TaxTMI 
TaxTMI 
2009 (1) TMI 27
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....ed by the assessee i.e., Sheraton International Inc. while the remaining four appeals were filed by the Revenue. As is evident from the impugned judgment of the Tribunal, both the assessee, as well as, the Revenue had filed four cross appeals each for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01. The remaining two, were the appeals of the assessee, for assessment years 1997-98 and 1998-99. 2. The Revenue being aggrieved by the impugned judgment has preferred the present appeals under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). Even though the Revenue, in these appeals, has proposed a total of ten questions, at the time of hearing the learned counsel for the Revenue, Mr Sanjeev Sabharwal confined his submissions to the following proposed questions of law:- (A) Whether the Tribunal was justified in law in holding that the amount received by the assessee from the Indian hotels/clients for the services rendered under the terms of the agreements was in the nature of "business profits" not liable to tax in terms of the Article 7 of the Indo-American DTAA? (B) Whether the income of the assessee from the receipts for services ....
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....dgment as the issues raised in these appeals are inter-related and based on a common set of facts. In order to dispose of these appeals it would be important to note the following undisputed facts. 3.1 The assessee is a company incorporated in USA and a non-resident under the Indian Tax Laws. The assessee is engaged in providing service to hotels in various parts of the world. Towards this end, the assessee, on 27.01.1979 entered into, one such, agreement with ITC Ltd for providing services to three of its hotels, viz., Welcomegroup Mourya Sheraton, New Delhi, Welcomegroup Mugal Sheraton, Agra and Welcomegroup Chola Sheraton, Madras. The scope of services envisaged in the agreement was publicity, advertisement and sales including reservation services. The tenure of the agreement was fixed at 10 years. In consideration of the services the assessee was required to render, ITC Ltd agreed to pay a fee at the rate of 3% of the room sales to the assessee. 3.2 Due to a re-organization, the rights and obligations, which enured to ITC Ltd under the agreement dated 27.01.1979 got vested in ITC Hotels ltd. 3.3 On 09.05.1985 the assessee entered into a similar agreement with ITC Hotel....
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.... was not charging a lump sum fee the consideration received by the assessee was relatable to the business concluded by its client-hotels; and the reservation network. 4.3 Based on the aforesaid findings the Assessing Officer came to the conclusion that the payments received by the assessee were fee for included services as provided in Article 12(4)(b) of the DTAA. The Assessing Officer also concluded that the assessee had a business connection with India and hence, fee received on account of services rendered by the assessee were deemed to accrue, or arose in India and therefore, the assessee's case was covered under Section 9 of the Act. In the alternative he held that the assessee's income was taxable as per the provisions of Article 12 of the DTAA. The Assessing Officer estimated the income of the assessee at Rs 30 crores and having held that they were fee for included services made them exigible to tax at the rate of 15%. 5. Aggrieved by the Assessing Officer's order the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) [hereinafter referred to as the 'CIT(A)"]. 5.1 Briefly, the CIT(A) vide order dated 22.03.01 classified the services rendered by....
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....t have a permanent establishment in India, they were not chargeable to tax in India. Thus 75% of Rs 7,78,26,499/- was brought to tax at the rate of 15% as per Article 12 of the DTAA. 6.1 The assessee being aggrieved carried the matter in appeal to the CIT(A). The CIT(A) vide order dated 11.11.2001 disposed of the appeal for assessment year 1998-99 based on the reasoning given in its order dated 22.03.2001 in respect of assessment year 1997-98. The aforesaid events prompted the Assessing Officer to re-open the proceeding for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01. Accordingly, a notice under Section 148 was issued on 25.01.2002. The reasons recorded in re-opening the assessment under Section 148 as extracted in the Tribunal's orders are as follows:- "Sheraton International Inc. is a company incorporated under the laws of USA. It carries on the business of providing hotel related services worldwide. It entered into agreement with M/s ITC Hotels Ltd. and other "Welcome Group" companies in India for providing various service like training, managerial assistance etc. It also provides its logo "S" and the name "Sheraton" to the Hotels it has entered into con....
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....thus, faulty because they had proceeded to examine the matter from the point of view of the provisions of the DTAA, whereas the approach ought to have been the other way round. 8. On remand the Assessing Officer held that the entire amount received by the assessee constituted royalty and/or fee for included services and was thus, taxable with reference to the charging provisions of section 4, 5 and 9 of the Act and since, the assessee did not have a permanent establishment in India the same was taxable in India as royalty and/or fee for included service as per article 12(3) and/or article 12(4)(b) of the DTAA. The Assessing Officer thus, brought to tax in India the entire amount of Rs 7,83,36,687/- and Rs 7,78,26,449/- received by the assessee during the previous year relevant to assessment year 1997-98 and 1998-99 respectively at the rate of 15%. The said order was passed by the Assessing Officer under Section 143(3) read with Section 254 on 28.11.2003. 8.1 Against the order of the Assessing Officer dated 28.11.2003, in respect of, assessment years 1997-98 and 1998-99 the assessee, being aggrieved, preferred an appeal to the CIT(A). 8.2 In the interregnum appeals against ....
