Hyatt International-Southwest Asia Ltd v. Additional Director Of Income Tax …

IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 22.12.2023 + ITA 216/2020 & CM Nos. 32641/2020, 32643/2020 &56179/2022 HYATT INTERNATIONAL-SOUTHWEST ASIA LTD. …. Appellant v. ADDITIONAL DIRECTOR OF INCOME TAX …. Respondent AND + ITA 217/2020 & CM Nos. 32644/2020 & 32646/2020 HYATT INTERNATIONAL-SOUTHWEST ASIA LTD. …. Appellant v. DEPUTY COMMISSIONER OF INCOME TAX …. Respondent AND + ITA 218/2020 & CM Nos. 32647/2020 & 32649/2020 HYATT INTERNATIONAL-SOUTHWEST ASIA LTD. …. Appellant v. ASSISTANT DIRECTOR OF INCOME TAX …. Respondent AND + ITA 219/2020 & CM Nos. 32650/2020 & 32652/2020 HYATT INTERNATIONAL-SOUTHWEST Signature Not Verified …. Appellant ASIA LTD. v. ADDITIONAL DIRECTOR OF INCOME TAX …. Respondent AND + ITA 140/2021 & CM Nos. 30258/2021, 30259/2021 & 30260/2021 HYATT INTERNATIONAL-SOUTHWEST ASIA LTD. …. Appellant v. DEPUTY COMMISSIONER OF INCOME TAX …. Respondent AND + ITA 36/2022 & CM APPL. 11636/2022 HYATT INTERNATIONAL-SOUTHWEST ASIA LTD. …. Appellant v. ASSISTANT COMMISSIONER OF INCOME TAX …. Respondent ASSISTANT COMMISSIONER OF INCOME TAX …. RespondentAND + ITA 201/2023 & CM APPL. 16442/2023 HYATT INTERNATIONAL-SOUTHWEST ASIA LTD. …. Appellant v. ACIT (INTERNATIONAL TAXATION)- 2 (1) (1) NEW DELHI …. Respondent AND + ITA 215/2023 & CM APPL. 18200/2023 HYATT INTERNATIONAL-SOUTHWEST ASIA LTD. …. Appellant v. ACIT (INTERNATIONAL TAXATION)- 2 (1) (1) NEW DELHI …. Respondent 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. CORAM HON’BLE MR JUSTICE VIBHU BAKHRU HON’BLE MR JUSTICE AMIT MAHAJAN JUDGMENT VIBHU BAKHRU, J. INTRODUCTION 1.Hyatt International Southwest Asia Ltd. (hereafter ‘the Assessee’) is a company incorporated under the Companies Law, Dubai International Financial Centre (DIFC) Law No. 3 of 2006 in the United Arab Emirates (hereafter ‘UAE’). It is a tax resident of the UAE under Article 4 of the Agreement between Government of India and the UAE for Avoidance of Double Taxation (hereafter ‘the DTAA’). 2.The Assessee has filed the present appeals under Section 260A of the Income Tax Act, 1961 (hereafter ‘the Act’) impugning the orders passed by the Income Tax Appellate Tribunal (hereafter ‘the Tribunal’) in the respective appeals preferred by the Assessee against the orders passed by the Assessing Officer (hereafter ‘theAO’) under Section 143(3) of the Act read with Section 144C of the Act in respect of the Assessment Years 2009-2010 to 2017-2018. 3.The appeals against the order dated 21.11.2012 passed by the AO in respect of the Assessment Year 2009-10; order dated 28.11.2013 in respect of Assessment Year 2010-11; order dated 28.01.2015 in respect of Assessment Year 2011-12; and order dated 18.12.2015 in respect of Assessment Year 2012-13, were subject matter of appeals in ITA 579/Del/2013, ITA 779/Del/2014, ITA 1762/Del/2015 and ITA 957/Del/2016. These appeals were disposed of by the Tribunal by a common order dated 04.12.2019. The Assessee has filed appeals ITA No. 216/2020, ITA No. 217/2020, ITA No. 218/2020 and ITA No. 219/2020 impugning the said common order. 4.The Assessee has filed ITA 140/2021 impugning an order dated 12.03.2021 passed by the learned Tribunal in ITA No. 727/Del/2017. The said appeal was in turn preferred by the Assessee against the order dated 24.11.2016 passed by the AO under Sections 143(3) and 144C of the Act in respect of the Assessment year 2013-2014. The Tribunal Signature Not Verified 4.The Assessee has filed ITA 140/2021 impugning an order dated 12.03.2021 passed by the learned Tribunal in ITA No. 727/Del/2017. The said appeal was in turn preferred by the Assessee against the order dated 24.11.2016 passed by the AO under Sections 143(3) and 144C of the Act in respect of the Assessment year 2013-2014. The Tribunal Signature Not Verified disposed of the Assessee’s appeal by following the common order dated 04.12.2019 passed in the appeals relating to Assessment Years 2009-2010 to 2012-13, which are subject matter of the above-captioned appeals (ITA 216/2020 to 219/2020). 5.The Assessee has filed ITA 36/2022 impugning an order dated 27.07.2021 passed by the learned Tribunal in ITA No. 6179/Del/2017 in respect of Assessment Year 2014-15. In terms of the said order, the Tribunal had rejected the assessee’s appeal following its order in ITA 727/Del/2017, which in turn had followed the common order dated 04.12.2019 passed by the Tribunal in appeals in respect of the Assessment Years 2009-10 to 2012-13. 6.In ITA 201/2023 and ITA 215/2023, the assessee appeals the common order dated 20.12.2022 passed by the Tribunal in ITA No. 6363/Del/2019 and ITA No. 712/Del/2021 in respect of the Assessment Years 2016-17 and 2017-18 respectively. The order dated 20.12.2022 also rejects the assessee’s appeal by following the earlier order dated 04.12.2019. 