International Taxation

Case Law Update

1. HIGH COURT

1. Non-resident – Business of exploration, etc. of mineral oil – Computation – Mobilization fee paid has no nexus with the actual amount incurred by the assessee for transportation of drilling units of rigs to the specified drilling locations in India – Mobilization fee is not reimbursement of expenditure – ONGC liable to pay a fixed sum regardless of actual expenditure – As per s. 44BB, amount paid to the assessee whether in or out of India had to be taken into account – Mobilization charges rightly taken into account.

SEDCO Forex International Inc. vs. CIT & Anr. – [2008] 214 CTR (Uttarakhand) 192

Mobilization fee paid to the non-resident assessee by ONGC which had no nexus with the actual amount incurred by the assessee company for transportation of drilling units of rigs to the specified drilling locations in India and which was not reimbursement of expenditure had to be taken into account for the purpose of computing income under s. 44BB.

Facts

1. The appellant a non-resident company entered into agreement with the ONGC, India, for drilling contract between the ONGC and Sedco Forex, a non-resident company, referred to in the contract as ‘operator’ and the assessee referred to in the contract as ‘contractor’. The assessee was assessed under s. 44BB of the IT Act, which included the mobilization charges.

2. The assessee filed appeals on the ground that mobilization charges were not actually charges but were expenses in nature which was reimbursed by the ONGC to the assessee towards the mobilization of the machineries from Portugal to Bombay seashore. Therefore, the amount of charges paid to the assessee as mobilization charges was not liable to be included. The CIT(A) rejected the appeal holding that the assessment has been made @ 10 per cent on the total amount received by the assessee, under s. 44BB and, therefore, the assessment was valid.

3. The assessee appealed to Tribunal on the ground that a plain reading of the relevant clauses of the agreement executed between the appellant non-resident company with the ONGC clearly reveals that mobilization fee paid by ONGC to the appellant company were in the nature of reimbursement of the expenses incurred by the appellant company for the mobilization of the drilling unit from their present location which was outside the taxable territories, viz., Setubal, Portugal to the location designated by ONGC, viz., offshore Bombay, India or to the other drilling units of ONGC (Kandla or Bombay).

4. Tribunal recorded the finding that the mobilization fee paid to the assessee by ONGC has no nexus with the actual amount incurred by the assessee company for transportation of drilling units of rigs to the specified drilling locations in India and that mobilization fee is not reimbursement of expenditure. ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by the assessee company.

5. The assessee preferred appeal on the ground as to whether on the facts and circumstances of the case, the Tribunal was right in upholding the inclusion of mobilization charges while calculating the aggregate amount referred in sub-s. (2) of s. 44BB of the IT Act.

Judgment

The High Court held that:

1. Sec. 44BB is a special provision for imposing the income-tax treating 10 per cent of the aggregate amount specified in sub-s. (2) of s. 44BB as deemed profits and gains of such non-resident assessee who is engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils.

2. The amount which is to be taken is the amount paid to assessee whether in or out of India, payable to assessee whether in or out of India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India and the amount received or deemed to be received in India by the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.

3. (iii) Sec. 5 and sec. 9 both are aimed at the income for the taxability under s. 4 of the Act, while s. 44BB does not take into account the income for calculating the aggregate amount to calculate 10 per cent profit and gains. Profit and gains is a type of income to be taxed under a legal fiction; i.e., @ 10 per cent of the amount specified in sub-s. (2) of s. 44BB. Sec. 44BB is a special provision relating to non-resident assessee who is providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of mineral oils in or outside India. The section is a complete code in itself.

4. (iv) The amount referred in sub-s. (2) of s. 44BB are four types of amounts and all the four types of amounts are mutually inclusive and has to be taken into account either all of them or any of them and its clauses themselves provide that whether the payment is made inside India or outside India.

5. (v) A finding has been recorded by the Tribunal that it was not in dispute that the payment was made to the appellant company outside India and the mobilization fee as claimed by the assessee was paid to the appellant by ONGC has no nexus with the actual amount incurred by the appellant company for transportation of drilling units of rigs to the specified drilling locations in India. Hence, the mobilization fee is not the reimbursement of expenditure.

6. (vi) ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by the assessee company for the purpose. In view of the fictional taxing provision contained under s. 44BB, the AO was right in adding the amount received by the assessee towards mobilization charges for the purpose of imposing income-tax.

Case referred to

Various cases were referred to.

2. Non-resident – Fees for technical services vis-à-vis income from exploration etc. of mineral oil – Assessee non-resident company inspected the existing control system of three units of ONGC at SHP platform and utilised services of engineer at offshore installation in India – The inspectors were well trained technical hands who inspected the plants and gave their advice to the ONGC and received the payment as fee – Payment received was clearly fees for technical services within the meaning of Expln. 2 to cl. (vii) to sub-s. (1) of s. 9 chargeable under s. 44D r.w.s. 115A.

CIT & Anr. vs. ONGC As Representative Assessee of Rolls Royce (P) Ltd. – [2008] 214 CTR (Uttarakhand) 135
Assessee inspected the existing control system of three units of ONGC at SHP platform and utilized services of engineer at offshore installation in India, and therefore payment received by assessee from ONGC was clearly fees for technical services chargeable under s. 44D r.w.s. 115A.

