The New Delhi Bench of Authority of Advance Rulings in the application made by FRS Hotel Group (Lux) S.a.r.l. (Now FRHI Hotels & Resorts S.a.r.l.) held that 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 (PE) in India.
The applicant is a company within the FRHI Group incorporated under the laws of and Dutchy of Luxemborg and is engaged in the provision of 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. Furthermore, BAHDL developed and owns a 5 Star deluxe hotel known as Swissotel 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.
The issue before the present Authority is that whether the payments received by the Applicant from the Indian hotel owner for provision of 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.
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.
The Revenue in its counter submissions urged that the primary issue in this case is whether or not the Indian Hotel constituted a 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 their “business connection” and also their “source” lies in the operation of the hotel in India.
The Authority after deliberating upon Article 12 of the India-Luxembourg DTAA held that the present application does call for adjudication on the issue of the existence of a PE. Hence, the existence of a PE in India is a question which needs to be decided pre-handed. After analyzing the different agreements it was held that the Hotel is completely at the disposal of the Applicant. Right from the employment of the hotel staff (including the managerial personnel) to taking decisions over capital improvements, every possible operational right stands vested in the Applicant. The Authority was hence of the view that the Applicant has a PE in India.
Also, the question whether it can be characterized as “royalty” or “fees for technical services‟ becomes wholly academic. Even if the income is characterized as either of these two, by virtue of para 4 of Article 12, the income would still be taxable as “business profits” under Article 7.
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