DIRECTOR OF INCOME TAX vs. SHERATON INTERNATIONAL 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 142, Section 234B

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ITA-922/2007HC Delhi2009:DHC:908330 January 200928 pages

AI SummaryDismissed

What did the High Court hold?

The High Court held that the Tribunal was justified in its findings. The Tribunal had concluded that the services rendered by the assessee were part of an integrated business arrangement aimed at promoting hotel business worldwide for mutual interest. Services like the use of trademarks, trade names, and loyalty programs were considered incidental to this main business objective. Consequently, the payments received were held to be business income, not royalty or fee for technical services under the Act or fee for included services under the DTAA. Since the assessee did not have a permanent establishment in India, its business income was not taxable under Article 7 of the DTAA. The Court also noted that the Revenue had not presented evidence to prove the agreements were a colourable device, and such a challenge would require a question of law impugning the Tribunal's findings as perverse, which was not raised. Therefore, no substantial question of law arose for consideration.

What were the facts?

The Revenue appealed against a common judgment of the Income Tax Appellate Tribunal (ITAT) concerning assessment years 1995-96 to 2000-01. The assessee, Sheraton International Inc., a US-based non-resident, provided services to Indian hotels under various agreements. These services included publicity, advertisement, sales, and reservations. Initially, fees received were taxed as business income. Post the India-USA Double Taxation Avoidance Agreement (DTAA) effective April 1, 1991, the assessee claimed non-taxability due to no permanent establishment in India, which was initially accepted. However, in 1999, the Revenue re-examined the issue, treating the Indian hotels as agents and issuing notices to the assessee. The Assessing Officer (AO) concluded that payments were 'fee for included services' under Article 12(4)(b) of the DTAA and also taxable as royalty or fee for technical services under the Income Tax Act, 1961.

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 taxable in India under Article 7 of the Indo-American DTAA? The Revenue argued that the services rendered were not merely ancillary but constituted royalty and/or fee for included services, making them taxable in India under Sections 4, 5, and 9 of the Act, and Article 12 of the DTAA. The assessee contended that the services were integral to promoting its worldwide hotel business and that it had no permanent establishment in India, thus business profits were not taxable as per Article 7 of the DTAA. The Revenue also questioned if the agreements were a colourable device to avoid tax. 2. Whether income received by the assessee was taxable in India as 'royalty' and/or 'fee for included services' as per Article 12(3)(a), 12(4)(a), or 12(4)(b) of the DTAA? The Revenue contended that the payments fell under these categories. 3. 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? 4. Whether the Tribunal correctly interpreted the agreements to conclude that the intention was to promote hotel business worldwide and other services were ancillary? 5. Whether the agreements were a colourable device to avoid tax? 6. Whether contributions received for 'Sheraton Club International'/'Starwood Preferred Guest' Programme and 'Frequent Flyer Programme' fell within Article 12 of the DTAA as 'fee for included services'?

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 142,Section 234B

AI-generated summary — verify with the full judgment below

2009:DHC:9083-DB

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