Facts

1. An agreement was entered into between M/s. Rolls Royce (P) Ltd., Singapore (non-resident company/assessee) represented by ONGC and in terms of the said contract, non-resident company rendered services for inspection of the existing control system of three units of RR Avon Gas Generator Driven Process Gas Compressor at SHP platform and for utilizing services of engineer for Y2K roll over time at offshore installation, within the water territory of India at offshore.

2. The inspection was of the compressor which was being used at the SHP platform plant installed for extracting the oil by the ONGC. ONGC had not disputed that the non-resident company was not required to inspect the plant and purpose of inspection could be only for the technical advice.

3. The AO taxed the amount @ 15% as per the DTAA between India and Singapore under s. 44D r.w.s. 115A treating that service rendered by the non-resident company was technical service. The CIT(A) upheld the order of the AO. The Tribunal has upset the order of the AO and held that it was a service rendered in connection with the production of oil. Therefore, the assessment could be made under s. 44BB of the IT Act.

4. Revenue preferred appeal on the ground as to whether the service rendered by inspecting the three units of control system of RR Avon Gas Generator Driven Process Gas Compressor used in connection with the production of oil at SHP platform can be said to be a technical service or not.

Judgment

The High Court held that:

1. The non-resident company ‘R’ represented by ONGC in terms of the contract with ONGC, inspected the existing control system of three units of RR Avon Gas Generator Driven Process Gas Compressor at SHP platform and for utilizing services of engineer for Y2K roll over time at offshore installation in India.

2. It is also not in dispute that the inspectors were well trained technical hands who inspected the plants and gave their advice to the ONGC and received the payment as fee. Thus, the service was obviously a technical service within the meaning of Expln. 2 appended to cl. (vii) to sub-s. (1) of s. 9 which has been adopted by reference under s. 44D and s. 115A and proviso appended to s. 44BB(1) clearly excludes the application of s. 44BB where s. 42 or s. 44D or s. 115A or s. 293A applies.

3. In view of the admitted fact that the company has received fee as consideration for the services rendered which were technical in nature and which could not be rendered by anyone else who does not have the technical expertise of that RR Avon Gas Generator Driven Process Gas Compressor or Y2K roll over time at offshore installation as he could not be able to inspect and give advice. Therefore, the advice given was purely technical in nature and accordingly the service rendered was a technical service squarely covered under Expln. 2 appended to cl. (vii) to sub-s. (1) of s. 9 which has been adopted by reference under s. 44D and s. 115A.

4. The AO rightly taxed the amount @ 15 per cent as per the DTAA between India and Singapore under s. 44D r.w.s. 115A treating that service rendered by the non-resident company was technical service. The Tribunal was not justified in upsetting the order of the AO and holding that it was service rendered in connection with the production of oil and therefore, the assessment could be made under s. 44BB.

Case referred to

No cases were referred to.

3. DTAA – Remuneration paid to pilots/engineers under agreement between assessee and ONGC for providing helicopter services – Falling within Article 16(2) of DTAA between India and Italy – Not exigible under Indian Taxation Laws

CIT vs. Elitos S.P.A. and Others [2008] 296 ITR 435 (All)

Remuneration paid to pilots/engineers under the agreement for providing helicopter services falls within Article 16(2) of DTAA between India and Italy, which is not exigible under Indian Taxation Laws.

Facts

1. There was an agreement between ONGC and Elitos S.P.A., the Italian company for providing helicopter services to ONGC for operations of exploration and exploitation of oil and natural gas in offshore and onshore areas in India.

2. In terms of the agreement, one Puma helicopter with pilots and engineers to operate and maintain the helicopter was provided by the assessee to ONGC.

3. The Assessing Officer held that the payments made to the assessee were not covered under the DTAA between India and Italy and further that the income was taxable under the Income-tax Act, 1961.

The said order was confirmed in appeal

by the Commissioner of Income-tax (Appeals).

4. The Tribunal held that no tax was payable by the assessee under the DTAA, and being a specific provision made pursuant to section 90 of the Act it had overriding effect over the other provisions of the Income-tax Act.

5. The Revenue filed appeal on the facts as to where the expenditure in question on payment of salaries was not borne by the permanent establishment in India and so the employee in question would not be exigible to Indian taxation laws in terms of Article 16(2)(c) of the Indo-Italy DTAA?

Judgment

The High Court agreeing with the finding and view of the Tribunal held that the assessee was not liable under the Indian taxation laws in view of Article 16(2)(c) of the DTAA.

Case referred to

No cases were referred to.

