DIECTOR OF INCOME TAX vs. SHERATON INTRNATIONAL INC

Q: Which sections of the Income-tax Act were involved?

Section 260A, Section 4, Section 5, Section 9, Section 9(1)(vi), Section 9(1)(vii), Section 195(2), Section 163, Section 234B, Section 209(1)(a), Section 209(1)(2)

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ITA-1037/2007HC Delhi2007:DHC:1057130 January 200728 pages

AI SummaryDismissed

What did the High Court hold?

The Tribunal held that the primary service rendered by the assessee was advertisement, publicity, and sales promotion for the mutual interest of the assessee and its client-hotels. Consequently, the use of trademarks, trade names, stylized 'S', and other enumerated services, including the "Sheraton Club International"/"Starwood Preferred Guest" Programme and "Frequent Flyer Programme", were incidental to this main business arrangement. The Tribunal concluded that the payments received were neither royalty under Section 9(1)(vi) nor fee for technical services under Section 9(1)(vii) of the Act, nor taxable under Article 12 of the DTAA. The payments were thus rightly classified as business income. Since the assessee did not have a permanent establishment in India, this business income was not taxable in India under Article 7 of the DTAA. The Tribunal also found no evidence that the agreements were a colourable device to avoid tax. The High Court agreed with the Tribunal's reasoning, noting that these were findings of fact and no question of law, particularly regarding perversity of findings, was raised by the Revenue. Therefore, no fault could be found with the impugned judgment.

What were the facts?

The Revenue appealed against a common judgment of the Income Tax Appellate Tribunal (Tribunal) concerning assessment years 1995-96 to 2000-01. The assessee, Sheraton International Inc., a US-based company, provided services to Indian hotels. Initially, fees received were taxed as business income. Post India-USA DTAA (effective April 1, 1991), the assessee claimed no tax liability in India due to no permanent establishment. The Revenue initially accepted this, allowing remittances without tax deduction at source. However, in November 1999, the Revenue re-examined the issue, treating an Indian hotel company as the assessee's agent and issuing notices to the assessee. The Assessing Officer (AO) determined taxable income based on best judgment, analyzing agreements and concluding services were technical, consultancy, related to trademark use, and reservation network, thus taxable in India.

What were the issues?

1. Whether the Tribunal was justified in holding that amounts received by the assessee from Indian hotels for services rendered were 'business profits' not liable to tax under Article 7 of the Indo-American DTAA? (Question of law) 2. Whether the income from services rendered to Indian clients/hotels was taxable in India with reference to Sections 4, 5, and 9 of the Act? (Question of law) 3. Whether the income received was taxable in India as 'royalty' and/or 'fee for included services' under Article 12(3)(a), 12(4)(a), or 12(4)(b) of the DTAA? (Question of law) 4. Whether the amount received was in the nature of 'royalty' as contemplated in Explanation-2 to Section 9(1)(vi) and (vii) of the Act? (Question of law) 5. Whether the Tribunal correctly interpreted the agreements to conclude that the purpose was to promote hotel business worldwide and other services were ancillary? (Question of law) 6. Whether the relevant agreement was a colourable device to avoid tax in India? (Question of law) 7. Whether contributions received for "Sheraton Club International"/"Starwood Preferred Guest" Programme and "Frequent Flyer Programme" fall under Article 12 of the DTAA as 'fee for included services'? (Question of law) Assessee's Contention (implied from Tribunal's findings): The services rendered were primarily for publicity, advertisement, and sales promotion of hotel business worldwide, with other services being incidental. The assessee had no permanent establishment in India. Therefore, the income was business income not taxable in India under Article 7 of the DTAA. Revenue's Contention (implied from Tribunal's findings): The services rendered were technical, consultancy, related to trademark use, and reservation network, making the income taxable in India as royalty or fee for technical services under the Act and the DTAA. The agreements constituted a colourable device to avoid tax.

Which sections of the Income-tax Act were involved?

Section 260A,Section 4,Section 5,Section 9,Section 9(1)(vi),Section 9(1)(vii),Section 195(2),Section 163,Section 234B,Section 209(1)(a),Section 209(1)(2)

AI-generated summary — verify with the full judgment below

2007:DHC:10571-DB

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