7.These appeals involve common questions of law and, essentially, assail the aforementioned common order dated 04.12.2019 (hereafter also referred to as ‘the impugned order’) passed by the learned Tribunal, which also is the foundation of the orders passed by the Tribunal that are the subject matter of ITA 36/2022, ITA 140/2021, ITA 201/2023 and ITA 215/2023. QUESTIONS OF LAW 8. This Court by a common order dated 14.03.2023 in ITA 216/2019, ITA 217/2020, ITA 218/2020, ITA 219/2020, ITA 140/2021 and ITA 36/2022, had re-stated the questions that arise for consideration in these appeals as under: “(i) Whether the Tribunal misdirected itself both in law and on facts in holding that service charges received by the Appellant under the various SOSA Agreements were taxable as royalty? on facts in holding that service charges received by the Appellant under the various SOSA Agreements were taxable as royalty? (ii) Whether the Appellant has Permanent Establishment in India within the meaning of the Double Taxation Avoidance Agreement? India within the meaning of the Double Taxation Avoidance Agreement? (iii) Whether the findings recorded by the Tribunal, in paragraphs 56, 57 and 59 are perverse and contrary to the terms of the Strategic Oversight Services Agreement (SOSA)? paragraphs 56, 57 and 59 are perverse and contrary to the terms of the Strategic Oversight Services Agreement (SOSA)? (iv) 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?”Appellant, having regard to the fact that it has incurred losses in the relevant financial years?” FACTUAL CONTEXT 9.This Court shall consider the facts relating to the assessment for the Assessment Year 2009-10 which is the subject matter of ITA No.216/2020 for the purpose of addressing the aforesaid questions. 10.The aforesaid questions arise in the context of the following facts. On 04.09.2008, the Assessee entered into two Strategic Oversight Services Agreements (hereafter ‘the SOSA’) with Asian Hotels Limited, India. One in respect of a hotel (Hyatt Regency, Delhi – hereafter ‘the Hotel’) owned by Asian Hotels Limited, in Delhi, and the other in respect of a hotel located at Mumbai. Both the SOSAs’ are similarly worded. FACTUAL CONTEXT 9.This Court shall consider the facts relating to the assessment for the Assessment Year 2009-10 which is the subject matter of ITA No.216/2020 for the purpose of addressing the aforesaid questions. 10.The aforesaid questions arise in the context of the following facts. On 04.09.2008, the Assessee entered into two Strategic Oversight Services Agreements (hereafter ‘the SOSA’) with Asian Hotels Limited, India. One in respect of a hotel (Hyatt Regency, Delhi – hereafter ‘the Hotel’) owned by Asian Hotels Limited, in Delhi, and the other in respect of a hotel located at Mumbai. Both the SOSAs’ are similarly worded. 11.For the purpose of the present appeals, this Court would refer to the SOSA entered into in respect of the Hotel (the hotel located at Delhi - Hyatt Regency). In terms of the SOSA, the Assessee agreed to provide strategic planning services and “Know-How” to ensure that the Hotel is developed and operated as an efficient and a high quality international full-service hotel. 12.Asian Hotels Limited was thereafter reorganized and its name was subsequently changed to Asian Hotels (North) Limited (hereafter ‘the Owner’). The said company continued to own the Hotel. On 18.07.2010, the SOSA was partially amended. 13.The Assessee filed a return of income for the Assessment Year 2009-10 (previous year 2008-09) declaring ‘Nil’ income and claiming refund of ₹87,99,091/-. The said return was picked up for scrutiny and the AO issued a notice dated 20.08.2010 under Section 142(1) read with Section 143(3) of the Act along with a questionnaire, to the Assessee. The Assessee responded to the said notice by a letter dated 25.08.2011 and furnished a brief note. 14.According to the Assessee, its income was not taxable under the Act as there was no specific Article under the DTAA for Taxing Fees for Technical Services. The Assessee further claimed that it had no fixed place of business, office or branch 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 and therefore, the Assessee did not have the ‘Permanent Establishment’ (hereafter ‘PE’) in India as contemplated under Article 5 of the DTAA. The Assessee claimed that its business income was not taxable under Article 7 of the DTAA as well. 15.During the course of the assessment proceedings, the Assessee was called upon to provide certain details and information. In response to the