TaxTMI 
TaxTMI 
2006 (10) TMI 183
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....ing various services related to hotels and provide such services to many hotels in theUnited Statesas well as other countries around the world includingIndia. InIndia, it has been providing the services to M/s. ITC Hotels Ltd., M/s. ITC Ltd. (Hotel Division) etc. on the terms and conditions stipulated in the agreements entered into with the said Indian companies from time to time. The first of such agreements was entered into with ITC Ltd. on27th January, 1979for providing the services to three of the hotels owned by ITC Ltd., namely, Welcomgroup, Maurya Sheraton,New Delhi, Welcomgroup Mughal Sheraton,Agraand Welcomgroup Chola Sheraton,Madras. The said agreement was executed after getting the necessary approval from the Government of India providing, inter alia, for the payment of fees for publicity, advertisement and sale (including reservation) services by ITC Ltd. to Sheraton at the rate of 3% of the room sales. This agreement dated27-1-1979was entered into for a period of ten years and after getting the necessary approval from the Government of India, the same was extended for a further period of ten years by executing a fresh agreement on30-12-1988. A similar agreement was ent....
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....and conditions of the said agreement and on such analysis, arrived at the following conclusions :- (i) Sheraton has agreed to make available technical and consultancy services to the hotel. Sheraton has modern international hotels and techniques and it has marketing specialists who make those techniques available to customers. It has also a reservation network. All these technical know-how together with consultancy services is to be made available to the customers. The computerized reservation systems are highly technical systems and they can be accessed fromIndia. It provides a complete connectivity to the hotels inIndia. The Indian hotels have a right to access this reservation system. (ii) The customers as well as the assessee have agreed that Sheraton will make available the following:- (a) the global SHERATON reservation network; (b) highly developed technology for hotel sales; (c) regular updating of such technologies and standards; (d) under Special of foreign tourist and travellers needs and meeting these through specialisms particularly in the context of food and beverages and other hotel services. This proves beyond doubt that the assessee is making tech....
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.... were chargeable to tax in India at the rate of 15%. 4. Against the aforesaid assessment order of the Assessing Officer, the assessee-company preferred an appeal before the learned CIT(A) and a detailed written submission along with paper-book was filed by it before him on6-10-2000. Oral arguments were also advanced before the learned CIT(A) who forwarded the submissions made on behalf of the assessee-company to the Assessing Officer for his comments. The remand reports received from the Assessing Officer giving his comments were confronted by the learned CIT(A) to the assessee and the written rejoinder as well as supplementary submissions made on behalf of the assessee-company were also taken on record by him. Before the learned CIT(A), it was submitted on behalf of the assessee-company at the outset that the estimation of its income made by the Assessing Officer for the assessment year 1997-98 at Rs. 30 crores was without any basis and it was purely a guess work of the Assessing Officer without reference to any material or evidence on record. As regards the nature of its receipts from the Indian companies, it was submitted that the said amounts were received by it for the hote....
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....The payment received to allow to use these intangible assets clearly amount to payment of royalties under paragraph 3(a) of Article 12. The agreement also provides for reservation services, assistance to the ITC in terms of expertise and know-how and its standards established worldwide. These services clearly fall under paragraph 3(a) as information concerning industrial or commercial experience. The appellant also undertook publicity, marketing and promotion activities outsideIndiafor the ITC. These activities cannot be said to be ancillary or subsidiary to the enjoyment of any right, property or information described as 'Royalties' in paragraph 3. Therefore, payments in respect of these activities outsideIndiawill constitute commercial income and in the absence of PE inIndia, these payments cannot be brought to tax. However, payments in respect of reservation services, services regarding maintenance of high international standard and use of trademark constitute payments of royalties. Of all these activities, the use of trademark and service mark etc. are of paramount importance because these assets and their user makes it, know to the public at large that the hotel confirms to th....
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....this advertisement is made by the assessee on various media such as TV, newspapers, magazines, posters etc. Presentation at Trade shows - The assessee sets up display and information booths at all major shows/exhibitions of hotel trade in the world such as ITB-Berlin, WTM-London, Arabian Travel Mart-Dubai, BIT-Milan, etc. where all Sheraton affiliated hotels of the world or of a particular region have their stalls. Participation inSheraton Roadshows to travel agents The assessee organizes meetings in important cities of the world where persons engaged in the travel trade and key account customers are invited and presentations are made to them about all Sheraton affiliated hotels. Worldwide directory and regional directories - The assessee prints at its own cost directory of all its client hotels and also directories of its client hotels located in a particular region (Indiais listed in the Asia Pacific region). The worldwide directory and directory of the particular region is placed in all the hotel rooms so that a guest staying in any hotel gets information about Sheraton affiliate hotels in the particular region as well as anywhere in the world. Such directories are also placed i....
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....o permanent establishment inIndia, such receipts were not chargeable to tax inIndiain view of Article 7 of DTAA betweenIndiaandUSA. 9. The aforesaid submissions made on behalf of the assessee-company were not found acceptably by the Assessing Officer. According to him, the nature of the amounts received by the assessee was required to be ascertained on the basis of the examination of the terms and conditions of the agreements made by the assessee with the Indian Hotels and Clients and after having made such examination, he held that the assessee was clearly making available not only its trademarks, trade names and designs etc. for the use of its Indian clients, but was also making available its expertise, technical know-how and skills to the Indian Hotels/Clients for developing its business of running international chain of hotels on a worldwide basis. After having so held, the Assessing Officer classified the various services rendered by the assessee to the Indian Hotels/Clients in four different categories as under:- "(a) For the use of trademarks, trade name and the stylized "S" of the assessee. To state that as per Agreement no cost has been charged is not correct as has ....
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....assessment year 1997-98 were reiterated on it's behalf before him for assessment year 1998-99. The ld. CIT(A), however, did not accept the same and for the similar reasons as given in his appellate order dated 22-3-2001 passed in assessee's own case for assessment year 1997-98 on the similar issues and involving similar facts, he upheld the order of the Assessing Officer for assessment year 1998-99 bringing to tax 75% of Rs. 7,78,26,449 in India @ 15% as per Article 12 of DTAA between India and USA holding the same to be 'royalty' and 'fees for included services'. 11. Based on his assessment orders passed in the assessee's case for assessment years 1997-98 and 1998-99 as sustained by the learned CIT(A) vide his appellate orders dated 22-3-2001 and 13-11-2001 holding that the income of the assessee for services rendered to the Indian Hotels/Clients was taxable @ 15% in India being royalty and fees for included services as per Article 12 of the DTAA, the Assessing Officer initiated re-assessments proceedings in assessee's case for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 by issue of notices under section 148 after recording the following reasons which are identical....
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.... 6,55,26,256 Fees ------------------------------------------------------------- Sheraton 1,06,17,408 96,48,432 56,89,157 32,34,095 Club International Contribution ------------------------------------------------------------- Contribution - - 6,10,300 14,18,758 from Frequent Flyer Programme ------------------------------------------------------------- 13. In connection with the receipt of aforesaid amounts by the assessee, the Assessing Officer referred to the classification of the services rendered by the assessee to the Indian Hotels/Clients as made by him in the assessment order for assessment year 199899 in four categories and relying on the conclusions drawn therein as upheld by the learned CIT(A) in his appellate order for that year, he held that the income attributable to the first three categories of such services taken at 75% was taxable in India as per Article 12 of the relevant DTAA. As regards the fourth category of s....
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....n Hotels @ 3% of room charges on account of services rendered for publicity, marketing and reservations in India vide Paragraph No. 24 as under:- "24. Both the parties have been heard at length. After going through the orders of authorities below and considering the arguments of the parties, we are of the view that the issue has not been dealt with in the right perspective inasmuch as the Assessing Officer as well as CIT(A) had proceeded on the assumption as if the covenants of DTAA authorizes the levy of tax on the income of the non-resident. The parties before us also have not addressed any argument as to whether the income of non-resident assessee is chargeable to tax under the provisions of Income-tax Act, 1961 or not. They simply have proceeded on the same footings on which lower authorities decided the issue. We are unable to uphold such approach adopted by the lower authorities for the simple reason that taxability of the income of non-resident has to be first determined in the light of the charging provisions of IT Act. The scheme of the Act is that taxability of the income of the non-resident has to be determined with reference to the charging provisions of sections 4, ....
