TMI Blog2006 (10) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... provide such services to many hotels in theUnited Statesas well as other countries around the world includingIndia. InIndia, it has been providing the services to M/s. ITC Hotels Ltd., M/s. ITC Ltd. (Hotel Division) etc. on the terms and conditions stipulated in the agreements entered into with the said Indian companies from time to time. The first of such agreements was entered into with ITC Ltd. on27th January, 1979for providing the services to three of the hotels owned by ITC Ltd., namely, Welcomgroup, Maurya Sheraton,New Delhi, Welcomgroup Mughal Sheraton,Agraand Welcomgroup Chola Sheraton,Madras. The said agreement was executed 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 at the rate of 3% of the room sales. This agreement dated27-1-1979was entered into for a period of ten years and after getting the necessary approval from the Government of India, the same was extended for a further period of ten years by executing a fresh agreement on30-12-1988. A similar agreement was entered into on9-5-1985with ITC Hotels Ltd. in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such analysis, arrived at the following conclusions :- (i) Sheraton has agreed to make available technical and consultancy services to the hotel. Sheraton has modern international hotels and techniques and it has marketing specialists who make those techniques available to customers. It has also a reservation network. All these technical know-how together with consultancy services is to be made available to the customers. The computerized reservation systems are highly technical systems and they can be accessed fromIndia. It provides a complete connectivity to the hotels inIndia. The Indian hotels have a right to access this reservation system. (ii) The customers as well as the assessee have agreed that Sheraton will make available the following:- (a) the global SHERATON reservation network; (b) highly developed technology for hotel sales; (c) regular updating of such technologies and standards; (d) under Special of foreign tourist and travellers needs and meeting these through specialisms particularly in the context of food and beverages and other hotel services. This proves beyond doubt that the assessee is making technology and its consultancy available to its custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Against the aforesaid assessment order of the Assessing Officer, the assessee-company preferred an appeal before the learned CIT(A) and a detailed written submission along with paper-book was filed by it before him on6-10-2000. Oral arguments were also advanced before the learned CIT(A) who forwarded the submissions made on behalf of the assessee-company to the Assessing Officer for his comments. The remand reports received from the Assessing Officer giving his comments were confronted by the learned CIT(A) to the assessee and the written rejoinder as well as supplementary submissions made on behalf of the assessee-company were also taken on record by him. Before the learned CIT(A), it was submitted on behalf of the assessee-company at the outset that the estimation of its income made by the Assessing Officer for the assessment year 1997-98 at Rs. 30 crores was without any basis and it was purely a guess work of the Assessing Officer without reference to any material or evidence on record. As regards the nature of its receipts from the Indian companies, it was submitted that the said amounts were received by it for the hotel related services rendered to the Indian companies in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets clearly amount to payment of royalties under paragraph 3(a) of Article 12. The agreement also provides for reservation services, assistance to the ITC in terms of expertise and know-how and its standards established worldwide. These services clearly fall under paragraph 3(a) as information concerning industrial or commercial experience. The appellant also undertook publicity, marketing and promotion activities outsideIndiafor the ITC. These activities cannot be said to be ancillary or subsidiary to the enjoyment of any right, property or information described as 'Royalties' in paragraph 3. Therefore, payments in respect of these activities outsideIndiawill constitute commercial income and in the absence of PE inIndia, these payments cannot be brought to tax. However, payments in respect of reservation services, services regarding maintenance of high international standard and use of trademark constitute payments of royalties. Of all these activities, the use of trademark and service mark etc. are of paramount importance because these assets and their user makes it, know to the public at large that the hotel confirms to the standards of Sheraton international standards and, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows/exhibitions of hotel trade in the world such as ITB-Berlin, WTM-London, Arabian Travel Mart-Dubai, BIT-Milan, etc. where all Sheraton affiliated hotels of the world or of a particular region have their stalls. Participation inSheraton Roadshows to travel agents The assessee organizes meetings in important cities of the world where persons engaged in the travel trade and key account customers are invited and presentations are made to them about all Sheraton affiliated hotels. Worldwide directory and regional directories - The assessee prints at its own cost directory of all its client hotels and also directories of its client hotels located in a particular region (Indiais listed in the Asia Pacific region). The worldwide directory and directory of the particular region is placed in all the hotel rooms so that a guest staying in any hotel gets information about Sheraton affiliate hotels in the particular region as well as anywhere in the world. Such directories are also placed in the general sales offices and central reservation offices. Divisional Brochures - The assessee publishes brochures called 'a la carte' and 'at a glance' containing information about its client hotels w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not found acceptably by the Assessing Officer. According to him, the nature of the amounts received by the assessee was required to be ascertained on the basis of the examination of the terms and conditions of the agreements made by the assessee with the Indian Hotels and Clients and after having made such examination, he held that 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. After having so held, the Assessing Officer classified the various services rendered by the assessee to the Indian Hotels/Clients in four different categories as under:- "(a) For the use of trademarks, trade name and the stylized "S" of the assessee. To state that as per Agreement no cost has been charged is not correct as has already been discussed above. It is not correct to state that such valuable trade name and trademark has been allowed to be used free whereas minor services as advertisements and booklets have been charged. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22-3-2001 passed in assessee's own case for assessment year 1997-98 on the similar issues and involving similar facts, he upheld the order of the Assessing Officer for assessment year 1998-99 bringing to tax 75% of Rs. 7,78,26,449 in India @ 15% as per Article 12 of DTAA between India and USA holding the same to be 'royalty' and 'fees for included services'. 11. Based on his assessment orders passed in the assessee's case for assessment years 1997-98 and 1998-99 as sustained by the learned CIT(A) vide his appellate orders dated 22-3-2001 and 13-11-2001 holding that the income of the assessee for services rendered to the Indian Hotels/Clients was taxable @ 15% in India being royalty and fees for included services as per Article 12 of the DTAA, the Assessing Officer initiated re-assessments proceedings in assessee's case for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 by issue of notices under section 148 after recording the following reasons which are identical for all these four years:- "Sheraton International Inc. is a company incorporated under the laws ofUSA. It carries on the business of providing hotel related services worldwide. It entered into agreements wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusions drawn therein as upheld by the learned CIT(A) in his appellate order for that year, he held that the income attributable to the first three categories of such services taken at 75% was taxable in India as per Article 12 of the relevant DTAA. As regards the fourth category of services, the income attributable to which was held to be not taxable in India being the business profits of the assessee in the assessment order for assessment year 1998-99 as well as in the appellate orders of the learned CIT(A) for assessment years 1997-98 and 1998-99, the Assessing Officer however held that these services/facilities provided by the assessee to the Indian Hotels/Clients were also essentially and intrinsically linked with advertisement and promotion activities undertaken by the assessee for the Indian Hotels operating under the brand Sheraton. According to him, in all such activities, the prominent motive was to maximize the reach of the Sheraton brand and to enhance brand equity of the hotels enjoying the brand name of Sheraton. He also noted that the said activities of advertising were not by using general means of advertising, but the assessee was using its highly sophisticated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason that taxability of the income of non-resident has to be first determined in the light of the charging provisions of IT Act. The scheme of the Act is that taxability of the income of the non-resident has to be determined with reference to the charging provisions of sections 4, 5 and 9. However, section 5 is subject to the other provisions of the Act. Section 90 authorizes the Central Government to enter into an agreement with the Government of any other country for- (a) The granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country; or (b) For the avoidance of double taxation of income under this Act and under the corresponding law in force in that country; or (c) For exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or investigation of cases of such evasion or avoidance; or (d) For recovery of income-tax under this Act and the corresponding law in force in that country. The combined reading of these provisions clearly reveals that provisions of section 90 are to be invoked for granting rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1996-97, 1999-2000, 2000-01 before the Assessing Officer as well as during the course of appellate proceedings for assessment years 1997-98 and 1998-99 before the learned CIT(A). The said submissions made on behalf of the assessee were examined by the Assessing Officer in the light of the agreements between the assessee and the Indian Hotels/Clients, DTAA between theIndiaand theUSAas well as the relevant provisions of section 9. The observations/findings recorded by the Assessing Officer on such examination in the assessment orders, which are identical in both the years, i.e., assessment years 1997-98 and 1998-99, are summarized hereunder:- 1. The assessee was making available its expertise, technical know-how and skills to maintain hotels for developing its business of running International Chain of Hotels on a worldwide basis. The very fact that the assessee was receiving payments linked to the sales further confirmed that the said payments were received for making available technical services and use of brand name Sheraton. 2. The payments received by the assessee from the Indian Hotels and Clients were indirectly for the use of the Sheraton trade name, trademarks and in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, he brought to tax in India @ 15% the entire amounts of Rs. 7,83,36,887 and Rs. 7,78,26,449 received by the assessee during the previous year relevant to assessment years 1997-98 and 1998-99 respectively from the Indian Hotels/Clients vide his assessment orders passed under section 143(3) read with section 254 on 28-11-2003. For this conclusion, he relied on the decision of Mumbai Bench of ITAT in the case of CEAT International v. IAC [1985] 12 ITD 381 which was later on upheld by the Hon'ble Bombay High Court in CEAT International SA v. CIT [1999] 237 ITR 859. 18. Aggrieved by the aforesaid orders passed by the Assessing Officer for assessment years 1997-98 and 1998-99 in the set aside proceedings under section 143(3) read with section 254 on28-11-2003, appeals were preferred by the assessee before the learned CIT(A). Meanwhile, the appeals were also filed by the assessee before the learned CIT(A) against the orders passed by the Assessing Officer for assessment years 1995-96, 1996-97, 1999-2000 2000-01 under section 148/143(3). Since the main issue involved in all these six appeals filed by the assessee involving assessment years 1995-96 to 2000-01 relating to the taxabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivisional brochures, magazines etc. are printed at the appellant's cost and the client hotels only pay for the cost of freight and import duties, if any, for receiving the same. Participation in sister hotel promotions - The appellant's clients hotels are entitled to participation in such promotional programmes where certain hotels are selected as 'hotels of the month' and the tent, cards, posters and other mechandising material are kept on display at all client hotels of a region for a month. This is done especially for new hotels to create awareness among potential customers. Networking all sales offices, contact names, addresses, etc., to provide access to key corporate clients worldwide. Promoting hotels to airline partners. Participation in American Express membership programmes. Access to key customer data of Sheraton worldwide. Access to marketing tools such as Global Preferred Rates, Sheraton Executive Traveller rates etc. for corporate clients worldwide." 