DIRECTOR OF INCOME TAX vs. SHERATON INTRNATIONAL 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

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ITA-1092/2007HC Delhi2009:DHC:916030 January 200928 pages

AI SummaryDismissed

What did the High Court hold?

The High Court held that the Tribunal had correctly concluded that the primary services rendered by the assessee were advertisement, publicity, and sales promotion for the mutual interest of the assessee and its client-hotels. The use of trademarks, trade names, or stylized marks, and other enumerated services, including the club and frequent flyer programs, were 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 the payments as business income. Since the assessee had no permanent establishment in India as per Article 7 of the DTAA, this business income could not be taxed in India. The Tribunal's finding that there was no evidence of the agreement being a colourable device was also upheld, as no question was proposed by the Revenue impugning this finding as perverse. The Court agreed with the Tribunal's reasoning and noted that it is the final fact-finding authority, and its findings of fact can only be challenged if they are perverse, which was not the case here. Therefore, no substantial question of law arose.

What were the facts?

The Revenue appealed against a common judgment of the Income Tax Appellate Tribunal (Tribunal) concerning assessment years 1995-96 to 2000-01. The appeals involved cross-appeals filed by both the assessee, Sheraton International Inc. (a US-incorporated non-resident), and the Revenue. The assessee provided services to Indian hotels, including publicity, advertisement, and sales, for which it received fees. Prior to the India-USA Double Taxation Avoidance Agreement (DTAA) effective April 1, 1991, these fees 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 matter, 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, use of trademark, and reservation network.

What were the issues?

1. Whether the amount received by the assessee from Indian hotels for services rendered was in the nature of 'business profits' not liable to tax under Article 7 of the Indo-American DTAA? (Assessee contended it was business profits not taxable due to no Permanent Establishment; Revenue contended it was taxable). 2. Whether the income was taxable in India with reference to Sections 4, 5, and 9 of the Income Tax Act? (Assessee contended no, Revenue contended yes). 3. Whether the income was taxable as 'royalty' and/or 'fee for included services' as per Article 12(3)(a), 12(4)(a), or 12(4)(b) of the DTAA? (Assessee contended no, Revenue contended yes). 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? (Assessee contended no, Revenue contended yes). 5. Whether the Tribunal correctly interpreted the agreements to conclude that the purpose was to promote hotel business worldwide and other services were ancillary? (Assessee contended yes, Revenue contended no). 6. Whether the agreements were a colourable device to avoid tax in India? (Assessee contended no, Revenue contended yes). 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'? (Assessee contended no, Revenue contended yes).

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

AI-generated summary — verify with the full judgment below

2009:DHC:9160-DB

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