The Authority for Advance Rulings (AAR) recently ruled[1] that the hotel property in India operated and managed by the applicant, FRS Hotel Group (Lux) S.a.r.l. (now FRHI Hotels & Resorts S.A.R.L) (Taxpayer) is its ‘fixed place’ permanent establishment (PE) in India. Accordingly, income of the Taxpayer attributable to such PE in India is taxable as its business income.

In India, income attributed to a PE of a non-resident is taxable at the rate of 40% (exclusive of any applicable surcharge and cess).


The Taxpayer is the principal operator of the FRHI Group outside of North America and provides comprehensive hotel management services including establishing hotel standards and policies, managing sales and marketing, handling centralised reservations, etc.

M/s Bengal Ambuja Housing Development Limited (BAHDL), the developer and owner of the ‘Swissotel Kolkata’, engaged the Taxpayer to manage and operate the said hotel as per the international standards applicable to ‘Swissotel’ properties. The Taxpayer was required to provide the following services:

  • Global reservation services: to facilitate reservation/ booking of rooms, etc;
  • Centralised services: to provide miscellaneous support services, including in areas of global sales and marketing, finance, HR, etc;
  • Corporate design and construction services: to advise on any capital improvements proposed by BAHDL in relation to the ‘Swissotel Kolkata’, including refurbishing, maintenance, etc; and
  • Purchasing services: to assist with the purchase of goods, supplies and services as may be required by BAHDL.

Importantly, the Taxpayer and BAHDL had entered into 5 agreements (Project Agreements) identifying the services the former was to render to the latter and the fees charged for the same.

The Taxpayer approached the AAR seeking a ruling on the taxability of consideration received for providing global reservation services.

Issue under Consideration

The key issue raised by the Taxpayer was whether the payments received by it in lieu of the global reservation services rendered to BAHDL are taxable in India as ‘royalty’ or as ‘fees for technical services’ (FTS) under Indian domestic tax laws read with Article 12 of the India – Luxembourg double tax avoidance treaty.

AAR’s Verdict

Review of all Project Agreements: In its application, the Taxpayer only submitted the centralised services agreement. However, the AAR, agreeing with the revenue authorities (Revenue), did not restrict its review to the said agreement and analysed all Project Agreements stating that each such contract covered a vital aspect of the services rendered by the Taxpayer. The AAR observed that in light of its objective to provide certainty and finality on taxation aspects, limiting its review to any one of the Project Agreements would leave open other agreements/ issues for regular assessment by the Revenue and, hence, render approaching the AAR a futile endeavour.

Framing of the issue: The AAR, agreeing with the Revenue, referred to Rule 12 of the AAR (Procedure) Rules 1996[2] and focussed on whether the services rendered by the Taxpayer gives rise to a PE in India. The AAR held that whether the services could be characterised as ‘FTS’ or ‘royalty’ was academic if the existing arrangement led to the presence of a PE in India. The Taxpayer had urged the AAR to limit its ruling to the question set forth in its application. However, the AAR noted that in its submission the Taxpayer itself made a passing reference to there being no PE, which the AAR believed to be an inherent assumption made by the Taxpayer without merit and requiring further investigation.

Fixed Place PE: The AAR enumerated the following conditions necessary to ascertain whether a non-resident enterprise has a ‘fixed place’ PE in the Source State (here, India) and sought to elaborate how each condition was satisfied in the present case:

  1. the existence of a ‘fixed place’;
  2. said ‘fixed place’ should be at the disposal of the non-resident; and
  3. the non-resident carries on its business (wholly or partly) through such fixed place.

Treating the ‘Swissotel Kolkata’ as a ‘fixed place’, the AAR reviewed the Project Agreements in detail to ascertain whether the ‘fixed place’ was indeed ‘at the disposal’ of the Taxpayer.

The AAR noted that key clauses in each agreement demonstrated that since the inception of the ‘Swissotel Kolkata’, the Taxpayer was called on to oversee the design and construction after which complete autonomy and exclusive operation and management (including the right of employing staff, taking decisions on capital improvements, and other operational rights) of the property rested with the Taxpayer, without any interference from BAHDL. Importantly, the AAR specially noted that the Taxpayer was given the final decision-making power with respect to the management of the hotel. In addition, to demonstrate a long-term arrangement, the AAR noted that the term of the Project Agreements was set for a period of 10 years, extendable by another 40 years.

Finally, in relation to condition (iii) set out above, the AAR referred to the Taxpayer’s description of the nature and scope of its business wherein the Taxpayer was admittedly engaged in the business of operating and managing hotels. Ignoring the nomenclature of the Project Agreements, the Taxpayer was held to be undertaking its business from the ‘Swissotel Kolkata’.

The AAR, therefore, attributed all income that the Taxpayer derived from the various contractual agreements with BAHDL to the ‘fixed place’ PE in India. Additionally, the Taxpayer’s argument of having undertaken services as BAHDL’s agent was rejected since in substance, the AAR opined that the contractual agreements established a ‘principal to principal’ relation.


This ruling marks an important development for the hospitality sector in India which has not seen much of litigation in the past in relation to taxable presence determination of non-resident hotel operators.

The AAR has reiterated the established principles of a ‘fixed place’ PE and seems to have turned on the peculiar facts of the case. The AAR seems to have adopted a comprehensive approach while pronouncing its ruling, having reviewed all the contractual arrangements, the services rendered by the Taxpayer as well as the access and powers granted to the Taxpayer. While the ruling is binding only on an applicant in relation to the issue raised, in case of other taxpayers having similar arrangements, the Revenue would be guided by this ruling and hence, one should review and evaluate the impact of this ruling.