M/s Sheraton International Inc., New Delhi V. DDIT, New Delhi

ITA 5480/DEL/2010

• Counselvise Citation: 548020114 RSA 2010
• Duration Of Justice: 2 year(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 08-11-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 06-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D K GUPTA
• Keywords: Business income; Double taxation relief; Permanent establishment; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI I.C. SUDHIR, JUDICIAL MEMBER ITA NO. 5480/DEL/2010 ASSESSMENT YEAR: 2007-08 SHERATON INTERNATIONAL INC., C/O NANGIA & CO., SUITE-4A, PLAZMA M-6, JASOLA, NEW DELHI. PAN NO. AAGCS6140J VS. DDIT, CIRCLE 2(2), INTERNATIONAL TAXATION, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. AMIT ARORA, CA RESPONDENT BY: SH. D.K. GUPTA, CIT(DR) O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ASSESSMENT ORDER DATED 04/10/2010 PASSED U/S 144C(1) READ WITH SECTION 143(3) INCONSEQUENCE TO THE DIRECTIONS ISSUED BY DISPUTE R ESOLUTION PANEL U/S 144C(5) DATED 27/09/2010 FOR A.Y. 2007-08. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY INCORPORATED IN USA. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING VARIOUS KINDS OF SERVICES TO THE HOTELS ACROSS THE WORLD. THE AS SESSEE HAD ENTERED INTO ITA NO. 5480/D/2010 2 AGREEMENTS WITH A CHAIN OF ITC HOTELS AND SOME OTHE R HOTELS. DURING THE FINANCIAL YEAR UNDER CONSIDERATION THE ASSESSEE HAD SHOWN THE FOLLOWING AMOUNTS ON CASH BASIS UNDER DIFFERENT HEADS FOR THE SERVICES RENDERED TO THE FOLLOWING HOTELS: - S.NO. NAME OF THE HOTELS MARKETING FEE FREQUENT FLIER PROGRAM STARWOOD PREFERRED GUEST TOTAL (IN RUPEES) (IN RUPEES) (IN RUPEES) (IN RUPEES) 1. MAURYA SHERATON 54025669 1826962 12390793 68243425 2. GRAND MARATHA 22306607 3111644 15114344 40532595 3. SONAR BANGLA 8209771 174573 726402 9110745 4. GRAND CENTRAL 12365377 436655 5833182 18635213 5. KAKATIA 12638213 77893 1204067 13920173 6. PARK SHERATON 13282919 1453542 992608 15729069 7. WINDSOR MANOR 29772853 35422 8912221 38720496 8. RAJPUTANA PALACE 14328645 - - 14328645 9. CHOLA SERATON 7172141 217247 1690574 9079963 10. MUGHAL SHERATON 9821767 19861 40019 9881647 11. ADJUSTMENT 475831 475831 TOTAL 184399793 7353799 46904210 238657802 3. THE ASSESSEE IN THE NOTE ATTACHED TO THE RETURN OF INCOME SUBMITTED AS UNDER: - THE ASSESSEE IS A NON-RESIDENT COMPANY INCORPORATED UNDER THE LAWS OF USA AND CARRIES ON T HE BUSINESS OF PROVIDING VARIOUS HOTEL RELATED SERVICE S IN SEVERAL COUNTRIES AROUND THE WORLD. SHERATON HAS ENTERED INTO AGREEMENTS WITH THE INDIAN HOTELS FOR PROVIDING WORLDWIDE PUBLICITY, MARKETING AND ADVERTISING OF HOTELS THROUGH SHERATONS WORLDWIDE SYSTEM OF SALES, ADVERTISING, PROMOTION, PUBLIC REL ATIONS AND RESERVATIONS. ITA NO. 5480/D/2010 3 DURING THE YEAR UNDER QUESTION, THE ASSESSEE HAS DERIVED INCOME VIZ. MARKETING FEES & SPG FROM THE INDIAN HOTELS IN RESPECT OF THE AFORESAID AGREEMENT S. IT IS