2018 (6) TMI 209 - AAR - Income Tax

Permanent Establishment (PE in India) - scope of the agreement - payments received by the Applicant from the Indian hotel owner for provision of global reservation services ( GRS ) - DTAA between India and Luxembourg - Royalty / Fee for technical services (FTS) - Held that - the Indian hotel, Swissotel Kolkata,satisfies all the three tests and does constitute a fixed place PE of the Applicant with respect to these incomes. The Applicant is carrying on its entire business operations from this fixed place. The existence of a PE of the Applicant in India gets established within the meaning of Article 7 of the DTAA. We have held that the income of the Applicant is attributable to the fixed place PE in India, the question whether it can be characterised as royalty or fees for technical services becomes wholly academic. The payments received by the Applicant from the Indian hotel owner for provision of global reservation services ( GRS ) would be chargeable to tax in India under section 9(1)(i) read with Articles 5 and 7 of the India-Luxembourg DTAA as business income and is attributable to the Applicant s permanent establishment in India. In view of this, the question whether these payments would be characterised as royalty or fees for technical services becomes wholly academic, and is, therefore, not considered necessary to be answered.

Summary

Issues Involved:
1. Taxability of payments received for Global Reservation Services (GRS) under the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and Luxembourg.
2. Existence of a Permanent Establishment (PE) in India under Article 5 of the DTAA.
3. Characterization of income as 'Royalty' or 'Fees for Technical Services' under Section 9(1)(vi) / 9(1)(vii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Payments Received for Global Reservation Services (GRS):
The Applicant sought a ruling on whether the payments received from the Indian hotel owner for GRS would be chargeable to tax in India as 'Fees for Technical Services' or 'Royalty' under Section 9(1)(vi) / 9(1)(vii) of the Income Tax Act, 1961, read with Article 12 of the DTAA between India and Luxembourg. The Applicant argued that the income from GRS should not be taxed in India as it does not fall under the definitions of 'royalty' or 'fees for technical services'. However, the Revenue contended that the income should be taxed as business income due to its business connection and source in India.

2. Existence of a Permanent Establishment (PE) in India:
The Revenue argued that the Indian hotel constituted a PE in India under Article 5 of the DTAA, and the profits attributable to such PE, including income from GRS, should be taxed in India as business profits. The Applicant contended that the question raised was limited to the taxability of GRS and did not include the existence of a PE. However, the Authority held that it was necessary to consider the existence of a PE to pronounce a ruling on the substance of the questions posed.

3. Characterization of Income as 'Royalty' or 'Fees for Technical Services':
The Applicant argued that the income from GRS does not fall under the definitions of 'royalty' or 'fees for technical services'. The Revenue countered that the income arises from providing 'managerial' as well as 'technical' services, thus qualifying as 'fees for technical services', and also argued that the income could be considered 'royalty' for the use of 'industrial or commercial equipment'. However, the Authority concluded that since the income is attributable to the fixed place PE in India, the question of whether it is characterized as 'royalty' or 'fees for technical services' becomes academic. The income would still be taxable as 'business profits' under Article 7 of the DTAA.

Conclusion:
The Authority ruled that the payments received by the Applicant from the Indian hotel owner for GRS would be chargeable to tax in India under Section 9(1)(i) read with Articles 5 and 7 of the India-Luxembourg DTAA as business income attributable to the Applicant's PE in India. The question of whether these payments would be characterized as 'royalty' or 'fees for technical services' was deemed academic and not necessary to answer.