1989 (1) TMI 171 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of membership fees received by IHC from East India and Indian Hotels Co.
2. Applicability of Section 9(1)(vi) and (vii) of the Income Tax Act, 1961.
3. Interpretation of agreements and their approval dates in relation to the applicability of the proviso to Section 9(1)(vi) and (vii).

Issue-Wise Detailed Analysis:

1. Taxability of Membership Fees:
The primary issue was whether the membership fees received by IHC from East India and Indian Hotels Co. were taxable in India. The ITO had taxed 5% of the receipts from East India and Indian Hotels Co. as attributable to the use of the word "Inter Continental." This was based on a previous Tribunal decision, which the Department accepted. The CIT, however, held that the entire payment from Indian Hotels Co. was taxable, while only 5% from East India was taxable, directing the ITO to verify the factual position.

2. Applicability of Section 9(1)(vi) and (vii):
Section 9(1)(vi) deems income by way of royalty to accrue or arise in India, while Section 9(1)(vii) deals with fees for technical services. The Tribunal had previously ruled that 5% of the receipts were attributable to the use of the word "Inter Continental" and taxable as royalty under Section 9(1)(vi). The remaining 95% was considered as fees for technical services under Section 9(1)(vii).

3. Interpretation of Agreements and Approval Dates:
The CIT and CIT(A) contended that the agreements executed after 1st April 1976 did not qualify for the benefit of the proviso to Section 9(1)(vi) and (vii). They argued that the agreements were substantially different and required fresh approval, which was obtained after 1st April 1976. The Tribunal, however, interpreted that the subsequent agreements were in continuation of the original agreements approved before 1st April 1976, thus qualifying for the proviso's benefit.

Detailed Analysis:

Taxability of Membership Fees:
For the assessment years 1984-85 and 1985-86, the ITO computed the income of IHC by taxing 5% of the membership fees from East India and Indian Hotels Co. The CIT, however, revised this, holding that the entire payment from Indian Hotels Co. was taxable, while only 5% from East India was taxable. The Tribunal upheld the ITO's approach, following its previous decision that 5% of the receipts were attributable to the use of the word "Inter Continental" and taxable as royalty.

Applicability of Section 9(1)(vi) and (vii):
The Tribunal found that 5% of the receipts were taxable as royalty under Section 9(1)(vi), while the remaining 95% were taxable as fees for technical services under Section 9(1)(vii). The Tribunal noted that the definition of "royalty" under Explanation 2 to Section 9(1)(vi) covered the use of the word "Inter Continental." Similarly, the definition of "fees for technical services" under Explanation 2 to Section 9(1)(vii) covered the remaining 95% of the receipts.

Interpretation of Agreements and Approval Dates:
The Tribunal disagreed with the CIT and CIT(A)'s interpretation that the agreements executed after 1st April 1976 did not qualify for the proviso's benefit. The Tribunal held that the subsequent agreements were in continuation of the original agreements approved before 1st April 1976. The Tribunal referred to the Government of India's letter dated 26th September 1988, which confirmed that the extension granted on 13th March 1985 was in continuation of the approval granted on 8th August 1967. The Tribunal also referred to the Gujarat High Court's decision in Meteor Satellite Ltd., which held that agreements made in accordance with proposals approved before 1st April 1976 qualified for the proviso's benefit.

Conclusion:
The Tribunal concluded that 5% of the receipts from East India and Indian Hotels Co. were taxable as royalty under Section 9(1)(vi), while the remaining 95% were taxable as fees for technical services under Section 9(1)(vii). The Tribunal allowed the appeals for the assessment years 1984-85 and 1985-86, holding that the assessee IHC was entitled to the benefit of the proviso to Section 9(1)(vii) in respect of 95% of the receipts. The orders of the CIT for the assessment year 1984-85 and the CIT(A) for the assessment year 1985-86 were set aside. The stay petition was dismissed as infructuous.