Fees for the marketing and business promotion activities conducted outside India to be taxable in India

BEFORE THE AUTHORITY FOR ADVANCE RULING (INCOME TAX)
NEW DELHI

A.A.R. No. 674 of 2005

Name & address of the applicant	INTERNATIONAL HOTEL LICENSING COMPANY S.A.R.L. 25A, Boulevard Royal, 9th Floor L-2449 Luxembourg
Commissioner concerned	DIT INERNATIONAL TAXATION, MUMBAI
Present for the Applicant	Mr. Nishith Desai, Advocate & others
Present for the Department	Mr. T N Chopra, Adv.

Justice Syed Shah Mohammed Quadri (Chairman)
Mr. A S Narang (Member)Mr. A Sinha (Member)

Dated : November 27, 2006

Amounts received by the International Hotel Licensing Company from the Indian Hotel owner in connection with the marketing and business promotion activities conducted outside India to be taxable in India

RULING

Justice Syed Shah Mohammed Quadri :

M/s International Hotel Licensing Company, SARL (referred to in this ruling as 'the applicant'), filed this application under section 245Q(1) of the Income-tax Act, 1961 (for short "the Act"). The applicant, a non-resident company, is a subsidiary of International Hotel Licensing Company Investments SARL which is a Luxembourg company. The applicant is in the business of promoting enterprises and is conducting international advertising, marketing and sales programs for Marriott chain of hotels to promote them in the foreign markets. Marriott is a leading worldwide hospitality group. In 2005 different Marriott group entities entered into various agreements with Unitech Hospitality Ltd., an Indian company, (referred to in this ruling as "the owner") in connection with the setting up of an Indian hotel to be constructed, furnished and equipped in Noida (Uttar Pradesh), India. The applicant also entered into an agreement with the Owner called "International Marketing Program Participation Agreement" (hereinafter referred to as "the IMPPA") on 6.9.2005. The IMPPA provides that the owner would participate in the marketing business promotion programs and that the applicant would provide, inter alia, advertising space in magazines, newspapers and other printed media and electronic media which would be conducted by it outside India. However, it is made clear that the applicant would not conduct any specific marketing activity for the owner. The consideration that the owner would pay to the applicant is described as an annual contribution equal to 1.5% of the gross revenues of the hotel by way of reimbursement of expenses that the applicant would incur for conducting and coordinating the international marketing activities for Marriott chain of hotels. This would, however, be subject to adjustment mechanism based on the final annual figures as postulated in clause 1.04(b) of the IMPPA. As it is not possible for the owner to incur marketing expenses on global scale without the cooperation of other similar hotels worldwide to attract tourists from all over the world, which is necessary for it to run its business, the applicant coordinates with owners of Marriott chain of hotels worldwide on the basis of the reimbursement. Pursuant to the IMPPA the applicant has also to provide certain special programs to all hotels in the Marriott chain and at present the only special program is the Marriott Rewards Program, (Marriott's award winning guest royalty program) for which the participants are charged 3.4% of a Marriott Rewards Program member's room charge (including taxes) during his/her stay at the applicable hotel. The said contributions of 1.5% and 3.4% are referred to as 'amounts' by the applicant in the question set-forth for seeking advance ruling of the Authority, which reads as follows:-

"Whether on the facts and circumstances of the case, amounts received by the International Hotel Licensing Company S.A.R.L. (hereinafter referred to as the "Applicant") from the Indian Hotel Owner in connection with the marketing and business promotion activities conducted outside India would be taxable in India?"

2. The jurisdictional Commissioner (for short "the Commissioner") submitted his comments to the application on 10th January, 2006. After summarizing the facts of the case and the submission of the applicant, it is stated that the question raises the following issues:-

(i) Whether the payment is for services or for the use of the brand?

(ii) Whether the services rendered by the applicant are covered by the definition of fees for technical services under Explanation to 9(1)(vii) of the Act?

(iii) Whether the payment is in the nature of reimbursement?

(iv) Whether the payment is for earning an income from a source outside India. What is the meaning of term "Source"?

(v) In case the payer is considered as a source, whether the payment by a resident in India to the applicant will amount to earning of an income from a source in India u/s 9(1)(i)of the Act?

(vi) Whether the payment made by the owner is under arms length principle particularly in the context that similar agreements have been entered into by and between IHLC and other Marriott group member hotels.

