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 142, Section 163, Section 234B, Section 209(1)(a), Section 209(1)(2)

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ITA-1033/2007HC Delhi2009:DHC:913630 January 200928 pages

AI SummaryDismissed

What did the High Court hold?

The High Court held that the Tribunal was correct in its findings. The Tribunal had concluded 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. Services like the use of trademarks, trade names, and other enumerated services, including loyalty programs, were considered incidental to this main business arrangement. Consequently, the payments received were neither royalty under Section 9(1)(vi) nor fee for technical services under Section 9(1)(vii), nor taxable under Article 12 of the DTAA. The Tribunal rightly classified the payments as business income. Since the assessee had no permanent establishment in India, such business income was not taxable in India under Article 7 of the DTAA. The High Court agreed with the Tribunal's reasoning and noted that the Revenue had not provided evidence to suggest the agreements were a colourable device. The Court emphasized that findings of fact by the Tribunal can only be challenged if they are perverse, and no such question was raised by the Revenue. 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 company, provided services to Indian hotels. Initially, fees were taxed as business income. After the India-USA Double Taxation Avoidance Agreement (DTAA) came into effect on April 1, 1991, the assessee claimed no permanent establishment in India and thus no tax liability. The Revenue accepted this, allowing remittances without tax deduction at source. However, in November 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, considering the services as technical, consultancy, training, use of trademark, technical know-how, and reservation network, deeming them taxable as royalty or fee for included services.

What were the issues?

The High Court had to decide the following questions of law, as argued by the Revenue: 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 under Article 7 of the Indo-American DTAA? (Section 4, 5, 9 of the Act and Article 7 of DTAA) 2. Whether the income from services rendered to Indian clients/hotels was taxable in India under Sections 4, 5, and 9 of the Act? 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? (Article 12 of DTAA) 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? (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 agreements constituted 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'? (Article 12 of DTAA) The Revenue also proposed questions (G), (H), and (J) regarding interest and scope of remand proceedings, but these were not pressed. The assessee argued that the services were ancillary to the main business of promoting hotels worldwide, and the payments were business income not taxable in India due to the absence of a permanent establishment.

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 142,Section 163,Section 234B,Section 209(1)(a),Section 209(1)(2)

AI-generated summary — verify with the full judgment below

2009:DHC:9136-DB

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