2006 (10) TMI 183 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of payments received by the assessee from Indian hotels/clients.
2. Validity of initiation of reassessment proceedings.
3. Scope of set aside proceedings.
4. Levy of interest u/s 234B.
5. Deletion of additions on account of contributions received for Sheraton Club International (SCI)/Starwood Preferred Guest (SPG) Programme and Frequent Flyer Programme (FFP).

Summary:

1. Taxability of Payments Received by the Assessee from Indian Hotels/Clients:
The Tribunal examined whether the payments received by the assessee, a non-resident company, from Indian hotels/clients were taxable in India as 'royalty' or 'fees for included services' under section 9(1)(vi) and 9(1)(vii) of the Income-tax Act, 1961, and Article 12 of the DTAA between India and USA. The Tribunal concluded that the payments were for services related to publicity, marketing, and sales promotion, which constituted business profits. Since the assessee had no permanent establishment (PE) in India, these profits were not taxable in India under Article 7 of the DTAA. The Tribunal rejected the Revenue's contention that the agreements were a colourable device to avoid tax.

2. Validity of Initiation of Reassessment Proceedings:
The Tribunal held that the initiation of reassessment proceedings for assessment years 1995-96, 1996-97, 1999-2000, and 2000-01 was valid. It rejected the assessee's argument that the reassessment was based on a mere change of opinion, noting that no assessments were originally made, and no returns were filed by the assessee for these years. The Tribunal emphasized that orders under section 195(2) are interim and do not preclude the department from passing appropriate assessment orders.

3. Scope of Set Aside Proceedings:
The Tribunal found that the Assessing Officer exceeded his jurisdiction in the set aside proceedings for assessment years 1997-98 and 1998-99 by taxing the entire amount received by the assessee, including the 25% portion previously held as business profits by the CIT(A). The Tribunal noted that the subject-matter of the appeals before it was limited to the taxability of 75% of the amounts, and the remaining 25% had attained finality. Therefore, the Tribunal deleted the additions made by the Assessing Officer for the 25% portion.

4. Levy of Interest u/s 234B:
The Tribunal canceled the interest charged under section 234B for all six years under consideration, following the decision of the Delhi Special Bench in the case of Motorola Inc. v. Dy. CIT, which held that when all payments made to the assessee are subject to deduction of tax at source, the assessee cannot be held to have committed default in paying advance tax.

5. Deletion of Additions on Account of Contributions Received for SCI/SPG Programme and FFP:
The Tribunal upheld the CIT(A)'s decision to delete the additions made by the Assessing Officer on account of contributions received by the assessee from Indian hotels/clients for SCI/SPG Programme and FFP. It agreed with the CIT(A) that these contributions were not in the nature of 'royalty' or 'fees for included services' but constituted the commercial income of the assessee, which was not taxable in India in the absence of a PE.

Conclusion:
- The appeals of the assessee for assessment years 1997-98 and 1998-99 were allowed.
- The appeals of the assessee for assessment years 1995-96, 1996-97, 1999-2000, and 2000-01 were partly allowed.
- All four appeals of the Revenue were dismissed.