A sales, marketing and management service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In 2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India. Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court. Judgement of the High Court The High Court set aside in part and upheld in part the decision of the Tribunal. The court set aside the decision of the Tribunal in regards of qualifying the service payments as royalty. The court found that the strategic and incentive fee received by Hyatt International was not a consideration for the use of or the right to use any process or for information of commercial or scientific experience. Instead, these fees were in consideration of the services as set out in SOSA. The fact that the extensive services rendered by Hyatt in terms of the agreement also included access to written knowledge, processes, and commercial information in furtherance of the services could not lead to the conclusion that the fee was royalty as defined under Article 12 of the DTAA. The court upheld the findings of the Tribunal that Hyatt had a permanent establishment in India. According to the court “It is apparent from the plain reading of the SOSA that the Assessee exercised control in respect of all activities at the Hotel, inter alia, by framing the policies to be followed by the Hotel in respect of each and every activity, and by further exercising apposite control to ensure that the said policies are duly implemented. The assessee’s affiliate (Hyatt India) was placed in control of the hotel’s day-to-day operations in terms of the HOSA. This further ensured that the policies and the diktats by the Assessee in regard to the operations of the Hotel were duly implemented without recourse to the Owner. As noted above, the assessee had the discretion to send its employees at its will without concurrence of either Hyatt India or the Owner. This clearly indicates that the Assessee exercised control over the premises of the Hotel for the purposes of its business. Thus, the condition that a fixed place (Hotel Premises) was at the disposal of the Assessee for carrying on its business, was duly satisfied. There is also little doubt that the Assessee had carried out its business activities through the Hotel premises. Admittedly, the Assessee also performed an oversight function in respect of the Hotel. This function was also carried out, at least partially if not entirely, at the Hotel premises.” The Court also confirmed the direction of the Tribunal asking Hyatt to submit the working regarding apportionment of revenue, losses etc. on a financial year basis so that profit attributable to the PE can be determined judicially. According to the High Court profits attributable to a PE are required to be determined considering the permanent establishment as an independent taxable entity, and prima facie taxpayers would be liable to pay tax in India due to profits earned by the permanent establishment notwithstanding the losses suffered in the other jurisdictions. This matter was to be decided later by a larger bench of the Court ...

The ATO is currently reviewing international arrangements that mischaracterise intangible assets[1] and/or activities or conditions connected with intangible assets. The concerns include whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met. Arrangements that allocate all consideration to tangible goods and/or services, arrangements that allocate no consideration to intangible assets, and arrangements that view intangible assets collectively, or conceal intangible assets, may be more likely to result in a mischaracterisation. Where arrangements are between related parties, we are concerned about whether the: amount deducted by the Australian entity under the arrangement meets the arm’s length requirements of the transfer pricing provisions in the taxation law[2] functions performed, assets used and risked assumed by the Australian entity, in connection with the arrangement, are appropriately compensated in accordance with the arm’s length requirements of the transfer pricing provisions in the taxation law. These arrangements typically display most, if not all, of the following features: intangible assets are developed, maintained, protected or owned by an entity located in a foreign jurisdiction (an ‘IP entity’) the Australian entity enters into an arrangement to undertake an activity or a combination of activities the Australian entity requires the use of the relevant intangible assets in order to undertake these activities the Australian entity purchases goods and/or services from an IP entity or a foreign associate of an IP entity in order to undertake these activities the Australian entity agrees to pay an amount, or a series of amounts, to a foreign entity which the Australian entity does not recognise or treat as wholly or partly being for the use of an IP entity’s intangible assets. This Taxpayer Alert (Alert) does not apply to international arrangements which involve an incidental use of an intangible asset. For example, this Alert does not apply to resellers of finished tangible goods where the activity of reselling the goods involves an incidental use of a brand name that appears on the goods and related packaging. Whether a use is incidental in this sense will depend on an analysis of the true relationship and activities of the parties. The fact that an arrangement fails to expressly provide for the use of an intangible asset does not, in itself, determine that a use is incidental ...