hotel. He submitted that the Assessee's contention that the management services were provided by a separate entity was not tenable. He pointed out that Section 5 of Article III of the SOSA stipulated that all debts and liabilities to third persons in the course of operation of the guidelines would be that of the Owner and the Assessee would not be liable for the same. He contended that this clearly indicated that the Assessee had complete control over the Owner in the business of the Hotel. Such terms had the potential to affect the profit making capability of the Indian entity which in turn adversely affected the interest of the Revenue. Similarly, he referred to other clauses, which granted immunity to the Assessee in respect of any matter relating to the hotel or performance of the SOSA. He submitted that there is no dispute that the Assessee had sent employees to India and they were working from the Hotel premises, thus, the Assessee had a principal place of business in the Hotel premises at its disposal. 31. He also relied on the decision of the Supreme Court in Formula On....
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....ct was not deliberated in the case of Commissioner of Income Tax (International Taxation)-2 v. Nokia Solutions and Networks OY. (2023) 455 ITR 157 35. This Court was of the view that the fourth question as raised by the Assessee ought to be referred to a larger Bench. This was recorded by this Court in an order dated 14.03.2023. However, the learned senior counsel appearing for the Assessee had requested this Court to consider the other questions and had asserted that the Assessee would not press the fourth question, if the Assessee's appeals are disposed of in its favour on the basis of the other questions as framed. The learned counsel for the parties had also agreed that if the appellant succeeded before this Court in respect of the first three questions, the Assessee would finally give-up the fourth question without any recourse. 36. In view of the above, this Court is confining further deliberations to the first three questions as set out above. Indo-UAE DTAA 37. The principal questions to be addressed is whether the Assessee's revenue receipts in terms of the SOSA are taxable as royalty and whether the Assessee has a PE in India within the meaning of the DTAA. ....
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....prise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred....
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....ents in respect of the operation of mines or quarries or exploitation of petroleum or other natural resources. 4. The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, 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 royalties are 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. 5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent ....
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.... royalties arise is effectively connected with the permanent establishment. In such a case, provisions of Article 7 of the DTAA would apply. Thus, notwithstanding that the receipts are royalties, as defined in paragraph (3) of Article 12 of the DTAA, the same would be taxable as business profits. In such case the restriction that the amount of tax be limited to a maximum of 10% on the gross receipts as provided in paragraph (2) of Article 12 of the DTAA, would be inapplicable. Re Question no. (i) 43. The first and foremost question to be addressed is whether the Assessee's income receipts from SOSA are liable to be taxed as royalties. The expression 'royalty' is defined in Sub-paragraph (3) of Article 12 of the DTAA to, inter alia, mean "payment of any kind received as consideration for the use of or the right to use... artistic or scientific work ..any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use.. or for information concerning industrial, commercial or scientific experience." Thus, the main question is whether the Assessee's receipts in terms of SOSA is consideration for the use of or the right to use any scient....
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....bject to the approvals, if any, required by the Government. It is also provided that till the SOSA became effective, the Original Management Agreement would continue to be operative. 49. Article III of the SOSA sets out the covenants in respect of the Operation of the Hotel. In terms of Section 1 of Article III, the parties agreed that the Hotel would be operated consistent with the standards comparable to those prevailing in International Hotels Operated by Hyatt International and its subsidiaries ("Hyatt Operating Standards"). The Assessee agreed to provide strategic plans, policies, process, guidelines and parameters for operating the Hotel in a manner consistent with the 'Hyatt Operating Standards'. 50. The Assessee also agreed to use its reasonable efforts to minimise conflict among Hyatt International Branded Hotels and the Hotel. 51. In terms of Section 2 of Article III of SOSA, the parties agreed that the Assessee would have complete control and discretion in formulating and establishing the general and strategic plan with regard to all aspects of the hotel including branding, marketing, product development and day to day onsite operations. 52. In terms of Secti....
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....processes, guidelines and parameters in the operation of the Hotel in substantial part because of Strategic Services Provider's expertise in the management and operation of a chain of full service, upscale, international hotels and resorts, and the benefits which Owner expects to derive by including the Hotel as part of the chain of H.I-branded hotels. Owner further acknowledges that it has determined, on an overall basis, that the benefits of operation of the Hotel as part of the H.I. chain of Hotels are substantial, notwithstanding that not all H.I. Hotels will benefit equally by inclusion therein. Owner further acknowledges that in certain respects all hotels compete with all other hotels and that conflicts may, from time to time, arise between the Hotel and other H.I. branded hotels. Strategic Services Provider agrees, however, that it shall use reasonable efforts to minimize conflicts among H.I. branded hotels, and will in all events proceed, both in its provision of services to the Hotel and in the provision of services to other hotels, in a good faith manner and in a manner reasonably deemed to serve the overall best interests, on a long term basis, of all H.I. branded h....
