Our Luxembourg company collects a share of an Indian hotel's revenue to fund worldwide marketing, all of it done abroad. Is that money taxable in India?
Yes. The Authority ruled that the contributions were taxable in India. It refused to treat them as reimbursements: the 1.5 per cent of gross hotel revenue and the 3.4 per cent of Marriott Rewards room charges were contractual charges with no direct nexus to the applicant's actual costs, the programmes benefited the whole chain, and any excess was retained. There was a business connection under section 9(1)(i), the twenty-five year participation agreement showing a real and intimate relation with the owner's Indian hotel and continuity rather than an isolated dealing. The services were also managerial and consultancy services within Explanation 2 to section 9(1)(vii), and the exception for services used outside India did not apply.
Pronounced by the Authority for Advance Rulings (Syed Shah Mohammed Quadri, J. (Chairman), A. S. Narang and A. Sinha, Members) on 2006-11-27, reported as [2007] 288 ITR 534 (AAR). It bears on section 9(1)(i), section 9(1)(vii), section 5(2) of the Income Tax Act 1961, in TDS Defaults and How Tax Law Is Read matters.
The one to read when a group marketing or advertising fund is billed to an Indian member and the money is called a reimbursement. Two things do the work. First, a payment is a reimbursement only if it can be tied to the payee's actual cost; a formula keyed to the payer's turnover is a price, whatever the contract calls it. Second, the applicant's own presence abroad did not save it, because the business connection was found in the relation between what it did abroad and the owner's hotel business here. Note that the ground has moved: the Authority proceeded on the footing that there was no India-Luxembourg treaty, and one has been in force in India since 1 April 2010, so a Luxembourg claimant today has articles 7 and 12 to run.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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The applicant was a company in Luxembourg, a subsidiary of International Hotel Licensing Company Investment S.A.R.L. It ran the international advertising, marketing, promotion and sales programmes of the Marriott chain: buying advertising space in foreign magazines, newspapers and electronic media, running promotional campaigns outside India and administering the Marriott Rewards guest loyalty scheme. Under an international marketing programme participation agreement of 6 September 2005, running twenty-five years and extendable by ten, Unitech Hospitality Ltd of Noida, the Indian hotel owner, participated in those programmes. It contributed 1.5 per cent of the hotel's annual gross revenues net of taxes towards international marketing and advertising expenditure, and 3.4 per cent of the room charges of Marriott Rewards members towards the special programmes. Only some of the chain's hotels contributed, though all benefited, and any surplus was not refunded. The applicant asked whether the amounts received from the Indian owner in connection with marketing and business promotion carried on outside India were taxable in India.
The Authority ruled that the amounts were taxable in India. It rejected the characterisation of the contributions as reimbursements of expenditure, because there was no direct nexus between what the applicant actually spent on any hotel and what each participating hotel paid; the percentages were contractual charges, the programmes served the whole chain rather than the Indian owner alone, and excess contributions were kept. It held that the applicant had a business connection in India: a real and intimate relation existed between the marketing activities carried on outside India and the owner's hotel activities in India, that relation contributed to the applicant's earning of income, and a twenty-five year agreement showed continuity rather than an isolated transaction. It also held the receipts to be fees for technical services within Explanation 2 to section 9(1)(vii), the services being managerial and consultancy in nature, and the exception for services utilised in a business carried on outside India inapplicable because the owner's hotel business was in India. There being no agreement between India and Luxembourg, domestic law governed.
Three steps. On reimbursement the Authority applied a test of nexus rather than of profit. A payment is a reimbursement when it restores to the payee what the payee has actually laid out for the payer. Here the applicant spent on a worldwide programme and recovered by formulae fixed to each participant's own revenue, so the amount received bore no relation to any cost incurred for the Indian hotel; that only some of the chain's hotels contributed while all enjoyed the benefit, and that surpluses were not returned, confirmed that the contributions were the price of participation. On business connection it took the familiar three elements - a real and intimate relation between the activity outside India and the activity within, a contribution by that relation to the earning of income, and continuity of the relationship - and found all three in the participation agreement, whose twenty-five year term put isolated dealing out of the question. It also declined to accept that everything happened abroad: advertisements placed in magazines carried on Indian airlines circulated in India, and foreign channels carrying the advertising were watched here, so the activity had an extension into India. On the alternative characterisation the Authority read Explanation 2 to section 9(1)(vii) as covering consideration for managerial and consultancy services, which advertising, marketing, promotion and sales programmes are, and held the utilisation exception unavailable because the business for which the services were used was in India.