said notice, the Assessee furnished a note explaining why its receipts are not taxable as Fees for Technical Services (FTS). The Assessee also furnished a summary on the nature of the services provided by it to the Owner during the relevant Assessment Year. The Assessee also provided details of the visits of its employees to India in connection with SOSA during the relevant Previous Year. In all, the Assessee’s six employees had stayed in India during the relevant period for an aggregate period of 158 days (one hundred and fifty-eight days). The Assessee also provided the job description of its employees who had visited India during the relevant period. ASSESSMENT ORDER 16.The AOfurnished a draft assessment order dated 28.12.2011 holding that the Assessee was “actually operating the hotels belonging to the owners in each and every manner”. The AO held that there was continuous presence of the Assessee through its employees or other personnel throughout the year. The AO concluded that 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. ASSESSMENT ORDER 16.The AOfurnished a draft assessment order dated 28.12.2011 holding that the Assessee was “actually operating the hotels belonging to the owners in each and every manner”. The AO held that there was continuous presence of the Assessee through its employees or other personnel throughout the year. The AO concluded that 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. 17.The AO held that the Assessee’s activities constituted (i) business connectionunder Section 9(1)(i) of the Act; (ii) PE under Article 5 of the DTAA; (iii) royalties and FTS under Section 9(1)(vi)/(vii) of the Act; and, (iv) royalties under Article 12 of the DTAA. The AO did not accept that the Assessee did not have a PE in India. According to the AO, the 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. The AO held that although the Assessee had restricted the stay of its employees in India below the specified period but, it was clear that the premises were available to the Assessee for the entire duration. And, that it had carried out its activities for performing its obligations under the SOSA from the said premises. The AO also held that the Assessee was providing Central Reservation System (CRS) services, which also constituted fixed place of business. In addition, the AO held that the Assessee had a PE in terms of Article 5(2) of the DTAA. The AO observed that the employees of the Assessee were physically present in each month of the Previous Year and that it was of no relevance that the employees came and left during the said period. The activities undertaken by them pursuant to the SOSA continued throughout the year. The AO held that a part of the activities also qualified as the fees to be treated as royalties. 18.The AO computed the tax payable by the Assessee at 10% of the gross receipts. It held that the royalties and FTS relatable to the PE were required to be taxedon net basis in accordance with Article 7 of the DTAA and Section 44 DA of the Act. However, since no information was provided by the Assessee in regard to the computation of taxable profits attributable to its PE in India, the AO assumed that the Assessee’s net profit would be 25% of the receipts and resultantly, the tax would be payable at 10% of the gross receipts. ASSESSEE’S OBJECTIONS 19.On 22.01.2012, the Assessee filed its objections to the draft assessment order issued under Section 143(3) of the Act read with Section 144C of the Act with the Dispute Resolution Panel (hereafter ‘theDRP’). The Assessee’s objections were founded on four grounds. 19.1First, that the AO had erred in facts and in law in holding that the Assessee had a PE in India under Article 5(1) and Article 5(2) of the DTAA. 19.2 Second, that the AO had disregarded the audited financial statement (on global basis), which disclosed that the Assessee had declared losses. And, the AO had arbitrarily adopted 25% of the gross receipts as taxable income attributable to the Assessees’s alleged PE in India. 19.3Third, that the payment of ₹8,51,41,569/- received from the Owner under the SOSA was primarily for consultancy services and the AO had erred in treating the same as ‘royalty’ under the DTAA on an erroneous assumption that it relates to the provisions of Know-how, skill, experience, commercial information and other intangibles. 19.4Fourth, that the AO had erred in not granting an opportunity to the Assessee to clarify as to why the fees for consultancy services did not constitute payment for intangibles to be categorized as royalty. receipts as taxable income attributable to the Assessees’s alleged PE in India. 