It is submitted that under the IMPPA the applicant has to provide advertising space in magazines, newspapers and other printed media, advertising slots on radio, television and other electronic media; marketing promotional and public relations campaign. The expenditure for these activities is aimed not for the benefit of the Indian hotel but for the Marriott group as a whole. It is seen from the samples of the advertisement furnished by the applicant that the main emphasis is on the brand i.e. Renaissance Hotels & Resorts, JW Marriott. The samples are so few in number that they do not bring out the actual nature of services rendered by the applicant. It is noted that the advertisements carry copyright of Marriott International Inc. and the connection between it and the applicant is not clear; whether the advertisements have been placed by the Marriott International Inc. or by the applicant, is not clear. There is no nexus between the expenditure incurred by the applicant in rendering the services and the consideration to be received by it. Therefore, the proposed payment of 1.5% of the gross revenues appears to be a payment towards royalty in a disguised form for the use of the brand "Marriott" and that the expenditure incurred by the applicant in international advertising, is for building up of the brand. The proposed payment would also be consideration for rendering of any managerial, technical or consultancy service within the meaning of "fee for technical services "(FTS) as defined in explanation 2 to Section 9(1)(vii) of the Act as the scope of the term "FTS" is much wider. The claim of the applicant that the payments received by it from the owner are reimbursement of expenses is disputed and it is stated that the applicant incurs expenses in general for promotion of Marriott chain of hotels and that the expenses are not exclusively incurred for the owner. The payments have no nexus with the amount of expenditure incurred by applicant. The payments by the owner are on the basis of gross turn over which has no link with the amount of expenses incurred or proposed to be incurred and that the payments by the owner represent the consideration for the services to be rendered by the applicant. It is stated that Section 9(1)(vii) of the Act provides that any payment by a resident to a non-resident as FTS shall be deemed to be income of non-resident accruing or arising in India and that the payments do not fall in any of the two exceptions to the proviso to the said Section. Without prejudice to the above contention, it is submitted that where the income of the resident (the owner) is on account of a foreign tourist being a guest in the Indian hotel the provision of Section 9(1)(i) of the Act would be attracted and as the owner is making payments to the applicant the income would be deemed to accrue or arise in India.

The Commissioner called upon the applicant to place the following agreements before the Authority:-

(i) Operating agreement between owner and Marriott hotels India Pvt. Ltd. (the operator) as referred to in item (A) of recital at page 1 of the Agreement dated 6.9.2005.

(ii) Licence and royalty agreement, the training and computer systems agreement and each subordination agreement as referred to in item (F) of clause 3.01, Article-Ill of the agreement dated 6.9.2005 and

(iii) Technical service agreement as referred to in item A.3 of clause 5.18 of Article-V of the agreement dated 6.9.2005.

On the basis of the above submissions, it is pleaded that the amounts received by the applicant from the owner would be taxable in India.

3. The applicant filed a fairly lengthy rejoinder to the comments of the Commissioner refuting that the applicant has business connection in India and disputing that payments under the IMPPA constitute royalty or FTS. It is reiterated that the payments are reimbursement as claimed in the application. In regard to the documents referred to above, the applicant declined to produce the same on the ground that they are not relevant for determination of tax liability of the applicant in respect of payments to be made under the IMPPA.

4. Mr. Nishith Desai, learned counsel appearing for the applicant, has submitted that there is no Double Taxation Avoidance Agreement between the Republic of India and Grand Duchy of Luxembourg and that the tax liability of the applicant, for the purpose of the question, has to be determined under the Act. Inviting our attention to article-1 of the IMPPA it is submitted that the owner's contribution to the costs and expenses associated with the International advertising, marketing, promotion and sales program for the hotel is fixed as 1.5% of gross revenues for the accounting period and that the same represents the share of costs and expenses of the owner incurred by the applicant and that para 1.03 of the IMPPA provides for "allocation of other costs and expenses" which would be 3.4% of a Marriott Rewards Program member's gross room revenues. These contributions are made for incurring necessary expenses and at the end of the year the excess contribution over the expenses is refunded to the owners. The payments being in the nature of reimbursement are not taxable. His explanation of the applicant's activities is that owners of Marriott Group hotels pool their funds together through the instrumentality of the applicant on the principle of mutual benefit society, spend the amount for collective benefit and enjoy the surplus. He has described the relationship between the applicant and the owner as that of a trustee and a beneficiary. His contention is that even though the applicant is in the business of administrating and marketing vis-a-vis the marketing funds, it collects moneys for costs and expenses actually incurred, as provided in para 1.04 (E) of the IMPPA. Relying on the observations of the Hon'ble Supreme Court in R.D. Aggarwal case1, he argues that the applicant has no business connection in India and even assuming for the sake of argument that business connection exists, no operations are carried out by the applicant in India and that the amounts paid by the owner under the IMPPA to the applicant cannot be treated as royalty. The owner might be paying royalty for the use of the brand name separately to another Marriott entity on which full tax would be deducted and that is not the subject matter of this application. He has further contended that amounts received by the applicant from the owner are not for any managerial technical or consultancy services and would not therefore be in the nature of FTS; he relied upon the decisions in Dunlop Rubber Co. Ltd.2 and DECTA3 .