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....o the file of the Assessing Officer for fresh adjudication after taking into consideration first the taxability of the amounts in question under the charging provisions contained in sections 4, 5 and 9 of the Income-tax Act, 1961. 16. In pursuance of the aforesaid directions given by the Tribunal, the Assessing Officer issued fresh notices to the assessee initiating the assessment proceedings for assessment years 1997-98 and 1998-99. During the said proceedings, the assessee was called upon by the Assessing Officer to state its case with regard to taxability or otherwise of the receipts to be treated as 'royalty' and/or 'fees for technical services' as defined in section 9. In reply, detailed submissions were made by the assessee reiterating its contentions as raised during the course of original assessment proceedings for assessment year 1998-99 and re-assessment proceedings for assessment years 1995-96, 1996-97, 1999-2000, 2000-01 before the Assessing Officer as well as during the course of appellate proceedings for assessment years 1997-98 and 1998-99 before the learned CIT(A). The said submissions made on behalf of the assessee were examined by the Assessing Officer in the l....
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....ved by the assessee from the Indian Hotels/Clients in respect of maintenance of high International Standards and use of trademark clearly constituted a royalty under the Income-tax Act. He also held that the activities performed by the assessee as part of the advertising and brand promotion were to enhance and market the hotels inIndiathat come under the brand Sheraton and thus, the entire receipts of the assessee were taxable as 'royalty' and/or 'fees for included services' as the case may be. He held that the entire income of the assessee from the receipts for services rendered to the Indian Hotels/Clients was taxable with reference to charging provisions of sections 4, 5 and 9 and the assessee having no P.E. in India, the same was taxable in India as 'royalty' and/or 'fees for included services' as per article 12(3) and/or article 12(4)(b) of the DTAA between India and USA at the specified rate of tax. Accordingly, he brought to tax in India @ 15% the entire amounts of Rs. 7,83,36,887 and Rs. 7,78,26,449 received by the assessee during the previous year relevant to assessment years 1997-98 and 1998-99 respectively from the Indian Hotels/Clients vide his assessment orders passed ....
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.... hotel rooms so that a guest staying in any hotel gets information about Sheraton affiliate hotels in the particular region as well as anywhere in the world. Such directories are also placed in the general sales offices and central reservation offices. Divisional brochures - The appellant publishes brochures called 'a la carte' and 'at a glance' containing information about its client hotels which are sent to travel agents, wholesalers, incentive planners, convention planners etc. In room magazine - The appellant publishes, inter alia, an in-room magazine called 'Sojourn' which contains information about all its client hotels in a region and also carries features about the country, State or city where such hotels are located in order to enhance awareness and create interest in the minds of the guests of its client hotels about the places and the hotels. This magazine is placed in the hotel rooms. The directories, divisional brochures, magazines etc. are printed at the appellant's cost and the client hotels only pay for the cost of freight and import duties, if any, for receiving the same. Participation in sister hotel promotions - The appellant's clients hotels are entitled to part....
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....of the assessee before the learned CIT(A) that the payment so received by it from the Indian clients/hotels had been consistently accepted as its 'business income' right from the year 1979 while issuing certificates under section 195(2) by the Department and there being no material change in the facts and circumstances of the case during the years under consideration, the Assessing Officer had no justifiable reason to take a different stand in these years. 20. The aforesaid submissions made on behalf of the assessee, however, were not found acceptable by the learned CIT(A). He held that the orders passed under section 195(2) in connection with deductibility of tax at source were not final and conclusive and the same, therefore, did not pre-empt the department from passing appropriate orders of assessment in accordance with law. For this conclusion, he relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Tata Engg. & Locomotive Co. Ltd. [2000] 245 ITR 823. He also relied on another decision of Hon'ble Bombay High Court in the case of CIT v. Elbee Services (P.) Ltd. [2001] 247 ITR 109 wherein it was held that finding given under section 195(2) will not preclud....
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....nts/hotels on a worldwide basis. He also observed that the fees received by the assessee was not a fixed amount, but the same was directly related to their turnover. He held that the payments so received, therefore, were clearly in the nature of 'royalty' and the assessee could not claim it to be different by simply drafting the agreements in a manner to state that the fees being received by it was only for the services rendered and not for allowing the use of its brand name in India. According to him, allowing the use of trademark, etc., by the assessee to the Indian hotels/clients was an important element of services provided by it to the Indian hotels/clients and, therefore, the payments received for such services were clearly in the nature of 'royalty' as defined in section 9(1)(vi) read with Explanation 2(iii) thereto as well as per article 12(3)(a) of DTAA between India and USA. 21. As regards the agreements between the assessee and Indian hotels/clients having been already approved by the various departments of the Government of India, the learned CIT(A) held that each department while giving approval to a particular agreement examines that agreement from its own angle an....
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....d 2000-01 challenging the relief allowed by the learned CIT(A) to the assessee. 23. The main issue relating to the taxability of the amounts received by the assessee-company from the Indian hotels/clients for the services rendered in pursuance of the agreements entered into with them in India is raised by the assessee-company in the following grounds which are common in all its six appeals (except that the numbers thereof are different in the appeals for assessment years 1997-98 and 1998-99):- "2(a) That in the facts and circumstances of the case the ld. CIT(A) erred in holding that payments received by the appellant from ITC Ltd., ITC Hotels Ltd. & Adyar Gate Hotels Ltd. fall within the definition of 'royalty' as per Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. 2(b) That the ld. CIT(A) erred in brushing aside the explanations of the appellant that the payment received from the aforesaid companies relate entirely to publicity and marketing services rendered entirely outside India on a global basis and the provision of reservation facility and accordingly, the same cannot be regarded as 'royalty' under the Income-tax Act. 2(c) That without prejudice to ....
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.... to prove the taxability of the impugned income under clause (2) of article 12 of the DTAA. 7(a) That the Assessing Officer erred in partly following the orders of the Assessing Officer and the ld. CIT(A) for assessment year 1998-99 without appreciating that the said orders were not sustained in further appeal by the Hon'ble Tribunal. 7(b) That the ld. CIT(A) erred in upholding the said action of the Assessing Officer. 7(c) That the Assessing Officer erred in differing from the orders of the Revenue authorities for assessment years 1997-98 and 1998-99 wherein 25% of fees for marketing, publicity and reservation services were held to be "Business Profits" of the appellant and hence not chargeable to tax in India in absence of Permanent Establishment, thereby not appreciating that said orders of the ld. CIT(A) to the aforesaid extent had reached finality inasmuch as the same were not challenged in appeal by the Department before the Hon'ble Tribunal. 7(d) That although the aforesaid ground of appeal was raised before the ld. CIT(A), the ld. CIT(A) erred in overlooking the said ground altogether in his appellate order for the impugned year. 8. That accordingly, the orde....
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....n of the Revenue authorities that the substantial part of the payments received by the assessee under the relevant agreements was attributable to allowing the use of trademark, trade name and stylized 'S' to the Indian hotels/clients and that it was an important element of the overall services provided by it to the Indian clients, the learned counsel for the assessee submitted that this allegation of the learned CIT(A) was entirely unfounded and baseless in the sense that the other services rendered under the agreements by the assessee had been totally sidetracked by him. He submitted that the practice of the assessee-company followed consistently is to enter into agreements with reputed hotels only which have a very strong brand of their own and which are capable of meeting the high international standards set by it. He submitted that the use of trademark of the assessee by the client hotels thus was just to facilitate the rendering of primary services viz., marketing, publicity and reservation services and the use of trade name or trademark was just to ensure optimum marketing and sales results for hotels marketed and publicized under the brand name 'Sheraton'. He submitted that ....
