2012 (3) TMI 259 - AT - Income Tax

Article 12 of DTAA - The assessee had entered into agreements with the ITC Hotels Ltd to provide marketing and advertising services through sales, promotion, public relations and reservations - income received in the form of marking fees for services provided by the assessee outside India - Revenue contented that the assessee had received income from royalty and / or fees from technical services - the payment was also held to be covered by the definition of fees for technical services as per Explanation 2 of section 9(1)(vii), being a consideration for the rendering of technical, managerial and consultancy services - Held that - payments received were in the nature of business income, and not in nature of royalty or fees for technical services. It was accepted that the assessee did not have a permanent establishment in India, and hence the business income could not be brought to tax under Article 7 of the India-USA DTAA - decided the issue in favour of the assessee.

Summary

Issues:
Appeals against orders of Ld. Commissioner of Income Tax (Appeals) for assessment years 2005-06 & 2006-07 regarding nature of receipts, taxability as Business Profits, Royalties, or Fees for Included Services under DTAA.

Analysis:
1. Nature of Receipts - Business Profits vs. Royalties/FIS:
The Revenue contended that the receipts of the assessee should be treated as Royalties or Fees for Included Services (FIS) rather than Business Profits. The Assessing Officer held that income derived by the assessee from trademark use, technical services, and sophisticated CRS systems constituted Royalty or FIS. However, the assessee argued that the income was in the nature of Business Profits as per the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

2. Taxability as Royalties/FIS:
The Ld. Commissioner of Income Tax (Appeals) considered the issue in light of previous judgments and orders. Referring to the ITAT and Delhi High Court orders for A.Yrs. 1995-96 to 2000-01, it was established that the payments received by the assessee were deemed as business income and not Royalties or FIS. The High Court dismissed the Revenue's appeals, affirming that the payments were not taxable as Royalties or FIS due to the absence of a permanent establishment in India.

3. Judicial Precedents and Orders:
The tribunal cited the decision in Sheraton International Inc. case and the subsequent dismissal of Revenue's appeal by the High Court. The Ld. Departmental Representative failed to counter the arguments presented by the assessee's counsel. Relying on the precedents and orders, the tribunal upheld the Ld. Commissioner of Income Tax (Appeals) decision in favor of the assessee, resulting in the dismissal of the Revenue's appeals.

In conclusion, the tribunal dismissed the appeals filed by the Revenue, affirming that the income received by the assessee from hotel-related services provided to Indian hotels was to be treated as Business Profits and not Royalties or Fees for Included Services under the DTAA. The decision was based on established judicial precedents and orders, emphasizing the absence of a permanent establishment in India as a key factor in determining the taxability of the receipts.