5. Mr. T.N. Chopra, learned counsel appearing for the Commissioner, on the other hand, has argued that the applicant is in the business of marketing and business promotion activities and therefore the plea of reimbursement is inconsistent with carrying on of the business; that the payments are in the nature of royalty or at any rate FTS as defined in explanation 2 to Section 9(1)(vii) of the Act; when a guest stays in the hotel in India as a result of the services of the applicant, it would be deemed that the services are utilized in India and merely because the guest is a foreigner it cannot be said that the income does not accrue or arise in India. His further contention is that there is business connection between the applicant and the owner within the meaning of section 9(1)(i) of the Act; he points out that the IMPPA was entered into in India, the hotel business of the owner is in India, the payments are received in India as per clause (B) of article 1.04 thereof and there is also continuity in regard to the payments as the said agreement is intended for 25 years and is extendable for a further period of 10 years. He has emphasized that advertisements could not be said to be outside India, samples of advertisement show that they are in Indian magazines of Jet Airways and Air Sahara and that they relate to specific Indian hotels of Marriott and Renaissance brand; even if the advertisements are in foreign magazines it would make no difference as they have circulation in India thus there would be advertisement in India and therefore, it would not be correct to say that there is no activity in India. Further, submits the learned counsel, the applicant has source of income in India and the payments are also received in India.

A perusal of the question would show that it is a common ground that the amounts in question are received by the applicant -a non-resident - from the Indian hotel owner - a resident - in connection with marketing and business promotion activities which are proposed to be conducted outside India. Now having regard to the contentions of the learned counsel, what remains to be determined, is whether such amounts are in the nature of business income, royalty or FTS so as to be taxable in India or whether they are mere reimbursement of expenses incurred by the applicant for the benefit of the Indian hotel owner.

6. First we shall deal with the issue whether the payments are mere reimbursement of expenses incurred by the applicant for the benefit of the owner; if so, receipt of payments in the hands of the applicant could not be treated as revenue receipt [see decision of the Delhi High Court in Commissioner of Income-tax v/s Industrial Engineering Projects Pvt. Ltd, following the judgement of the Hon'ble Supreme Court in CIT v. Tejaji Farasram Kharawalla Ltd.

Pressing into service the dictionary meaning of the term 'reimburse', Mr. Desai has argued that the consideration paid by the owner is reimbursement in the nature of participation contribution which is used by the applicant for defraying its expenses in undertaking the international marketing activities; that in the event of deficiency/surplus resulting from contributions made by owners, the IMPPA provides mechanism for adjustment. Mr. Chopra points out that the applicant is in the business of promoting enterprises and it is conducting international advertising, marketing and sales programs for Marriott chain of hotels to promote them in foreign markets and therefore the plea of reimbursement will become inconsistent. As under the IMPPA the consideration is received in lieu of services rendered during the course of carrying on the business by the applicant, amounts received by it can only be revenue receipt. He has invited our attention to various clauses of the IMPPA to show that services are being provided by the applicant for which owner is liable to make payment @ 1.5% of the gross revenue (net of taxes) for each accounting period and 3.4% of gross room revenues under special scheme of Courtyard System and these amounts have no nexus with the actual expenses incurred by the applicant and therefore the payments cannot be treated as reimbursement of expenses.

7. We have considered the rival contentions carefully. It would be apt to notice here the meaning of the word "reimburse". The meaning ascribed to the word 'reimburse' in "The New Shorter Oxford English dictionary" is:

"repay (a sum of money spent); repay or recompense (a person),

In the Black's Law Dictionary the word 'reimburse' is defined to mean:

"to pay back, make restoration, to repay that expended, to indemnify or make whole"