19.3Third, that the payment of ₹8,51,41,569/- received from the Owner under the SOSA was primarily for consultancy services and the AO had erred in treating the same as ‘royalty’ under the DTAA on an erroneous assumption that it relates to the provisions of Know-how, skill, experience, commercial information and other intangibles. 19.4Fourth, that the AO had erred in not granting an opportunity to the Assessee to clarify as to why the fees for consultancy services did not constitute payment for intangibles to be categorized as royalty. 20.The DRP rejected the aforesaid objections. Thereafter, on 21.11.2012, the AO passed the Final Assessment Order. TRIBUNAL’S ORDER 21.The Assessee appealed the Assessment Order dated 21.11.2012 before the Tribunal. The Tribunal examined the terms of the SOSA and rejected the Assessee’s contention that it did not have a PE in India. 22.The Tribunal held that the amounts received by the Assessee were royalties. 23.The Tribunal referred to the decision of the Supreme Court in the case of Formula One World Championship Limited. v. Commissioner of Income Tax, International Taxation-3, Delhi & Anr[1]and held that 1(2017) 15 SCC 602 the Assessee had a fixed place of business in India and therefore, is a PE in terms of Article 5(1) of the DTAA. 24.The operative parts of the impugned order dated 04.12.2019 passed by the Tribunal are set out below: “56. We find that from the concurrent reading of the Strategic Oversight Agreements (SOA), the assessee has been technically operating the hotel belonging to the owners namely, Asian Hotels Ltd. (AHL) through the employees who are recruited by them. The hotel premises have been at the disposal of the assessee during their period of stay. The employees has stayed for a period of 158 days as per the assessee in India while rendering the services. In terms of OECD commentary on Article 5(1) the assessee can be said to be having a permanent establishment owning to existence of a place of business i.e. a facility such as premises, and that place was fixed and established as a distinct place with certain degree of permanence and the foreign enterprise (the assessee) is carrying the business through this fixed place i.e. the premises of the hotel. The assessee can be said to be dependent on the personnel to conduct the business of the foreign enterprise in the State in which the fixed place situated. The assessee is found to be meeting all these requirements stipulated in the OECD commentary under para 2. Further, the assessee is also found to be meeting the requirements specified in para 4 of the OECD MC that the term place of business covers in the premises, facilities, installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. In the instant case, the assessee has been using permanently the premises belonging to the hotel for doing their business. The place of business may also exist where no premises are available required for carrying on the business of the enterprise. It is sufficient to have certain amount of space at their disposal to conduct their business operations. Further, the place of business may also be situated in the business facilities of any other enterprise too. Thus, it can be said that the assessee who is running the business operations at the premises available for constant disposal in the hotel can be said to be a place of business. The availability of an office premises to a foreign company in the premises of the contracting party in order to ensure that both the parties comply with their obligations to the contract for a long period of time will constitute a permanent establishment. As long as, the premises is at the disposal of the assessee and having the right to use the premises for the purpose of the assessee’s business on behalf of the party to the agreement can constitute a fixed place PE. We also find that the physical criteria (existence of a geographical location), subject to criteria (right to use the place) and the functional criteria (carrying on the business through that place) as mentioned in the OECD principles with relation to the existence and determination of PE as held by the Mumbai Tribunal in the case of Air Linese Rotables Vs. DIT 131 TTJ 385 have been found to be met by the assessee before us, so as to treat them as having a PE in India. Though, it was argued that the assessee has got no right to use the premises and no premises of AHL was at their disposal, we find on going to the agreements and the work executed, that the premises of AHL was very much at the disposal of the assessee for carrying on their business. Thus, we find that the assessee has met the twin criterion of existence of a fixed place of business and carrying out of business from such fixed place of