19. It was submitted on behalf of the assessee before the learned CIT(A) that all the aforesaid services/facilities provided by it were related to publicity, marketing and reservation only and the payment at the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Tata Engg. Locomotive Co. Ltd. [2000] 245 ITR 823. He also relied on another decision of Hon'ble Bombay High Court in the case of CIT v. Elbee Services (P.) Ltd. [2001] 247 ITR 109 wherein it was held that finding given under section 195(2) will not preclude the Department from taking a contrary view in the assessment proceedings. He then proceeded to examine the main issue involved in the assessee's case relating to taxability of the payments received by it from the Indian hotels/clients of the services rendered in India in the light of orders passed by the Assessing Officer, submissions made on behalf of the assessee from time to time, agreements between the assessee and the Indian hotels/clients, relevant articles of the DTAA between India and USA as well as the relevant provisions of the Income-tax Act, 1961. On such examination and after analyzing the various terms and conditions of the agreements between the assessee and the Indian hotels/clients, he noted that the assessee was imparting information concerning technical and/or commercial knowledge and experience to the Indian hotels for developing their business of running hotels as per the international standards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the assessee and Indian hotels/clients having been already approved by the various departments of the Government of India, the learned CIT(A) held that each department while giving approval to a particular agreement examines that agreement from its own angle and within the mandate provided to that authority under the particular Acts or Rules and, therefore, such approval does not preclude the other departments from examining the nature of payment under the relevant Statute. He, therefore, finally 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) of the I.T. Act, 1961 and also under Article 12(3)(a) of the DTAA between India and USA. He, therefore, upheld the action of the Assessing Officer in bringing the said receipts as chargeable to tax inIndiaat the rate of 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 Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relate entirely to publicity and marketing services rendered entirely outside India on a global basis and the provision of reservation facility and accordingly, the same cannot be regarded as 'royalty' under the Income-tax Act. 2(c) That without prejudice to the above, even otherwise the ld. CIT(A) fell in error in not appreciating that since there existed a Double Taxation Avoidance Agreement between Government of India and Government of USA (hereinafter referred to as DTAA), the provisions of DTAA will prevail over the general provisions contained in the Income-tax Act as per provision of section 90(2) of the Income-tax Act and as per CBDT Circular Nos. 333 and 728. 3(a) That the ld. CIT(A) acted capriciously in overlooking the repeated contention of the appellant that as per express clauses of the agreements with Indian companies, the trademark was provided free of any cost or charges. 3(b) That the ld. CIT(A) failed to appreciate that the specific clauses of the agreement providing for use of trademark free of any cost were approved by the Government of India on several occasions and found to be true and acceptable and accordingly, the same cannot be brushed aside merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Hon'ble Tribunal. 7(d) That although the aforesaid ground of appeal was raised before the ld. CIT(A), the ld. CIT(A) erred in overlooking the said ground altogether in his appellate order for the impugned year. 8. That accordingly, the order of the ld. CIT(A) holding that the payments to the extent of Rs. 5,19,92,318 received by the appellant-company from hotels in India for services rendered in terms of various agreement entered into with them were in the nature of royalty under section 9(1)(vi) of the Income-tax Act and also under article 12(3)(a) of the DTAA, is arbitrary, unwarranted and bad in law and as such, the same should be quashed." 24. The learned counsel for the assessee, at the outset, submitted before us that the assessee being a non-resident company, only the income received in India or deemed to be received in India, income accruing or arising in India and income deemed to accrue or arise in India is liable to tax in India as per the charging provisions of section 5(2) contained in Chapter-II. He submitted that the income on account of the receipts in question received by the assessee-company from the Indian hotels/clients was neither received by it inI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rimary services viz., marketing, publicity and reservation services and the use of trade name or trademark was just to ensure optimum marketing and sales results for hotels marketed and publicized under the brand name 'Sheraton'. He submitted that such use of the brand name 'Sheraton' was also going to facilitate cluster advertising by allowing all hotels using brand name 'Sheraton' to be advertised together resulting in a reduction of cost. He submitted that the use of trademark/trade name of the assessee by the Indian hotels thus was for the purpose of maximizing client or tourist procurement on a worldwide basis in order to increase the revenue of the assessee which was directly related to the sale results of the client hotels. He contended that the use of trademark/trade name thus was going to help the assessee in maximizing its business profit and since it was in the business interest of the assessee, such use was allowed free of any cost to the client hotels. He pointed out that the client hotels of the assessee in India like ITC themselves have a very strong and reputed brand and the agreement entered into by the assessee with them provided for the joint use of brand name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi High Court in the case of CIT v. Sriram Pistons Rings Ltd. [1990] 181 ITR 230 and that of Pune Bench of ITAT in the case of Kinetic Honda Motor Ltd. v. Jt. CIT [2001] 77 ITD 393. He contended that the consideration paid to the