Keeping this meaning in mind we shall refer to the relevant recitals in the IMPPA to resolve the controversy with regard to the nature of consideration paid by the owner to the applicant. Para 1.01 (A) to (E) of the IMPPA says, inter alia, that any advertising, marketing, promotion or sales services generated directly by the Hotel, whether in India or outside India, shall not be part of the International advertising, marketing, promotion and sales program of the applicant The1 owner's contributions of 1.5% of gross revenues, net of taxes, for each accounting period and 3.4% of a Marriott Rewards Program member's gross room revenues (including tax) for special services and programs, are in effect contractual charges though they are referred to as costs and expenses associated with the programs and such common special service provided for Courtyard System hotels. In regard to the said payments it is provided that the applicant has the right to be reimbursed without owner's prior approval from the EEFC Account within 20 days after the end of each accounting period. The agreement is co-terminus with the operating agreement i.e. if operating agreement is terminated the IMPPA shall immediately and automatically be terminated and if the operating agreement is renewed or extended the same shall be immediately and automatically renewed and extended. Article-VI of the IMPPA which contains the definition of terms used therein, defines, inter alia, chain services to mean "any one or more, as the context may require, of the services, programs, and systems provided by the applicant or any of its affiliates pursuant to the agreement. The expression 'International Advertising, Marketing, Promotion, and Sales Program" is defined to mean "the international programs for advertising, marketing, promotion and sales services provided on a central or other group basis for the benefit of Courtyard System hotels, including purchasing advertising space in magazines, newspapers and other printed media; purchasing advertising on radio, television, and other electronic media; printing and publishing pamphlets, brochures, directories, and other materials; marketing; promotional, and public relations campaigns designed to increase sales or to increase public awareness of the Courtyard System of the Hotel; conducting market research and developing marketing products; advertising, marketing, promotion, and sales activities of applicant and its affiliates marketing and sales offices throughout the world; retaining advertising agencies, marketing firms, public relations firms, and other professionals to assist in the development and implementation of any of the foregoing. Any advertising, marketing, promotion, or sales services generated directly by the hotel shall not be part of the international advertising, marketing, promotion, and sales program. The meaning of Courtyard system is as follows:-

"All hotels operated under the name Courtyard Hotel in the United States and Canada are referred to as Courtyard Hotels. Courtyard Hotels located outside of the United States and Canada are collectively referred to as Courtyard International Hotels".

The expression "special services and programs" is ascribed the meaning as detailed in section 1.02 of Article - l of the agreement. The said section reads as follows:-

1.02 Special Services and Programs

"IHLC shall provide or cause one or more of its Affiliates to provide on a central or regional basis to the Hotel and other Hotels in the Courtyard System special services and special programs other than those described in Section 1.01 which services and programs are intended to benefit the Courtyard System ("Special Services and Programs"), and IHLC may require the Hotel to participate in such Special Services and Programs. As of the Effective Date, these Special Services and Programs include the Marriott Rewards Program. IHLC or one of its Affiliates shall provide Owner with reasonable notice of the introduction of any Special Services and Programs".

From various recitals of the agreement, it is clear that (i) the applicant would be providing the international advertising marketing programs and sales program ; and (ii) special services program, details of which have been referred to above. We have also pointed out that any advertising, marketing promotion or sales services generated directly by the owner whether in India or outside India, shall not be part of the International advertising, marketing, promotion and sales program of the applicant.

We have carefully gone through the report of the independent auditors and the notes to the Statement of Revenues and Expenses and changes in Fund Balance but in view of the request of the applicant not to quote the same, we are refraining from incorporating the names of the auditors and the relevant extracts of their report and its enclosures. It appears that only 45 Courtyard International Hotels participated in the System Marketing Fund for the Courtyard International Hotel System whereas all the hotels of the brand are beneficiaries of the said services(mentioned in the Annexure-II to the application). It may also be noticed that the gross revenue of each hotel will be different and consequently the contribution of each hotel will also vary; however, services of advertisement etc. provided by the applicant will enure to the benefit of each member equally. Courtyard International Hotels generally are required to pay a percentage of their gross revenues, as defined by their management and franchise agreements, to the Fund in the form of marketing fees. These marketing fees as well as restricted marketing allowances contributed by strategic partners comprise the sources of revenue for the Fund. The third-party strategic partners are major charge card, travel and beverage companies, which provide the restricted marketing allowances contributions. It is also noticed that all cash received by the Fund is deposited in and commingled with the Administrator's general corporate funds. The Fund consequently includes both costs specifically identifiable with the Courtyard International Hotel System as well as an allocation of sales and marketing support expenses.

A careful reading of the classification of the expenses, noted in clauses (a) to (m) , furnish a fairly good picture of services provided by the applicant. In effect what the applicant would be providing is services both within and outside India in the form of advertising, marketing promotion, sales program and special services and other programs for the brand of Marriott hotels and other group of hotels. Marriott's award-winning guest loyalty program, Marriott Rewards, has over 2400 participating hotels and 21 million members . No service will be provided individually to the hotel of the owner and that all the beneficiaries of the services are not contributors. From the above details, it becomes evident that there is no direct nexus between the owners of the hotel, and the costs and expenses of providing the said services. The owner will get the benefit, if any, being one of the members of Marriott chain hotels. Even if after adjustment the payments in the form of contributions equal to the total costs and expenses incurred by the applicant, for the reasons noted above, we find it difficult to accept that they would amount to reimbursement of costs and expenses.

