DIRECTOR OF INCOME TAX vs. SHERATON INTERNATIOANL 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-1044/2007HC Delhi2009:DHC:915330 January 200928 pages

AI SummaryDismissed

What did the High Court hold?

The Tribunal held that the primary service rendered by the assessee to its client-hotels was advertisement, publicity, and sales promotion for their mutual interest. In this context, the use of trademarks, trade names, stylized 'S', and other enumerated services, including the SCI and FFP programmes, were incidental to the 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 payments were rightly held to be business income. Since the assessee did not have a permanent establishment in India, its business income was not taxable in India as per Article 7 of the DTAA. The Tribunal also found no evidence that the agreements were a colourable device. The High Court agreed with the Tribunal's reasoning, noting that these were findings of fact and no question of law, particularly regarding perversity, was raised by the Revenue. Therefore, the impugned judgment of the Tribunal was upheld.

What were the facts?

The appeals were filed by the Revenue 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-incorporated non-resident, provided services to Indian hotels, including publicity, advertisement, and sales/reservation services, under various agreements. Prior to the India-USA Double Taxation Avoidance Agreement (DTAA) effective April 1, 1991, fees received were taxed as business income. Post-DTAA, the assessee claimed non-taxability in India due to no permanent establishment, which was initially accepted. However, the Revenue later re-examined the issue, treating the Indian hotels as agents and issuing notices to the assessee for assessment. The Assessing Officer (AO) determined taxable income based on best judgment, analyzing the agreements and concluding that services rendered included technical, consultancy, trademark use, know-how, and reservation network, making payments taxable.

What were the issues?

The Tribunal had to decide several questions of law, with the Revenue confining its submissions to the following: 1. Whether the amount received by the assessee from Indian hotels/clients for services rendered under agreements constituted 'business profits' not liable to tax 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 received was taxable in India as 'royalty' 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 in the nature of '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 within Article 12 of the DTAA as 'fee for included services'. The Revenue argued that the services were taxable as business profits, royalty, or fee for included services, and the agreements might be a colourable device. The assessee argued that the services were ancillary to the main purpose of promoting hotel business worldwide and that it had no permanent establishment in India, thus its business profits were not taxable under the DTAA. The Tribunal's findings on these issues were challenged by the Revenue.

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:9153-DB

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