business as enunciated of the judgment of Hon’ble Supreme Court in the case of Morgan Stanley & Co. 292 ITR 416 (SC). The claim of the assessee that they did not have a place at their disposal cannot be accepted in view of the judgment of Hon’ble Supreme Court in the case of Formula One World Championships Ltd. 394 ITR 80, in the case of Azadi Bachao Andolan and also E-funds IT Solutions 86 Taxman 240. The facts on record undisputedly prove that the premises AHL are at the disposal of the assessee for conduct of their business. While coming to the issue of “at the disposal” in the premises is available for the assessee for running of their business even for a limited time it constitutes a PE. Further, we have examined the various clauses of SOA dated 04.09.2008. The SOA itself is for a period of 20 years when an agreement is made for such a long period of 20 years, whether it can be said to be a consultancy provided or use of rights whether intellectual or technical, or know-how or patent or license or otherwise is also examined. 57. The SOA defines that the owner AHL consents to the ownership management, licensing and operation by HISWA (the assessee). The SOA also clearly mentions that the HISWA will have complete control and discretion with regard to all aspects of operations of the hotel. It also mentions that the right of the owner AHL to receive financial returns from the operation of the hotel shall not deemed to give the owner any right or obligations with respect to the operation or management of the hotel. These clauses clearly prove that the HISWA, the assessee is totally involved in the maintenance and operations of running the hotel even allowing the owner a very minimal role. This also clearly establishes that the hotel premises were at the disposal of the assessee in view of the length and duration of the use of the premises. Even taking into consideration, the permanency test and the temporal aspects detailed by the Hon’ble Supreme Court in the case of Formula One World Championships prove that the assessee has got fixed place of business and can be considered having a permanent establishment in view of Article 5(1) of the DTAA. 58. With regard to the permanent establishment it has been examined whether the assessee has got PE in relation to Article 5(1) or Article 5(2) of the DTAA. Article 5(2)(i) stipulates a PE in case of the furnishing of services including consultancy services provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any 12 months period. Thus, the period of stay stipulated only in relation to invocation of Article 5(2) but not with regard to Article 5(1) of DAA. Thus, we hold that based on the DAA of Indo-UAE under Article 5(1), the assessee is having a permanent establishment in India. 59. Further, various clauses of SOA such as the AHL cannot unreasonably withheld or delay the appointment of GM and appointment of employees as full time members of executive staff goes to prove the extent of control and management of HISWA in the affairs of the running of the business. The agreement provides absolute control to the assessee over the day to day management administration finance and all other sphere of the running of the hotel including opening and operating of the bank accounts. Thus, it cannot be held that the assessee is only giving consultancy services to the hotel. Further, Section 2 pertaining to the control of strategic planning of the operation indicates that strategic service provider will have complete control and discretion in formulating and establishing the overall general and strategic plan with regard to branding, marketing, product development, day to day onsite operations. Such clauses which accord the assessee, HISWA complete control and discretion even at the exclusion of the AHL can only lead to a conclusion that the assessee is into full fledged operation and management of the hotel. The operations such as guest admission, charges for rooms, operating of bank account, overseeing, implementation and administration of the same on day to day account, recruiting, interviewing, hiring, establishing Hyatt operating standards, establishing purchasing policies with regard to selection of goods, supplies, food, beverages including vermin extermination, security, garbage removal are all managed and operated by the assessee. All these operations are controlled through the General Manager who in turn reports to the assessee in all aspects. 