8. We shall now advert to the cases relied upon by Mr. Desai in support of his argument.

In Dunlop Rubber Co. Ltd. (Supra 2 ) both the assessee company and the Indian company were beneficiaries of the research conducted as joint venture, therefore the contributions were held to be reimbursement. In the instant case it is seen above that the applicant received the consideration in the form of contribution for providing services to the members of the chain of Marriott hotels group and the class of beneficiaries is not confined to the contributors. The fact that the consideration for providing services is described as contribution for participation would, in our view, make no difference because it is the substance and not the nomenclature of the payment that would be material.

In DECTA's case (supra 3), the applicant sought a ruling of the Authority on the question, "whether the contribution received from the Government of United Kingdom by way of technical cooperation fund to be administered by Decta through its project office in Delhi, was taxable in India". The applicant was established by Overseas and Development Administration (ODA) of the British Government; later it became an autonomous body with the object of establishing and providing information and advisory services and undertaking research and promotional activities for the benefit of Third World countries. It opened a liaison office in Delhi to aid administration of the programme and to facilitate communication between DECTA and various governmental and official bodies which will be involved in the projects. At the instance of ODA the participating companies made a rupee contribution towards the costs of the assistance they received from the organization. The Government of U.K. made available substantial amounts by way of technical cooperation fund to meet the expenses of the project carried on by the DECTA. The Authority ruled that DECTA was merely implementing an agreement between the British Government and the Indian Government under which all kind of assistance was extended to Indian companies for view, make no difference because it is the substance and not the nomenclature of the payment that would be material.

In DECTA's case (supra 3), the applicant sought a ruling of the Authority on the question, "whether the contribution received from the Government of United Kingdom by way of technical cooperation fund to be administered by Decta through its project office in Delhi, was taxable in India". The applicant was established by Overseas and Development Administration (ODA) of the British Government; later it became an autonomous body with the object of establishing and providing information and advisory services and undertaking research and promotional activities for the benefit of Third World countries. It opened a liaison office in Delhi to aid administration of the programme and to facilitate communication between DECTA and various governmental and official bodies which will be involved in the projects. At the instance of ODA the participating companies made a rupee contribution towards the costs of the assistance they received from the organization. The Government of U.K. made available substantial amounts by way of technical cooperation fund to meet the expenses of the project carried on by the DECTA. The Authority ruled that DECTA was merely implementing an agreement between the British Government and the Indian Government under which all kind of assistance was extended to Indian companies for developing their products, their export potential and their export markets in Europe and other Western countries; in substance and reality the contributions made by Indian companies could not be described as consideration for the technical services provided by DECTA and that they were not really payment to DECTA but to a common fund to enable it to defray a part of the expenses of the project carried out by DECTA on behalf of the company in question and that the contribution received/receivable to recover part of the expenses of the technical assistance provided by the applicant therein under the provisions of the Aid programme to the companies assisted by it in India, was not income of the applicant and was not chargeable to tax. For the reasons already noted above this case also will be no help to the petitioner.

In the case of CIT v/s Industrial Engineering Projects Pvt. Ltd. (Supra 4), the assessee had an agreement with a foreign company whereby some services were to be rendered by the latter to the former on payment of consideration of Rs. 1,20,000/- per year and that certain costs and expenses incurred by the assessee would be reimbursed. The controversy centered round the claim of the assessee for reimbursement of expenses only. The Income-tax Appellate Tribunal, on interpretation of the agreement and on considering the facts of the case, found that the assessee received no sums in excess of the expenses incurred by it on behalf of the foreign company under the agreement and that the reimbursement of expenses did not constitute income. On reference, a division bench of the High Court of Delhi, following the judgement of the Hon'ble Supreme Court in the case of CIT v. Tejaji Farasram Kharawalla Ltd.,(supra 5) held that the reimbursement of expenses could, under no circumstances, be regarded as revenue receipt. This case is clearly distinguishable on the facts of the case and on the clear finding recorded by the Tribunal. Therefore the applicant can derive no benefit from it.

The first two cases (Dunlop Rubber Co. Ltd. and DECTA) were referred to by the Authority in Danfoss Industries Ltd. in re. In that case the applicant, an Indian company, proposed to enter into an agreement with Danfoss Singapore, a foreign company incorporated in Singapore which provided services to a group of companies including the Indian company. The consideration for availing of the services was a service fee based on the portion of the services received in relation to the total costs of the foreign company in providing such services. The fees was calculated on the basis of allocation key which was determined on a proportional percentage of budget turn over weighted by growth and market maturity of the company in the group availing the services and any increase or shortfall of the actual turnover would proportionately increase or decrease the portion of cost to be absorbed by the company which availed of the services of the foreign company. The Indian company applied to the Authority for a ruling on the question whether the payments to be made to the foreign company would be subject to withholding tax under section 195 of the Act. It was ruled, inter alia, :

