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 Delhi30 January 200928 pages

For Petitioner: SANJEEV SABHARWAL

AI SummaryDismissed

What did the High Court hold?

The Tribunal held that the payments received by the assessee were in the nature of business income. The Court agreed with the Tribunal's reasoning that the main 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 loyalty programs, were considered incidental to this main business arrangement. Consequently, the Court found that the payments 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. As the assessee admittedly had no permanent establishment in India, its business income was not taxable in India as per Article 7 of the DTAA. The Court also noted that the Tribunal found no evidence of the agreements being a colourable device, and these were findings of fact that could only be challenged as perverse, which was not done. 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-based non-resident company), 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. After the DTAA, the assessee claimed no permanent establishment in India and was permitted remittance without tax deduction. However, the Revenue later re-examined the issue, treating the Indian hotels as agents and issuing notices to the assessee. The Assessing Officer (AO) treated the payments as fee for included services and royalty, making additions based on best judgment.

What were the issues?

The Tribunal had to decide several questions of law. The primary questions, as confined by the Revenue's counsel, were: 1. Whether the amount received by the assessee from Indian hotels for services rendered was business profits not taxable in India under Article 7 of the Indo-American DTAA? 2. Whether the income was taxable in India under Sections 4, 5, and 9 of the Income Tax Act, 1961? 3. Whether the income was taxable as 'royalty' or 'fee for included services' under Article 12 of the DTAA? 4. Whether the amount received was 'royalty' as per Explanation 2 to Section 9(1)(vi) and (vii) of the Act? 5. Whether the Tribunal correctly interpreted the agreements to conclude that the services were ancillary to the main object of promoting hotel business worldwide? 6. Whether the agreements constituted a colourable device to avoid tax in India? 7. Whether contributions to "Sheraton Club International"/"Starwood Preferred Guest" Programme and "Frequent Flyer Programme" fell under Article 12 of the DTAA as 'fee for included services'? The Revenue contended that the payments were taxable as royalty or fee for included services. The assessee argued that the services were part of an integrated business arrangement for worldwide promotion of hotel business, and since it had no permanent establishment in India, the income was not taxable under the DTAA. The Revenue also raised questions regarding interest under Section 234B and the scope of remand proceedings, but these 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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