60. Based on the clauses of the Strategic Service Agreement and Strategic Oversight Agreements, we hold that the revenue's earned by the assessee are taxable under Article 12 of the DTAA. Regarding the determination of the profit, taken up at ground no. 4 by the assessee, we hereby hold that the taxable profits may be computed in accordance with the provisions of Section 44DA of Indian Income Tax Act and Article 12 of the Indo UAE, DTAA. During the arguments, it was also submitted that the assessee has incurred losses in the assessment year 2008-09. The assessed be given an opportunity of submitting the working of apportionment of revenue, losses etc on financial year basis with respect to the work done in entirety by furnishing the global profits earned by the assesse, so that the profits attributable to the work done by the PE can be determined judiciously. The same may be considered while determining the taxable profits in India in accordance with the provisions of Section 90(2) of Indian Income Tax Act, 1961.” SUBMISSIONS 25.At the outset, Mr. S. Ganesh, learned senior counsel appearing for the Assessee submitted that the conclusions of the AO and the Tribunal were premised on the reading of the SOSA and therefore, the questions whether the payments received by the Assessee were taxable as royalty and whether the Assessee had a PE in India, were required to be determined on a careful reading of the SOSA and the terms of the DTAA. SUBMISSIONS 25.At the outset, Mr. S. Ganesh, learned senior counsel appearing for the Assessee submitted that the conclusions of the AO and the Tribunal were premised on the reading of the SOSA and therefore, the questions whether the payments received by the Assessee were taxable as royalty and whether the Assessee had a PE in India, were required to be determined on a careful reading of the SOSA and the terms of the DTAA. 26.He submitted that the Tribunal had grossly erred in proceeding on the basis that the Assessee had “complete control and discretion with respect to all aspects or operations of the hotel” and that “was totally involved in the maintenance and operation of running hotels even allowing the owner a very minimal role”. He contended that the said conclusion disregards and ignores a crucial fact that the Owner had simultaneously while entering into the SOSA with the Assessee also entered into a Hotel Operation Service Agreement (hereafter ‘HOSA’) with Hyatt India Consultancy Pvt. Ltd. (hereafter ‘Hyatt India’) whereby Hyatt India had agreed to provide day-to-day management assistance and render technical assistance for the operation of the Hotel. He submitted that the SOSA could not be read in isolation and was required to be read in conjunction with the HOSA. This would clearly establish that the Assessee was not in control of the day-to-day management, administration, finance and other aspects of the Hotel. He submitted that the findings in paragraphs 57 and 58 of the impugned order were thus, perverse. 27.Next, he contended that the Tribunal’s finding that the Assessee’s receipts under the SOSA were royalty and taxable under Article 12 of the DTAA was rendered without any reasoning and discussion. He submitted that the Tribunal had made no attempts to indicate how the requirements of Article 12 of the DTAA were satisfied in the present case. He contended that the Tribunal’s finding that the Assessee’s receipts were taxable under Article 12 of the DTAA were also inconsistent with the finding regarding Article 5(1) of the DTAA. He contended that the findings that the Assessee had a PE under Article 5(1) of the DTAA “was superseded, swept away and nullified” by the Tribunal’s findings in regard to the Assessee’s revenue being taxable under Article 12 of the DTAA. 28.He submitted that in terms of the SOSA, the Assessee had permitted the Owner to use its knowledge and information for the purpose of operation of the Hotel. Therefore, the permitted use of knowledge and information were strictly incidental and ancillary to rendering services by the Assessee. He submitted that it is settled position that payments for service, where the use of intellectual property is only incidental, cannot be considered as royalty. 29.He referred to the decision of the Supreme Court in Formula One World Championship Ltd.[1]and the decision of the Coordinate Bench of this Court in Director of Income Tax v. Sheraton International Inc.[2]in support of the said contention. 28.He submitted that in terms of the SOSA, the Assessee had permitted the Owner to use its knowledge and information for the purpose of operation of the Hotel. Therefore, the permitted use of knowledge and information were strictly incidental and ancillary to rendering services by the Assessee. He submitted that it is settled position that payments for service, where the use of intellectual property is only incidental, cannot be considered as royalty. 29.He referred to the decision of the Supreme Court in Formula One World Championship Ltd.