"(i) that, in the absence of the break up of the cost incurred by DS, the foreign company, in providing services and the fees payable by each individual company, the only conclusion possible was that there was no direct nexus between the actual cost incurred by the foreign company in providing the services to a company of the group of companies and the fees payable by each individual company which availed of the services. Therefore, it could not be said that the fee payable by the Indian company was nothing but reimbursement of costs incurred by the foreign company in providing services to the Indian company;

(ii) that, even assuming that the fees charged by DS, the foreign company, to the applicant-company and the companies in the group were equivalent to the expenses incurred by it in providing the services and there was no profit element, it would be a case of quid pro quo for the services and not reimbursement of expenses;

(iii) that, therefore, payments of fees had to be made by the Indian company only after withholding tax under section 195.

The contention that the primary object of the applicant is not to make profit but to enable the owner to attract foreign tourists from all over the world as the cost of international marketing and promotion activities would be impossible for an owner alone to incur and that in fact the applicant is not earning any profit is in our view not well founded. It is worthwhile mentioning that the IMPPA has the characteristics of a business contract. In clause 4 of annexure II and clause 2 of annexure III to the application the description of the applicant is that it is in the business of promoting enterprises and conducting international advertising, marketing and sales programs for Marriott chain of hotels. It has been emphasized that the applicant has no profit motive and as a fact also it is not earning any profit. For a receipt to be income in the hands of the recipient, element of profits therein is immaterial. This is the view the Authority has taken in Danfoss Industries P. Ltd., in re(supra 7) and Timken India Ltd. in re.

9. The issue, which remains to be considered, is whether the amounts in question are in the nature of business income, royalty or fees for technical services. Mr. Desai has contended that the payments could not be deemed to accrue or arise in India as the applicant has neither any business connection in India nor any source of income in India. Mr. Chopra, on the other hand, submits that the applicant has business connection as well as source of income in India. The contention of the revenue is developed on a conjoint reading of Sections 5 and 9 of the Act. Section 5 of the Act deals with the 'Scope of total income' for the purpose of charge of income tax under section 4 of the Act. Sub-section(2) of Section 5 of the Act provides that the total income of any previous year of a non-resident includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person or deemed to accrue or arise to him in India during such year. If the income accrues or arises or is received in India no further question will arise as to whether it is deemed to be received or deemed to accrue or arise to him in India during such year.

As the contention is that the income shall be deemed to accrue or arise in India, we shall refer to Section 9 of the Act; the relevant portion of Section 9 reads as under: -

Income deemed to accrue or arise in India

9. (1) The following incomes shall be deemed to accrue or arise in India:-

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India.

From a plain reading of the provision, quoted above, it is clear that all income accruing or arising, whether directly or indirectly through or from any business connection in India, or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situate in India, shall be deemed to accrue or arise in India. The case of the revenue is that the payments in question shall be deemed to accrue or arise in India because the applicant has business connection in India as also a source of income in India. It would be necessary to read the explanation 2 to Section 9(1)(i) of the Act which defines the expression 'business connection1 and reads as follows:-

Explanation 2 of Section 9(1 )(i) of the Act.

For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident-

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the nonresident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other nonresidents controlling, controlled by , or subject to the same common control, as that non-resident;

Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business:

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other nonresidents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.

The above definition of "business connection", brings within the fold of the expression activities mentioned in clause (a) to (c) of the explanation carried out through a person acting on behalf of the non-resident. Proviso (1) to the explanation deals with business activity carried out through a broker, general commission agent or any other agent having an independent status and proviso (2) lays down as to when such broker agent, general commission agent or any other agent shall not be deemed to be a broker, general commission agent or an agent of an independent status. We may point out that the explanation is declaratory in nature; it is inclusive or not exhaustive. It is nobody's case that the activities mentioned in clauses (a) to (c) of explanation (2) to Section 9(1)(i) of the Act establish business connection in the instant case. It is, therefore, necessary to ascertain the import of the expression "business connection" dehors the explanation, Mr. Desai referred to the decision of Hon'ble Supreme Court in R.D. Aggarwal and Co case (supra 1). To understand the concept of business connection it would be useful to refer to the decision of the Hon'ble Supreme Court in R.D. Aggarwal case, which elucidated the expression. The scope of the expression was considered under Section 42(1) of the Income-tax At, 1922 and it was observed that the expression "business connection" postulated a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. The following observation of the Hon'ble Supreme Court is relevant for the present discussion:-

"A relation to be a "business connection" must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the Act of a non-resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the nonresident, and if through or from that connection income directly or indirectly arises".

