Facts of the case

1. M/s International Hotel Licensing Company, SARL ("the applicant"), a non-resident company, is a subsidiary of International Hotel Licensing Company Investments SARL, which is a Luxembourg company. 
    

2. The applicant is in the business of promoting enterprises and is conducting international advertising, marketing and sales programmes for Marriott chain of hotels to promote them in the foreign markets. 
    

3. Applicant entered into an agreement called International Marketing Programme Participation Agreement (IMPPA) with Unitech Hospitality Ltd., an Indian company, ("the owner").
    

4. IMPPA provides that the owner would participate in the marketing business promotion programmes and that the applicant would provide advertising space in magazines, newspapers and other printed media and electronic media, which would be conducted by it outside India.

5. Consideration for the services rendered:

1. an annual contribution equal to 1.5% of the gross revenues of the hotel by way of reimbursement of expenses that the applicant would incur for conducting and co-ordinating the international marketing activities for Marriott chain of hotels; and

2. 3.4% of a room charge (including taxes) from the participants of the Programme for the provision of special programme to all the hotels in the Marriott chain.

The surplus amount of the above consideration on an annual basis will be refunded to the owner.

Issues

The following issues emerged out of the submission of the appellant and the fact of the case

1. Whether the payment is in the nature of reimbursement
    

2. Whether the payment is for earning an income from a source outside India.  What is the meaning of term "Source"?
    

3. 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 u/s 9(1)(i) of the Act?
    

4. Whether the payment is for the services or the use of the brand?
    

5. Whether the services rendered by the applicant are covered by the definition of fees for technical services under the explanation to 9(1)(vii) of the act?
    

6. Whether the payment made by the owner is under arm’s length principle particularly in the context that similar agreements have been entered into by and between the applicant and other Marriott group member hotels.

Contention of the appellant

1. The payment is in the nature of reimbursement of expenses and that the same represents the share of costs and expenses of the owner incurred by the applicant. Para 1.03 of the IMPPA provides for "allocation of other costs and expenses" and also mentioned in that, the excess contribution over the expenses is refunded to the owners. 
    

2. Applicant contends that his activities are to pool together the funds of the owners of Marriott Group hotels and spend the amount for collective benefit and enjoy surplus.
    

3. He described the relationship between the applicant and the owner as that of trustee and beneficiary. Therefore the nature of payments is reimbursement of expenses and are not taxable. Applicant referred Dunlop Rubber Co. Ltd. and DECTA’s case.
    

4. Relying on the decision of the Supreme Court in case of R. D. Aggrawal, applicant argued that it has no business connection in India. Even if we assume that business connection exists, no operations are carried out by the applicant in India (i.e. all the advertisements were observed in the magazines which were published outside India), therefore provisions of section (9)(1)(i) cannot be attracted.
    

5. The amounts paid cannot be treated as royalty. The owner may be paying royalty for the use of brand name separately to another Marriott entity but not the applicant. He further contends that amounts received by the applicant are not for any managerial, technical or consultancy services and therefore would not be in the nature of Fees for Technical Services.
    

6. The applicant is in the business of marketing and business promotion activities and therefore the plea of reimbursement is inconsistent with carrying on of the business.
    

7. The expenses are incurred not for the benefit of the Indian hotel but for the Marriott group as a whole.
    

8. There is no nexus between the expenditure incurred and the consideration received. Department supported its argument relying on the decision of Danfoss Industries Ltd. In this case it was held that there is no direct nexus between the actual expenses incurred by the foreign company in providing the services to a company of the group of companies and the fees payable by each individual company which availed the services. So it could not be said that the payments are reimbursement of expenses.
    

9. When a guest stays in the hotel in India as a result of the services of the applicant it would be deemed that the services are utilized in India and merely because the guest is a foreigner it cannot be said that the income does not accrue or arise in India IMPPA was entered into India therefore applicant has business connection in India and also there is continuity in regard to the payment as the agreement is intended for 25 years and extendable for a further period of 10 years. The samples of the advertisements show that they are in the Indian magazines and they relate to specific Indian hotels of Marriott and Renaissance brand; even if the advertisements are in foreign magazines or T.V. shows it would make no difference as they have circulation or are accessible in India, it would not be correct to say that there is no activity in India.
    

10. As there is no nexus between the payment and the expenditure incurred, the proposed 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". The payment may also be considered as Fees for Technical Services (FTS) as the scope of the term is much wider.
     

11. Authority held that as evident from IMPPA the nature of the agreement is business contract. It would be impossible for an owner alone to incur the entire cost of international marketing and promotion activities and not earning any profits.
     

12. In case of Dunlop Rubber Co. Ltd. the assessee company and the Indian company were beneficiaries of the research, therefore the contributions were held to be reimbursement. In the instant case the applicant received the contribution for providing the services to the members of the chain of members of Marriott hotels group and the class of beneficiaries is not confined to contributors.
     

13. In the DECTA’s case the contributions made by the Indian companies were not payment towards technical services provided by DECTA and the payments was not to DECTA but to a common fund to enable it to defray the expenses of the project carried out by it.
     

14. In case of Danfoss Industries Ltd. the break up of the cost incurred for providing services and fees payable by each individual company was not available, therefore, there was no direct nexus between the actual cost incurred and the fees payable. Therefore it could not be said that fees payable was nothing but reimbursement of expenses. Even if we assume that the fees charged were equivalent to expenses incurred, it would be a case of quid pro quo for the services and not reimbursement, therefore, payment can be made only after deduction of appropriate withholding taxes. The applicant in the instant case is in the business of promoting enterprises and conducting international advertising, marketing, sales programmes and the contention of the appellant that he is not earning any profit is not well founded.
     

15. In the case of R.D. Aggarwal and Co., Anglo-French Textile Company Limited and Honeywell Technologies SARL, it was observed that a relation is a "business connection" if

Source: www.aar.gov.in