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....ey were clearly operating at arms' length, there was no basis to go behind the express clauses of the agreements and allege that a part of consideration was attributable to use of trademark especially when the said agreements had been approved by different Government authorities repeatedly after necessary scrutiny. In support of this contention, he relied on the decision of Hon'ble Delhi High Court in the case of D.S. Bist & Sons v. CIT [1984] 149 ITR 276. He also relied on the decision of Hon'ble Madras High Court in the case of CIT v. Lucas TVS Ltd. [1997] 226 ITR 281 to contend that the said agreements having been approved by the various Government authorities from time to time, the terms thereof could not be regarded as unreasonable or excessive and the same, in any case, cannot be considered as sham or collusive merely on the basis of surmises and conjectures. For this contention, he also derived support from the decision of Hon'ble Delhi High Court in the case of CIT v. Sriram Pistons & Rings Ltd. [1990] 181 ITR 230 and that of Pune Bench of ITAT in the case of Kinetic Honda Motor Ltd. v. Jt. CIT [2001] 77 ITD 393. He contended that the consideration paid to the assessee-comp....
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....g that the apparent was not real is on the party who claimed it to be so and the Department has failed to discharge this onus. He also relied on the decision of Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 wherein it was held that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest. He contended that the agreements entered into by the assessee-company with the Indian hotels/clients thus have to be taken at their face value since the Department has failed to prove the same to be sham or collusive by bringing on record some cogent or conclusive evidence. He contended that the payments in question received by the assessee from the Indian hotels/clients thus are not in the nature of 'royalty' under Explanation 2 to section 9(1)(vi) and the learned CIT(A) was not justified in invoking the same. He pointed out that the learned CIT(A) in his impugned order has not treated the said payments as 'fees for technical services' under Explanation 2 to section 9(1)(vii) and the Department having not ch....
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....onsideration received by the assessee in the present case since the use of trademark was allowed free of cost to the Indian hotels/clients as per the agreement, Explanation (ii) to section 9(1)(vi) has no application. He also pointed out that in the case of CEAT International, the use of channels of distribution in overseas market and after sales services was allowed as per the relevant agreement whereas no such services were rendered by the assessee in the present case. He further pointed out that unlike in the case of CEAT International, the assessee has not imparted any information concerning technical, industrial, commercial or scientific knowledge or experience or skill to the Indian hotels. 31. As regards the applicability of article 12(4) of the DTAA dealing with "fees for included services", the learned counsel for the assessee submitted that the said article has been impliedly held to be not applicable by the learned CIT(A) for all the years under consideration and there being no appeal filed by the Department against the orders of the learned CIT(A) on this issue, the fact that the impugned payments are not in the nature of "fees for included services" has attained fin....
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....hould make available to the person acquiring the service, some technology enabling him to apply the same. He contended that applying this criterion, none of the services rendered by the assessee under the impugned agreements could be said to be technical in nature to fall under article 12(4)(b). He also contended that even the marketing advice, corporate divisional and area programmes and promotions, advisory services of senior hotel specialists, training facilities etc. could not be regarded as technical or consultancy services as envisaged in article 12(4)(b). In support of this contention, he relied on the decision of Mumbai Bench of ITAT in the case of Dy. CIT v. Boston Consulting Group Pte. Ltd [2005] 94 ITD 31 wherein it was held that the services rendered by the assessee-company which was engaged in the business of rendering strategy consulting services such as business strategy, marketing and sales strategy, portfolio strategy to its clients in India and abroad, were outside the scope of article 12(4)(b) of the India-US Tax Treaty observing that such non-technical services could not be covered under the said article. It was also held that payments for services not containin....
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....td v. Dy. CIT in [IT Appeal Nos. 3949 and 3950 (Delhi) of 1998] wherein it was held that keeping in view the lacuna in the provisions of DTAA as well as the defective machinery provided therein and in the absence of any guidelines issued by the CBDT or any other competent authority, the Assessing Officer cannot be given a discretion to impose tax in India and benefit of such shortcomings/lacuna is required to be extended to the assessee. 33. The learned Special Counsel for the Revenue Shri Y.K Kapur, on the other hand, submitted that it is necessary to refer to the relevant clauses of the agreement between the assessee and the Indian hotels/clients to ascertain the exact nature of payments received by it for the services rendered to the said parties. In this regard, he took us through the relevant clauses of the said agreements in order to explain the stand of the Revenue about the nature of the amount in question received by the assessee being 'royalty' and/or 'fees for included services' chargeable to tax in India. Referring to clauses (4) and (5) of the preamble of said agreement, he submitted that the background of the assessee as well as the experience attained by it in the....
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....ate with each other through satellite which again brings the services rendered by it within the ambit of Article 12(4). According to him, even the making of reservation system available facilities the assessee to send the communication through the said system inIndiato the Indian hotels which again attracts Article 12(4) of the DTAA. He submitted that as per the agreement, it was also agreed by the assessee to part with its knowledge to help the Indian clients to bring their hotels at par with the international standards and the information in this connection was agreed to be supplied a ongoing process by bringing the said hotels under the Sheraton network. He pointed out that it was also agreed by the assessee to make available to the Indian clients/hotels the services of senior hotel specialists from Sheraton Asia Regional Offices and these stipulations contained in Article 4 further show that the payment received by the assessee for the services rendered in terms of the said agreement was covered not only under Article 12(3)(a) but also under Article 12(4)(a). He also submitted that as per the said Article, regular feedback was agreed to be supplied by the assessee pertaining to....
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....arly falls under Article 12(4)(b) of the DTAA whereas the advertising and other services rendered by the assessee being nothing but ancillary and subsidiary to the obligation of enjoyment of right, property and information etc. are squarely covered under Article 12(4)(a). He submitted that this stand of the Revenue also gets support from the illustrations given in the Memorandum of Understanding to explain the scope of 'fees for included services' as mentioned in Article 12. 36. As regards the charge ability of the payment in question received by the assessee from Indian hotels/clients, Shri Kapur contended that the same is covered under section 9 of the Income-tax Act, 1961 as established by the learned CIT(A) in his impugned orders relying on the definition of 'royalty' and 'fees for included services' given therein. He submitted that the stand of the assessee about the said payment not being in the nature of 'royalty' based on the premise that the use of trademark as specifically provided in the agreement was without consideration is devoid of any merits in view of section 25 of the Contract Act which provides that the agreement without consideration is void. He contended tha....
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....hts and results flowing therefrom and not from picking and choosing out ultimate effect or the result. He also cited the decision of Hon'ble Delhi High Court in the case of Nanak Builders & Investors (P.) Ltd. v. Vinod Kumar Alag AIR 1991Delhi315 wherein it was held that mere heading or title of document cannot deprive the document of its real nature and it is the substance which has to be seen and not the form. He also relied on the decision of Hon'ble Bombay High Court in the case of Govindram Mihamal v. Chetumal Villardas AIR 1970 Bom. 251, Hon'ble Supreme Court in the case of Angurbala Mullick v. Debabrata Mullick AIR 1951 SC 293, Hon'ble Calcutta High Court in the case of Abdul Kadar Laskar v. State ofWest Bengal AIR1967 Cal. 99. Hon'ble Bombay High Court in the case of Aziende Colori Naziondali Affini v. CIT [1977] 110 ITR 145 as well as host of other judgments wherein similar proposition was propounded laying down that a document/agreement has to be considered as a whole to ascertain the real nature thereof as well as to gather the real intention of the parties and the different clauses thereof cannot be considered in isolation. He contended that if the entire agreements ent....
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....ailable with it such as reservation offices worldwide, computerized systems etc. are only incidental to facilitate this business. He submitted that the Indian companies such as ITC were already in the business of running hotels of international standard with all the infrastructure facilities and network available with them including the computerized reservation system which got interfaced with the computerized reservation system of the assessee-company. Referring to the relevant portion of the agreements entered into by the assessee-company with the Indian hotels/clients, he pointed out that the main purpose of entering into the said agreements was to do business together and all the services listed in the said agreements were merely incidental to this main purpose. He contended that to ascertain the exact nature of the arrangement between the two sides, the main object of such arrangement as evident from the agreements is to be seen and not the modus operandi and apparatus used to attain the said objective. He submitted that the whole purpose of the Indian hotels/clients to avail the services from the assessee-company was to boost its hotel business and the nature of services to b....