In CIT, Bombay City l v/s Tata Chemicals Ltd, the question before the Bombay High Court was how much of the income could be deemed to accrue or arise in India? The High Court noted the finding of facts recorded by the Tribunal that income which arose to M/s Lichema of West Germany did not accrue or arise or could not be deemed ever to have accrued or arisen in the taxable territory. It was admitted for the purpose of argument that business connection existed. The Hon'ble Court held,

"To enable the revenue to assess the assessee, which had business connection with, and was the agent of a non-resident, on the income which it is alleged arose to the non-resident where all the operations of the business of the non-resident are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India, as provided in clause (a) of the explanation to section 9(1)(i) of the Income-tax Act, 1961. Whether the income is attributable to the operations carried out in India is always a question of fact.

On the basis of that finding as everything was done outside India the writ petition filed by the revenue was dismissed.

In the decision of the Hon'ble Supreme Court in Carborandum Co. v CIT, the question under consideration vis-a-vis business connection, was whether on the facts and circumstance of the case the technical fee in excess of 5 per cent received by the assessee company (an American company) from the Indian company during the accounting year had accrued or arisen in India. The case arose under the Income Tax Act, 1922. There the technical information was furnished by the assessee company by post and the service was said to have been rendered in India. The Hon'ble Supreme Court observed :

"On a plain reading of sub-sections (1) and (3) of section 42 it would appear that income accruing or arising from any business connection in the taxable territories-even though the income may accrue or arise outside the taxable territories-will be deemed to be income accruing or arising in such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub-section (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise to the income would be deemed to accrue or arise in the taxable territories. If, however, all the operations are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part the operations carried out in the taxable territories".

It was held :

"The service rendered by the American company in that connection was wholly and solely rendered in the foreign territory. Even assuming however, that there was any business connection between the earning of the income in the shape of the technical fee by the American company and the affairs of the Indian company, yet no part of the activity or operation could be said to have been carried on by the American company in India. And in the absence of such a sustainable finding by the High Court the provisions of section 42, either of sub-section (1) or of sub-section (3), were not attracted at all".

In this context rulings of this Authority in the following cases are also relevant :-

(i) UAE Exchange Centre LLC (268 ITR 9)

(ii) Sutron Corporation (268 ITR 156)

(iii) Speciality Magazines Private Ltd (274 ITR 310)

(iv) Honeywell Technologies SARL

However we shall refer to the last mentioned case wherein the Authority after referring to the decisions of the Hon'ble Supreme Court in R.D. Aggarwal and Co. (Supra 1) and in Anglo-French Textile Company Limited11 summed up the essential features of the business connection thus :

(a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India;

(b) such relation, shall contribute, directly or indirectly, to the earning of income by the non-resident in his business;

(c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of 'business connection' in India.

We shall now ascertain whether these essential features are present in this case.

From the above narration of facts, the terms of the IMPPA and the discussion thereof it can be seen that the real and intimate relation exists between the business activities carried on by the applicant outside India and the activities of the owner in India, namely, running of hotel business and paying 1.5% of the gross revenues of the hotel and 3.4% of member's gross room revenues to the applicant. The business activities of the applicant are in relation to promotion of enterprises and conducting international advertising, marketing and sales programs for Marriott chain of hotels of which the applicant is one, to promote these hotels in the foreign markets. It is stated in the Annexure-ll to the application that the applicant would conduct all the aforesaid marketing activities outside India. Therefore, the first and the second requirements of business connection, noted above, are satisfied. In as much as admittedly the period of the IMPPA which would provide nexus between the business of the applicant outside India and the activities of the owner in India, is 25 years which is extendable for a further period of 10 years. Thus the third requirement is also satisfied. The pleas of the applicant that it conducts international marketing and business promotion activities outside India in the normal course of business and that it has no form of presence in India nor is the owner an agent of the applicant and that no activity of the owner result in any earning of the income of the applicant have no merit both on facts and in law.

The existence of business connection is sufficient to attract the provision of Section 9(1)(i) of the Act to the amounts in question and further question as to whether the applicant has also a source of income in India is unnecessary but in as much as both the parties have devoted a part of the discussion on the latter question we would like to touch on this aspect as well. In support of the contention that the applicant has a source of income in India, the case of the revenue is that source means a profit making apparatus and the hotel of the owner is therefore the source of income and as the payments are made for utilization of services of the applicant there is source of income for the applicant in India. The applicant, on the other hand, emphasized that the source of income for purposes of Section 9(1)(i) of the Act has to be determined in the context of the non-resident and the Indian payer and his activities should not be taken into consideration. As the applicant carries out all the activities outside India, the source of the income of the applicant is from those activities without any specific connection with or the impact of the same on the owner in India. There can be no gainsaying that a person who makes the payment cannot be the source of income for purposes of Section 9(1)(i) of the Act; the term therein refers to the activities which give rise to making a payment by the person. For example the employer pays the salary for the activities of the employees or the principal pays commission to the agent for his activities. Such examples can be multiplied [see Asia Satellite Telecommunications Ltd. v. Dy. CIT.