The real and intimate relation exists between the business activities carried on by the applicant outside India and the activities of the owner in India.
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Handle my notice → Ask a CA on WhatsAppYes. The Authority ruled that the contributions were taxable in India. It refused to treat them as reimbursements: the 1.5 per cent of gross hotel revenue and the 3.4 per cent of Marriott Rewards room charges were contractual charges with no direct nexus to the applicant's actual costs, the programmes benefited the whole chain, and any excess was retained. There was a business connection under section 9(1)(i), the twenty-five year participation agreement showing a real and intimate relation with the owner's Indian hotel and continuity rather than an isolated dealing. The services were also managerial and consultancy services within Explanation 2 to section 9(1)(vii), and the exception for services used outside India did not apply. This was decided by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman), A. S. Narang and A. Sinha, Members) and bears on section 9(1)(i), section 9(1)(vii), section 5(2) of the Income Tax Act 1961. It is reported as [2007] 288 ITR 534 (AAR). The one to read when a group marketing or advertising fund is billed to an Indian member and the money is called a reimbursement. Two things do the work. First, a payment is a reimbursement only if it can be tied to the payee's actual cost; a formula keyed to the payer's turnover is a price, whatever the contract calls it. Second, the applicant's own presence abroad did not save it, because the business connection was found in the relation between what it did abroad and the owner's hotel business here. Note that the ground has moved: the Authority proceeded on the footing that there was no India-Luxembourg treaty, and one has been in force in India since 1 April 2010, so a Luxembourg claimant today has articles 7 and 12 to run. If it applies to you, the first step is this: If you are calling a group recharge a reimbursement, produce the payee's actual costs and show the link to the amount billed; a turnover-based formula will not pass.
The applicant was a company in Luxembourg, a subsidiary of International Hotel Licensing Company Investment S.A.R.L. It ran the international advertising, marketing, promotion and sales programmes of the Marriott chain: buying advertising space in foreign magazines, newspapers and electronic media, running promotional campaigns outside India and administering the Marriott Rewards guest loyalty scheme. Under an international marketing programme participation agreement of 6 September 2005, running twenty-five years and extendable by ten, Unitech Hospitality Ltd of Noida, the Indian hotel owner, participated in those programmes. It contributed 1.5 per cent of the hotel's annual gross revenues net of taxes towards international marketing and advertising expenditure, and 3.4 per cent of the room charges of Marriott Rewards members towards the special programmes. Only some of the chain's hotels contributed, though all benefited, and any surplus was not refunded. The applicant asked whether the amounts received from the Indian owner in connection with marketing and business promotion carried on outside India were taxable in India. The matter was decided on 2006-11-27 by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman), A. S. Narang and A. Sinha, Members). On those facts the Advance Ruling held as follows. The Authority ruled that the amounts were taxable in India. It rejected the characterisation of the contributions as reimbursements of expenditure, because there was no direct nexus between what the applicant actually spent on any hotel and what each participating hotel paid; the percentages were contractual charges, the programmes served the whole chain rather than the Indian owner alone, and excess contributions were kept. It held that the applicant had a business connection in India: a real and intimate relation existed between the marketing activities carried on outside India and the owner's hotel activities in India, that relation contributed to the applicant's earning of income, and a twenty-five year agreement showed continuity rather than an isolated transaction. It also held the receipts to be fees for technical services within Explanation 2 to section 9(1)(vii), the services being managerial and consultancy in nature, and the exception for services utilised in a business carried on outside India inapplicable because the owner's hotel business was in India. There being no agreement between India and Luxembourg, domestic law governed.
