2006 (11) TMI 141 - AAR - Income Tax

Setting up of an Indian hotel - 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 - owner would pay to the applicant an annual contribution - amounts received by 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.

Issues Involved:
1. Whether the payment is for services or for the use of the brand?
2. 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?
3. Whether the payment is in the nature of reimbursement?
4. Whether the payment is for earning an income from a source outside India and the meaning of the term "Source"?
5. 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 under section 9(1)(i) of the Act?
6. Whether the payment made by the owner is under the arms' length principle, particularly in the context that similar agreements have been entered into by and between IHLC and other Marriott group member hotels?

Detailed Analysis:

1. Whether the payment is for services or for the use of the brand?
The Commissioner contended that the 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." It was argued that the expenditure incurred by the applicant in international advertising is for building up the brand. However, the applicant argued that the payments are for the marketing and business promotion activities conducted outside India and do not constitute royalty.

2. 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?
The Commissioner argued that the proposed payment would be consideration for rendering managerial, technical, or consultancy services within the meaning of "fees for technical services" (FTS) as defined in Explanation 2 to Section 9(1)(vii) of the Act. The applicant contended that the payments received are not for any managerial, technical, or consultancy services and would not, therefore, be in the nature of FTS.

3. Whether the payment is in the nature of reimbursement?
The applicant claimed that the payments are reimbursement of expenses incurred for the benefit of the Indian hotel owner. The Commissioner disputed this, arguing that the payments have no nexus with the amount of expenditure incurred by the applicant and are based on gross turnover, representing consideration for the services rendered by the applicant.

4. Whether the payment is for earning an income from a source outside India and the meaning of the term "Source"?
The applicant argued that the payments are for activities conducted outside India and, therefore, do not constitute income from a source in India. The Commissioner contended that the payments are for services utilized in India, thus constituting income from a source in India.

5. 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 under section 9(1)(i) of the Act?
The Commissioner argued that the payments by the owner represent income accruing or arising in India under section 9(1)(i) of the Act. The applicant disputed this, arguing that no operations are carried out by the applicant in India, and therefore, the payments cannot be treated as income accruing or arising in India.

6. Whether the payment made by the owner is under the arms' length principle, particularly in the context that similar agreements have been entered into by and between IHLC and other Marriott group member hotels?
The Commissioner submitted that the payments are not under the arms' length principle as the agreements are similar to those entered into by and between IHLC and other Marriott group member hotels.

Conclusion:
The Authority concluded that the amounts received by the applicant from the Indian hotel owner under the IMPPA would be taxable in India. The payments are not mere reimbursements but are in the nature of revenue receipts. The payments fall within the definition of fees for technical services (FTS) as they are for rendering managerial and consultancy services. The applicant has a business connection and a source of income in India, satisfying the requirements of Section 9(1)(i) of the Act. Therefore, the amounts received by the applicant from the Indian hotel owner in connection with the marketing and business promotion activities conducted outside India would be taxable in India.

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