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....ance in hiring the General Manager, and any other Hotel employees, to the extent of any such recruiting, interviewing and hiring needs to be conducted outside of India; (b) formulating and establishing overall human resource policies consistent with Hyatt Operating Standards including, without limitation, selection, employment, training, allocation, transfer and termination of employment of all employees of the Hotel, the establishment of the conditions of employment, staffing list and salary and benefit structures, and formulation and establishment of training and motivational programs for employees such as the "Training for Your Future" program and other training and motivational programs implemented from time to time in hotels managed by subsidiaries of H.I.; (c) establishing overall and strategic purchasing policies with respect to selection of goods, supplies (and suppliers) and materials, including without limitation food, beverages, operating supplies and expendables, Furnishings and Equipment and such other services and merchandise necessary for the proper operation of the Hotel, and as necessary, establishing policies to facilitate the purchase and procur....
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....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 1, which forms an integral part of this Agreement. From and after the Effective Date, Strategic Services Provider shall provide to Owner, through the General Manager, access to and the right to use the Know-How, solely as required in connection with the operation of the Hotel, in written form, by electronic mail, or in any other appropriate form depending on the nature of the Know-How. Strategic Services Provider shall additionally provide to Owner, through the General Manager, with the special purpose software to enable the use of certain Know-How, when necessary and to the extent required under the circumstances. Strategic ....
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....istance and technical assistance services as appropriate and required to operate and manage the Hotel within India shall be performed by Service Provider, employees of the Hotel, or their designees. It is further understood and agreed to by Owner that employees of Strategic Services Provider, H.I. and their affiliates will be in India only when, in the sole discretion of Strategic Services Provider, H.I. or their affiliates, their presence is required, and then only on a temporary basis." 53. In addition to the above, in terms of Section 4 of Article III of SOSA, the Assessee also agreed to establish policies with regard to handling of Operating Bank Account(s) for operating the Hotel. 54. It is apparent from the above that the Assessee was required to render services in the area of strategic planning, maintaining the Hyatt Operating Standards and covering all aspects of the operation of the Hotel. 55. Section 6 of Article III of SOSA provided for Assessee's entitlement for reimbursement of certain expenses. It was agreed that the Assessee would be reimbursed costs for certain services including internal audits, management operation reviews and specialised training program....
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....es range from US$200 to US$350 (in 2008 Dollars) dependent upon the seniority of the executives performing the audit, M.O.R. or training. * key executives (including, without limitation, expatriate personnel's) social benefits, including, without limitation, life, disability and health insurance, incentive compensation and pension benefits arranged by Strategic Services Provider or H.I. * premiums for the worldwide insurance coverage (including, without limitation public liability and crime insurance, such as employee fidelity and cash-in-transit coverage) maintained by Strategic Services Provider or H.I." 56. In terms of Section 7 of Article III, it was agreed that the Assessee would identify, recruit and assist in appointing any non-local employees of the Hotel including General Manager, key personnel and Executive Committee Members for and on behalf of the Owner. However, it was also specified that the same would be in consultation with the Owner and it would have the right to approve such appointments. 57. The Assessee was also required to formulate human resource policies consistent with the Hyatt Operating Standards. The Assessee could also assign its ....
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....mployees deputed during the Previous Year for rendering assistance for operation of the Hotel (as well as the hotel in Mumbai). A tabular statement indicating the name of the employee, designation and the job description as set out in the impugned order is reproduced below: "Sr.No. Name of 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. • Guidelines 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 the confidentiality of finance data. • Assist....
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.... process or for information of commercial or scientific experience. The fees payable is in consideration of providing the services as set out in SOSA and as highlighted above. 64. We are unable to accept the Revenue's contention that the fee received by the Assessee in terms of SOSA could be termed as consideration for use or for right to use any design, model, process and also for information concerning commercial and scientific experience. Indisputably, in terms of the SOSA, the Assessee had agreed to provide access. However, such access is only incidental to the services agreed to be provided by the Assessee. The obligation to grant access to information, knowledge and software is solely to certain information, written knowledge, skill and experience in furtherance of the service provided by the Assessee under SOSA and for operating the Hotel. Merely because the extensive services rendered by the Assessee in terms of the SOSA also included access to written knowledge, processes, and commercial information in furtherance of the services, cannot lead to the conclusion that the fee received by the Assessee was in the nature of royalty as defined under Article 12 of the DTAA. ....
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....r Article 12 of the DTAA. It is clearly in the nature of business income. 67. It is relevant to note that the Assessee had contended before the authorities that the amount received under SOSA was Fees for Technical Services (FTS). We are unable to accept the same. This is also inconsistent with the submissions advanced before this Court. The fee received is not fees for technical services but in consideration for wide range of services as discussed above. Since, the Assessee is in the business of providing such services for management of Hotels, the income is required to be classified as income from business. 68. The first question is, thus, answered in the affirmative in favour of the Assessee and against the Revenue. Re Question (ii) 69. The next question to be examined is whether the Assessee has a permanent establishment in India within the meaning of the DTAA. The operative part of the impugned order (paragraph no. 58) indicates that the learned Tribunal had sustained the Revenue's case that the Assessee has a PE in India on the basis that it carried on its business through a fixed place of business - the Hotel. Accordingly, the Tribunal has held that the Assessee ....
