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 163, Section 142, Section 234B

PDF · subscribers

ITA - 922 / 2007HC Delhi30 January 200928 pages

For Petitioner: SANJEEV SABHARWAL

AI SummaryDismissed

What did the High Court hold?

The High Court upheld the ITAT's decision. It agreed with the Tribunal's finding that the services rendered by the assessee, including publicity, advertisement, sales promotion, use of trademark, and participation in programs like 'Sheraton Club International' and 'Frequent Flyer Programme', constituted an integrated business arrangement. The Tribunal had concluded that these services were incidental to the main object of promoting hotel business worldwide for mutual interest. Consequently, the payments received were held to be business income, not royalty or fee for included services under Section 9 of the Act or Article 12 of the DTAA. Since the assessee had no Permanent Establishment (PE) in India as per Article 7 of the DTAA, the business income was not taxable in India. The Court also agreed with the Tribunal that there was no evidence to suggest the agreement was a colourable device to avoid tax, noting that such a challenge would require a specific question of perversity, which was not raised. The appeals were dismissed as no substantial question of law arose.

What were the facts?

The Revenue appealed against a common judgment of the Income Tax Appellate Tribunal (ITAT) 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, sales, and reservation services, under various agreements. Initially, fees were taxed as business income. Post the India-USA Double Taxation Avoidance Agreement (DTAA) effective April 1, 1991, the assessee claimed non-taxability due to no Permanent Establishment (PE) in India, which was accepted. However, in 1999, the Revenue re-examined the issue, 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 fee for included services under Article 12(4)(b) of the DTAA.

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 argued it was business profits and not taxable due to no PE; Revenue argued it was taxable under Sections 4, 5, and 9 of the Act). 2. Whether the income was taxable in India with reference to Sections 4, 5, and 9 of the Act? (This question is intertwined with the first). 3. Whether the income received by the assessee was taxable in India 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 argued it was not royalty or fee for included services; Revenue argued it was). 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 argued it was not royalty; Revenue argued it was). 5. Whether the Tribunal correctly interpreted the agreements to conclude that the intention was to promote hotel business worldwide and other services were ancillary? (Assessee argued the Tribunal's interpretation was correct; Revenue likely disagreed). 6. Whether the relevant agreement was a colourable device to avoid tax in India? (Assessee argued it was not a colourable device; Revenue likely argued it was).

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 142,Section 234B

AI-generated summary — verify with the full judgment below

2009:DHC:9083-DB

More judgments on Section 4

Prakash Dayaram Chandnani, Rajkot vs ITO Ward 2(1)(1), Rajkot
ITA 927/RJT/2026[2019-20]Status: Disposed29 Sept 2026AY 2019-20
Hiteshkumar Mohanlal Desai, Daman vs The Assessment Unit, ITO, Daman Ward, Daman
ITA 962/SRT/2025[2018-19]Status: Disposed29 Sept 2026AY 2018-19
Hiteshkumar Mohanlal Desai, Daman vs The Assessment Unit, ITO, Daman Ward, Daman
ITA 962/SRT/2025[2018-19]Status: Disposed29 Sept 2026AY 2018-19
Ratilal Manubhai Dhanani, Amreli vs ITO WD 3(1)(4), Amreli
ITA 697/RJT/2026[2015-16]Status: Disposed28 Sept 2026AY 2015-16
Ratilal Manubhai Dhanani, Amreli vs ITO WD 3(1)(4), Amreli
ITA 697/RJT/2026[2015-16]Status: Disposed28 Sept 2026AY 2015-16

All 1,145 judgments and leading authorities on Section 4 →

Recent GST High Court judgments

Search GST case law →