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....any and the Indian hotels/clients as well as the main purpose of their association as evident from the relevant agreements, bifurcation of services rendered cannot be done for attributing or apportioning the payment on the basis of such bifurcation. 39. We have considered the rival submissions in the light of material available on record and the various case laws cited at the Bar. The issue which requires our consideration relates to the taxability in India of the amount in question received by the assessee for services rendered to the Indian hotels/clients as per the agreements entered into with them and this issue first of all needs to be considered and examined from the point of view of the charging provisions contained in sections 4, 5 and 9. Only when it is found that the income is chargeable to tax in India as per these provisions, one can refer to the DTAA between India and the concerned country (i.e., USA in the present case) to look for any benefits available to the assessee vis-a-vis the Income-tax Act since as per specific provisions contained in section 90(2), the provisions of DTAA override the provisions of the Income-tax Act insofar as they are more beneficial to ....
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....: Provided.............. Provided further......... Explanation 1. ....... Explanation 2. - For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trademark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trademark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; [(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, lit....
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....arise in India except where the fees are payable in respect of services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. In the present case, the amount in question was paid or payable by the Indian hotels/clients, who are residents to the assessee-company, who is a nonresident for the services rendered and such services/facilities provided by the assessee were utilized by the said Indian clients/hotels for the purposes of their business carried on in India and the amount in question paid for rendering of the said services thus could be said to have accrued or arisen in India by invoking the deeming provisions of section 9 only if the same was payable by the Indian hotels/clients to the assessee by way of 'royalty' as defined in Explanation (2) below clause (vi) of section 9(1) or by way of 'fees for technical services' as defined in Explanation (2) below clause (vii) of section 9(1). The first and foremost question which thus arises for our consideration in the present case is whether the amount in question paid by the Indian hotels/clients to the assesse....
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....lhi High Court has held that mere heading or title of a document cannot deprive a document of its real nature and it is the substance which has to be seen and not the form. 43. Keeping in view this settled position as emanating from the aforesaid judicial pronouncements in respect of interpretation of any agreement, we can now endeavour to analyse the relevant terms of the agreements entered into by the assessee in the present case with its Indian clients/hotels in order to find out the exact nature of services rendered by it from the point of view of applicability of section 9(1)(vi) or 9(1)(vii). Admittedly, the terms and conditions of all the agreements entered into by the assessee with the different Indian clients/hotels, by and large, are similar and the major payments having been received by the assessee from ITC Ltd., we can appropriately refer to the agreement entered into by the assessee with the said Indian client covering the years under consideration for this analysis. A copy of the said agreement executed on 30-12-1988 is placed at page Nos. 31 to 52 of the assessee's paper book-II and a perusal of the same shows that the background of ITC, being party to the said a....
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....avel and trade and has established well-known high international standards policies and procedures for the operation of such hotels has evolved a highly experienced organization for the provision of expert technological knowhow in the planning designing construction decorating managing and equipping of hotels and motor inns throughout the world as well as for the training and development of key personnel to equip them for the operation of such hotels to the international standards established by SHERATON and has furthermore acquired the name, experience and the personnel that enable SHERATON to obtain international business for hotels from all market segments such as individual travellers, groups from travel and tour industry and groups for conventions, congresses and seminars and sale meetings etc." 45. Before us, the learned Special Counsel for the department Shri Y.K Kapur has highlighted this background of the assessee to contend that it clearly shows its expertise in the field of hotel business especially the management and publicity thereof. He has also laid great emphasis on the highly specialized system such as international computerized system available with the assesse....
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....he main intention of both the sides to continue their association was to develop tourism on a wide front by providing, inter alia, the best hotel facilities of international standards to the tourists worldwide. The said objective was to be achieved by promoting and advertising worldwide the Sheraton chain of hotels for the mutual benefit. As stated in the agreement, ITC was already having a well-developed, well-known, extensive and highly efficient organization in India manned by experienced and knowledgeable personnel and through its hotel division known by its own brand name 'WelcomGroup', it was already engaged in setting up and management of hotels consistent with international standards in different parts of India. It was also maintaining a network for the booking and confirmation of hotel reservations known as 'Welcomnet' withinIndia. If the background of the assessee-company given in paragraph Nos. 4 and 5 of the agreement is read with this background of ITC given in paragraph Nos. 2 and 3 as well as the main intention given in paragraph No.6 of promoting and advertising worldwide the Sheraton chain of hotels for the mutual benefit, one can easily understand that both these ....
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.... the hotels covered by this Agreement in any appropriate corporate. Sheraton Directory; (e) Corporate advertising of the SHERATON name and system i.e., TV, Radio, Billboards and press; (b Facilitating cluster advertising (at I.T.C. cost) which allows groups of hotels with like facilities and like markets to advertise together at a reduction from the cost of going it alone; (g) Make available any Corporate Divisional and Area programmes and promotions to counter problem periods in particular off-season periods for hotels; special efforts towards group bookings including groups for international conventions, congresses, seminars, sales and other meetings, appropriate representation at most important trade shows exhibitions and functions of the hotel and travel industry worldwide; (h) Provide assistance, through Sheraton's Corporate facilities, in worldwide public relations; (i) Utilisation of worldwide SHERATON reservations offices. ARTICLE III RESERVATION SERVICES SHERATON shall arrange for all hotels covered by this Agreement to be included in the SHERATON worldwide computerized reservation system ('RESERVATRON') operated by the Sheraton Reservation Corporat....
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....ty Standards and all other SHERATON Standards and Guidelines are introduced and maintained at all times including, but not limited to installation of sprinklers throughout each of the hotels covered by this Agreement by April 6, 1990. Towards this end SHERATON shall assist ITC by making available information of its standards as established worldwide; furthermore, to facilitate coordination between the parties hereto, and the SHERATON network in the area including India, SHERATON shall arrange to make available from time to time the advisory services of senior Hotel Specialists from the Sheraton Asia Regional Office. ITC shall reimburse SHERATON any actual out-of-pocket expenses incurred related to providing such assistance/services. 2. ITC agrees it will ensure compliance with existing regulations, guidelines and standards of SHERATON as from time to time revised and supplemented by SHERATON with respect to the operations and maintenance of standards at the Hotels. ARTICLE V ASSISTANCE WITH TRAINING In order to assist ITC with maintenance of high international standards at the hotels to be marketed and publicized as provided herein, and its operation by adequately train....
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....d by the assessee to ITC as enumerated in the various Articles of the agreement and has tried to explain the nature of each such service in an attempt to fit it either under the provisions of section 9(1)(vi) or that of the relevant Articles of the DTAA between India and USA. While doing so, he, however, has ignored/overlooked the main intention/objective behind the association of the two parties as clearly spelt out in the agreement. If the said agreement or for that matter all the terms thereof are read together as a whole, it explicitly shows that the assessee in substance, had mainly undertaken the job of publicity, marketing and advertising of the hotels of Indian clients worldwide and all the services to be rendered by it as enumerated in the various articles of the agreement were incidental or supplementary to carry out this job effectively and efficiently in the interest of its business of which the said activity/job was forming part. These services, therefore, were integral part of the main work undertaken by the assessee of publicity, marketing and promotion of the Indian hotels worldwide and the nature thereof has to be understood or appreciated keeping in view the main ....
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....are operated and maintained in accordance with such standards. All these hotels including the hotels inIndiawere to comply with the standards so that the target customers visiting any such hotel will be able to get the desired services. All these requirements which were required to be complied with by the Indian hotels/clients thus were for the purpose of customer satisfaction which was an integral part of the marketing strategy of the assessee. Similarly, the training to be imparted by the assessee to the employees of the Indian hotels/clients in order to maintain the standards as per Article V was a part of marketing and business promotion strategy for which the Indian hotels/clients had agreed to pay separately towards reimbursement of expenses actually incurred by the assessee. No such training, however, was imparted by the assessee to the Indian clients/hotels during the years under consideration as submitted by the learned counsel for the assessee and there was no occasion to make such payment. As per Article VI, the assessee had agreed to make available its comprehensive standards and technical assistance for design and construction of new hotels, if any, by the Indian clien....