assessee-company by the Indian hotels/clients thus was not paid for use of any patent, model, design, secret formula or process or trademark and the same, therefore, could not be regarded as 'royalty' within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi). He contended that the said consideration as specified in the agreements thus was only attributable to marketing, promotion and reservation services which essentially constituted 'business income' of the assessee which cannot fall under Explanation 2to section 9(1)(vi) or even under article 12(3) of the DTAA. 27. As regards the allegation of the Revenue authorities that the assessee was imparting information concerning technical and/or commercial knowledge or experience to the Indian hotels for developing their business of running hotels, the learned counsel for the assessee submitted that the international standards set by Sheraton are well-known worldwide and they are not in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) was not justified in invoking the same. He pointed out that the learned CIT(A) in his impugned order has not treated the said payments as 'fees for technical services' under Explanation 2 to section 9(1)(vii) and the Department having not challenged the said orders of the learned CIT(A) on this issue, the same has attained finality. 28. The learned counsel for the assessee also submitted that since the entire payment in question received by the assessee from the Indian hotels/clients was related entirely to publicity and marketing services rendered outside India on a global basis, the same constituted business profits of the assessee which could not be brought to tax in India as per article 7 of the DTAA since the assessee did not have any permanent establishment in India during all the six years under consideration. 29. As regards the allegation of the learned CIT(A) that the aforesaid payments are in the nature of 'royalty' under article 12(3)(a) of the DTAA, the learned counsel for the assessee invited our attention to the said article to show that the same does not take within its ambit the rendering of services as the same are dealt with in paragraph 4 of article 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the years under consideration and there being no appeal filed by the Department against the orders of the learned CIT(A) on this issue, the fact that the impugned payments are not in the nature of "fees for included services" has attained finality. Without prejudice to this contention, he argued that the said article, in any case, has no application to the amount in question received by the assessee. In this regard, he invited our attention to the relevant portion of the said article as contained in the DTAA as well as the Memorandum of Understanding explaining further the scope and ambit of the said article in 187 ITR (Statute) 102. He submitted that clause (a) of article 12(4) includes technical and consultancy services that are ancillary and subsidiary to the application and enjoyment of the right, property or information for which royalty is received under a license or sale as described in article 12(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 article 12(3)(b). He submitted that since the payment received by the assessee was not cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients in India and abroad, were outside the scope of article 12(4)(b) of the India-US Tax Treaty observing that such non-technical services could not be covered under the said article. It was also held that payments for services not containing any technology are required to be treated as outside the scope of "fees for technical services". He also cited the decisions of Mumbai Bench of ITAT in the case of McKinsey Co. Inc. (Philippines) v. Asstt. DIT [2006] 99 TTJ (Mum.) 857, National Organic Chemical Industries Ltd v. Dy. CIT [2005] 96 TTJ (Mum.) 765, Raymond Ltd v. Dy. CIT [2003] 86 ITD 791 (Mum.) and the unreported decision of Mumbai Bench of ITA in ITA No. 300/Mum/2002 in support of this contention. He emphasized that in the course of rendering services in respect of marketing, publicity and reservations, no technical knowledge or skill was made available to the clients by the assessee-company and if at all rendering of such services required providing of some technical input by the assessee, it does not per se mean that technical knowledge, skill, etc., was made available to a person purchasing the said services to attract article 12(4)(b) of the Indo-US DTAA. He also invited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 'royalty' and/or 'fees for included services' chargeable to tax in India. Referring to clauses (4) and (5) of the preamble of said agreement, he submitted that the background of the assessee as well as the experience attained by it in the field of hotel business described therein clearly shows the "fund of knowledge" possessed by it. He submitted that clause (3) of the preamble of said agreement talks of imparting technical knowledge so as to bring the computers of the ITC in synchronization with those of the Sheraton through which reservation can be done which can take place only on the Sheraton imparting the technical information with regard to the software used and also would fall within the means of communication skill through satellite as noted by the Assessing Officer in his assessment orders for assessment years 1997-98 and 1998-99. He submitted that even clause (4) further shows the experience and knowledge of the assessee pertaining to the hospitality industry and the information concerning the commercial and scientific experience possessed by it. According to him, clauses (5) and (6) of the said agreement talk of bringing out the hotels in India to international standar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered in terms of the said agreement was covered not only under Article 12(3)(a) but also under Article 12(4)(a). He also submitted that as per the said Article, regular feedback was agreed to be supplied by the assessee pertaining to the services and supplemented guidelines and even the ITC agreed to ensure the compliance of the existing as well as revised regulations guidelines and standards made available by the assessee from time to time. He contended that it was thus a clear case of information concerning industrial, commercial or scientific experience being made available by the assessee to the Indian clients/hotels and the consideration paid for the same, therefore, clearly falls within the ambit of 'royalty' and 'fees for included services'. He also contended that even the assistance and training of the staff to be provided by the assessee in accordance with the international standards set up by it would also constitute imparting of information regarding industrial, commercial or scientific experience and the amount paid for such services would be nothing but 'royalty'. 