THE CONTENTION OF THE ASSESSEE COMPANY THAT T HE AFORESAID REVENUE DERIVED BY IT IS IN THE NATURE OF BUSINESS PROFITS AS DEFINED IN ARTICLE 7 OF THE DOU BLE TAX AVOIDANCE AGREEMENT BETWEEN INDIA AND USA (DTAA). THE COMPANY DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA AS DEFINED IN ARTICLE 5 OF T HE DTAA. IN VIEW OF THE FACT THAT THE COMPANY DOES NOT HAVE A PE IN INDIA, THE AFORESAID SUMS ARE NOT CHARGEABLE TO TAX IN INDIA. 4. THE AO REQUIRED THE ASSESSEE TO EXPLAIN AS TO WH Y THE AFORESAID SUMS SHOULD NOT BE TAXED AS INCOME FROM ROYALTY AND/OR FEES FOR TECHNICAL SERVICES. THE ASSESSEES REPLY HAS BEEN REPRODUCE D IN PARA 4.1 WHICH WAS AS UNDER: - UNDER THE PREVIOUSLY ENTERED CONTRACTS, THE ASSESSEE COMPANY HAS RENDERED SERVICES TO INDIAN HOTELS, WHICH ARE PREDOMINANTLY IN RELATION TO ADVERTISEMENT, PUBLICITY AND SALES PROMOTION OF HOTEL BUSINESS WORLDWIDE IN MUTUAL INTEREST AND THE USE OF TRADEMARK, TRADE NAMES ETC. OF THE ASSESSEE COMPANY BY THE INDIAN HOTELS AS WELL AS THE PROVISION OF OTHER SERVICES AND FACILITIES AS IN TE RMS OF THE AGREEMENTS WERE MERELY INCIDENTAL TO THE ITA NO. 5480/D/2010 4 UNDERTAKING OF THIS MAIN ACTIVITY. FURTHER, THE PROGRAMMES IN QUESTION KNOWN AS FFP AND SPG IMPLEMENTED IN THE SHERATON GROUP OF HOTELS INCLUDING THE INDIAN HOTELS WERE ALSO INCIDENTAL TO THE SAID ACTIVITY. THE SERVICES RENDERED BY SHERATO N DO NOT MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE OR EXPERTISE AND HENCE, CANNOT BE TERMED AS FEES FOR INCLUDED SERVICES IN TERMS OF ARTICLE 12(4)(B) OF T HE DTAA BETWEEN INDIA AND USA. FURTHER, THE IMPLEMENTATION OF THE SHERATONS PROGRAMME BY THE INDIAN HOTELS IS NEITHER ANCILLARY NOR SUBSIDIARY T O THE ENJOYMENT OF RIGHT OR PROPERTY OR INFORMATION A S ENVISAGED IN ART. 12(3)(A) OF THE DTAA. ACCORDINGLY , THE SAME CAN ALSO NOT BE TREATED AS FEES FOR INCLUD ED SERVICES WITHIN THE MEANING GIVEN IN ART. 12(4)(A) OF THE DTAA. 5. THE ASSESSEE ALSO RELIED ON THE DECISION OF ITAT IN ITS OWN CASE FOR ASSESSMENT YEARS 1995-96 TO 2000-01. THE ASSESSEE ALSO REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT APPROVING THE AFORESAID DECISION REPORTED IN 313 ITR 267, WHEREIN THE HONBLE DELHI HIGH COURT APPROVED THE TRIBUNALS FINDING THAT THE PAYMENTS RECEIVED WERE IN THE NATURE OF BUSINESS INCOME AND SINCE ASSESSEE ADMITTEDLY HAD NO PERMANE NT ESTABLISHMENT UNDER ARTICLE 7 OF THE DTAA, BUSINESS INCOME RECEIV ED BY THE ASSESSEE COULD NOT BE BROUGHT TO TAX IN INDIA. THE AO, HOWE VER, OBSERVED THAT SINCE THE DECISION OF HONBLE DELHI HIGH COURT HAD NOT BE EN ACCEPTED BY THE ITA NO. 5480/D/2010 5 DEPARTMENT AND THE APPEAL HAS BEEN PREFERRED BEFORE THE HONBLE SUPREME COURT, THEREFORE, FOLLOWING THE ORDER FOR AY 1998-9 9 THE ASSESSEES CLAIM WAS NOT ACCEPTABLE. HE COMPUTED TAX @ 15%. 