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.... of each quarter of the calendar year (or part thereof after the commencement of this Agreement) a financial statement showing operating results and monthly gross room sales and revenue for such quarterly period and to file within sixty (60) days after the close of each such year a similar statement certified by a Chartered Accountant acceptable to SHERATON showing a balance sheet and the result of operations for the year including monthly gross room and other sales and revenues. SHERATON shall have the right to inspect the books and records of the Hotels at all reasonable times." 52. As mentioned clearly in the payment clause of the agreement reproduced above, it was agreed that the Indian client would pay to the assessee a fee equivalent to 3% of its room sales expressly for publicity, marketing and sales (including reservation) services. This specific term of payment agreed by both the sides and forming part of the agreement entered into between them explicitly shows that the entire payment made by the Indian clients to the assessee was on account of services rendered in relation to publicity, marketing and sales services and even the quantum of the fees agreed to be so paid ....
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....ovided by it and, therefore, the payments received for such services were clearly in the nature of 'royalty' as defined in section 9(1)(vi) read with Explanation 2(iii). In order to appreciate and examine this stand taken by the Revenue, it would be worthwhile to refer to Article VIII of the agreement relating to trademarks, trade names, signs etc. which is reproduced below:- "ARTICLE VIII TRADE MARKS, TRADE NAMES, SIGNS ETC. (a) SHERATON shall grant appropriate rights at no cost pursuant to separate agreements and in accordance with the terms thereof so as to permit the use by the hotels covered by this Agreement of SHERATON trade names and trademarks in particular the use of the name 'SHERATON' and its stylized 'S' service mark and any other identifying characteristics that may be mutually developed by the parties hereto. The name for each hotel will be jointly determined by the parties. Each hotel to be covered by this Agreement shall unless otherwise determined by SHERATON include the word 'SHERATON' in its name. The three existing WELCOMGROUP hotels inAgra,MadrasandDelhishall continue to be known as the Welcomgroup 'CHOLASHERATON' inMadras, the Welcomgroup 'MUGHALSHER....
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....ntention to have an association with the Indian hotels/clients that the main arrangement between the assessee and the Indian clients was for rendering the services in connection with publicity, advertising and sales promotion of the Sheraton Hotels in their mutual interest. The background of the assessee as well as that of ITC given in the preamble of the relevant agreement shows that even the ITC was possessing not only the required skills, expertise and knowledge to set up and manage the hotels at international standards, but it was also having its own trade name 'Welcomgroup' already established in India. As per Article VIII, the hotels in India of ITC were specifically allowed to use both the trade names i.e., the trade name of the assessee as well as its own trade name. Moreover, the use of trademark, trade names etc. of the assessee by the Indian hotels was not only going to help and assist the assessee in rendering its services relating to publicity, advertising and business promotion of the Indian hotels, but such use was also going to help the assessee in advertising its other hotels worldwide and to promote their business as submitted by the learned counsel for the assess....
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.... learned Special Counsel for the Revenue in his arguments before us have relied heavily on the decision of Mumbai Bench of ITAT in the case of CEAT International SA which was subsequently upheld by the Hon'ble Bombay High Court. It is, however, observed that the facts involved in the said case were materially different from the facts involved in the present case. Firstly, the services for which the amount was paid by the Indian company to the foreign company were classified as per the agreement into four categories and such clear-cut classification made in the said case as well as apportionment of the payment amongst such different services as made by the Assessing Officer was not disputed by the assessee. On the other hand, the payment to the extent of 25% attributed for the services referred to in clause (b) of the agreement viz., allowing use of channels of distribution in overseas markets to the Indian company and after sales service in those markets was impliedly accepted by the assessee-company itself to be in the nature of 'royalty' or 'fees for technical services' before the Tribunal liable to tax in India. The dispute before the Tribunal thus was mainly relating to the amo....
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....ademark by the Indian company under clause (d) of the agreement and the payment attributable thereto was held to be in the nature of 'royalty' in terms of Explanation (2) to section 9(1)(vi).1n the present case, the agreements, however, specifically provide for the use of trademark free of cost by the Indian hotels/clients and this being materially distinguishable fact, the decision rendered in the case of CEAT International SA cannot be applied to the facts of the present case. It is also pertinent to note that the assessment year involved in the case of CEAT International SA was 1978-79 wherein the benefit of DTAA was not available to the assessee. 57. As held by Hon'ble Andhra Pradesh High Court in the case of CIT v. Klayman Porcelains Ltd. [1998] 229 ITR 735, the question as to whether the amount in question paid by the Indian company to the non-resident company is in the nature of royalty or fees for included services is a question of fact to be determined on the facts and circumstances of each case and the terms of agreement under which the same has been paid. In this regard, we have already examined and analyzed the relevant terms of agreements under which the amount in q....
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....resent is to be ascertained from all the circumstances relevant to that matter. The true nature of the sum is not necessarily its nature in law but its nature in business or in accountancy whichever way one likes to put it, because from the legal point of view there may be no difference whatsoever as between the parties between a capital and an income sum. It may be totally irrelevant to the legal relationships into which they are proposing to enter. When, however, the tertius gaudens, in the shape of the Revenue, appears on the scene, that matter which as between the parties may have been a matter of not the slightest importance becomes immediately a matter of very great importance, and it is necessary to examine the circumstances of each individual case, including any documents which require to be construed, in order to ascertain what is the character to be attributed to the payment." 58. In our opinion, the aforesaid observations of the Court of Appeal highlighted by the learned Special Counsel for the Revenue as well as the ultimate decision rendered by the Hon'ble Calcutta High Court in the case of Stanton & Stavely (Overseas) Ltd, in fact, support the assessee's case as th....
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....eering and personnel services on one part and supply of equipment on the other, but even the consideration for such services was payable separately as per the terms and conditions of the relevant agreement. Moreover, the nature of services rendered by the foreign company was also different from the services rendered by the assessee-company in the present case. 62. In the case of Union Carbide Corpn. v. IAC [1994] 50 ITD 437 (Cal.) the assessee, a non-resident company, had received from an Indian company certain amounts under a "technical service agreement" and claimed that the amounts so received being 'fees for technical service', were exempt under section 9(1)(vii) read with Explanation thereto as applicable to the relevant year i.e., assessment year 1982-83. The Assessing Officer did not accept this claim of the assessee and the matter travelled to the Tribunal which was called upon to consider and decide the question as to whether the amount received by the assessee from the Indian company under a "technical service agreement" dated 13-111973 was taxable in its hands as 'royalty' under section 9(1)(vi). Since the experience of the foreign company in the field of manufacture ....
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.... liable to tax at a lower rate of 20%. It is thus clear that not only the nature of services rendered by the Japanese company to the Indian company was different from that of the present case but even the issue involved before the Tribunal, was quite limited relating to rate of tax which was higher if the amount received by the assessee was treated as 'royalty' than if the same was treated as 'fees for included services'. 64. In the case of Raymond Ltd v. Dy. CIT [2003] 86 ITD 791 (Mum.) the assessee-company had engaged a company incorporated in UK as Lead Manager and since this main job undertaken by the UK company involved specialized services rendered by its Managers, the same were held by the Mumbai Bench of ITAT as managerial or consultancy services within the meaning of section 9(1)(vii) read with Explanation 2. However, as no technical knowledge, experience, skills, know-how or process etc. "was made available" to assessee-company by non-resident Managers to GDR issue within the meaning of Article 13.4(c) of the DTAA between India and UK, it was held by the Tribunal that no part of fees for managerial services could be considered as 'fees for technical services' since the....
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....ing that none of the sub-clauses in the Explanation (2) under section 9(1)(vi) would apply to such supply of design and drawings so as to say that any income accrued to the foreign supplier in India. Hon'ble Madras High Court also observed that mere passing of information concerning design of a machine which is tailor made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user so as to render the payment made therefrom being regarded as 'royalty'. 67. In the case of Klayman Porcelains Ltd., Hon'ble Andhra Pradesh High Court held that the question whether the amount paid by the Indian company to the non-resident for imparting of any information concerning the working of the use of a patent, invention, model, design, secret formula or process or trademark or similar property and if it is paid for the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill, would fall within the meaning of 'royalty' or not is essentially of facts to be determined on the facts and circumstances of each case and the terms of agreement under which there has been a transfer. In the said case,....