35. Shri Kapur submitted that for all the aforesaid services agreed to be rendered by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of trademark as specifically provided in the agreement was without consideration is devoid of any merits in view of section 25 of the Contract Act which provides that the agreement without consideration is void. He contended that if the test of section 25 is applied, then the assessee cannot be permitted to say that there was no consideration for usage of trademark relying on the agreement. He contended that the consideration agreed under the agreement in any case was for all the services to be provided by the assessee under the said agreements and the same being a composite consideration for such services, part of it was clearly attributable to use of trademark which clearly was in the nature of 'royalty'. He also invited our attention to a letter dated9-4-1990issued by the Reserve Bank ofIndiagranting permission to remit the amount to the assessee placed at page No. 75 of paper book-2 and pointed out that the said payment was clearly termed therein as 'royalty'. 37. Shri Kapur then took us through the various Articles of the relevant agreements and submitted that a perusal of terms contained therein clearly shows that the same are composite documents with each clause b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be considered as a whole to ascertain the real nature thereof as well as to gather the real intention of the parties and the different clauses thereof cannot be considered in isolation. He contended that if the entire agreements entered into by the assessee-company with the Indian clients/hotels are read as a whole, the real nature as well as intention of the parties arising from the substance thereof leaves no room to doubt that it was a single/composite payment agreement and the payments received by the assessee in pursuance thereof were liable to tax in India not only under section 9 of the domestic law but also under Article 12(3) and 12(4) of the Indo- US DTAA. He contended that the said payments received by the assessee were not its business profits as claimed by it but were clearly in the nature of 'royalty' and 'fees for included services' chargeable to tax in India. In support of this contention, he also placed reliance on the following judgments:- (i) CEAT International v. IAC [1985] 12 ITD 381 (Bom.). (ii) CEAT International S.A. v. CIT [1999] 237 ITR 859 (Bom.). (iii) Aziende Colori Naziondali Affini v. CIT [1977] 110 ITR 145 (Bom.). (iv) CIT v. Stanton St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d apparatus used to attain the said objective. He submitted that the whole purpose of the Indian hotels/clients to avail the services from the assessee-company was to boost its hotel business and the nature of services to be rendered by the assessee-company needs to be appreciated in this background. He submitted that the use of its trademark, trade name etc. by the Indian hotels/clients is being insisted upon by the assessee-company for achieving the main objective in its own interest to promote the hotel business and not for anything else and since the whole purpose of such insistence as well as providing the incidental and ancillary services was to maximize its business profits, the payments received by it from the Indian hotels/clients was entirely its business income. He submitted that the Indian hotels/clients including especially ITC neither insisted nor paid for the use of trademark, trade name etc. as well as other facilities separately and it was the assessee-company who provided these facilities with the purpose, inter alia, of maximizing its business profit. He submitted that the prime object of providing all these facilities thus was to augment larger revenue from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable to the assessee vis-a-vis the Income-tax Act since as per specific provisions contained in section 90(2), the provisions of DTAA override the provisions of the Income-tax Act insofar as they are more beneficial to the assessee. In our view, this precisely is the reason why a direction was given by the Tribunal earlier in assessee's case while restoring the matter to the Assessing Officer for assessment years 1997-98 and 1998-99 to consider the same first from the point of view of charging provisions contained in sections 4,5 and 9. 40. Section 4 of the Income-tax Act, 1961 is the charging provision for all the heads of income as regards income-tax and it confers power upon the Central Government to "Charge" income-tax. The charge arises when the person earns an income, the computation of which is to be made according to the provisions of the Income-tax Act, 1961 and the total income envisaged by section 2(45) is arrived at. The scope of such total income of any previous year of a particular person is defined in section 5 and as is evident from the provisions contained in section 5 such scope is primarily determined by the residential status of a person whether he is a res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v). [Explanation 3. - For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data;] (vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vii) of section 9(1). The first and foremost question which thus arises for our consideration in the present case is whether the amount in question paid by the Indian hotels/clients to the assessee for the service rendered in pursuance of the agreements entered into with them was on account of royalty as defined in Explanation (2) below clause (vi) of section 9(1) or on account of fees for technical services as defined in Explanation (2) below clause (vii) of section 9(1) so as to bring the same to tax in India as per the charging provisions of section 4, read with section 5 and section 9. 42. In order to ascertain the exact nature of services rendered by the assessee-company to the Indian hotels/clients, it is necessary to analyse and appreciate the agreements entered into by it with the said parties and there cannot be a quarrel with the proposition that the said agreements are required to be read as a whole in order to construe the same. As held by Hon'ble Supreme Court in the case of Chatturbhuj Vithaldas v. Moreshwar Parashram AIR 1954 SC 236, when a contract consists of a number of terms and conditions, each condition does not form a separate contract but is an item in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said agreement executed on 30-12-1988 is placed at page Nos. 31 to 52 of the assessee's paper book-II and a perusal of the same shows that the background of ITC, being party to the said agreement, was given in paragraph Nos. 2 and 3 of the preamble as follows :- "2. ITC has been engaged in a number of manufacturing and commercial activities inIndiafor many years and has developed a well-known extensive and highly efficient organization in the country manned by personnel with prolonged experience and knowledge of Indian business and market conditions, Indian economic policies priorities and procedures. 