[2018] 94 taxmann.com 23 (AAR – New Delhi)
FRS Hotel Group (Lux) S.a.r.l. In re
A.A.R. No. 1010 of 2010
Date of Order: 24th May, 2018
Facts
The
Applicant was a company incorporated in Luxembourg. It was
a member-company of a hospitality group engaged in development, operation and
management of chain of hotels, resorts and branded residences. The Applicant
provided management and operation services for hotels, of which, majority were
owned by third parties. The hotels were managed under different brands which
were licensed by one of the member-companies of the group. The Applicant was engaged by an Indian Company (“ICo”) for development and
operation of hotel of ICo. For this purpose, the Applicant and ICo entered into
five agreements for provision of services. ICo compensated the Applicant for
these services, either by way of, lumpsum payment (for technical services), or
percentage of revenue/market fee/construction costs.
Before the AAR, the Applicant raised limited
issue in respect of compensation under Global Reservation Services (“GRS”)
agreement (one of the five agreements), as to whether the receipt was
chargeable to tax as FTS or Royalty?
The tax authority contended that the primary
issue was whether the hotel in India constituted a PE of Applicant and
consequently, whether all income streams, including GRS, was business income.
The Applicant contended that since the question raised was limited to FTS or
Royalty, AAR should not adjudicate on the existence of PE.
Held
(i) Power of AAR to deal with issues other
than questions raised
– The activity of
the Applicant is integrated and cannot be split into one or the other. The five
agreements are part of a wholesome arrangement. Hence, even though the issue
raised was on taxability of income under GRS agreement, it cannot be viewed on
standalone basis.
– Rule 12 of the
AAR (Procedure) Rules, 1996 provides that the AAR “shall at its discretion
considered all aspects of the questions set forth”. Hence, ruling only on
certain income stream and leaving other income streams open for regular
assessment will render the exercise of approaching AAR futile.
(ii) Constitution of fixed place PE
– In Formula
One World Championship Ltd vs. CIT [2017] 394 ITR 80 (SC), it is held that
fulfilment of following three conditions constitutes a fixed place PE:
(a) Existence of a fixed place.
(b) Such fixed place being at the disposal of
non-resident.
(c) Non-resident carrying on its business, wholly
or partly, through such fixed place.
– In the case of the
Applicant:
(a) The hotel was a fixed place.
(b) Perusal of various clauses of all the
agreements shows that the hotel was at the disposal of the Applicant. After
completion of the hotel, its operation and management was not only the
responsibility of the Applicant but ICo had undertaken that it will not
interfere in exercise of exclusive authority of the Applicant over such
operation and management. Every operational right vested in the Applicant and
ICo was even barred from directly contacting any hotel staff. Core functions
such as sales, marketing, reservation, etc. were out sourced to the
Applicant.
(c) The business of the Applicant was operation
and management of the hotel and it had earned income through the different
agreements. The Applicant was carrying on all the activities from the hotel.
The relationship between the Applicant and ICo was that of
principal-to-principal and not principal-to-agent.
– Since all the
three conditions were fulfilled in case of the Applicant, hotel in India
constituted fixed place PE of
the Applicant.
(iii)
Whether GRS income was FTS or Royalty?
– Hotel in India
constituted fixed place PE of the Applicant. The income under the agreements
was attributable to the fixed place PE of the Applicant. Since such income will
be taxable as ‘business profits’, the question whether it can be characterized
as FTS or Royalty is academic.
– Even assuming
that it is characterized as FTS or royalty, having regard to Article 12(4) of
India-Luxembourg DTAA, it would be taxable as ‘business profits’ under Article
7.
– Consequently,
provisions of section 9(1)(i) of the Act will apply.