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....ly of the machinery which could not be said to be covered under sub-clause (vi) and also (vii) of section 9(1). In the case of CIT v. HEG Ltd [2003] 263 ITR 230, Hon'ble M.P. High Court has held that payment for any information concerning industries or commercial venture cannot earn the status of royalty and to have the status of royalty, the information must have some special features. 69. In the present case, the main job undertaken by the assessee-company was to render the services in relation to advertisement, publicity and sales promotion (including reservation) of the Indian hotels as is clearly evident from the relevant terms of the agreements and the use of trademark, trade name etc. as well as provision of other facilities/services was only incidental to the rendering of the said services. Moreover, the payments under the agreements were entirely made by the Indian hotels/clients to the assessee-company for these main services as per the express payment clause contained in the said agreements and the said incidental/ancillary services not being independent of and separable from the main job undertaken by the assessee in the peculiar facts of the case, it was neither pos....
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....which they arise according to the laws of that State subject to certain concessions as provided in clauses (a) and (b) of Article 12(2). The terms "royalties" and "fees for included services" as used in Article 12 are defined in Article 12(3) and 12(4) respectively as follows :- "12(3). The term "royalties" as used in this article means: (a) payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or a scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from ac....
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....m the Indian hotels/clients was in the nature of 'royalty' or 'fees for included services' as per the DTAA between India and America, reliance thus has been placed by it mainly on the provisions of Articles 12(3)(a) as well as 12(4)(a) and 12(4)(b). Article 12(3)(b) being specifically applicable only to payments received for the use of or the right to use of any equipment of industrial, commercial or scientific nature, in any case, is not applicable to the facts of the present case. It is, therefore, relevant to consider as to whether the payment received by the assessee from the Indian hotels/clients was in the nature of "royalties" or "fees for included services" within the meaning given in Article 12(3)(a), 12(4)(a) or 12(4)(b) of the DTAA between India and USA or "fees' for technical services" within the meaning given in Explanation 2 to section 9(1)(vii). 73. In order to decide this issue relating to the applicability of Article 12(3)(a), 12(4)(a) or 12(4)(b) of the DTAA or the provisions of section 9(1)(vii) read with Explanation 2 to the payment received or receivable by the assessee from the Indian hotels/clients in pursuance of the agreements entered into with them, it ....
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....rovide the services relating to advertising, publicity and sales promotion including reservations of the Indian hotels worldwide in mutual interest cannot be relied upon by picking and choosing the same in isolation so as to say that part of the consideration received by the assessee, as attributable to the said services, was in the nature of 'royalties' or 'fees for included services', Such an approach adopted by the Revenue authorities, in our opinion, was neither permissible in law nor practicable in the facts of the case and the conclusion drawn by them on the basis of such approach to cover the said services taken individually or in isolation divorced from the main intention within the meaning of 'royalties' or 'technical services' as defined in Explanation 2 to section 9(1)(vi) or to section 9(1)(vii) and/or that of "royalties" or "fees for included services" as defined in Article 12(3) and 12(4) of the DTAA between India and USA was neither well-founded nor justified. 74. On the other hand, the predominant object/purpose of the integrated business arrangement between the assessee-company and its Indian clients/hotels as reflected in the, relevant agreements so also as und....
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....is business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience, skill etc. 77. As already observed, a close reading of the relevant agreements especially the payment clause, the predominant nature of the services rendered, the integrated arrangement between assessee-company and Indian hotels/clients as well as the nature of relationship between them as reflected in the relevant agreements so also as understood by both the sides leaves no doubt that the entire consideration was paid by the Indian hotels/clients to the assessee-company for the services rendered in relation to advertisement, publicity and sales promotion of the hotel business worldwide and this being so as well as considering all the facts of the case including especially the fact that other services to be rendered by the assessee as enumerated in the various Articles of th....
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....t and where such services are inextricably linked with manufacture, installation, sale or supply, they cannot be evaluated for the purpose of FTS. It is only where services are separable and independent that the FTS will be assessable. In the present case, the services sought to be treated as 'fees for technical services' or 'fees for included services' were of ancillary or auxiliary in nature and being integral part of the job undertaken by the assessee-company, the same were neither independent of nor separable from the said job undertaken by the assessee in relation to publicity, advertisement and sales promotion of the hotel business worldwide. 79. Before us, the learned Special Counsel for the Revenue has referred to some of the Articles of the agreements between the assessee and the Indian hotels/clients to submit that the drawings, designs, documents, systems and other facilities agreed to be provided by the assessee to the Indian hotels/clients in terms of the said Articles are the components which have been provided/supplied in the process of rendering of the services in relation to advertisement, marketing and sales promotion. He has contended that since the same come ....
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....pportion any portion of the consideration received by the assessee-company from the Indian hotels/clients towards use of trademark, trade name etc. by the Indian hotels/clients. Having regard to all these facts and circumstances of the case borne out from the record including especially the relevant agreements between the parties, we find it difficult to accept the stand taken by the Revenue that the payments received by the assessee-company from the Indian hotels/clients in pursuance of the said agreements or any part thereof was in the nature of royalties within the meaning of Article 12(3)(a). 81. As regards Article 12(3)(b) covering the payments received as consideration for the use of or the right to use any industrial, commercial or scientific equipment, we have already noted that neither the Revenue has invoked the provisions of this Article in the assessee's case nor the same otherwise also is applicable to the facts of the present case since there was no such use or the right to use any industrial, commercial or scientific equipment. This takes us to Article 12(4)(a) of the DTAA which covers only the payments made for rendering of any technical or consultancy services w....
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....ly involve either the development and transfer of technical plans or technical designs or making technology available as described in paragraph 4(b) have been illustrated in the aforesaid MoU as engineering service, architectural services and computer software development none of which covers the services rendered by the assessee in the present case, the nature of which is altogether different as already discussed in detail by us. 83. It is also further clarified in the Memorandum of Understanding that technical and consultancy services as envisaged under paragraph 4(b) of Article 12 could make technology available in a variety of settings, activities and industries and some of the areas to which such services may relate are also enumerated in the MoU which do not include the hotel industry. One of such areas as indicated in the MoU is "communication through satellite or otherwise" and relying on the same, learned Special Counsel for the Revenue has contended that the interface between the reservation system of the assessee-company and that of the Indian hotels/clients was covered in this category. We, however, find it difficult to agree with this contention of the learned Speci....
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.... may not involve either the development and transfer of technical plans or technical designs, or making technology available as described in paragraph 4(b). It is, however, possible that the experience, expertise, knowledge etc. acquired by the said party is utilized for rendering the services as integral part of the arrangement between the parties. The same, however, cannot be considered as technical or consultancy services of the nature envisaged in paragraph 4(b) of Article 12. The examples given in the Memorandum of Understanding to indicate the scope of paragraph 4(b) of Article 12 clearly support this view. In example 4 so given, an Indian builder hires theUScompany to produce wallboard at their plant outsideIndia. The Indian company provides the raw material and theUSmanufacturers fabricate the wallboard in its plant using advanced technology. On the analysis of these facts, it is clarified in the MoU that although the US company is clearly performing a technical service, no technical knowledge, skill etc. are made available to the Indian company nor is there any development and transfer of a technical plan or design and, therefore, the fees payable by the Indian company to ....
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....he integrated business arrangement between the assessee-company and the Indian hotels/clients as evident from the relevant agreements as well as the nature of assessee's own business, the said amount clearly represented its 'business profit' which was not liable to tax in terms of Article 7 of the Indo-American DTAA. We, therefore, allow the relevant grounds raised in the assessee's appeals on this issue and dismiss the additional grounds raised by the Revenue in its appeals. 86. Before us, the learned Special Counsel for the Revenue Shri Y.K Kapur has also raised an alternative contention that the affairs between the assessee and the ITC have been arranged or planned in such a way that any payment of income-tax inIndiacan be evaded. He has contended that the agreement entered into between them incorporating such design or plan is nothing but a colourable device not only to defraud the Revenue but also to play fraud upon the statute. He submitted that it is thus a case not of tax planning but of tax avoidance by adopting a colourable device. He took us through the copies of various judgments of the Hon'ble Supreme Court and High Courts filed in Compilation 22A(C-l) to explain th....
