IN RE: INTERNATIONAL HOTEL LICENSING COMPANY S.A.R.L. Vs. STATE

JUDGEMENT

(1.) M /s International Hotel Licensing Co., SARL (referred to in this ruling as 'the applicant'), filed this application under Section 245Q(1) of the IT Act, 1961 (for short "the Act"). The applicant, a non -resident company, is a subsidiary of International Hotel Licensing Co. Investment, SARL which is a Luxembourg company. The applicant is in the business of promoting enterprises and is conducting international advertising, marketing and sales programs for Marriott chain of hotels to promote them in the foreign markets. Marriott is a leading worldwide hospitality group. In 2005, different Marriott group entities entered into various agreements with Unitech Hospitality Ltd., an Indian company (referred to in this ruling as "the owner") in connection with the setting up of an Indian hotel to be constructed, furnished and equipped in Noida (Uttar Pradesh), India. The applicant also entered into an agreement with the owner called "International Marketing Program Participation Agreement" (hereinafter referred to as "the IMPPA") on 6th Sept., 2005. The IMPPA provides that the owner would participate in the marketing business promotion programs and that the 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. However, it is made clear that the applicant would not conduct any specific marketing activity for the owner. The consideration that the owner would pay to the applicant is described as an annual contribution equal to 1.5 per cent 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. This would, however, be subject to adjustment mechanism based on the final annual figures as postulated in Clause 1.04(b) of the IMPPA. As it is not possible for the owner to incur marketing expenses on global scale without the co -operation of other similar hotels worldwide to attract tourists from all over the world, which is necessary for it to run its business, the applicant co -ordinates with owners of Marriott chain of hotels worldwide on the basis of the reimbursement. Pursuant to the IMPPA the applicant has also to provide certain special programs to all hotels in the Marriott chain and at present the only special program is the Marriott Rewards Program (Marriott's award -winning guest royalty program) for which the participants are charged 3.4 per cent of a Marriott Rewards Program member's room charge (including taxes) during his/her stay at the applicable hotel. The said contributions of 1.5 per cent and 3.4 per cent are referred to as 'amounts' by the applicant in the question set forth for seeking advance ruling of the Authority, which reads as follows:

(2.) THE jurisdictional Commissioner (for short "the CIT") submitted his comments to the application on 10th Jan., 2006. After summarizing the facts of the case and the submission of the applicant, it is stated that the question raises the following issues:

(3.) MR . Nishith Desai, learned Counsel appearing for the applicant, has submitted that there is no DTAA between the Republic of India and Grand Duchy of Luxembourg and that the tax liability of the applicant, for the purpose of the question, has to be determined under the Act. Inviting our attention to Article 1 of the IMPPA it is submitted that the owner's contribution to the costs and expenses associated with the International advertising, marketing, promotion and sales program for the hotel is fixed as 1.5 per cent of gross revenues for the accounting period and that the same represents the share of costs and expenses of the owner incurred by the applicant and that para 1.03 of the IMPPA provides for "allocation of other costs and expenses" which would be 3.4 per cent of a Marriott Rewards Program member's gross room revenues. These contributions are made for incurring necessary expenses and at the end of the year the excess contribution over the expenses is refunded to the owners. The payments being in the nature of reimbursement are not taxable. His explanation of the applicant's activities is that owners of Marriott group hotels pool their funds together through the instrumentality of the applicant on the principle of mutual benefit society, spend the amount for collective benefit and enjoy the surplus. He has described the relationship between the applicant and the owner as that of a trustee and a beneficiary. His contention is that even though the applicant is in the business of administrating and marketing vis -a -vis the marketing funds, it collects moneys for costs and expenses actually incurred, as provided in para 1.04(E) of the IMPPA. Relying on the observations of the Hon'ble Supreme Court in CIT v. R.D. Aggarwal & Co. , he argues that the applicant has no business connection in India and even assuming for the sake of argument that business connection exists, no operations are carried out by the applicant in India and that the amounts paid by the owner under the IMPPA to the applicant cannot be treated as royalty. The owner might be paying royalty for the use of the brand name separately to another Marriott entity on which full tax would be deducted and that is not the subject -matter of this application. He has further contended that amounts received by the applicant from the owner are not for any managerial, technical or consultancy services and would not therefore be in the nature of FTS; he relied upon the decisions in CIT v. Dunlop Rubber Co. Ltd. and DECTA, In re .