3. Pursuant to one of its principal objects and maximizing foreign exchange earnings ITC is also engaged through its Hotels Division (known by the name of WELCOMGROUP) in the operation and/or construction of Hotels consistent with international standards in different parts of India; and towards this end has already established hotels in Madras, Agra and Delhi and has also leased or is otherwise operating hotels in association with third parties in Bombay, Bangalore, Madras, Aurangabad and various other Indian locations. Furthermore, ITC maintains a network for the making an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness especially the management and publicity thereof. He has also laid great emphasis on the highly specialized system such as international computerized system available with the assessee for the reservation which was to be made available to the Indian hotels/clients by providing the necessary interface. In our opinion, this background of the assessee given in the preamble of the agreement, however, cannot be appreciated in the right perspective by reading the same in isolation and it is necessary to read the same with the background of the Indian client/hotel given in paragraph Nos.2 and 3 as reproduced above as well as the intention and purpose for which these two parties had joined hands as described in paragraph No.6 in the preamble of the said agreement as follows :- "6. ITC and SHERATON intend to continue to associate together (1) in the international marketing of hotels of high international standards inIndiawith the objects inter alia of : (i) Development of tourism on a wide front covering a broad economic spectrum of foreign tourists and provision of hotel services for individual travellers including important customers from international commercial organizations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main intention given in paragraph No.6 of promoting and advertising worldwide the Sheraton chain of hotels for the mutual benefit, one can easily understand that both these parties had come together with their specialized information, experience and knowledge in the field of hotel business for mutual benefits 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 the 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. 47. The aforesaid position gets further fortified from the various obligations stipulated in the various Articles of the said agreement as discussed now. Article II to Article VI, being relevant in this context, are reproduced below:- "ARTICLE II PUBLICITY MARKETING AND PROMOTION SHERATON shall undertake worldwide publicity marketing and advertising of the hotels covered by this Agreement through its worldwide sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tels covered by this Agreement to be included in the SHERATON worldwide computerized reservation system ('RESERVATRON') operated by the Sheraton Reservation Corporation for which the said Corporation normally obtains reimbursement of costs from SHERATON hotels in other countries. Link up with this system fromIndiais through a commercial leased telex circuit (INTELNET) with SHERATON and ITC respectively bearing communication costs at each end. ITC shall as early as technically and commercially feasible complete the modernization of its WELCOMNET reservations system into a fully computerized Reservation Centre covering all major Welcomgroup-Sheraton hotels in India as well as interface the system with the Sheraton RESERVATION system so that the parties hereto are able to provide their customers a fully integrated worldwide reservations service. The cost of the hardware and software for the RESERVATION IV System for the said Reservation Centre shall be borne by SHERATON. All other costs including those for the installation, interfacing and operation of the said ITC Reservation Centre inIndiawill be borne by ITC. The inclusion of any hotel which is not owned or leased by ITC directly o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assist ITC with maintenance of high international standards at the hotels to be marketed and publicized as provided herein, and its operation by adequately trained personnel, SHERATON shall make available facilities for the training within the network of SHERATON hotels in the area including India or at various locations in other parts of the world of selected personnel for employment at the hotels. Such training may be in the nature of 'on the job' or formal training as determined by SHERATON. ITC shall reimburse SHERATON any actual out-of-pocket expenses incurred related to providing any services under this Article. ARTICLE VI TECHNICAL ASSISTANCE; DESIGN AND CONSTRUCTION SHERATON shall make available its comprehensive standards and technical assistance for design and construction of any new hotels to be covered by this Agreement so that such hotel meets SHERATON requirements of operating standards. SHERATON shall not have any architectural or engineering responsibility in connection with such design or construction. The scope and extent of the compensation for such services and the terms on which such services shall be rendered will be separately negotiated and agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee of publicity, marketing and promotion of the Indian hotels worldwide and the nature thereof has to be understood or appreciated keeping in view the main intention/objective behind rendering of such services as evident from the sum and substance of the agreement. 49. The services described in the various Articles of the agreement also clearly show that they have no 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. For instance, the marketing advice to be given by the assessee to assist the management of Indian hotels in planning market strategy was clearly for the purpose of enabling it to maximize revenues as mentioned in clause (b) of Article II of the agreement which was an integral part of promoting and marketing the Indian hotels. Similarly, the guidance to be provided by the assessee to the Indian hotels/clients in installing and maintaining systems and procedures designed by it as mentioned in clause (c) of Article II was for the purpose of initiating and servicing the international business to ensure that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 learned counsel for the assessee. 