2. Tribunal Decisions

1. Payment of fees by Indian hotels to American company for rendering services in relation to advertisement, publicity and sale (including reservation) based on percentage of Room Charges – Whether in the nature of Royalty or Fees for Technical Services or Business Income – Held to be Business Income – Sections 9(1)(vi) & (vii) of the Act and articles 12(3) and 12(4) of the DTAA between India and USA

Sheraton International Inc. vs. DCIT [2007] 107 ITD 120 (Delhi) – Assessment Years 1995-96, 1996-97, 1999-2000 and 2000-01

Assessee, a non-resident company incorporated in USA, was engaged in business of providing various services related to hotel industry to many hotels in United States as well as other countries around the world including India. In India, it had been providing services to ITC Hotels Ltd. and other hotels on terms and conditions stipulated in agreements entered into with said Indian companies from time to time. Agreement entered into with Indian hotels were executed after getting necessary approval from Government of India providing, inter alia, for payment of fees, for publicity, advertisement and sale (including reservation) services, by Indian hotels to assessee @ 3% of room sales. Prior to coming into force of DTAA between India and USA with effect from 1-4-1991, fee paid by Indian companies to assessee for services rendered by it relating to hotel business was held to be a business income for determining tax deductible from remittances under section 195(2) and 10% of such income was held to be taxable in India on estimated basis. As a result of DTAA between India and USA coming into force with effect from 1-4-1991, assessee sought review of this position contending that there being no permanent establishment in India, its entire income received from Indian companies was not taxable in India. This stand of assessee was accepted by department and, accordingly, no objection certificate was issued initially on 28-10-1991 permitting remittance of fees without deduction of any tax at source. Assessee, thus, continued to receive remittances from India towards fees for services rendered by it without deduction of tax at source. For Assessment Years 1997-98 and 1998-99, A.O. held that fee received by assessee from Indian companies was covered under section 9. He also held that said fee was taxable in India as per provisions of Article 12 of DTAA between India and USA. A.O. therefore, charged to tax fees received by assessee from Indian companies @ 15%. A.O. further, based on his assessment orders passed in assessee’s case for assessment years 1997-98 and 1998-99 as sustained by Commissioner (Appeals), reopened assessments of assessee for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 and in reassessment proceedings held that entire amount received by assessee from Indian hotels/clients for services rendered and also contribution received by it from Indian hotels/clients in respect of ‘Sheraton Club International’ (SCI)/’Starwood Preferred Guest’ (SPG) Programme and ‘Frequent Flyer Programme’ (FFP) was taxable in India as royalty and/or fees for included services. Since main job undertaken by assessee-company was to render services in relation to advertisement, publicity and sales promotion (including reservation) of Indian hotels and use of trademark, trade name, etc., as well as provision of other facilities/services was only incidental to rendering of said services and payments under agreements were entirely made by Indian hotels/clients to assessee-company for these main services as per express payment clause contained in said agreements, payments in question received by assessee or even any part thereof were not in nature of ‘royalties’ or ‘technical services’ as defined in Explanation 2 to section 9(1)(vi), or to section 9(1)(vii) and/or that of ‘royalties’ or ‘fee for included services’ as defined in, articles 12(3) and 12(4) of DTAA between India and USA. Having regard to integrated business arrangement between assessee-company and Indian hotels/clients as evident from relevant agreements as well as nature of assessee’s own business, said amount clearly represented its ‘business profit’ which was not liable to tax in terms of article 7 of the Indo-American DTAA. Similarly, programmes in question known as SCI/SPG and FFP implemented in the Sheraton Group of Hotels including Indian hotels were also incidental to said business arrangement between assessee-company and Indian hotels which was neither independent of nor separable from main job undertaken by assessee-company to render services relating to advertisement, publicity and sales promotion of Indian hotels/clients and since entire amount paid for such services under agreements had been held to be ‘business income’ of assessee, it followed that amount received as contribution in respect of these programmes also represented its ‘business income’ .

Facts

1. The assessee, a non-resident U.S. company was engaged in the business of providing various services related to many hotels in the United States as well as other countries around the world including India. In India, it had been providing the services to ITC Hotels Ltd. and some other hotels. It entered into with the Indian companies after getting the necessary approval from the Government of India providing, inter alia, for the payment of fees for publicity, advertisement and sale (including reservation) services by ITC Ltd. to Sheraton @ 3% of the room sales.

2. Prior to the coming into force of the DTAA between India and USA with effect from 1-4-1991, the fee paid by the Indian companies to the assessee for services rendered by it relating to hotel business was held to be a business income for determining the tax deductible from the remittances under section 195(2) and 10% of such income was held to be taxable in India on estimated basis.

3. 3) As a result of the DTAA between India and USA coming into force with effect from 1-4-1991, the assessee sought review of this position contending that there being no permanent establishment in India, its entire income received from the Indian companies was not taxable in India. This stand of the assessee was accepted by the department and, accordingly, no-objection certificate was issued initially on 28-10-1991 permitting the remittance of fees without deduction of any tax at source. The assessee, thus, continued to receive the remittances from India towards the fees for services rendered by it without deduction of tax at source.

4. However, on 25-11-1999 the A.O. issued a notice u/s 163 to the assessee proposing to treat Indian hotels as the agent of the assessee in India. Thereafter, the A.O. also issued a notice u/s 142(1) for the assessment year 1997-98, but the assessee did not comply with the said notice. The A.O., therefore, analyzed the terms and conditions of the agreements entered into between the assessee and Indian hotels and held that the assessee-company had business connections in India and the income on account of fees for services rendered having been deemed to accrue or arise to it in India, the case of the assessee was covered under section 9. Without prejudice to this conclusion and as an alternative, he also held that the said income of the assessee was taxable in India as per the provisions of Article 12 of DTAA between India and USA. The A.O., therefore, held that the amount received by the assessee from the Indian companies covered under fees for included services was chargeable to tax in India @ 15%. On appeal, the Commissioner (Appeals) held that only 75 per cent of the amount received by the assessee-company from the Indian companies was in the nature of royalty taxable in India under article 12.

