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 234B, Section 209(1)(a), Section 209(1)(2)

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ITA-933/2007HC Delhi2009:DHC:912530 January 200928 pages

AI SummaryDismissed

What did the High Court hold?

The High Court held that the ITAT had correctly concluded that the payments received by the assessee were in the nature of business income. The Tribunal found that the primary service rendered was advertisement, publicity, and sales promotion for the mutual interest of the assessee and its client-hotels. Services like the use of trademarks, trade names, and other enumerated services, including the SCI and FFP programs, were considered incidental to this main business arrangement. Consequently, the payments were neither royalty under Section 9(1)(vi) nor fees for technical services under Section 9(1)(vii), nor taxable under Article 12 of the DTAA. Since the assessee had no permanent establishment in India, the business income was not taxable in India as per Article 7 of the DTAA. The Court agreed with the Tribunal's reasoning and noted that the Revenue had not presented evidence to suggest the agreements were a colourable device. The Court emphasized that findings of fact by the Tribunal could only be challenged as perverse, and no such question was raised. Therefore, no substantial question of law arose.

What were the facts?

The Revenue appealed against a common judgment of the Income Tax Appellate Tribunal (ITAT) for assessment years 1995-96 to 2000-01. The assessee, Sheraton International Inc., a US-incorporated non-resident, provided services to Indian hotels. Initially, fees were taxed as business income. After the India-USA Double Taxation Avoidance Agreement (DTAA) came into force on April 1, 1991, the assessee claimed no permanent establishment in India and was permitted remittances without tax deduction at source. 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) determined taxable income based on best judgment, concluding the payments were for technical and consultancy services, training, use of trademarks, technical know-how, and reservation network, deeming them taxable as fees for included services or royalty.

What were the issues?

The Tribunal had to decide several questions of law. The Revenue, in its appeals, confined its submissions to the following: 1. Whether the amount received by the assessee from Indian hotels/clients for services rendered was business profits not taxable in India under Article 7 of the Indo-American DTAA? 2. Whether the income from services rendered to Indian clients/hotels was taxable in India under Sections 4, 5, and 9 of the Income Tax Act? 3. Whether the income 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? 4. Whether the amount received was 'royalty' as contemplated in Explanation-2 to Section 9(1)(vi) and (vii) of the Act? 5. Whether the Tribunal correctly interpreted the agreements to conclude that the intention was to promote hotel business worldwide and other services were ancillary? 6. Whether the relevant agreements were a colourable device to avoid tax in India? 7. Whether contributions received for "Sheraton Club International"/"Starwood Preferred Guest" Programme and "Frequent Flyer Programme" fell under Article 12 of the DTAA as 'fee for included services'? Assessee's contentions were not explicitly detailed in the provided text, but their arguments would likely have supported the ITAT's findings that the income was business profits not taxable in India. The Revenue contended that the services rendered constituted royalty or fees for included services, making them taxable in India under the Act and the DTAA.

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

2009:DHC:9125-DB

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