6. BEING AGGRIEVED WITH THE ASSESSMENT ORDER, THE A SSESSEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL : - 1. THAT THE AO HAS ERRED ON FACTS AND IN LAW IN ASSESSING THE INCOME OF THE APPELLANT AT RS. 238,657,802/- BY HOLDING THAT THE PAYMENTS RECEIVED BY THE APPELLANT FOR RENDERING VARIOUS MARKETING AND ADVERTISEMENT SERVICES TO CUSTOMERS IN INDIA, WERE TAXABLE AS ROYALTY AND/OR FEES FOR TECHNICAL SERVICES, IN TERMS OF SECTION 9 OF THE INCOME TAX ACT, 1961 (THE ACT) AS WELL AS ARTICLE 12 OF THE INDIA-US DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA). 1.1 THAT THE AO HAS ERRED ON FACTS AND IN LAW IN APPORTIONING PART OF THE CONSIDERATION RECEIVED BY THE APPELLANT TOWARDS, (I) USE OF TRADEMARK, (II) MAKING AVAILABLE TECHNICAL KNOW-HOW, SKILLS, (III) USE OF CRS SYSTEMS FOR MAKING RESERVATIONS AND, (IV) PROVIDING MARKETING, ADVERTISEMENT SERVICES MERELY BASED ON CONJECTURES AND SURMISES AND WITHOUT HAVING ANY COGENT BASIS FOR THE SAME. ITA NO. 5480/D/2010 6 1.2 THAT THE AO HAS ERRED IN FACTS AND ON LAW IN ASSIGNING A PART OF THE AFORESAID PAYMENTS TOWARDS THE RIGHT TO USE TRADEMARK AND HOLDING THAT THE SAME WERE WAS TAXABLE AS ROYALTY AS PER THE PROVISIONS OF THE ACT. 1.3 THAT THE AO HAS ERRED IN FACTS AND ON LAW IN ASSIGNING A PART OF THE AFORESAID PAYMENTS TOWARDS MAKING AVAILABLE TECHNICAL KNOW-HOW SKILLS AND MANAGERIAL PRACTICE, MARKETING, PUBLICITY AND RESERVATION FEES AND FOR USE OF HIGHLY SOPHISTICATED CRS SYSTEMS AND HOLDING THAT THE SAME WERE TAXABLE AS FEES FOR TECHNICAL SERVICES AS PER THE PROVISIONS OF THE ACT. 2. THAT THE AO, WHILE HOLDING AS ABOVE, HAS FAILED TO APPRECIATE THAT THE APPELLANT HAD RENDERED THE ABOVE SERVICES IN PURSUANCE OF AN INTEGRATED BUSINESS ARRANGEMENT FOR RENDERING MARKETING AND ADVERTISEMENT SERVICES, WHICH CONSTITUTE BUSINESS PROFITS OF THE APPELLANT AND AS PER PROVISIONS OF ARTICLE 7 (READ WITH ARTICLE 5) OF THE DTAA, BUSINESS INCOME RECEIVED BY THE APPELLANT CANNOT BE BROUGHT TO TAX IN INDIA SINCE THE APPELLANT DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA. 3. THAT THE AO HAS ERRED IN HOLDING THAT THE CONTRIBUTIONS RECEIVED BY THE APPELLANT TOWARDS FREQUENT FLIER PROGRAM (FFP) AND STARWOOD PREFERRED GUEST PROGRAM (SPGP) ITA NO. 5480/D/2010 7 WERE LIABLE TO TAX IN INDIA, EVEN THOUGH THERE IS NO FINDING IN THE ASSESSMENT ORDER ABOUT THE TAXABILITY THEREOF. 4. THAT THE AO HAS ERRED IN LAW AND ON FACTS IN MECHANICALLY FOLLOWING THE ASSESSMENT ORDER FOR AY 1998-99 AND DISREGARDING THE FACT THAT THE SAME HAS BEEN OVERRULED BY THE DECISION OF THE HONBLE DELHI HIGH COURT IN APPELLANT OWN CASE FOR AYS 1995-96TO 2000-01VIDE ORDER DATED30.01.2009. 5. THAT THE AO HAS ERRED IN LAW IN NOT FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT MERELY ON THE GROUND THAT THE SAME HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN APPEAL AGAINST THE SAID DECISION HAS BEEN FILED BEFORE THE HONBLE SUPREME COURT. 7. