Typically, Indian hotel chains have tie-ups with international hotel chains. Under such collaboration, any of the following services could be procured: design, layout and architectural planning of the hotel; operation and management of the hotel; and global marketing, publicity and sales promotion.
Of these, the arrangements for global marketing and sales promotion enable Indian hotel chains to gain high visibility worldwide, which would be a big challenge in the absence of such a tie-up.
A 30 January decision of the Delhi high court dealt with taxability of the fees payable for global publicity and marketing services.
Sheraton International Inc., a company incorporated in the US and engaged in the business of providing services to hotels across the world, had entered into various agreements with ITC Ltd for providing services to certain ITC hotels. The services broadly included publicity, advertisement and sales, including reservation services. Under the agreement, Sheraton was not only to provide marketing services but on an ancillary basis, had also granted free use of its trademark/brand name. In addition, the ITC hotels were also made part of certain schemes introduced by Sheraton for promoting global sales. Sheraton was entitled to 3% of the room sales as payment.
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In respect of the years prior to the notification of the India-US tax treaty in 1991, the fee received by Sheraton was taxed as “business income” on which taxes were withheld. Subsequent to the treaty, Sheraton claimed that fees received were not taxable in India as it had no permanent establishment in India. The revenue authorities held that based on the terms and conditions of the agreement, the fees received by Sheraton were in relation to technical and consultancy services being made available by Sheraton. Accordingly, the revenue authorities held that fees were taxable as royalty/fees for technical services (FTS) under the Income-tax Act as well as royalty/fees for included services (FIS) under the tax treaty.
The Delhi tribunal in its order decided the appeal in favour of Sheraton, holding that fees/contribution received by Sheraton were in the nature of business income not taxable in India.
The revenue authorities contended that Sheraton had acquired vast knowledge and experience in the hotel business.
Accordingly, such experience in the hospitality industry was in the nature of information pertaining to industrial, commercial and scientific experience and payments received for it were chargeable to tax under the Act as well as the treaty.