BEFORE THE AUTHORITY FOR ADVANCE RULING
(INCOME TAX)
NEW DELHI
NEW DELHI
A.A.R. No. 674 of 2005
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Name & address of the
applicant
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INTERNATIONAL HOTEL
LICENSING COMPANY S.A.R.L.
25A, Boulevard Royal, 9th Floor L-2449 Luxembourg |
|
Commissioner concerned
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DIT INERNATIONAL TAXATION,
MUMBAI
|
|
Present for the Applicant
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Mr. Nishith Desai, Advocate
& others
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Present for the Department
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Mr. T N Chopra, Adv.
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Justice Syed Shah Mohammed Quadri
(Chairman)
Mr. A S Narang (Member)Mr. A Sinha (Member)
Mr. A S Narang (Member)Mr. A Sinha (Member)
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.
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