A Luxembourg-based company recently approached the Authority for Advance Rulings (AAR), seeking clarity on the taxability of payments received by it from Indian hotels towards marketing and promotion. To know more about the case, which may be of interest to those in the hospitality industry, Business Line interacted with Mr Rajesh Patil, Manager, Deloitte Haskins & Sells, Mumbai. Here are his answers to a few questions.

First, the facts.

The Luxembourg company in question is IHLC, or International Hotel Licensing Company SARL. For starters, SARL stands for `Societe a Responsabilite Limitee' or limited liability company as per Luxembourg corporate law.

IHLC was in the business of promoting enterprises and was conducting international advertising, marketing sales programmes for Marriott chain of hotels, a leading worldwide hospitality group. In 2005, different Marriott group entities entered into various agreements with UHL, or Unitech Hospitality Ltd, an Indian company, in connection with setting up of an Indian hotel to be constructed, furnished and equipped in Noida, India.

IHLC had also entered into an agreement with UHL, according to which, UHL would participate in the marketing business promotion programmes; and IHLC was to provide, inter alia, advertising space in magazines, newspapers and other printed media and electronic media, outside India.

What was the revenue model?

The consideration that UHL had to pay to IHLC as per the agreement was equal to 1.5 per cent of the gross revenues of the hotel, by way of `reimbursement' of expenses that IHLC would incur for conducting and coordinating the international marketing activities for Marriott chain of hotels. IHLC was to provide special programmes such as `Marriott Rewards Programme' for which participants are to pay 3.4 per cent of room charge.

These would however be subject to the adjustment mechanism based on the final annual figures as postulated in the agreement. It was not possible for UHL to incur marketing expenses on a global scale without the cooperation of IHLC or other similar hotels worldwide to attract tourists from all over the world to run its business. IHLC coordinated with the owners of Marriott chain of hotels worldwide on the basis of the reimbursement.

The issue before the AAR was whether the payments by the Indian counterparts would be taxable in India.

Are such financial arrangements quite common in the hospitality industry?

Yes, such agreements are often heard of in the industry.

How did IHLC argue its case?

It contended that the payments by the Indian counterparts were nothing but reimbursement of expenses, and that the services were rendered outside India. Further, in the absence of a business connection in India, the payments were not taxable in India, said IHLC.

What was the ruling?

The Authority said that a real and intimate relation existed between the trading activities carried on by IHLC and the activities within India, which contributed to earning of income by IHLC. Therefore, there existed a business connection within the meaning of Income-Tax Act, observed the AAR.

On the facts of the case, the income did accrue and arise in India, and therefore the payments by the Indian counterparts were taxable in India, said the AAR. Also, the payments were in the nature of fees for technical services as per the Act, more as contractual charges, rather than as reimbursement, the Authority ruled.

Where was the source of income from India or abroad?

Though IHLC claimed that it carried out its activities outside India, the facts made it clear that these activities had extension in India and, therefore, the source of income was in India, as the AAR noted.

Would it have made a difference if there was a DTAA (double taxation avoidance agreement) with Luxembourg?

Yes, had the transaction been with a country with which there exists a DTAA a.k.a. treaty, and the applicant carried out business outside India, the position may have been different.

Of course, the same will also depend upon the withholding provisions contained in the treaty. For instance, if the payments were made to a German entity, instead of to a Luxembourg one, withholding tax would have been different.

D. Murali