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....y the assessee, in respect of, the assessment year 1997-98 and 1998-99. As noted in the beginning the Tribunal by the impugned judgment disposed of the eight cross-appeals and two appeals filed by the assessee. SUBMISSIONS OF THE COUNSEL 9. Before us the learned counsel for the Revenue Mr Sanjeev Sabharwal, Advocate, submitted that the entire payments received by the assessee were in the nature of royalty and/or fee for included services. For this purpose he referred to various clauses of the agreement to demonstrate that the assessee had a vast knowledge and experience in the field of hotel business. This experience, according to the learned counsel for the Revenue, which the assessee acquired in the hospitality industry, is in the nature of information pertaining to an industrial and commercial and scientific experience and hence, payments received by the assessee are covered under the provisions of Section 9 of the Act, as well as, Article 12 of the DTAA. He further contended that the services rendered in connection with publicity, marketing and promotion being in the nature of ancillary and subsidiary services were covered within the meaning of the provisions of Article 1....
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....s service in the nature of advertisement, publicity and sales to its clients, that is, the hotels in India through systems and facilities located outside India. It was the contention of the learned Senior counsel for the assessee that the income of the assessee was in the real sense a business income and, in view of the fact that the assessee did not have a permanent establishment in India, the said income could not be brought to tax in India by virtue of Article 7 of the DTAA. It was strenuously urged by the learned Senior counsel for the assessee, that the primary service rendered by the assessee under the agreement was marketing, publicity and reservation services and it was only to facilitate this primary objective that the assessee permitted the use of trade name or trademark or the stylized "S" to its clients i.e., Indian hotels only to ensure optimum marketing and sales. It was contended that the permission given to its clients in India to use the brand name "Sheraton" was only to facilitate "cluster advertising" which resulted in reduction of costs and maximization of clients or tourist procurement on a worldwide basis with a view to enhance the revenue of the assessee whic....
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....ultancy services which are of technical nature. It was the learned counsel's contention that advisory services, marketing advice, etc., were not the kind of technical and consultancy services as envisaged under Article 12(4)(b) of the DTAA. 11. The submission of the learned Senior counsel for the assessee was that in any event no substantial question of law arose for consideration of this court. The Tribunal, according to him, had returned the findings of fact based on the material before it, which ought not to be disturbed as there was no perversity attached to any of the findings returned by it. 12. Having heard both the learned counsel for the Revenue, as well as, the assessee we are of the view that the impugned judgment of the Tribunal deserves to be sustained for the reasons given hereinafter:- 12.1 But first, the findings of fact returned by the Tribunal: (i) the main purpose of the agreement entered into between the assessee and its client-hotels was to promote business keeping in mind their mutual interests, through worldwide publicity, marketing and advertisement. All other services rendered by the assessee as encapsulated in various Articles of the agreement ....
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....hereto of the Income-Tax Act, 1961 or Article 12(4) of the Indo-American DTAA respectively. Having regard to the 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.' (v) it found that Article 12(4)(b) had no applicability and for this purpose it relied upon the Memorandum of Understanding dated 15.05.1989 and the examples set out therein. After perusing the examples given therein, it came to the conclusion that it had no applicability to the hotel industry. It held that Article 12(4)(b) applied to those services which related to areas where technology was made available, whereas what the assessee in the present case was extending was services to the hotel industry in relation to advertisement, publicity and sales promotion, which were, not in the nature of tech....
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....ion system of the assessee and that of the Indian hotels/clients." 'What is transferred to the Indian company through the service contract is commercial information and the mere fact that technical skills were required by the performer of the service in order to perform the commercial information services does not make the service a technical service within the meaning of paragraph 4(b) of Article 12. Since the facts of the present case are almost similar to the facts of this case given in Example 7 of the memorandum of Understanding, it leaves no doubt that the payment in question received by the assessee company from the Indian hotels/clients or any part thereof could not be treated as "fees for included services' within the meaning of paragraph 4(b) of Article 12." 12.2 As regards the agreement being a colourable device the Tribunal noted that nothing was brought on record by the Revenue Authorities to show that the intention of the said arrangement or even the action of the parties, as reflected in the agreement, was at variance with the terms of the agreement. It noted that since both the assessee and its clients were operating at arm's length, no collusion could b....