Hyatt International - Delhi High Court Judgement Analysis - Royalty, Permanent Establishment & Global Losses attribution to PE

Case Law Update

IN THE HIGH COURT OF DELHI

Hyatt International-Southwest Asia Ltd. (Appellant)

v.

Additional Director of Income-tax (Respondent)

Judgement Delivered On - December 22, 2023, Order Released On - January 3, 2024

Advocates who appeared in this case:

For the Appellant : Mr S. Ganesh, Senior Advocate with Mr U.A. Rana and Mr Himanshu Mehta, Advocates.

For the Respondent : Mr Sanjay Kumar, Senior Standing Counsel for Revenue with Ms Easha Kadian, Advocate

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Synopsis

The taxpayer, a UAE tax resident, entered into two Strategic Oversight Services Agreements (SOSA) with owner of a hotel located in Delhi. Under the SOSA arrangements, the taxpayer committed to delivering strategic planning services and expertise to ensure the hotel's efficient development and operation at an international standard. Both the Assessing Officer and the Tribunal concluded that the taxpayer had a Permanent Establishment, as defined in Article 5(2) of the DTAA.

The rationale behind this determination was the acknowledgment that the taxpayer exercised authoritative influence over all hotel activities. This influence was manifested through the formulation of policies governing every operational facet of the hotel and further ensured the practical implementation of these policies. Notably, it was recognized that the taxpayer carried out an oversight function concerning the hotel, a function conducted, at least in part, if not entirely, on the premises of the hotel.

The pivotal question arises: given that the hotel premises were at the disposal of the taxpayer for its business activities, did the Tribunal appropriately conclude that the taxpayer had a Permanent Establishment in India in the form of a fixed place through which its business operations were conducted?

Facts of the case

• Assessee - Hyatt International Southwest Asia Ltd., a company incorporated in the United Arab Emirates.

• An Indian Company - Asian Hotels Limited, India (subsequently name changed to Asian Hotels (North) Limited) (‘AHL’) entered into two contracts in respect of a hotel owned by it in Delhi -

• To provide the services under SOSA, Assessee’s six employees had stayed in India during the relevant period for an aggregate period of 158 days.

• In consideration of the host of services to be provided in terms of the SOSA, the Assessee received certain fees (strategic fee as well as incentive fee) as set out in SOSA.

• Fees received pursuant to SOSA was for consultancy services and not for royalty of provisions of Know-how, skill, experience, commercial information or any other intangibles and that payments for service, where the use of intellectual property is only incidental, cannot be considered as royalty.

• The consultancy fees was not taxable under the Income Tax Act as there was no specific Article under the DTAA for Taxing Fees for Technical Services.

• Assessee did not have the Permanent Establishment (‘PE’) in India under Article 5 of the DTAA since there was no fixed place of business, office or branch of Assessee in India. Further the presence of the Assessee’s employees in India during the relevant previous year did not exceed the specified time of nine months under Article 5(2) of the DTAA. Hence its income was not taxable under Article 7 of the DTAA - ‘Business Profits’.

• Even if it is assumed that it has a PE in India, no income was attributable to PE as it had incurred losses on entity level (global basis).

Revenue's Contentions

• Apart from operating the Hotel, the Assessee also provided its proprietary, written knowledge, skill, experience, operational and management information and associated technologies etc. and therefore, its receipts constituted ‘royalties’ as defined in Section 9(1)(vi) of the Act and Article 12 of the DTAA.

• Assessee had a fixed place of business at its disposal throughout the year in the premises of the Hotel, including the Chambers of the Managing Director and other expatriates who were continually present and it had carried out its activities for performing its obligations under the SOSA from the said premises, hence Assessee’s activities constituted PE under Article 5 of the DTAA.

• A reading of the SOSA made it clear that the AHL was owner only for namesake and that the entire control of the hotel rested with the Assessee and that the terms of the SOSA clearly indicated that AHL could not reject or defy any guidelines or directions issued by the Assessee in respect of running the hotel.

Question before the Hon’ble High Court of Delhi

• Whether the service charges received by the Appellant under the various SOSA Agreements were taxable as royalty?

• Whether the Assessee has Permanent Establishment in India within the meaning of the Double Taxation Avoidance Agreement?

• 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?

Decision w.r.t. taxability of SOSA charges as Royalty

• Terms of SOSA are crucial to determine whether Assessee’s receipts are consideration for Royalty as defined under Article 12 of DTAA.

• Under terms of SOSA -

• In the case of Director of Income Tax v. Sheraton International Inc., the hon’ble Court held that access to computerized reservation system (CRS) by Sheraton International was held to be an integral part of the business arrangement between the Sheraton International and Indian hotels, which was not separable from the integrated services in respect of marketing, publicity and sales promotion.

• Hence, 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.

Decision w.r.t. existence of PE in India

• 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.

• The Supreme Court in the case of Formula One World Championship Ltd. v. Commissioner of Income Tax had explained that there are three characteristics to determine whether there is a fixed place of business or not - stability, productivity and independence. The Court held that one of the principal tests to determine whether an enterprise has a PE or not is to determine whether the fixed place of business, stated to be the PE is at the disposal of the enterprise.

• The Supreme Court in the case of Assistant Director of Income Tax-I, New Delhi v. E. Funds IT Solutions Inc explained that the place would be treated at the disposal of an enterprise only when the enterprise has a right to use the said place and exercises control over the said place of business.

• It is not necessary that an enterprise has a legal and exclusive control in respect of the fi xed place of business for the same to be construed at its disposal. The plain test is to determine whether de facto the enterprise had suffi cient control over the fi xed place for the purpose of carrying on its business.

• Based on the terms of SOSA which inter alia included, restriction on AHL to use hotel as collateral, term of 20 years further extendable by 10 years, sole discretion of Assessee to assign any one or more of its employees or employees of its affiliates to India coupled with the fact that six senior employees of the Assessee had visited India during the said term whose job description clearly indicated that they had exercised certain amount of supervisory control, the Court held that Assessee had a fixed place (hotel premises) at its disposal.

• Since Assessee performed an oversight function in respect of the hotel, it could be held that business was carried out, even if not entirely, from the hotel premises. Hence, Assessee had a PE in India.

Decision w.r.t. attribution of income to PE in case of entity level losses

• Court conceded that it had reservation with the decision of the Coordinate Bench of the Court in Commissioner of Income Tax (International Taxation)-2 v. M/s Nokia Solutions and Networks OY where PE was in major losses but at entity level, assessee was in profits, and the Court confirmed Tribunal’s decision to attribute global profits to PE on the basis of turnover.

• The Court held that the Coordinate Bench did not consider that profits attributable to the Assessee’s PE in India are required to be determined on the footing that the PE is an independent taxable entity and if it is held that the Assessee has a PE in India, prima facie the Assessee would be liable to pay tax on the income attributable to its PE in India notwithstanding the losses suffered in other jurisdictions.

• Hence the Court held that this question ought to be referred to a larger Bench.