2024 (1) TMI 220 - HC - Income Tax

Income taxable in India - PE in India - as per ITAT service charges received by the Appellant under the various SOSA Agreements were taxable as royalty - SOSA Strategic Oversight Services Agreements entered into in respect of the Hotel (the hotel located at Delhi - Hyatt Regency) as Assessee agreed to provide strategic planning services and Know-How to ensure that the Hotel is developed and operated as an efficient and a high quality international full-service hotel. AO held that the Assessee s activities constituted (i) business connection under Section 9(1)(i) of the Act; (ii) PE under Article 5 of the DTAA; (iii) royalties and FTS u/s 9(1)(vi)/(vii) of the Act; and, (iv) royalties under Article 12 of the DTAA. The AO did not accept that the Assessee did not have a PE in India - Tribunal held that the amounts received by the Assessee were royalties - whether the Assessee s income receipts from SOSA are liable to be taxed as royalties? HELD THAT - In terms of Section 7 of Article III, it was agreed that the Assessee would identify, recruit and assist in appointing any non-local employees of the Hotel including General Manager, key personnel and Executive Committee Members for and on behalf of the Owner. However, it was also specified that the same would be in consultation with the Owner and it would have the right to approve such appointments. It is apparent from the plain reading of Article III and other provisions of SOSA that the Assessee had an overarching role in the management of the Hotel albeit at the policy level, with further right to oversee its implementation to ensure that the Hotel is operated as an upscale Hotel commensurate with the standards of the Hyatt chain of hotels Hyatt Operating Standards. It is also amply clear that the policies and procedures framed by the Assessee covered every aspect of the management of the Hotel. It is material to note that the Assessee was not required to manage day-to-day operations of the Hotel. It is apparent that the day-to-day affairs of the Hotel were required to be managed by Hyatt India (an Indian Company affiliated to the Assessee) in terms of the HOSA. But Hyatt India was required to implement the strategic policies as set out by the Assessee. The Assessee was also required to broadly oversee the implementation of its policies. The Assessee was called upon to provide the job description of various employees deputed during the Previous Year for rendering assistance for operation of the Hotel (as well as the hotel in Mumbai). In consideration of the host of services to be provided in terms of the SOSA, the Assessee would be entitled to fee (strategic fee as well as incentive fee) as set out in SOSA. It is clear that the said fee is not a consideration for use of or the right to use any process or for information of commercial or scientific experience. The fees payable is in consideration of providing the services as set out in SOSA and as highlighted above. We are unable to accept the Revenue s contention that the fee received by the Assessee in terms of SOSA could be termed as consideration for use or for right to use any design, model, process and also for information concerning commercial and scientific experience. Indisputably, in terms of the SOSA, the Assessee had agreed to provide access. However, such access is only incidental to the services agreed to be provided by the Assessee. The obligation to grant access to information, knowledge and software is solely to certain information, written knowledge, skill and experience in furtherance of the service provided by the Assessee under SOSA and for operating the Hotel. Merely because the extensive services rendered by the Assessee in terms of the SOSA also included access to written knowledge, processes, and commercial information in furtherance of the services, cannot lead to the conclusion that the fee received by the Assessee was in the nature of royalty as defined under Article 12 of the DTAA. Thus the consideration received by the Assessee in terms of SOSA cannot be termed as Royalty under Article 12 of the DTAA. It is clearly in the nature of business income. It is relevant to note that the Assessee had contended before the authorities that the amount received under SOSA was Fees for Technical Services (FTS). We are unable to accept the same. This is also inconsistent with the submissions advanced before this Court. The fee received is not fees for technical services but in consideration for wide range of services as discussed above. Since, the Assessee is in the business of providing such services for management of Hotels, the income is required to be classified as income from business. The first question is, thus, answered in the affirmative in favour of the Assessee and against the Revenue. Permanent establishment in India within the meaning of the DTAA - Whether the Assessee had sufficient control over the premises of the Hotel for the same to be construed at its disposal for carrying on its business.? - In terms of paragraph (1) of Article 5 of the DTAA, the term Permanent Establishment would mean a fixed place of business through which business of an enterprise is wholly or partly carried out. According to the Revenue, the Hotel premises constituted a fixed place through which the Assessee carried on its business in part. According to the AO, the Assessee had access to the chambers of the General Manager of the Hotel and the same could be construed as Assessee s fixed place of business. There is no cavil that the Hotel premises has all attributes of being a fixed place. The only issue is whether the Hotel was at the disposal of the Assessee through which it carried on its business. In Formula One World Championship Ltd. 2017 (4) TMI 1109 - SUPREME COURT decided it is sufficient that the enterprise exercises an effective degree of control over its business activity. The extent of control required for the fixed place of business to be construed as the PE depends on the business activity carried on by the taxpayer. It is recognized that whilst certain activities may require a lesser degree of control over the place of business and yet be construed at the disposal of the enterprise, certain other activities may require a higher degree of control. It is well accepted that an enterprise would be recognized as controlling the fixed place of business if it can use it at its discretion. There is no dispute that it is not necessary that an enterprise has a legal and exclusive control in respect of the fixed place of business for the same to be construed at its disposal. The plain test is to determine whether de facto the enterprise had sufficient control over the fixed place for the purpose of carrying on its business. It is relevant to note that SOSA was one amongst other agreements that were entered into contemporaneously. Whereas the SOSA was for providing overarching strategic services for management of the Hotel, the HOSA was for day to day management of the Hotel. The term of the SOSA was twenty years and it could be extended by a further period of ten years. Section 3 of Article III of SOSA expressly provided that the Assessee had no obligation and was not expected to assign any of its employees to India on a permanent basis. However, it did have the sole discretion to assign any one or more of its employees or employees of its affiliates to India on occasional basis. As noted above, the Assessee had the discretion to send its employees at its will without concurrence of either Hyatt India or the Owner. This clearly indicates that the Assessee exercised control over the premises of the Hotel for the purposes of its business. Thus, the condition that a fixed place (Hotel Premises) was at the disposal of the Assessee for carrying on its business, was duly satisfied. There is also little doubt that the Assessee had carried out its business activities through the Hotel premises. Admittedly, the Assessee also performed an oversight function in respect of the Hotel. This function was also carried out, at least partially if not entirely, at the Hotel premises. Assessee is correct in its submission that there is no provision in the SOSA, which entitled the Assessee to carry on any activity or business in respect of any other hotel from the premises of the Hotel. However, there is no specific bar that proscribed the Assessee s employees from making decisions or issuing policies in respect of management of other hotel while they were stationed or visiting the Hotel Premises in connection with rendering services under the SOSA. Since the Hotel premises were at the disposal of the Assessee in respect of its business activities, we find no infirmity with the Arbitral Tribunal s decision holding that an Assessee had a PE in India in the form of a fixed place through which it carried on its business. Given the nature of the Assessee s business, it is difficult to accept that the Assessee s senior employees deputed in India would completely be insulated from addressing the issues of other hotels under the management of the Hyatt Group, while they were at the Hotel. Question no.(ii) is answered in the affirmative. Whether the findings recorded by the Tribunal, in paragraphs 56, 57 and 59 are perverse and contrary to the terms of the Strategic Oversight Services Agreement (SOSA)? - Insofar as the Tribunal s finding that the Assessee has a fixed place of business in India as it has sufficient control over the operations of the Hotel, this Court finds no infirmity with the same. It is not necessary to examine whether the Assessee has a PE under Para 2 of Article 5 of the DTAA as the Tribunal has proceeded on the finding that the Assessee has a PE in terms of Article 5(1) of the DTAA. This is apparent from the Tribunal s conclusion in Paragraph 58 of the impugned order. Insofar as the Tribunal s finding that the payments made are in the nature of royalty under Article 12 of the DTAA is concerned, we are unable to concur with the conclusion of the Tribunal as set out in paragraph 60 of the impugned order. The question no.(iii) is answered accordingly. Is Article 7(1) of the DTAA at all applicable to the Appellant, having regard to the fact that it has incurred losses in the relevant financial years? - We note that the Tribunal had also given an opportunity to the Assessee to submit its working regarding apportionment of revenue, losses etc. on a financial year basis so that the profits attributable to the PE can be determined judicially. We confirm the said direction. Obviously, this is subject to the determination in respect of question no. (iv). We direct that this order be placed before the Acting Chief Justice for referring the said question to a Larger Bench in view of our reservations in regard to the earlier decision of this Court in Commissioner of Income Tax (International Taxation)-2 v. M/s Nokia Solutions and Networks 2022 (12) TMI 700 - DELHI HIGH COURT

