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

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ITA - 1092 / 2007HC Delhi30 January 200928 pages

For Petitioner: SANJEEV SABHARWAL

AI SummaryDismissed

What did the High Court hold?

The High Court held that no substantial question of law arose for consideration. It agreed with the Tribunal's finding that the primary service rendered by the assessee was advertisement, publicity, and sales promotion in the mutual interest of the assessee and its client-hotels. Services like the use of trademarks, trade names, or other enumerated services, including the 'Sheraton Club International' and 'Frequent Flyer' programmes, were considered incidental to this main business arrangement. Consequently, the payments received were rightly held by the Tribunal as not being royalty under Section 9(1)(vi) or fee for technical services under Section 9(1)(vii), nor taxable under Article 12 of the DTAA. As the assessee had no permanent establishment in India, the business income received could not be taxed in India under Article 7 of the DTAA. 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 cited the Supreme Court's decision in K. Ravindranathan Nair vs CIT, emphasizing that the Tribunal is the final fact-finding authority and its findings can only be challenged as perverse.

What were the facts?

The Revenue appealed against a common judgment of the Income Tax Appellate Tribunal (Tribunal) for assessment years 1995-96 to 2000-01. The assessee, Sheraton International Inc., a US-based non-resident, provided services to Indian hotels, including publicity, advertisement, and sales. Agreements were entered into with ITC Ltd and its successors. Initially, fees were taxed as business income. Post India-USA DTAA, the assessee claimed no permanent establishment and no tax liability, which was accepted. However, the Revenue later re-examined the issue, treating the fees as taxable. The Assessing Officer (AO) determined taxable income based on best judgment, considering services like technical, consultancy, use of trademark, and reservation network. The Tribunal, however, held the payments as business profits not taxable in India under Article 7 of the Indo-American DTAA, finding the services ancillary to the main object of promoting hotel business worldwide. The Revenue's appeals challenged this.

What were the issues?

The Tribunal had to decide the following questions of law: 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? 2. Whether the income from services rendered to Indian clients/hotels was taxable in India with reference to Sections 4, 5, and 9 of the Income Tax Act, 1961? 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? 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 purpose was to promote hotel business worldwide and other services were ancillary? 6. Whether the agreements were 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'? Assessee's Contention: The Tribunal correctly held that the payments were business profits not taxable in India as the assessee had no permanent establishment. The services were ancillary to the main purpose of worldwide hotel business promotion. The agreements were not a colourable device. The contributions to programmes were also business income. Revenue's Contention: The Revenue argued that the services rendered were taxable in India under the charging provisions of the Act and potentially as royalty or fee for included services under the DTAA. They also questioned the Tribunal's interpretation of the agreements and suggested they might be a colourable device.

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:9160-DB

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