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

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ITA-1050/2007HC Delhi2009:DHC:915730 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 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 programs such as SCI and FFP 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 held these payments as business income. Since the assessee did not have a permanent establishment in India, these business profits were not taxable in India as per Article 7 of the DTAA. The Tribunal also found no evidence that the agreement was a colourable device. The High Court agreed with the Tribunal's reasoning, noting that these were findings of fact and no question of perversity was raised. Therefore, no substantial question of law arose, and the appeals were dismissed.

What were the facts?

The appeals by the Revenue challenge 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, provides services to hotels. Agreements were made with Indian hotel groups, including ITC Ltd. and Aidyar Hotels Ltd., for publicity, advertisement, and sales, including reservation services. Initially, fees were taxed as business income. Post-DTAA, the assessee claimed no tax liability due to no permanent establishment, which was accepted. However, the Revenue later re-examined this, 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 rendered as technical, consultancy, trademark use, and reservation network provision, classifying payments as fee for included services or royalty.

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? (Question A) 2. Whether the income from services rendered to Indian clients/hotels was taxable in India under Sections 4, 5, and 9 of the Act? (Question B) 3. Whether the income 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? (Question C) 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 D) 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 E) 6. Whether the relevant agreement was a colourable device to avoid tax in India? (Question F) 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 G) Assessee's Contentions: The assessee argued that the services rendered were ancillary to the main purpose of promoting hotel business worldwide, and the payments received were business profits. They contended that since they had no permanent establishment in India, these business profits were not taxable in India as per Article 7 of the DTAA. They also argued that the payments were not royalty or fee for technical services. The Tribunal accepted this view. Revenue's Contentions: The Revenue contended that the services were technical and consultancy services, involved the use of trademarks, and included reservation networks. They argued that the payments were taxable in India as royalty or fee for included services under the DTAA and domestic law, and that the agreements constituted a colourable device to avoid tax. The Revenue also raised questions regarding interest under Section 234B and the scope of remand proceedings, which were not pressed.

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

AI-generated summary — verify with the full judgment below

2009:DHC:9157-DB

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