Summary

Issues Involved:
1. Taxability of service charges as royalty.
2. Existence of Permanent Establishment (PE) in India.
3. Perversity of Tribunal's findings in relation to the Strategic Oversight Services Agreement (SOSA).
4. Applicability of Article 7(1) of the DTAA in the context of incurred losses.

Summary:

1. Taxability of Service Charges as Royalty:
The primary question was whether the Assessee's income from the SOSA should be taxed as royalties under Article 12 of the DTAA. The Court examined the terms of the SOSA and concluded that the fees received were not for the use of or the right to use any intellectual property or commercial information but were in consideration of a wide range of strategic services provided by the Assessee. The Court referenced the decision in Director of Income Tax v. Sheraton International Inc., which supported the view that such integrated services, including access to proprietary knowledge, do not constitute royalties. Thus, the Court held that the receipts were business income and not royalties.

2. Existence of Permanent Establishment (PE) in India:
The Tribunal had held that the Assessee had a PE in India under Article 5(1) of the DTAA, based on the control and use of the Hotel premises. The Court agreed with the Tribunal's findings, noting that the Assessee had significant control over the Hotel's operations, strategic planning, and policy implementation. The Court emphasized that the Assessee's ability to depute employees at its discretion and the pervasive control over the Hotel's management indicated that the Hotel premises were at the Assessee's disposal, thus constituting a PE.

3. Perversity of Tribunal's Findings in Relation to SOSA:
The Assessee argued that the Tribunal's findings were perverse, particularly the conclusion that the Assessee had complete control over the Hotel's operations. The Court, however, found no infirmity with the Tribunal's conclusion, noting that the SOSA provided the Assessee with overarching control and discretion in formulating and establishing strategic plans and policies for the Hotel's operation. The Court upheld the Tribunal's view that the Assessee's activities went beyond mere consultancy services and involved significant operational control.

4. Applicability of Article 7(1) of the DTAA in the Context of Incurred Losses:
The Assessee contended that no income could be attributed to its PE in India as it had incurred losses on a global basis. The Court noted that this issue was covered by the decision in Commissioner of Income Tax (International Taxation)-2 v. M/s Nokia Solutions and Networks OY but expressed reservations about the view that profits attributable to a PE should be determined independently of global losses. The Court decided to refer this question to a larger bench for reconsideration. However, it was noted that if the Assessee succeeded on the other issues, it would not press this question further.

Conclusion:
The Court concluded that the receipts were business income and not royalties, affirmed the existence of a PE in India, and upheld the Tribunal's findings regarding the control over the Hotel operations. The question of attributing profits to the PE in the context of global losses was referred to a larger bench.