Three steps. On reimbursement the Authority applied a test of nexus rather than of profit. A payment is a reimbursement when it restores to the payee what the payee has actually laid out for the payer. Here the applicant spent on a worldwide programme and recovered by formulae fixed to each participant's own revenue, so the amount received bore no relation to any cost incurred for the Indian hotel; that only some of the chain's hotels contributed while all enjoyed the benefit, and that surpluses were not returned, confirmed that the contributions were the price of participation. On business connection it took the familiar three elements - a real and intimate relation between the activity outside India and the activity within, a contribution by that relation to the earning of income, and continuity of the relationship - and found all three in the participation agreement, whose twenty-five year term put isolated dealing out of the question. It also declined to accept that everything happened abroad: advertisements placed in magazines carried on Indian airlines circulated in India, and foreign channels carrying the advertising were watched here, so the activity had an extension into India. On the alternative characterisation the Authority read Explanation 2 to section 9(1)(vii) as covering consideration for managerial and consultancy services, which advertising, marketing, promotion and sales programmes are, and held the utilisation exception unavailable because the business for which the services were used was in India. In the words reproduced by the source cited on this page: "The real and intimate relation exists between the business activities carried on by the applicant outside India and the activities of the owner in India."
It was decided by the Advance Ruling on 2006-11-27 and is reported as [2007] 288 ITR 534 (AAR). Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 9(1)(i), section 9(1)(vii), section 5(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Authority ruled that the amounts were taxable in India. It rejected the characterisation of the contributions as reimbursements of expenditure, because there was no direct nexus between what the applicant actually spent on any hotel and what each participating hotel paid; the percentages were contractual charges, the programmes served the whole chain rather than the Indian owner alone, and excess contributions were kept. It held that the applicant had a business connection in India: a real and intimate relation existed between the marketing activities carried on outside India and the owner's hotel activities in India, that relation contributed to the applicant's earning of income, and a twenty-five year agreement showed continuity rather than an isolated transaction. It also held the receipts to be fees for technical services within Explanation 2 to section 9(1)(vii), the services being managerial and consultancy in nature, and the exception for services utilised in a business carried on outside India inapplicable because the owner's hotel business was in India. There being no agreement between India and Luxembourg, domestic law governed. It arises in TDS Defaults and How Tax Law Is Read matters, on section 9(1)(i), section 9(1)(vii), section 5(2) of the Income Tax Act 1961, and was decided by Syed Shah Mohammed Quadri, J. (Chairman), A. S. Narang and A. Sinha, Members. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask whether excess contributions are refunded - retention was one of the facts that sank the reimbursement argument here. Check whether a treaty now covers the payee's State before relying on a ruling decided without one. Expect the utilisation exception in section 9(1)(vii)(b) to fail where the business served is in India, even if every service is performed abroad.
Superseded by amendment. The ruling rests on there being no agreement between India and Luxembourg. Checked the Income-tax Department's page for Luxembourg agreements: India and Luxembourg signed a comprehensive agreement at New Delhi on 2 June 2008, notified by Notification No. 78/2009, S.O. 2591(E) dated 12 October 2009, with effect in India from 1 April 2010. A Luxembourg applicant on these facts today would have the business profits and royalties and fees articles available, which this applicant did not. I also checked the current official text of section 9: Explanation 2A, substituted by the Finance Act 2020 with effect from 1 April 2022, now makes a significant economic presence a business connection, a further limb that did not exist in 2006. I found no High Court or Supreme Court decision dealing with this ruling. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Indian Kanoon does not print the AAR application number. The input note calls this the standard citation on global advertising and marketing-fund contributions; Indian Kanoon records no citing decisions, so I could not verify that. I did not check whether the ruling was carried to the High Court by writ petition. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority ruled that the amounts were taxable in India. It rejected the characterisation of the contributions as reimbursements of expenditure, because there was no direct nexus between what the applicant actually spent on any hotel and what each participating hotel paid; the percentages were contractual charges, the programmes served the whole chain rather than the Indian owner alone, and excess contributions were kept. It held that the applicant had a business connection in India: a real and intimate relation existed between the marketing activities carried on outside India and the owner's hotel activities in India, that relation contributed to the applicant's earning of income, and a twenty-five year agreement showed continuity rather than an isolated transaction. It also held the receipts to be fees for technical services within Explanation 2 to section 9(1)(vii), the services being managerial and consultancy in nature, and the exception for services utilised in a business carried on outside India inapplicable because the owner's hotel business was in India. There being no agreement between India and Luxembourg, domestic law governed.
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