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....iness, stated to be the PE is at the disposal of the enterprise. The relevant extract of the said decision is set out below: "30. Emphasising that as a creature of international tax law, the concept of PE has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model. First, an establishment which is part of the same enterprise under common ownership and control-an office, branch, etc., to which he gives his own description as an "associated permanent establishment". The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a PE. Such PE is given the nomenclature of "unassociated permanent establishment" by Baker. He, however, pointed out that there is a possibility of a third type of PE i.e. a construction or installation site may be regarded as PE under certain circumstances. In the first type of PE i.e. associated permanent establishments, primary requirement is that there must be a fixed place of business through which the business of an enterprise is wholly or partly carried on. It entai....
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.... 75. There is no cavil that the Hotel premises has all attributes of being a fixed place. The only issue is whether the Hotel was at the disposal of the Assessee through which it carried on its business. 76. In Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation-3, Delhi & Anr., the Supreme Court referred to the text of "Klaus Vogel on Double Taxation Conventions" and accepted the proposition that a fixed place would be at the disposal of the enterprise if it controls the place of business to a considerable extent. It is not necessary that the enterprise has any legal right to exclude other persons from the said premises or holds any legal interest in the fixed place, for it to be construed as at its disposal. It is sufficient that the enterprise exercises an effective degree of control over its business activity. The extent of control required for the fixed place of business to be construed as the PE depends on the business activity carried on by the taxpayer. It is recognized that whilst certain activities may require a lesser degree of control over the place of business and yet be construed at the disposal of the enterprise, certain ot....
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....t can neither service his other clients from the said premises nor use the same at his will to carry on any of his other activities. The Supreme Court had also referred to the decision of Canadian Federal Court of Appeal [William Dudney v. R., (1999) 99 DTC 147 (Can)] ruling that a self-employed engineer who had access to his customers premises to perform the services required under his contract but had no control over the premises because he had access only during the customers regular office hours and was not entitled to carry on business of his own from the said premises. 79. The duration for which the fixed place of business is at the control of the Chartered Accountant may not be material. In Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation-3, Delhi & Anr., the Supreme Court held that the appellant in that case had a PE in India and had carried on its business through a fixed place of business - Buddh International Circuit. The said track was owned by Jaypee Sports International Ltd. (an Indian Company). The appellant (Formula One World Championship Ltd.) had granted the right to host the Formula One Grand Prix of India (event) to Ja....
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.... 84. There is no dispute that it is not necessary that an enterprise has a legal and exclusive control in respect of the fixed place of business for the same to be construed at its disposal. The plain test is to determine whether de facto the enterprise had sufficient control over the fixed place for the purpose of carrying on its business. It is relevant to note that SOSA was one amongst other agreements that were entered into contemporaneously. Whereas the SOSA was for providing overarching strategic services for management of the Hotel, the HOSA was for day to day management of the Hotel. 85. In terms of Section 4 of Article I of SOSA, the owner had warranted that it would maintain full ownership of the Hotel and subject to Section 2 of Article XVI of SOSA, keep the said property clear from any lien, encumbrances, covenants, charges and burdens of claim other than those that do not materially and adversely affect the Assessee's performance on the services for the benefit of the Hotel. As noticed by the Tribunal, in terms of SOSA, the Owner was not entitled to use the Hotel as a collateral unless it obtained non-disturbance and attornment agreements acceptable to the Assesse....
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....ny such inability of Strategic Services Provider to perform its obligations, arising therefrom, shall not be deemed a default or a breach of this Agreement by Strategic Services Provider. Owner shall timely pay and discharge any ground rents, or other rental payments, concession charges and any other charges payable by Owner in respect of the Hotel and, at its expense, undertake and prosecute all appropriate actions, judicial or otherwise, required to permit the operation of the Hotel as contemplated in this Agreement. Owner shall further timely pay all real estate taxes, personal property taxes and assessments that may become a lien on the Hotel and that may be due and payable during the Operating Term, unless payment thereof is in good faith being contested by Owner and provided enforcement thereof is stayed." 86. The term of the SOSA was twenty years and it could be extended by a further period of ten years. Section 3 of Article III of SOSA expressly provided that the Assessee had no obligation and was not expected to assign any of its employees to India on a permanent basis. However, it did have the sole discretion to assign any one or more of its employees or emplo....
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....t required to carry on day-to-day management of the Hotel. However, it would be erroneous to accept that the agreements entered into by the Assessee did not provide a pervasive control. This is also apparent when one considers that the SOSA was entered simultaneously with Hyatt India (an affiliate of the assessee) entering into the agreement for managing the day-to-day operations of the Hotel. There is no dispute that the day-to-day management of the Hotel was required to be conducted in the manner and in terms of the policy and guidelines laid down by the Assessee. Article III of SOSA indicates that the policies would cover every aspect of functioning of the Hotel. 90. It is important to note that six senior employees of the assessee had visited India during the said term. The job description clearly indicate that they had exercised certain amount of supervisory control in respect of various activities of the Hotel. Considering the nature of function coupled with the fact that the Assessee could depute its employees at its discretion, we find no infirmity with the decision of the Tribunal accepting that the Hotel premises would be sufficiently at the disposal of the Assessee th....