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....ents in the present case have been drafted clearly shows that it was a design to avoid the payment of tax in India and the same, therefore, was rightly held by the CIT(A) as a colourable device adopted by the assessee to avoid the payment of tax legally payable by it relying on the decision of Hon'ble Supreme Court in McDowell & Co. Ltd 's case. He submitted that the said agreements were so drafted that the trademarks, trade names etc. of the assessee-company were allowed to be used by the Indian hotels/clients at free of cost despite the fact that the said use was the most crucial and important element of the arrangement between the parties and it was thus a clear case of an attempt made to avoid payment of tax by resorting to dubious methods. He contended that the payment made by the Indian hotels/clients to the assessee-company under the agreements or at least part thereof was clearly attributable to such use of trademark, trade names etc., but by showing that the said use was allowed free of cost in the relevant agreements, an attempt was clearly made to avoid payment of tax by artificial device showing apparently the nature of income to be different than the actual one. He con....
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....s to the agreements i.e., the assessee-company and the Indian hotels/clients are operating at arms' length and without there being any evidence brought on record to show any collusion between them, the agreements between them cannot be held to be sham or collusive merely on the basis of suspicion and surmises. 88. After considering the rival submissions and perusing the relevant material on record, we find it difficult to agree with the stand of the Revenue that the agreements between the assessee-company and Indian hotels/clients were in the nature of a colourable device adopted to avoid payment of tax inIndia. First of all, one of such agreements was entered into between the assessee-company and ITC initially on27-1-1979for a period of ten years which was further extended on virtually the same terms and conditions for a period of ten years vide a fresh agreement dated30-12-1988. Before entering into the said agreements, the required approvals of the different Government authorities including that of RBI were duly obtained. Even the copies of the said agreements were produced before the concerned income-tax authorities for obtaining no-objection under section 195(2) and after e....
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....already observed by us after taking into consideration all the facts of the case that the arrangement between the assessee-company and the Indian hotels as evidenced by the agreements was for rendering the services in relation to advertisement, publicity and sales promotion of the hotel business worldwide and the entire payment was made by the Indian hotels to the assessee-company for such services. This is what has been reflected in the agreement and this is the way in which both the sides have not only understood but acted upon the said agreements. Nothing, however, has been brought on record by the Revenue authorities to show that the intention of the said arrangement or even any action taken by either of the parties was different or at variation with any of the terms of the said agreements. As described in the said agreements, both the parties thereto i.e., the assessee-company and the Indian hotels/clients were reputed and renowned parties having no relation whatsoever between them besides their business association and since both of them were clearly operating at arms' length, it cannot be alleged that there was some sort of collusion between them to draft the agreement in su....
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....ive from the Indian hotels/clients consideration @ 3% of room sales. In these circumstances, when the payment was agreed to be made by the Indian hotels/clients for the job of publicity, advertisement and sales promotion undertaken by the assessee-company, provision of other services/facilities and use of trademark, trade names etc. which were integral part of the said arrangement without any separate cost, in our opinion, would not make the entire contract to be null and void as sought to be contended by Shri Kapur. 93. Before us, the learned counsel for the assessee has raised an alternative contention that even if it is assumed for the sake of argument that the payments in question received by the assessee-company from the Indian hotels/clients are in the nature of 'royalties' or 'fees for included services' within the meaning given in Article 12(3) or 12(4), the same may be charged to tax only in USA in terms of Article 12(1). He has contended that Article 12(2) no doubt provides that the same may also be brought to tax in India at the rate not exceeding 15%, but in the absence of any such rate prescribed by the CBDT or any other competent authority of Indian Government or a....
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....veral years, acted whimsically and illegally in reopening the assessment for the impugned assessment year under section 147 on a mere change of opinion. l(b) That accordingly, the order of the Assessing Officer under section 147 is bad-in-law and void ab initio and the order of the ld. CIT(A) confirming the said order of the Assessing Officer is also unsustainable in law." 95. The learned counsel for the assessee submitted before us that the assessee-company had been receiving the impugned payments of the identical nature consistently from 1979 onwards and after being satisfied that the income arising from the said payments was not taxable in India, the concerned Income-tax authority had granted no-objection certificate under section 195(2) to the Indian companies for making remittance to the assessee-company without deduction of tax at source. He submitted that as per the provisions of section 40(a)(1), any remittance of the sum chargeable to tax in India to a foreign company without deduction of tax at source is not deductible as business expenditure in the hands of the payer and considering this repercussion of non-deduction of tax at source by the payer, the department ex....
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....earned Special Counsel for the Revenue submitted that no assessment for any of the four years under consideration was originally made in the case of the assessee nor even any return of income for the said years was filed by the assessee. He contended that there was thus no occasion for the Assessing Officer to express any opinion on the issues involved in the assessee's case and consequently, the question of initiating the reassessment proceedings on the basis of "change of opinion" does not arise at all as alleged by the learned counsel for the assessee. He contended that when there were no assessments completed by the Assessing Officer originally in the case of the assessee for all the four years under consideration, the question of formation of any opinion about any issue did not arise at all. As regards the contention of the learned counsel for the assessee that the orders passed under section 195(2) involved the expression of opinion, he submitted that the order passed under section 195(2) is not an order of assessment but it is only an interim order which is subject to final assessment. In this regard, he relied on the decision of Hon'ble Supreme Court in the case of Transmis....
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....ment and by the deduction of income-tax, the rights of the parties are not in any manner adversely affected. The proposition propounded in these judicial pronouncements thus is very clear that the order passed under section 195(2) are only interim orders passed for the limited purpose of tentative deduction of income-tax and they do not pre-empt the department from passing appropriate orders of assessment taking even a contrary view than what was expressed in the orders passed under section 195(2). The said orders, therefore, cannot be equated with the regular assessments and the view expressed therein cannot be construed as opinion expressed in the regular assessment. In order to say that the initiation of reassessment proceedings is based on "change of opinion", the change should be in the opinion already expressed by the Assessing Officer on the same issue in the regular assessment originally completed and one cannot look into anything else than the regular assessment originally completed for the same year to say that reassessment proceedings initiated by taking a different/contrary view is based on change of opinion. It is pertinent to note here that, even the intimation issued....
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....ssee for the years under consideration i.e., assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 and this being the undisputed position, there was no occasion to make any assessment for the said years expressing any opinion. The question of change of opinion in issuing notices under section 148, therefore would not arise and the argument of the learned counsel for the assessee that mere change of opinion is not sufficient to issue notices under section 148, has no relevancy at all in the present case. It is also pertinent to note here that the assessments originally made by the Assessing Officer for assessment years 1997-98 and 1998-99 were set aside by the Tribunal vide its common order passed only on 23-10-2002 whereas the reassessment proceedings for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 has been initiated on the basis of said assessments on 18-1-2002 itself. We, therefore, reject the contention raised by the learned counsel for the assessee in this regard and holding that there was no legal infirmity in the initiation of reassessment proceedings for the four years under consideration i.e., assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 as alleg....
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....nal and the orders of the learned CIT(A) to that extent had attained finality at that stage itself. He submitted that the said orders of the learned CIT(A) holding that the remaining 75% of the amounts in question are chargeable to tax being in the nature of 'royalty' or 'fees for included services' were challenged by the assessee-company in its appeals preferred before the Tribunal and, therefore, the limited issue before the Tribunal was about the taxability of the said amount to the extent of 75%. He contended that the subject-matter of appeals before the Tribunal thus was relating to the taxability of such 75% of the amounts in question and the powers of the Tribunal were confined to this subject-matter only. In support of this contention, he relied on the decision of Hon'ble Supreme Court in the case of Hukum Chand Mills Ltd. v. CIT [1966] 63 ITR 232. He also relied on the decision of Hon'ble Allahabad High Court in the case of S.P. Kochhar v. ITO [1984] 145 ITR 255 to contend that the powers of the Tribunal were confined to the subject-matter of appeals and when the assessments were set aside by the Tribunal and the matter was remanded to the Assessing Officer for making a fr....