51. The various services agreed to be rendered by the assessee to the Indian hotels/clients as enumerated in Articles II to VI of the relevant agreements 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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% of room sales of the Indian hotels further shows 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 point 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% 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, in our opinion, was neither permissible nor possible in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The three existing WELCOMGROUP hotels inAgra,MadrasandDelhishall continue to be known as the Welcomgroup 'CHOLASHERATON' inMadras, the Welcomgroup 'MUGHALSHERATON' inAgraand the Welcomgroup 'MAURYASHERATON' inDelhi. Each of the hotels covered by this Agreement shall also be presented and advertised as a WELCOMGROUP hotel. (b) ANY use or the right to use by ITC of the name 'SHERATON' or by the stylized 'S' service mark or other SHERATON trademarks or distinguishing characteristics owned by or associated with SHERATON shall cease upon the termination or expiry of this Agreement. (c) ITC agrees that it will always acknowledge and recognize both before and after the expiration of this agreement the exclusive right of SHERATON (consistent with Article, X) to use or to grant to others the right or licence to use whether separately or as a part of or in connection with other words slogans, symbols or designs the name 'SHERATON' the stylized 'S' service mark and any other trademarks, trade names or other identifying characteristics which may now or in the future be generally used in connection with the operation of SHERATON hotels, motels or inns. (d) Consistent with international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also going to help the assessee in advertising its other hotels worldwide and to promote their business as submitted by the learned counsel for the assessee before us which is also evident from Article IX of the agreement reproduced below :- "ARTICLE IX ADVERTISING AND MARKETING IN INDIA ITC undertakes to maintain and continue to extend facilities inIndiafor sales, advertising and reservations services for the hotels covered by this agreement. Furthermore, ITC shall also take steps to recommend and promote all SHERATON inns, hotels and motels worldwide and to make every reasonable effort to encourage the use of same by all of its customers and guests, it being intended that each ITC hotel and all other SHERATON hotels will benefit from their mutual promotional efforts." 55. 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 names 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 client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of 'royalty' or 'fees for technical services' before the Tribunal liable to tax in India. The dispute before the Tribunal thus was mainly relating to the amount of 75% attributable to other three categories of services referred to in clauses (a), (c) and (d) of the agreement and when the Tribunal held that payments for three services referred to in clauses (c) and (d) of the agreement were in the nature of 'royalty' or 'fees for technical services' taxable under section 9, the decision of the Tribunal was accepted by the assessee during the course of hearing of its appeal by the Hon'ble Bombay High Court. The Hon'ble Bombay High Court thus was required to consider and decide only the issue raised by the Revenue relating to the payment attributable to the services referred to in clause (a) of the agreement, according to which, the assessee had foregone in favour of CEAT Tyres of India Ltd. export sales in various markets and in certain cases, export orders were also transferred to the Indian company and it was held by their Lordships that the said payment attributable to services referred to in clause (a) of the agreement could not be treated as 'royalty' or 'fees for technical se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement under which the same has been paid. In this regard, we have already examined and analyzed the relevant terms of agreements under which the amount in question was paid by the Indian hotels/clients to the assessee-company and on such examination as well as on appreciation of peculiar facts and circumstances of the case, we have noted that the amount in question was entirely paid by the Indian hotels/clients to the assessee-company for the services rendered in relation to publicity, advertisement and sales promotion whereas the other services enumerated in the agreements were ancillary being incidental to attain the main objective. On the other hand, the facts involved in the various cases cited by the learned Special Counsel for the Revenue were materially different from the facts of the present case. For instance, in the case of Aziende Colori Nazionali Affini, the assessee foreign company had entered into an agreement with the Indian company for supply of know-how for which fees was payable by the Indian company. The said agreement also contemplated assistance to be given by the assessee foreign company to the Indian company in manufacture. On the other hand, the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ultimate decision rendered by the Hon'ble Calcutta High Court in the case of Stanton Stavely (Overseas) Ltd, in fact, support the assessee's case as the true nature of the amount paid by the Indian hotels/clients to the assessee-company has been found to be for the services rendered in relation to advertisement, marketing and sales promotion after examining the relevant terms of the agreement, commercial principles, the nature of assessee's business and not merely on the basis of nomenclature used by the parties. 59. In the case of CIT v. Ahmedabad Mfg. Calico Printing Co. [1983] 139 ITR 806 (Guj.), agreement between the assessee and foreign company for ten years was for supply of technical knowhow to the assessee and the assessee was given exclusive license to manufacture, sale and exploit products and improvements thereof in India and in these circumstances, payment made to foreign company by the assessee was held to be 'royalty' for exclusive right to manufacture the products. 