5. The A.O. also issued a notice u/s 142(1) requiring the assessee to file its return of income for the A.Y. 1998-99. The assessee finally filed the return of income for the A.Y. 1998-99 showing a certain amount to have been received by it from the Indian clients/hotels : on account of International Marketing, Publicity and Sales (including reservations), on account of Sheraton Club International (SCI) and on account of Frequent Flyer Programme (FFP). It also contended before the A.O. that the said amount received by it entirely was in the nature of its business profits and it having no permanent establishment in India, such amount was not chargeable to tax in India in view of Article 7 of DTAA between India and USA.

6. 6) The A.O. rejected the contention of the assessee and held that according to the terms and conditions of the agreements made by the assessee with the Indian hotels and clients, the assessee was clearly making available not only its trademarks, trade names and designs etc. for the use of its Indian clients, but was also making available its expertise, technical know-how and skills to the Indian hotels/clients for developing its business of running international chain of hotels on a worldwide basis.

7. The A.O. further classified the various services rendered by the assessee to the Indian hotels/clients in four different categories as : (a) For the use of trademarks, trade name and stylized ‘S’ of the assessee. Thus, the payments received which were attributable to the user of the intangible assets would be taxable as ‘royalty’; (b) Further, the assessee was receiving payments for reservation services, assistance to Indian hotels and other clients in terms of expertise and know-how and its standards established worldwide. The assessee was making available its expertise, technical know-how, skills and managerial practices for development of its international business to ITC, Indian hotels and other clients. These services were taxable as ‘fees for included services’ under article 12(4)(b) of the DTAA; (c) The assessee was receiving payments, i.e., charging ITC, etc. for the use of its highly sophisticated centralized reservation system. These were also taxable as ‘fees for included services;’ (d) The assessee was receiving payments for rendering of certain services such as advertisements, worldwide directory, in room magazine, brochures, networking, promotion of the hotels worldwide, promoting hotels to airline partners, etc. These incomes of the assessee were business income and in the absence of ‘PE’ in India were not taxable. Out of the said four categories the A.O. held the income received by the assessee from three categories classified as (a), (b) and (c) to be taxable in India as ‘royalty’ under article 12(3)(a) and/or as ‘fees for included services’ as per article 12(4)(b) of the DTAA between the India and the USA, whereas he held the income classified in category (d) to be business profit of the assessee not chargeable to tax. Accordingly, he brought 75 per cent of the total amount received by the assessee for the aforesaid services to tax in India @ 15% as per Article 12. On appeal, the Commissioner (Appeals) upheld the impugned order.

8. The A.O. further, based on his assessment orders passed in the assessee’s case for the assessment years 1997-98 and 1998-99 as sustained by the Commissioner (Appeals), reopened the assessments of the assessee for the A.Ys. 1995-96, 1996-97, 1999-2000 and 2000-01. The A.O. in reassessment proceedings, deviated from the view earlier taken by his predecessor in the assessment order for the assessment year 1998-99 as well as by the Commissioner (Appeals) in his appellate orders for the A.Ys. 1997-98 and 1998-99 and held that the entire amount received by the assessee from the Indian hotels/clients including fees for services rendered, contribution towards Sheraton International Club (SIC) and contribution under Frequent Flyer Programme (FFP) was taxable in India as ‘royalty’ and/or ‘fees for included services’. Accordingly, he brought the entire amount received by the assessee from the Indian hotels/clients under different heads during all the four previous years relevant to the A.Ys. 1995-96, 1996-97, 1999-2000 and 2000-01 to tax in India @ 15% as per article 12 of the DTAA between India and USA.

9. Meanwhile, the appeals filed by the assessee against the appellate orders of the Commissioner (Appeals) for the A.Ys. 1997-98 and 1998-99 came to be disposed of by the Tribunal and the latter vide its common order dated 23-10-2002 set aside the orders of the Commissioner (Appeals) for the A.Ys. 1997-98 and 1998-99 and restored the matter to the file of the A.O. for fresh adjudication after taking into consideration first the taxability of the amounts in question under the charging provisions contained in sections 4, 5 and 9 of the Act. In pursuance of the directions given by the Tribunal, the A.O. issued fresh notices to the assessee initiating the assessment proceedings for the A.Ys. 1997-98 and 1998-99 and in fresh assessment orders held that the payments received by the assessee from the Indian hotels/clients in respect of maintenance of high international standards and use of trademark clearly constituted a royalty under the Act. He further held that the activities performed by the assessee as part of the advertising and brand promotion were to enhance and market the hotels in India that came under the brand Sheraton and, thus, the entire receipts of the assessee were taxable as ‘royalty’ and/or ‘fees for included services’ as the case may be. The A.O. held that the entire income of the assessee from the receipts for services rendered to the Indian hotels/clients was taxable with reference to charging provisions of sections 4, 5 and 9 and the assessee having no P.E. in India, the same was taxable in India as ‘royalty’ and/or ‘fees for included services’ as per Article 12(3) and/or article 12(4)(b) at the specified rate of tax. Accordingly, he brought to tax in India @ 15% the entire amounts received by the assessee during the previous year relevant to the A.Ys. 1997-98 and 1998-99 from the Indian hotels/clients.

10. On appeals to the Commissioner (Appeals) against the assessment orders for the A.Ys. 1995-96 to 2000-01, the Commissioner (Appeals) held that the entire payments received by the assessee from the Indian hotels/clients for the services rendered in terms of various agreements entered into with them were in the nature of ‘royalty’ under section 9(1)(vi) and also under article 12(3)(a). He, therefore, upheld the action of the A.O. in bringing the said receipts as chargeable to tax in India @ 15% during all the six years under consideration. As regards the contributions received by the assessee from the Indian hotels/clients in respect of Sheraton Club International (SCI) and Frequent Flyer Programme (FFP) held to be taxable by the A.O. in India in the assessments completed under section 145/143(3) for the A.Ys. 1995-96, 1996-97, 1999-2000 and 2000-01, the Commissioner held that these contributions were not in nature of fees for technical services or royalty but constituted the commercial income of the assessee which could not be brought to tax in India in the hands of the assessee-company, since it was not having any PE in India. He, therefore, deleted the additions made by the A.O. on account of these contributions.

Decision

On cross appeals, the Tribunal held as under:

1. As is evident from the reading of the agreement, the main intention of both the parties to continue their association was to develop tourism on a wide front by providing, inter alia, the best hotel facilities of international standards to the tourists worldwide. The said objective was to be achieved by promoting and advertising worldwide the Sheraton chain of hotels for the mutual benefit. As stated in the agreement, ITC was already having a well-developed, well-known, extensive and highly efficient organization in India manned by experienced and knowledgeable personnel and through its hotel division known by its own brand name ‘Welcome Group’, it was already engaged in setting up and management of hotels consistent with international standards in different parts of India. It was also maintaining a network for the booking and confirmation of hotel reservations known as ‘Welcomnet’ within India. If the background of the assessee-company given in clauses 4 and 5 of the agreement was read with this background of ITC given in clauses 2 and 3 as well as the main intention given in clause 6 of promoting and advertising worldwide the Sheraton chain of hotels for the mutual benefit, one could easily understand that both these parties had come together with their specialized information, experience and knowledge in the field of hotel business for mutual benefit and in a way to justify or explain their association, their introduction was given highlighting the relevant experience and knowledge possessed by them. This experience and knowledge described in the agreement, thus, was in the context of explaining/justifying the association of the two parties for attaining of the main objective to promote and advertise the hotel business of not only the Indian clients but also that of the assessee for mutual benefit. The said position was further fortified from the various obligations stipulated in the various articles of the said agreement.

2. A careful reading/perusal of the obligations stipulated in various articles of the agreement would reveal that the main intention/purpose of the association between the assessee and ITC was to publicize, market and promote the hotels of the ITC and the assessee-company had undertaken to provide all the services as enumerated in the various articles to achieve this main intention/purpose. It was no doubt true that such services were multifarious involving utilization of the experience and expertise of the assessee in the relevant field. At the same time, it was also true that all these services to be rendered by the assessee utilizing its experience and expertise as well as facilities available with it were for the purpose of achieving the main intention/objective of publicity, marketing and promotion of the hotels of ITC situated in India. The said services, therefore, were merely incidental to the main job undertaken by the assessee of publicity, marketing and promotion of the hotels of the Indian client worldwide and one could not pick and choose some of such services in isolation in order to describe its nature de hors the main intention/objective behind rendering of such services as had been attempted to be done by the revenue.

3. The services described in the various articles of the agreement also clearly showed that they had not much significance on their own independently and the same were an integral part of the arrangement between the assessee and the Indian hotels/clients for publicity, marketing and advertising of hotel business.

4. As per its marketing strategy adopted worldwide, certain international standards were set by the assessee to be maintained by the hotels being marketed/promoted by them and such standards determined from time to time were communicated also to the Indian hotels/clients so that the hotels were operated and maintained in accordance with such standards. All these hotels including the hotels in India were to comply with the standards so that the target customers visiting any such hotel would be able to get the desired services. All these requirements which were required to be complied with by the Indian hotels/clients, thus, were for the purpose of customer satisfaction which was an integral part of the marketing strategy of the assessee. Similarly, the training to be imparted by the assessee to the employees of the Indian hotels/clients in order to maintain the standards as per article V of the agreement was a part of marketing and business promotion strategy for which the Indian hotels/clients had agreed to pay separately towards reimbursement of expenses actually incurred by the assessee. No such training, however, was imparted by the assessee to the Indian clients/hotels during the years under consideration as submitted by the assessee and there was no occasion to make such payment. As per article VI, the assessee had agreed to make available its comprehensive standards and technical assistance for design and construction of new hotels, if any, by the Indian clients. However, there being no such case of construction of new hotel during the years under consideration, no such services as specified in article VI were provided by the assessee to the Indian clients as pointed out by the assessee.

5. Various services agreed to be rendered by the assessee to the Indian hotels/clients as enumerated in articles II to VI of the relevant agreement, thus, were an integral part of the arrangement by which the assessee had agreed mainly to provide services relating to publicity, marketing and advertising of the hotels of the Indian clients covered under the said agreements. The main purpose/intention of the association between the assessee and the Indian clients/hotels was to promote the hotel business in their mutual interest through worldwide publicity, marketing and advertising and the various facilities as well as services were merely the means to attain this main objective. The same, therefore, were ancillary and auxiliary services to the main job undertaken by the assessee-company of promoting the hotel business by worldwide publicity, marketing and advertisement.

6. As mentioned clearly in the payment clause of the agreement, it was agreed that the Indian client would pay to the assessee a fee equivalent to 3 per cent of its room sales expressly for publicity, marketing and sales (including reservation) services. This specific term of payment agreed by both the sides and forming part of the agreement entered into between them explicitly showed that the entire payment made by the Indian clients to the assessee was on account of services rendered in relation to publicity, marketing and sales services and even the quantum of the fees agreed to be so paid to the extent of 3 per cent of room sales of the Indian hotels further showed that the assessee was to be compensated on the basis of quantum of sales realized/business done by the Indian hotels without there being any relation to the individual services enumerated in the agreements. These payment terms, thus, also pointed out clearly that the said incidental services had no significance on its own and what really mattered was the main job of publicity and business promotion undertaken by the assessee as finally reflected/resulted in the quantum of room sales. It was, thus, a case of periodical payment agreed to be made by the Indian hotels to the assessee in the form of fees equivalent to 3 per cent of room sales for the services rendered in connection with publicity, marketing and sales services and not a case of composite payment made by the Indian clients/hotels to the assessee which could be bifurcated over the different services as done by the revenue authorities. Such bifurcation, was neither permissible nor possible in view of the arrangement between the two parties as reflected from the terms of the relevant agreements.

7. Article VIII of the agreement undisputedly showed that its trademark, trade names and signs were allowed to be used by the assessee to the Indian clients at no cost. The rationale behind providing the use of trademarks, trade names, etc., by the assessee free of cost to the Indian hotels was not accepted/appreciated by the department. Moreover, the use of trademark, trade names, etc., of the assessee by the Indian hotels was not only going to help and assist the assessee in rendering its services relating to publicity, advertising and business promotion of the Indian hotels, but such use was also going to help the assessee in advertising its other hotels worldwide and to promote its business, which was also evident from article IX of the agreement. The use of assessee’s trademark, trade name, etc., by the Indian hotels was, thus, going to benefit both the sides mutually to promote their business and this was precisely the rationale behind the assessee allowing use of its trademark, trade name, etc., by the Indian hotels free of cost. Allowing such use again was an integral part of the main arrangement between the assessee and the Indian clients/hotels to promote their hotel business in mutual interest by publicity, advertising and sales (including reservations) services. Therefore, singling out the aspect of use of trademark, trade names of the assessee by the Indian hotels/clients to say that the same was crucial or important aspect of the arrangement between them without appreciating overall arrangement between the parties or their nature of relationship was nothing but reading too much between the lines.

8. The main job undertaken by the assessee-company was to render the services in relation to advertisement, publicity and sales promotion (including reservation) of the Indian hotels and the use of trademark, trade name, etc., as well as provision of other facilities/services was only incidental to the rendering of the said services. Moreover, the payments under the agreements were entirely made by the Indian hotels/clients to the assessee-company for these main services as per the express payment clause contained in the said agreements and the said incidental/ancillary services not being independent of and separable from the main job undertaken by the assessee in the peculiar facts of the case, it was neither possible nor desirable to apportion or attribute any part of the consideration received by the assessee thereto. This being the factual position and keeping in view the various decisions of the High Courts including that of jurisdictional High Court in the case of CIT vs. Mitsui Engg. & Ship Building Co. Ltd. [2003] 259 ITR 248/[2002] 123 Taxman 182 (Delhi), the payments in question received by the assessee or even any part thereof were not in the nature of ‘royalty’ within the meaning of section 9(1)(vi) read with Explanation 2 thereto.

9. Having held that the amount in question paid by the Indian clients/hotels to the assessee-company on account of services rendered in pursuance of the agreements entered into with them was not in the nature of ‘royalty’ or ‘technical services’ within the meaning of section 9(1)(vi) read with Explanation 2, the next issue for consideration would arise as to whether the said payment could be treated as ‘royalty’ or ‘fees for included services’ in terms of the relevant articles of the DTAA between India and America. As per article 12(1) between India and America, royalties and fees for included services arising in a contracting State (i.e., India) and paid to a resident of the other contacting State (i.e., America in the instant case) are liable to be taxed in that other State (i.e., America). However, as per article 12(2), such royalties and fees for included services may also be taxed in the contracting State (i.e., India) in which they arise according to the laws of that State subject to certain concessions as provided in clauses (a) and (b) of article 12(2). The terms ‘royalties’ and ‘fees for included services’ as used in article 12 are defined in articles 12(3) and 12(4) respectively.

10. The assessee had undertaken to provide services in connection with advertising, publicity and sales promotion including reservations for the Indian hotels/clients. Even the payment was entirely made as expressly stipulated in the agreement for these services and this was the way in which the entire arrangement was not only made but was also understood by both the sides. Even the use of trademark, trade names, etc., of the assessee-company by the Indian hotels/clients was an integral part of this arrangement and such use was allowed at no cost as expressly provided in the relevant agreements. Therefore, the various services rendered by the assessee to enable it to complete efficiently and effectively the job undertaken by it as an integrated business arrangement to provide the services relating to advertising, publicity and sales promotion including reservations of the Indian hotels worldwide in mutual interest could not be relied upon by picking and choosing the same in isolation so as to say that part of the consideration received by the assessee, as attributable to the said services, was in the nature of ‘royalties’ or ‘fees for included services’. Such an approach adopted by the revenue authorities, was neither permissible in law nor practicable in the facts of the case and the conclusion drawn by them on the basis of such approach to cover the said services taken individually or in isolation divorced from the main intention within the meaning of ‘royalties’ or ‘technical services’ as defined in Explanation 2 to section 9(1)(vi) or to section 9(1)(vii) and/or that of ‘royalties’ or ‘fees for included services’ as defined in article 12(3) and 12(4) of the DTAA between India and USA, was neither well-founded nor justified.

11. The supply of drawings, design, documents, information, etc. such as fire safety system, computer reservation system, etc., as mentioned in the relevant articles of the agreements on which much emphasis had been laid by the revenue was made by the assessee to enable it to execute the job undertaken by it to render services in relation to advertisement, marketing and sales promotion of hotel business worldwide and such supply was merely incidental to the performance of integrated business arrangement which included mainly rendering services in relation to advertisement, publicity and sales promotion of hotel business. The payment made by the Indian hotels/clients to the assessee-company on account of such job or any part thereof, therefore, could not be attributed to the use of a patent, invention, model, design, secret formula or process or trademark or similar property or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. Its trademark, trade name, etc., were made available by the assessee-company to the Indian hotels/clients as an integral part of the business arrangement between them and the same, therefore, was merely incidental to carry out the job of advertisement, publicity and sales promotion undertaken by the assessee-company. Moreover, the said use was allowed for mutual benefit. It was, thus, neither desirable nor possible to apportion any portion of the considera-tion received by the assessee-company from the Indian hotels/clients towards use of trademark, trade name, etc. by the Indian hotels/clients. Therefore, it could not be accepted as contended by the revenue that the payments received by the assessee-company from the Indian hotels/clients in pursuance of the said agreements or any part thereof was in the nature of royalties within the meaning of article 12(3)(a).

12. As regards article 12(3)(b) covering the payment received as consideration for the use of or the right to use any indus-trial, commercial or scientific equipment, neither the revenue had invoked the provisions of this article in the assessee’s case nor the same otherwise also was applicable to the facts of the instant case since there was no such use or the right to use any industrial, commercial or scientific equipment. Further, article 12(4)(a) covers only the, payments made for rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received . As clarified and explained in the Memorandum of Understanding (MoU) dated 15-5-1989 in relation to Indo-US Tax Treaty paragraph 4(a) of article 12, thus, includes technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a license or sale as described in paragraph 3(a) as well as those ancillary, and subsidiary to the application or enjoyment of industrial, commercial or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). The payments received by the assessee in the instant case from the Indian hotels/clients were not in the nature of royalties within the meaning given in paragraph 3(a) or 3(b) of article 12. It, therefore, followed that paragraph 4(a) of article 12 also could not be applied to cover any of the services rendered by the assessee-company to the Indian hotels/clients.

13. As explained and clarified in the MoU dated 15-5-1989 in relation to Indo-US Tax Treaty, paragraph 4(b) of article 12 refers to technical or consultancy services that make available to the person acquiring the service, technical knowledge, experience, skill, know-how or process or consists of the development and transfer of a technical plan or technical design to such person. It is also clarified that this category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered ‘made available’ when the person acquiring the service is able to apply the technology. As further clarified in the aforesaid memorandum, the very fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service within the meaning of paragraph 4(b). Typical categories of services that generally involve either the development and transfer of technical plans, or technical designs or making technology available as described in paragraph 4(b) have been illustrated in the aforesaid MoU as engineering service, architectural services and computer software development none of which covered the services rendered by the assessee in the instant case. It is also further clarified in the MoU that technical and consultancy services as envisaged under paragraph 4(b) of article 12 could make technology available in a variety of settings, activities and industries and some of the areas to which such services may relate are also enumerated in the MoU which do not include the hotel industry. One of such areas as indicated in the MoU is ‘communication through satellite or otherwise’ and relying on the same, the revenue had contended that the interface between the reservation system of the assessee-company and that of the Indian hotels/clients was covered in this category. There was no merit in the said contention of the revenue. Moreover, no communication through satellite was involved in the interface between the computerized reservation system of the assessee and that of the Indian hotels/clients.

14. In reality, it is always possible that job undertaken by one party for the other party of supply of any goods or services may involve utilization of the knowledge, information and expertise of the party undertaking the said job. This possibility is more in the international trade because the job is entrusted to a foreign party generally having the expertise, knowledge, technology and experience to execute the said job. However, just because such expertise, knowledge, technology and experience is possessed by the said party and the same has been utilized for rendering the services, it cannot be said that the services so rendered are in the nature of technical and consultancy services making any technology available to the other party. Therefore, the payment in question received by the assessee-company from the Indian hotels/clients or any part thereof could not be treated as ‘fees for included services’ within the meaning of paragraph 4(b) of article 12.

15. The amount received by the assessee from the Indian hotels/clients for the services rendered under the relevant agreements was not in the nature of ‘royalties’ within the meaning given in section 9(1)(vi) read with Explanation 2 thereto of the Act, or as given in article 12(3) of Indo-American DTAA. The same was also not ‘fees for technical services’ or ‘fees for included services’ as defined in section 9(1)(vii) read with Explanation 2 thereto of the Act, or article 12(4) of the Indo-American DTAA respectively. Having regard to the integrated business arrangement between the assessee-company and the Indian hotels/clients as evident from the relevant agreements as well as the nature of assessee’s own business, the said amount clearly represented its ‘business profit’ which was not liable to tax in terms of article 7 of the Indo-American DTAA.

16. There was no merit in the contention of the revenue that the agreements between the assessee-company and Indian hotels/clients were in the nature of a colourable device adopted to avoid payment of tax in India. First of all, one of such agreements was entered into between the assessee company and ITC initially on 27-1-1979 for a period of ten years which was further extended on virtually the same terms and conditions for a period of ten years vide a fresh agreement dated 30-12-1988. Before entering into the said agreements, the required approvals of the different Government authorities including that of RBI were duly obtained. Even the copies of the said agreements were produced before the concerned income-tax authorities for obtaining no-objection under section 195(2) and after examining the terms and conditions of the said agreements, orders under section 195(2) were passed from time to time treating the amount received by the assessee-company from the Indian hotels/clients under the said agreements as its ‘business profits’. Similar agreements were entered into by the assessee-company with hundreds of other hotels situated worldwide having similar type of arrangement for the services to be rendered in relation to advertisement, publicity and sales promotion. Therefore, it was difficult to accept the stand of the revenue that the said agreements were nothing but a colourable device adopted by the assessee to defraud the revenue.

17. There was also no merit in the contention of the revenue based on section 25 of the Contract Act because the agreements between the assessee-company and Indian hotels/clients represented an integrated business arrangement for which the assessee-company was to receive from the Indian hotels/clients consideration at the rate of 3 per cent of room sales. In these circumstances, when the payment was agreed to be made by the Indian hotels/clients for the job of publicity, advertisement and sales promotion undertaken by the assessee-company, provision of other services/facilities and use of trademark, trade names, etc., which were integral part of the said arrangement without any separate cost, would not make the entire contract to be null and void as sought to be contended by the revenue.

18. The job undertaken by the assessee-company was in the nature of integrated business arrangement whereby services were to be rendered to the Indian hotels/clients predominantly in relation to advertisement, publicity and sales promotion of hotel business worldwide in mutual interest and the use of trademark, trade names, etc., of the assessee-company by the Indian hotels/clients as well as the provision of other services and facilities as enumerated in the relevant agreements were merely incidental to the undertaking of this main job in the sense that they spelt out only the manner and method in which the said job was to be accomplished.

19. Similarly, the programmes in question known as SCI/SPG and FFP implemented in the Sheraton Group of Hotels including the Indian hotels were also incidental to the said business arrangement between the assessee-company and Indian hotels which was neither independent of nor separable from main job undertaken by the assessee-company to render services relating to advertisement, publicity and sales promotion of Indian hotels/clients. In these circumstances, it was very difficult to accept the stand of the revenue that the implementation of the Sheraton’s programme by the Indian hotels/clients was ancillary or subsidiary to the enjoyment of right or property or information as envisaged in article 12(3)(a) so as to treat the same as ‘included services’ within the meaning given in article 12(4)(a). The implementation of the said programmes, on the other hand, was an integral part of the main services rendered by the assessee-company to the Indian hotels/clients in relation to advertisement, publicity and sales promotion and since the entire amount paid for such services under the agreements had been held to be the ‘business income’ of the assessee, it followed that the amount received as contribution in respect of these programmes also represented its ‘business income’.

20. A perusal of copy of relevant programme guide also clearly showed that the purpose of the said programme was to promote the hotel business worldwide in mutual interest which was ancillary and incidental to the main job undertaken by the assessee-company to render services in relation to advertisement, publicity and sales promotion of the Indian hotels/clients worldwide and it had nothing to do with the, enjoyment of any right to property or information as contended by the revenue. Moreover, as rightly observed by the Commissioner (Appeals) in his impugned orders, the payment of contributions in respect of the said programme was not made by the Indian hotels/clients to the assessee-company in pursuance of the agreements entered into between them and the whole of the amount received as contribution under these programmes was to be given back to the members in the form of various rewards through SCI Points as per the scheme itself as was evident from the relevant programme guide. Therefore, the amount received by the assessee-company from the Indian hotels/clients in respect of the said programmes could not be treated as ‘royalty’ or ‘fees for technical or included services’ either under the relevant provisions of the Act or even under the DTAA as rightly held by the Commissioner (Appeals).

[It was also held by the Tribunal that since all payments made to the assessee by the Indian hotels/clients were subject to deduction of tax at source and although no tax was actually deducted at source, the assessee could not be held to have committed default in paying the advance tax and, therefore, there could be no liability to pay interest under section 234B. The Tribunal upheld the validity of the reopening on the cases u/s 147.]

Cases referred to

Both the sides relied upon a catena of decisions which are not listed here.

[Author’s Note: On somewhat similar facts, the AAR has taken a different view in the case of International Hotel Licensing Co. S.A.R.L.(2007) 288 ITR 534 (AAR) ].

[Note: This being a very long decision , only one decision has been digested in this Issue.]