Save article




India rules management of client’s hotel creates fixed place PE

Executive summary

The taxpayer (the Taxpayer), a foreign company and a tax resident of Luxembourg, entered into various agreements with an Indian company (I Co), the owner of a hotel (Hotel) in India, to provide multiple services (such as reservations, human resources, technical, consultancy, and procurement) in relation to the operation and management of I Co’s Hotel.

The Authority for Advance Rulings (the AAR) held that the Taxpayer has a fixed permanent establishment (PE) in India at I Co’s Hotel through which the Taxpayer conducted its core business activities, i.e., the operation and management of the Hotel. The Hotel is at the disposal of the Taxpayer since it has absolute control, authority and responsibility over the operations and management of all vital and important functions of the Hotel.

Consequently, income earned by the Taxpayer through such an arrangement is taxable as “business profits.”

Detailed discussion


Under the India–Luxembourg Income Tax Treaty (the Treaty), a nonresident (NR) enterprise creates a fixed PE in another country (source country) if it carries on business through a fixed place in the source country. In such case, profits attributable to the PE are taxable in the source country. Further, NR’s other income such as royalty/fees for technical services (FTS) from the source country, would be taxable on a net basis if effectively connected to a PE.

The Taxpayer was the principal operator company of a group which is a leading international hotel chain engaged in development, operation and management of hotels, resorts, and branded residences.

The Taxpayer was engaged by I Co for development and operation of I Co’s Hotel in India and entered into following service agreements with I Co:

  • Hotel management Services Agreement (HMA) – principal agreement to obtain Taxpayer’s expertise in connection with day-to-day operation and management of the Hotel. The following three agreements were ancillary to this principal agreement.
  • Global Reservation Services (GRS) Agreement – to facilitate reservation/booking of rooms, banquets, etc., in the Hotel.
  • Centralized Services Agreement – miscellaneous support services as required by I Co.
  • Corporate Design and Construction Services Agreement (Construction Agreement) - technical and advisory services in connection with development of the Hotel as per Taxpayer’s brand standard, any capital improvements in relation to the Hotel, including refurbishing, maintenance, repairs or other capital improvements.

Depending on the contracts, a fee structure is either fixed as a percentage of revenue/market fee/construction costs or a lump sum consideration.

Issue before the AAR

Whether payment under the GRS Agreement would be taxable as “FTS” or “royalty” under the Indian Income Tax Law as well as the Tax Treaty?

AAR Ruling

The AAR ruled that, while the issue was specific to taxability of income under the GRS agreement, all other agreements must be reviewed, since the activities of the Taxpayer are integrated and different agreements are part of the whole arrangement of operation and management of the Hotel. Further, these agreements are related to each other. Accordingly, the AAR ruling should be based on a more holistic approach by reviewing all the agreements the Taxpayer has with I Co, to determine if the activities of the Taxpayer created a PE in India.

Fixed place PE

A fixed place PE arises on meeting the following three conditions:

1. Existence of a “fixed place” –

The Hotel constitutes a fixed place.

2. Fixed place being at the disposal of the nonresident Taxpayer

Various facts and agreements support that the Hotel is at the complete disposal of the Taxpayer:

  • At the beginning of the construction of the Hotel, the Taxpayer was asked to oversee the design and construction of the property to ensure that it is compliant with the brand standards of the Taxpayer. The Taxpayer visited the project site during the construction period to review its progress and quality of work.
  • Once the Hotel was constructed, its entire operation and management were conducted by the Taxpayer, through its own employees/personnel, without I Co’s involvement, covering the employment of the Hotel staff to making decisions over capital improvements.
  • As noted in the HMA, the Taxpayer has exclusive control, discretion, responsibility and authority for the Hotel operations. The Taxpayer and its affiliates have the right to access all parts of the Hotel both to the extent and at the times deemed appropriate by the Taxpayer without I Co’s direct and indirect involvement. Furthermore, I Co was barred from such involvement, including contacting Hotel staff.
  • Some of the core functions of the Hotel operations, such as sales and marketing, and reservations were also carried out by the Taxpayer.

3. The Taxpayer carrying on its business wholly or partly through the Hotel

Pursuant to above operation and management agreements, the Taxpayer had, in substance, taken over all the important functions of the Hotel operations and management as a whole evidenced by the Taxpayer’s final decision-making authority, risks, control, and complete autonomy. The contractual relationship is neither a principal-to-principal nor an agency in nature. As a result, the Taxpayer had substantial business presence and operations in India.

Based on the above, the AAR ruled that the Hotel constitutes a fixed place PE of the Taxpayer.

On FTS and royalty

Since the income from GRS is taxed as “business profits,” the question of whether such services are taxable as FTS or royalty becomes irrelevant.


The ruling clearly defines the power of the AAR to rule beyond the specific question raised in the application and analyze an issue on its substance and in its entirety.

The issue of a PE is generally contentious since its tests are often difficult to resolve. The present ruling reaffirms that the Taxpayer did have fixed place of business at its disposal since the Taxpayer had absolute control, access and authority over the fixed premises.

Although the AAR ruling is binding only on the Taxpayer and with respect to the transaction involved, taxpayers with similar arrangements may consider the principles and/or approach adopted by the AAR when evaluating their business arrangements.

EYG no. 010042-18Gbl

Download this Tax Alert as a PDF file.

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.



Font size

Tax topics >

No filter criteria selected.

Industries >

No filter criteria selected.

Countries >

No filter criteria selected.

 < Close


 < Close


 < Close

Tax topics

 < Close


 < Close


 < Close

0 articles have been saved