2009 (1) TMI 27 - HC - Income Tax

Assessee under agreement provided advertisement services to its client-hotels - use of trademark/trade name were incidental - payments received were neither in the nature of royalty nor in the nature of fee for technical services - payments received were held by Tribunal as business income - no evidence brought by the Revenue to prove that the agreement was a fake - these are findings of fact - findings of the Tribunal are not perverse no question of law arise revenue s appeal fails

Summary

Issues Involved:
1. Nature of Amount Received by Assessee
2. Taxability of Income Under Indian Law
3. Classification as Royalty or Fee for Included Services
4. Interpretation of Agreements and Articles
5. Allegation of Colourable Device
6. Contributions to Specific Programs (SCI and FFP)

Detailed Analysis:

1. Nature of Amount Received by Assessee:
Issue: Whether the amount received by the assessee from Indian hotels/clients for services rendered was in the nature of "business profits" and not liable to tax under Article 7 of the Indo-American DTAA.

Analysis: The Tribunal found that the main purpose of the agreement between the assessee and its client-hotels was to promote business through worldwide publicity, marketing, and advertisement. All other services, including the use of trademarks and reservation systems, were incidental and/or ancillary to this main objective. The Tribunal concluded that the payments received by the assessee were business profits, not royalties or fees for technical services, and thus not taxable in India under Article 7 of the DTAA.

2. Taxability of Income Under Indian Law:
Issue: Whether the income of the assessee from receipts for services rendered to Indian clients/hotels was taxable in India under Sections 4, 5, and 9 of the Income Tax Act.

Analysis: The Tribunal held that the income received by the assessee did not accrue or arise in India because the services were rendered outside India. The Tribunal emphasized that the income was business income and, in the absence of a permanent establishment in India, it could not be taxed under Indian law.

3. Classification as Royalty or Fee for Included Services:
Issue: Whether the income received by the assessee was taxable as "royalty" and/or "fee for included services" under Article 12 of the DTAA and Explanation-2 to Section 9(1)(vi) and (vii) of the Act.

Analysis: The Tribunal found that the payments received by the assessee were not in the nature of royalty or fees for technical services. It noted that the services provided were related to advertisement, publicity, and sales promotion, which did not involve the transfer of technology or technical knowledge. Therefore, the payments were classified as business income, not royalties or fees for included services.

4. Interpretation of Agreements and Articles:
Issue: Whether the Tribunal correctly interpreted the relevant clauses and Articles of the agreements to conclude that the primary purpose was to promote hotel business worldwide, with other services being ancillary.

Analysis: The Tribunal examined the agreements and found that the primary objective was to promote business through marketing and publicity. The use of trademarks and other services was incidental to this main purpose. The Tribunal's interpretation was based on a detailed analysis of the agreements and the nature of services provided.

5. Allegation of Colourable Device:
Issue: Whether the agreement executed by the assessee was a colourable device to avoid tax in India.

Analysis: The Tribunal noted that there was no evidence to suggest that the agreement was a colourable device. It observed that the terms of the agreement were vetted by various statutory authorities and treated as arm's length transactions. The Tribunal concluded that the agreement was genuine and not designed to avoid tax.

6. Contributions to Specific Programs (SCI and FFP):
Issue: Whether the contributions received by the assessee from Indian hotels/clients for the "Sheraton Club International" and "Frequent Flyer Programme" were taxable under Article 12 of the DTAA as "fees for included services."

Analysis: The Tribunal held that the contributions for SCI and FFP were part of an integrated business arrangement aimed at promoting mutual business interests. These contributions were considered business income and not fees for included services. Therefore, they were not taxable in India under Article 12 of the DTAA.

Conclusion:
The Tribunal's judgment was sustained, concluding that the payments received by the assessee were business income, not royalties or fees for technical services. The income was not taxable in India in the absence of a permanent establishment. The Tribunal's findings were based on a detailed analysis of the agreements and the nature of services provided, and no substantial question of law arose for consideration. The appeals were dismissed.