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE FIND THAT HONB LE DELHI HIGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX VS. SHERATON INTERNA TIONAL INC. VIDE ITS JUDGMENT DATED 30/01/2009 REPORTED IN 313 ITR 267 H ELD AS UNDER: - IN VIEW OF THE FINDINGS OF THE TRIBUNAL THAT THE MAIN SERVICE RENDERED BY THE ASSESSEE TO ITS CLIENT - HOTELS WAS ADVERTISEMENT, PUBLICITY AND SALES PROMOTION KEEPING IN MIND THEIR MUTUAL INTERESTS AND, IN THAT CONTEXT, THE USE OF TRADEMARK, TRADE NAME OR THE STYLIZED S OR OTHER ENUMERATED SERVICES REFERRED TO IN THE AGREEMENT WITH THE ITA NO. 5480/D/2010 8 ASSESSEE WERE INCIDENTAL TO THE SAID MAIN SERVICE, IT RIGHTLY CONCLUDED, THAT THE PAYMENTS RECEIVED WERE NEITHER IN THE NATURE OF ROYALTY U/S 9(1)(VI) R/W EXPLN. 2 OR IN THE NATURE OF FEE FOR TECHNICAL SERV ICES U/S 9(1)(VII) R/W EXPLN. 2OR TAXABLE UNDER ART. 12 OF THE DTAA. THE PAYMENTS RECEIVED WERE THUS, RIGHTLY HELD BY THE TRIBUNAL, TO BE IN THE NATURE OF BUSINE SS INCOME. AND SINCE THE ASSESSEEADMITTEDLY DOES NOT HAVE A PE UNDER THE ART. 7 OF THE DTAA BUSINESS INCOME RECEIVED BY THE ASSESSEE CANNOT BE BROUGHT TO TAX IN INDIA. THE FINDINGS OF THE TRIBUNAL ON TH IS ACCOUNT CANNOT BE FAULTED. THE TRIBUNAL POINTEDLY OBSERVED THAT THERE WAS NO EVIDENCE BROUGHT ON RECORD BY THE REVENUE TO ENABLE THEM TO HOLD THAT THE AGREEMENT WAS A COLORABLE DEVICE, IN PARTICULAR , THAT THE PAYMENTS RECEIVED WERE FOR USE OF TRADEMARK, BRAND NAME AND STYLIZED MARK S. THE REASONING ADOPTED BY THE TRIBUNAL IS SUSTAINABLE. MOREOVER, THESE ARE FINDINGS OF FACT WHICH COULD BE GONE INTO ONLY IF A QUESTION WAS PROPOSED IMPUGNING THE FINDINGS OF THE TRIBUNAL JUDGMENT. NO SUCH QUESTION HAS BEEN PROPOSED IN THE APPEAL. NO FAULT CAN BE FOUND WITH THE IMPUGNED JUDGMENT. NO QUESTION OF LAW, MUCH LESS A SUBSTANTIAL QUESTIO N OF LAW, HAS ARISEN FOR CONSIDERATION. IN THE RESUL T THE APPEALS ARE DISMISSED - K. RAVINDRANATHAN NAIR VS. CIT (2000) 164 CTR (SC) 498: (2001) 247ITR 178 (SC) RELIED ON; SHERATON INTERNATIONAL INC. VS. ITA NO. 5480/D/2010 9 DY. DIRECTOR OF IT (2007)106 TTJ (DEL.) 620 : (2007) 107 ITD 120 (DEL.) AFFIRMED . 8. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE D ELHI HIGH COURT, IT IS HELD THAT THE MAIN SERVICES RENDERED BY THE ASSESSE E, A COMPANY INCORPORATED AND TAX RESIDENT IN USA, TO INDIAN COM PANY, WAS ADVERTISEMENT, PUBLICITY AND SALES PROMOTION KEEPIN G IN MIND THEIR MUTUAL INTEREST AND IN THAT CONTEXT, THE USE OF TRADEMARK, TRADE NAME ETC. AND OTHER ENUMERATED SERVICES REFERRED TO IN THE AGREEMENT WI TH THE ASSESSEE WERE INCIDENTAL TO MAIN SERVICE AND, THEREFORE, THE PAYM ENTS RECEIVED WERE NEITHER IN THE NATURE OF ROYALTY NOR IN THE NATURE OF FEE FOR TECHNICAL SERVICES, BUT BUSINESS INCOME AND ASSESSEE NOT HAVING ANY PE IN INDIA, SUCH BUSINESS INCOME WAS NOT TAXABLE IN INDIA. 9. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14/12/2012 SD/- SD/- (I.C. SUDHIR) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 14/12/2012 *KAVITA ITA NO. 5480/D/2010 10 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR