ITA No.69 & 70/Bang/2009
Assessment Years : 2000-1 & 2001-02
INCOME TAX OFFICER (INTRNATIONAL TAXATION)
WARD-1(2), BANGALORE
Vs
M/s ITC HOTELS LTD
SANKEY ROAD, BANGALORE-560001
Income tax - Indo-USA DTAA - Assessee is a reputed hotel group - receives certain services from US-based hotel group and makes payment without TDS - Revenue treats it as royalty or fees for technical services u/s 9(1)(vi) or (vii) and also under Article 12(3) of the DTAA - CIT(A) goes by the Delhi HC decision in the assessee's case and treats it as business income and since the non-resident has no PE in India, the payment received is held to be non-taxable - Revenue refers to the Explanation inserted at the end of section 9 by the Finance Act, 2007 with retrospective effect from 1.6.1976 which states that TDS to be deducted under clauses (v), (vi) and (vii) of sub-section (1) of Sec 9 even if there is no PE - held, since the income of the non-resident is held to be business income, this Explanation has no applicability to this case - Revenue's appeal dismissed
ORDER
Per : R V Easwar :
These are two appeals filed by the revenue for the asst.years 2000-01 & 2001-02.
2. The assessee is a public limited company engaged in the running of hotels. It made payments of Rs.2,52,93,968/- and Rs.1,11,35,305/- respectively for the two years to Sheraton International, USA, a non-resident company. The question whether the assessee was liable to deduct tax from the above payments came up before the Assessing Officer. The Assessing Officer held that the assessee was liable to deduct the tax and since it had not done so, he passed an order u/s.201(1) and section 201(1A) of the IT Act on 31.7.2001 holding the assessee to be in default and directing it to pay the taxes which it ought have deducted and also charging interest. The tax amount came to Rs.33,47,733/- and Rs.15,02,609/-. The interest charged came to Rs.10,00,935/- and Rs.2,57,918/-. This order reached the Bangalore Bench of the ITAT in ITA Nos.145 to 148/Bang/2004 and by order dt.11.11.2005, the issue was restored to the file of the Assessing Officer with the following directions :
"Since the chargeability or otherwise is yet to be decided we think it fit not to prejudge the issue so as to hamper the judicial decision to be arrived at by the Assessing Officer in view of the remand by the Tribunal at New Delhi. The Assessing Officer, after determination of the taxability or otherwise of the payee, may appropriately pass order in the case of the present assessee. The matter is therefore restored back to the file of the Assessing Officer. The Assessing Officer shall determine the nature of payment as well as the amount taxable therein."
3. The Assessing Officer appears to have contacted his counterpart in New Delhi where Sheraton International, USA was being proceeded against as recipient of the aforesaid payments made by the assessee. The latter seems to have sent to the Assessing Officer all the relevant papers including the order of the Delhi Bench of the Tribunal in the case of Sheraton International which is reported in (2007) 293 ITR (AT) 68 = (2007-TIOL-288-ITAT-DEL). In this order it was held that the payments made by the present assessee under the agreement to Sheraton International did not amount to royalty or fees for technical services or fees for included services and that the payments represented business profits in the hands of Sheraton International and since Sheraton did not have any permanent establishment in India, the profits were not taxable in India in terms of Article 7 of the DTAA between India and America. The issues have been elaborately dealt with by the Tribunal but suffice to note paragraph 87 of the said order (page 152 of the report) which is as under :
"As such, considering all the facts of the case, the relevant provisions of the income-tax Act, 1961 as well as that of the Double Taxation Avoidance Agreement between India and USA and keeping in view the legal position emanating from various judicial pronouncements discussed above, we are of the opinion that 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 Income tax Act, 1961 or as given in article 12(3) of the 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 Income-tax Act, 1961 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 the 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. We, therefore, allow the relevant grounds raised in the assessee's appeals on this issue and dismiss the additional grounds raised by the Revenue in its appeals."
4. On receipt of the aforesaid order of the Tribunal the Assessing Officer in the present proceedings held that the order of the Tribunal did not have any bearing on the question of the assessee's liability to deduct tax from the payments. He, accordingly, directed the assessee to deduct tax from the payments and reiterated the earlier order passed on 31.7.2001, by order passed on 30.11.2006.
5. On appeal, the Commissioner of Income-tax (Appeals) accepted the assessee's plea based on the order of the Tribunal cited above and held as follows :
"7.5. I have considered the submissions made by the AR on behalf of the appellant and perused the order passed by the Hon'ble ITAT, Delhi Bench in the case of Sheraton referred to above. It is an undisputed fact that the liability for TDS is a vicarious liability. The principal liability is of the recipient of income as provided u/s.191 of the Act. Since, in the instant case, the recipient i.e., Sheraton is assessed to tax in India, the interest of the revenue would be amply protected because upon conclusion of the litigation, the tax due on remittances, if any, will be liable to be paid or otherwise recovered from Sheraton direct. It is observed that proceedings u/s.201(1) were initiated against the appellant on receipt of information that the appellant had paid various amounts to Sheraton without deduction of tax as required u/s. 195. I find that the impugned order was passed by the ITO concerned at Bangalore as per direction of ITAT, Bangalore Bench after taking into account the findings contained in the order of his counterpart dated.28.11.2003 in the case of Sheraton. Since the said order of the Assessing Officer in the case of Sheraton has been set aside by the Hon'ble IT AT, Delhi Bench vide its order referred to above, there is no justification for the continuance of the impugned order. Once it has been held by the Hon'ble Tribunal that the services rendered by Sheraton to Indian hotels including the appellant are not chargeable to tax in India, there is no valid reason to hold the appellant to be an assessee in default ufs.201(1) of the Act for not deducting tax at source u/s.195 on remittances made towards availing the said services. Respectfully following the said order of the Hon'ble ITAT, Delhi Bench referred to above, I hold that as the very foundation of the impugned order has ceased to exist by virtue of the said order of the Hon'ble Tribunal, the impugned order cannot be sustained anymore. The impugned order is accordingly set aside. This ground of appeal is, therefore, decided in favour of the appellant."
As regards interest u/s.201(lA) the CIT(A) deleted the same consequential to his decision on the applicability of section 201(1).
6. The revenue is in appeal challenging the order of the CIT(A) as above. At the time of the hearing it was pointed out on behalf of the assessee that the order of the Delhi Bench of the Tribunal in the case of Sheraton International has been affirmed by the Hon'ble Delhi High Court in Director of Income tax v. Sheraton International Inc. by judgement dt.30.1.2009 reported in (2009) 221 CTR 752 (Del) = (2009-TIOL-57-HC-DEL-IT). A copy of the judgement was also filed. We find from paragraph 13 of the judgement of the High Court it has been observed as under :
"13. In view of the aforesaid findings of the Tribunal that the main service rendered by the assessee to its client-hotels was advertisement, publicity and sales promotion keeping in mind their mutual interest and, in that context, the use of trademark, trade name, or the stylized "S" or other enumerated services referred to in the agreement with the assessee were incidental to the said main service. It rightfully concluded, in our view, that the payments received were neither in the nature of royalty under s.9(1)(vi) r/w Expln. 2 or in the nature of fee for technical services under s.9(1)(vii) r/w Expln. 2 or taxable under art. 12 of the DTAA. The payments received were thus, rightly held by the Tribunal, to be in the nature of business income. And since the assessee admittedly does not have a PE under the art. 7 of the DTAA "business income" received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. The Tribunal pointedly observed that there was no evidence brought on record by the Revenue to enable them to hold that the agreement was a colourable device, in particular, that the payments received were for use of trademark, brand name and stylized mark "S". We agree with reasoning adopted by the Tribunal. Moreover, these are findings of fact which could be gone into only if a question was proposed impugning the findings of the Tribunal as perverse. We find that no such question has been proposed in the appeal."
Thus, after the judgement of the Hon'ble Delhi High Court, the argument of the revenue that the payments made by the assessee are to be treated either as royalty u/s.9(1)(vi) or as fees for technical services u/s.9(1)(vii) of the Income tax Act cannot be upheld. The Delhi Bench of the Tribunal has applied the Indo-US DTAA and held that the payments cannot be considered as royalty or fees for technical services as per the Act or as per the DTAA. It has further found that the payments represented business profits in the hands of Sheraton assessable as such but because of the fact that Sheraton had no permanent establishment in India, the payments cannot be taxed by the Income-tax department in India as per Article 7 of the DTAA. The Tribunal has also found that the agreement between the parties cannot be considered as a colourable device. All these findings of the Tribunal have been upheld by the Hon'ble Delhi High Court in the judgement cited supra. In this view of the matter and respectfully following the High Court's judgement, we hold that the Commissioner of Income-tax (Appeals) was right in cancelling the orders passed by the Assessing Officer on 30.11.2006 u/s.201(1) and 201(lA)of the Act.
7. The learned DR however submitted that the Explanation inserted at the end of section 9 by the Finance Act, 2007 with retrospective effect from 1.6.1976 makes a difference. The Explanation reads as under :
Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.
It may be seen that the Explanation applies only where the income is deemed to accrue or arise to the non-resident company under clauses (v), (vi) or (vii) of section 9(1). These clauses speak of interest, royalty and fees for technical services, respectively, payable to the non-resident. We have already seen that the Delhi High Court has affirmed the finding of the Delhi Bench of the Tribunal in the case of Sheraton International that the character of the payments made by the assessee to Sheraton was that of business profits and not either royalty or as fees for technical or included services. The Explanation will apply only if the payments can be characterized as interest or royalty or fees for technical services. Therefore, we are of the opinion that the Explanation has no application to the present case. The argument of the learned DR cannot be upheld.
8. In the result the appeals of the department are dismissed with no order as to costs. Order pronounced in the open court on this 1st day of May, 2009.
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