No doubt the applicant claims to carry out its activities outside India, the fact remains that those activities are carried out in India and even when they are carried out from outside India have extension in India as well; take for example advertisements assuming they are given in the various foreign magazines, the advertisements will not be confined to circulation outside India, they also cover India as now almost all the magazines have circulation in India. However, from the samples of the advertisements filed before us it is seen that the advertisements have been given in Indian magazines - in Jet Airways and Air Sahara magazines. Further from the enclosures of the report of the independent auditors, noted above, it is seen that advertising consisting of consumer marketing communications includes international and regional advertising. It cannot also be disputed that advertising on T.V. in foreign channels are very much accessible in India and they have the effect of advertisement in India. Therefore, it follows that payments by the owner for the purpose of service of advertisement, among others services has relation to the activities of the applicant, which generate activities of the owner of hotel business. There can, therefore, be no hesitation in concluding that the applicant has source of income in India.

The revenue sought to connect the operating agreement, licensing and royalty agreements with the IMPPA to urge that what is being paid by way of contributions is nothing but "royalties" within the meaning of explanation 2 to Section 9(1)(vi) of the Act. We are not impressed by this plea. The applicant sought ruling of the Authority with reference to the payments made by the owner in connection with the marketing and business promotion activities (under the IMPPA), therefore, any amount payable by virtue of other agreements to others or even the applicant would be irrelevant for the purpose of this application.

The last point, which needs to be dealt with, is whether payments made by the owner to the applicant under the IMPPA constitute 'FTS' under Section 9(1)(vii) of the Act. The relevant portion of the said provision reads as under:-

Income deemed to accrue or arise in India

Section - 9

(1) The following incomes shall be deemed to accrue or arise in India:-

(i) to (vi) x x x x x x

(vii) income by way of fees for technical services payable by-

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilizes in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:

Explanation 1 - x x x x

Explanation 2 - For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

x x x x x

The gist of the provision, quoted above, is that income shall be deemed to accrue or arise in India under section 9(1)(vii) of the Act by way of FTS if it is paid by the persons specified in sub-clauses (a) to (c). Here we are concerned with sub-clause (b) of the above clause (vii), which provides that where FTS is paid by a person who is a resident in India, the income shall be deemed to accrue or arise in India. It excludes from the deeming provision of FTS such fees which are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. Here on the facts of this case, the owner is not carrying on the hotel business outside India nor is he making or earning any income from any source outside India so the question of paying fees to the applicant in respect of services utilised in business or profession carried on by the owner outside India, does not arise. Admittedly, the hotel business of the owner is in India, therefore the exception is not attracted. However, it has to be seen whether the amounts paid by the owner to the applicant falls within the meaning of FTS as defined in explanation 2 thereof, which means any consideration including any lump sum consideration for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'. The exceptions to the definition of FTS are admittedly not attracted in this case. The short question, therefore, would be whether payments made by the owner to the applicant are for rendering of any managerial, technical or consultancy services.

The applicant relied on the decision of a learned single Judge of Madras High Court13 in support of the plea that the service provided by the applicant would not amount to technical service. In that case the petitioner was engaged in the business of providing cellular telephone service to the subscriber. The Chief Commissioner of Income-tax issued a direction to treat the payment made to the petitioner by the subscriber as fees for technical services. That direction was assailed in the writ petition before the court. Allowing the writ petition the learned judge held that the expression "technical service" was required to be understood in the context in which it was used, therefore fees for technical services could only be meant to cover such things technical as were capable or being provided by way of service for a fee and that the type of services provided by the applicant did answer the description of technical services.

In the instant case from the provisions of the IMPPA, referred to above, as well as the classification of expenditure of the fund, as noted by the independent auditors under the heads (a), (b), (c), (d), (f), indicated above, it is evident and it requires no elaboration to conclude that services provided by the applicant both within and outside India in the form of advertising, marketing promotion, sales programme and special services and other programmes for which payments are made by the owner, would amount to rendering managerial and consultancy services and therefore the requirements of the said definition of FTS are satisfied. In the light of the above discussion we conclude that the amounts received by the applicant from the Indian hotel owner under the IMPPA would be taxable in India.

Accordingly, we rule on the aforementioned question that on the facts and circumstances of the case, amounts received by the International Hotel Licensing Company SARL (referred to as the applicant) from the Indian Hotel owner in connection with the marketing and business promotion activities said to be conducted outside India would be taxable in India.