[1]and the decision of the Coordinate Bench of this Court in Director of Income Tax v. Sheraton International Inc.[2]in support of the said contention. 30.Mr. Sanjay Kumar, learned counsel appearing for the Revenue countered the aforesaid submissions. He referred to Sections 1 and 2 of Article III of the SOSA and submitted that the said terms clearly substantiated that the Assessee was not only having a fixed place of business in the Hotel premises but was controlling its entire affairs. He contended that a reading of the SOSA made it clear that the Owners were only for namesake and that the entire control of the Hotel rested with the Assessee. He submitted that the Assessee’s contention that it only issues guidelines, is misleading. He contended that the guidelines would remain guidelines only if the Owner had the discretion not to accept the same. He submitted that the terms of the SOSA clearly indicated that the Owner could not reject or defy any guidelines or directions issued by the Assessee in respect of running the Hotel. He submitted that the Assessee’s contention that the management services were provided by a separate entity was not tenable. He pointed out that Section 5 of Article III of the SOSA stipulated that all debts and liabilities to third persons in the course of operation of the guidelines would be that of the Owner and the Assessee would not be liable for the same. He contended that this clearly indicated that the Assessee had complete control over the Owner in the business of the Hotel. Such terms had the potential to affect the profit making capability of the 22009 SCC OnLine Del 4231 Indian entity which in turn adversely affected the interest of the Revenue. Similarly, he referred to other clauses, which granted immunity to the Assessee in respect of any matter relating to the hotel or performance of the SOSA. He submitted that there is no dispute that the Assessee had sent employees to India and they were working from the Hotel premises, thus, the Assessee had a principal place of business in the Hotel premises at its disposal. 31.He also relied on the decision of the Supreme Court in Formula One World Championship Ltd.[1]and submitted that the degree of control depended upon the type of activity that the taxpayer carried on. It is therefore not necessary that the Assessee is able to exclude others from entering the said place of business. He submitted that in the given facts, the finding that the Assessee had a fixed place of business in the Hotel premises could not be faulted. 32.Next, he submitted that the provisions of Article 12 of the DTAA is required to be read in conjunction with Article 7 of the DTAA. He submitted that the consideration received by the Assessee was clearly in the form of ‘royalties’ as defined under Article 12(3) of the DTAA. Since, the Assessee also had a PE in India, the application of Articles 12(1) and 12(2) of the DTAA would stand excluded and the provisions of Article 7 of the DTAA would apply in respect of such income by virtue of Article 12(4) of the DTAA. Accordingly, the Assessee’s income was required to be computed under the provisions of Section 44A of the Act. REASONS &CONCLUSION Re: Question No. (iv) 32.Next, he submitted that the provisions of Article 12 of the DTAA is required to be read in conjunction with Article 7 of the DTAA. He submitted that the consideration received by the Assessee was clearly in the form of ‘royalties’ as defined under Article 12(3) of the DTAA. Since, the Assessee also had a PE in India, the application of Articles 12(1) and 12(2) of the DTAA would stand excluded and the provisions of Article 7 of the DTAA would apply in respect of such income by virtue of Article 12(4) of the DTAA. Accordingly, the Assessee’s income was required to be computed under the provisions of Section 44A of the Act. REASONS &CONCLUSION Re: Question No. (iv) 33.One of the principal contentions advanced by the Assessee is that even if it is assumed that the Assessee has a PE in India, there is no question of attributing any amount as income chargeable to tax under the Act to its PE, as it has incurred a loss on an entity level (global basis). According to the Assessee, income chargeable to tax under the Act could be attributed to its PE in India only if the Assessee had made profit on an entity level. Concededly, the said issue is covered in favour of the Assessee by a decision of the Coordinate Bench of this Court in Commissioner of Income Tax (International Taxation)-2 v. M/s Nokia Solutions and Networks OY[3]. However, we have some reservations regarding the said view. 34.The 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. It is, thus, possible that an Assessee makes a net loss at an entity level on account of losses suffered in other jurisdictions, which is partly offset by profits arising from India. In these circumstances, 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. This aspect 3(2023) 455 ITR 157 was not deliberated in the case of Commissioner of Income Tax (International Taxation)-2 v.Nokia Solutions and Networks OY.