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....ed that the Assessing Officer thus has clearly exceeded his jurisdiction in framing the orders under section 143(3) read with section 254 in bringing to tax the amount of 25% which was not in dispute before the Tribunal. 102. The learned Special Counsel for the Revenue, on the other hand, submitted that as per the clear cut decision rendered by the Tribunal, the entire assessments for assessment years 1997-98 and 1998-99 were set aside by it and the matter was restored to the file of the Assessing Officer for fresh adjudication in accordance with law. He submitted that the entire matter thus was left at large by the Tribunal and the Assessing Officer was at liberty to deal with the matter de novo. He contended that the powers of the Assessing Officer thus were not circumvented by the Tribunal in any manner while remanding the matter back to him and therefore, it could not be said that he exceeded his jurisdiction while framing the assessments in the set aside proceedings for both the years i.e., assessment years 1997-98 and 1998-99 de novo. In support of this contention, he relied on the decision of Hon'ble Madras High Court in the case of CIT v. D. Veerappan [1995] 215 ITR 533 ....
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....appeals before the learned CIT(A) who held that 75% of the said amounts was taxable inIndia. Accordingly, he sustained the additions made by the Assessing Officer to that extent. As regards the remaining portion of 25%, he, however, held that the same represented business profits/commercial income of the assessee not liable to tax inIndiaas per Article 7 of the DTAA betweenIndiaandUSA. In its appeals filed before the Tribunal, the assessee-company challenged the orders of learned CIT(A) for both the years i.e., assessment years 1996-97 and 1997-98 disputing the additions sustained by him to the extent of 75%. The Revenue, however, did not prefer any appeals or even cross-objections before the Tribunal challenging the relief allowed by the learned CIT(A) to the assessee by deleting the additions made by the Assessing Officer to the extent of 25%. The Tribunal disposed of the appeals filed by the assessee for both the years vide its common order dated 23-10-2002, the operative portion of which as contained in paragraph 24, is reproduced below:- "24. Both the parties have been heard at length. After going through the orders of authorities below and considering the arguments of the ....
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....n accordance with law. At this stage, we may also refer to a decision rendered by the Authority for Advance Ruling in the case of Cyril Eugene Pereira, In re (1999) 154 CTR (AAR) 281 wherein it has been held that provisions of DTAA cannot be availed of if the non-resident is taxable only in one country. The other view has also been expressed by the said authority in the cases Mohsinally Ali mohammed Rafik, In re (1995) 126 CTR (AAR) 311 : (1995) 213 ITR 317 (AAR) and Dr. Rajnikant R. Bhatt, In re (1996) 135 CTR (AAR) 472 : the issue. The assessee shall also be given a reasonable opportunity of being heard and to lead the evidence in support of its case." 104. The Tribunal thus set aside the orders of the learned CIT(A) for assessment years 1997-98 and 1998-99 impugned in the appeals filed before it and restored the matter to the file of the Assessing Officer for fresh adjudication after taking into consideration first the taxability of the amounts in question under the charging provisions contained in sections 4, 5 and 9 of the Income-tax Act, 1961. 105. Relying on the aforesaid observations of the Tribunal, the learned Special Counsel for the Revenue has submitted before us ....
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.... of the ITO by giving suitable directions in regard to the scope of enquiry by the ITO. In the absence of such direction or restriction on the power of the ITO, while making a fresh assessment, the ITO is not bound by anything that had happened either when he made the original assessment or when the appeal was heard. When the remand is made by the Tribunal the position is different. The powers of the Tribunal are confined to the subject-matter of appeal as constituted by the original grounds of appeal and such additional grounds as may be raised by the leave of the Tribunal. Thus, when the Tribunal allows the appeal and sets aside the assessment and remands the case for making a fresh assessment, the power of the ITO is confined to such subject-matter only. He cannot take up the questions which were not the subject-matter of appeal before the Tribunal. This will be so even though no specific direction has been given by the Tribunal. If a specific direction is given, then there is no scope whatsoever for the ITO to travel beyond those directions or restrictions." 108. As held by Hon'ble Supreme Court in the case of Hukum Chand Mills Ltd., the powers of the Tribunal in dealing wit....
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....rocedure, the worst detriment which an appellate court may visit on an appellant is to dismiss the appeal with a direction in an appropriate case to pay costs to the opposite side. An order adverse to the interest of the appellant - adverse in the sense that it takes away from him a benefit which he has already acquired under the order appealed from-is possible only by means of an order made either upon a cross-appeal filed by the other side or on the basis of a memorandum of cross-objections presented by him wherever the law permits him to do so. 109. As already noted, the addition of the impugned amounts to the extent of 75% as sustained by the learned CIT(A) was disputed by the assessee in the appeals filed before the Tribunal in the first round for assessment years 1996-97 and 1997-98. No cross-appeal or even the cross-objection, however, was filed by the Revenue challenging the deletion of the remaining portion of 25% of the said amounts as made by the learned CIT(A) and the subject-matter of the appeals before the Tribunal thus was only about the taxability of 75% of the impugned amounts received by the assessee-company from the Indian hotels/clients whereas the remaining ....
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....ducted and consequently, there could be no liability to pay tax under section 234B. To the similar effect are the decisions of Delhi Bench of ITAT in the case of Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 and in the case of Asia Satellite Telecommunications Co. Ltd v. Dy. CIT [2003] 85 ITD 478 (Delhi). In the present case, all payments made to the assessee by the Indian hotels/clients were subject to deduction of tax at source and although no tax was actually deducted at source, the assessee could not be held to have committed default in paying the advance tax. Consequently, there could be no liability to pay interest under section 234B. We, therefore, cancel the interest charged under section 234B in the assessee's case for all the six years under consideration and allow the relevant grounds raised by the assessee on this issue. 111. As regards the issue raised by the Revenue in its appeals relating to the deletion by the learned CIT(A) of the additions made by the Assessing Officer on account of amount of contribution received by the assessee-company from the Indian hotels/clients in respect of 'Sheraton Club International' (SCI)/'Starwood Preferred G....
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....ncome of the appellant and since the Assessing Officer has nowhere established either during the course of assessment proceedings or during the course of remand proceedings that the appellant had a PE inIndiathese contributions cannot be brought to tax inIndia. Therefore, I am of the considered view that the Assessing Officer was not justified in making addition of Rs. 1,06,17,408 towards these contributions and hence the addition is deleted." 112. Before us, the learned Special Counsel for the Revenue Shri Y.K. Kapur submitted that while giving the aforesaid relief in his impugned orders, the learned CIT(A) failed to appreciate properly the applicability of article 12(3)(a) and 12(4)(a) to the services rendered by the assessee-company in respect of the concerned programmes known as SCI/SPG and FFP. He submitted that any service which helps to promote the enjoyment of property for which payment under article 12(3)(a) is made, would fall within the domain of included services. He contended that the 'fees for included services' as mentioned in paragraph 12(4)(a) includes any services which are ancillary or subsidiary to the enjoyment of right or property or information for which p....
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....he programmes laid out under the said schemes were self-sustaining based on the concept of mutuality. He contended that the amount received by the assessee-company from the Indian hotels/clients on account of contribution in respect of the said programmes thus could not be treated as 'royalty' or 'fees for included services' and no basis was given even by the Assessing Officer to treat the same as such in his assessment order. He submitted that the learned CIT(A), however, appreciated the object of the programmes as well as nature of receipts in the right perspective while holding that the amount in question received by the assessee-company was its 'business income' not chargeable to tax in India in the absence of any PE in India. 114. After considering the rival submissions and perusing the relevant material on record, we find no justifiable reason to interfere with the impugned orders of the learned CIT(A) giving relief to the assessee on this issue. As already held by us, the job undertaken by the assessee-company was in the nature of integrated business arrangement whereby services were to be rendered to the Indian hotels/clients predominantly in relation to advertisement, p....