The director of income tax has sought the interference of the Supreme Court in deciding whether the payments made by Indian hotels, including ITC, to hospitality major Sheraton International Inc would fall under business profits or royalties and fees under the double taxation avoidance agreement between India and the US.
A bench headed by Chief Justice SH Kapadia has issued notice to Sheraton. While the department is arguing that the payments are in the nature of royalties and services rendered by the Sheraton and liable to be taxed under Article 12 of the DTAA, the courts below have held that such payments are business profits and are non-taxable under Article 7 of the agreement as the assessee did not have a permanent establishment in India.
Both the Income Tax Appellate Tribunal and the Delhi high Court have held that the assessee was providing publicity and reservation services as part of integrated business activity and, therefore, the payment was by way of business profits.
However, the department has differed saying the services including use of trademark or trade names ‘Sheraton’ and other technical services like know how, management training, reservations provided by the non-resident entity to various hotels in India, including ITC, had not only been rendered in India but payments have been made also made in the country and hence taxable in India as far as the Indian component is concerned.
The department in its five petitions stated that the assessee had claimed that it was not taking any fees for the use of the trademark and trade name, the composite payment made by the Indian hotels was a colourable device which included the payments for use of trademark.
According to additional solicitor general Gourab Banerji, ITC had agreed to pay a fee of 3% of the room sales to the US hospitality major for providing services to its three of its hotels in January 1979.
“The services in question were not incidental to the services being rendered outside India, but were stand alone and could be rendered independently of the services rendered outside India. The assessee had made available its main frame computer facilities through the interface setup in India to be used in India,” the petitions stated.
The tribunal and the high court had held that the transfer of the right to use the trademark ‘Sheraton’ was at zero cost and the income received by the non-resident company was its business income…