[3] 35.This Court was of the view that the fourth question as raised by the Assessee ought to be referred to a larger Bench. This was recorded by this Court in an order dated 14.03.2023. However, the learned senior counsel appearing for the Assessee had requested this Court to consider the other questions and had asserted that the Assessee would not press the fourth question, if the Assessee’s appeals are disposed of in its favour on the basis of the other questions as framed. The learned counsel for the parties had also agreed that if the appellant succeeded before this Court in respect of the first three questions, the Assessee would finally give-up the fourth question without any recourse. 36.In view of the above, this Court is confining further deliberations to the first three questions as set out above. Indo-UAE DTAA 37.The principal questions to be addressed is whether the Assessee’s revenue receipts in terms of the SOSA are taxable as royalty and whether the Assessee has a PE in India within the meaning of the DTAA. 38.Before proceeding further, it would be relevant to refer to the DTAA. Article 4 of the DTAA defines the term “resident of a Contracting State”. In terms of Article 4(1)(b) of the DTAA, a company which is incorporated in UAE and is managed and controlled wholly in UAE would be a resident of UAE. The Assessee had produced a Tax Residency Certificate and there is no dispute that the Assessee is a resident of UAE in terms of the DTAA. Article 5 of the DTAA defines the expression ‘Permanent 39.Article 5 of the DTAA defines the expression ‘Permanent Establishment’. Article 7 of the DTA contains provisions regarding taxability of business profits. Article 12 of the DTAA defines the term ‘Royalties’ and its taxability under the DTAA. 38.Before proceeding further, it would be relevant to refer to the DTAA. Article 4 of the DTAA defines the term “resident of a Contracting State”. In terms of Article 4(1)(b) of the DTAA, a company which is incorporated in UAE and is managed and controlled wholly in UAE would be a resident of UAE. The Assessee had produced a Tax Residency Certificate and there is no dispute that the Assessee is a resident of UAE in terms of the DTAA. Article 5 of the DTAA defines the expression ‘Permanent 39.Article 5 of the DTAA defines the expression ‘Permanent Establishment’. Article 7 of the DTA contains provisions regarding taxability of business profits. Article 12 of the DTAA defines the term ‘Royalties’ and its taxability under the DTAA. 40.Paragraph (1) of Article 22 expressly provides that subject to the provisions of paragraph (2) of the DTAA, items of incomes of a resident of a Contracting State, whenever arising, which are not expressly dealt with the foregoing articles, that is, under Articles 1 to 22 of the DTAA, would be taxable only in the State where the taxpayer is resident. 41.Paragraphs (1) and (2) of Article 5, Article 7, Article 12 and Article 22 of the DTAA are relevant and are set out below: “Article 5 - Permanent establishment 1. For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term “permanent establishment” includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; place of extraction of natural resources; (g) a farm or plantation; (h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months; supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months; (i) the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. *** *** *** Article 7 – Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. Article 7 – Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State. establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State. 4. Insofar as it has been customary in a Cont1·acting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the methods of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the methods of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for the enterprise. establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for the enterprise. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for the enterprise. establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. *** *** *** Article 12 – Royalties 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. a resident of the other Contracting State may be taxed in that other State. 2.