60. In the case of N.V. Philips v. CIT [1988] 172 ITR 521, as per the agreement between foreign company and Indian company, the foreign company had supplied technical assistance and technical in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " dated 13-111973 was taxable in its hands as 'royalty' under section 9(1)(vi). Since the experience of the foreign company in the field of manufacture of pesticides for long period of years, according to the Tribunal, was a "fund of knowledge" which was supplied by it to the Indian company for utilization for manufacturing of pesticides, it was held that 50% of the total amount received by the assessee under a technical service agreement could be treated as 'royalty' under section 9(1)(vi). The facts of this case before the Tribunal clearly show that the agreement between the two sides was for rendering the technical services and the knowledge and experience possessed by the foreign company referred to as "fund of knowledge" was in the field of manufacture of pesticides which was made available to the Indian company for manufacturing the pesticides. Moreover, the issue before the Tribunal was also different than the one involved in the present case inasmuch as the assessee-company itself had claimed the amount received under the technical service agreement as 'fees for technical services' under section 9(1)(vii) whereas the Revenue's stand was that the same did fall under the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and UK, it was held by the Tribunal that no part of fees for managerial services could be considered as 'fees for technical services' since the word 'managerial' did not find place in the concerned Article. Consequently, it was held by the Tribunal that the assessee-company was under no obligation to deduct tax under section 195. In the present case, no such managerial services were rendered by the assessee-company to the Indian clients/hotels so as to attract the provisions of section 9(1)(vii). 65. A resume of the various decisions cited by the learned Special Counsel for the Revenue, as discussed above, clearly shows that the facts involved therein were materially different than the facts involved in the present case inasmuch as the nature of services rendered therein was altogether different from the nature of services predominantly rendered by the assessee-company in the present case as discussed hereinabove in detail. The learned Special Counsel for the Revenue, however, has attempted to pick out and rely on some sentence from the said judgments in support of the Revenue's case divorced from the text and context thereof. It is a first and foremost principle of review ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to be determined on the facts and circumstances of each case and the terms of agreement under which there has been a transfer. In the said case, finding was recorded by the Tribunal on construing the relevant portion of the agreement that a foreign company had undertaken to supply, erect and commission a kiln in India and even though know-how was also provided along with the material, the entire payment had been considered as the cost of the kiln by the purchaser in India. Keeping in view this finding of fact recorded by the Tribunal, it was held by the Hon'ble A.P. High Court that the entire consideration having been paid for construction/installation of kiln, one is unable to say that any amount was paid for imparting any information concerning the working of a patent, invention, design, secret formula etc. falling under clause (ii) of Explanation or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within the meaning of clause (iv) of Explanation (2). Hon'ble A.P. High Court, therefore, upheld the conclusion of the Tribunal that part of the payment made by the Indian company to the foreign company in pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices 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 aforesaid decisions of the Hon'ble High Courts including that of Hon'ble Jurisdictional High Court in the case of Mitsui Engg. Ship Building Co. Ltd, we are of the view that 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. 70. 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 which arises for our consideration is 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. Alth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cientific equipment, other than payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8. 4. For purposes of this article, "fees for included services", means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) 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; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." 72. It appears from the orders of the authorities below passed in the present case that while treating the amount in question received by the assessee from Indian hotels/clients as 'royalty' and/or 'fees for included services' the Assessing Officer relied on Article 12(3) and 12(4)(b) of the Indo-American DTAA besides the provisions of section 9(1)(vi) of the Income-tax Act, 1961 where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment received or receivable by the assessee from the Indian hotels/clients in pursuance of the agreements entered into with them, it is necessary to appreciate the exact nature of services rendered by the assessee as is evident from the said agreements. In this regard, it is necessary to read the said agreements as a whole as held in the various judicial pronouncements discussed above so as to ascertain the exact nature of services as well as the relationship between the two parties. We have already done this exercise in the context of issue relating to applicability of section 9(1)(vi) read with Explanation 2 and after examining and analyzing all the relevant clauses and articles of the said agreements in detail, we have come to a conclusion that the arrangement between the assessee-company and the Indian hotels/clients was in the nature of integrated business arrangement predominantly for rendering the services in connection with publicity, advertising and sales including reservations of the Indian hotels worldwide. The main intention/purpose of the said arrangement was to promote the hotel business worldwide in the mutual interest of both the sides and the other services enume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness arrangement between the assessee-company and its Indian clients/hotels as reflected in the, relevant agreements so also as understood by both the sides was that of providing the services in relation to marketing, publicity and sales promotion and even the payments in question were entirely made by the Indian hotels/clients to the assessee-company for such services as expressly provided in the relevant agreements. 75. In the case of Dy. CIT v. Boston Consulting Group Pte Ltd. [2005] 94 ITD 31 (Mum.) the assessee was a foreign company receiving income by providing strategy consultancy services such as marketing and sales strategy, business strategy and portfolio strategy to its clients in India and the said income was sought to be held as in the nature of 'fees for technical services' within the meaning given in relevant Articles of the DTAA between India and Singapore and after comparing the scope of Article 12(4)(b) of India-US Treaty with that of the same Article of the India-Singapore Tax Treaty, it was held by the Tribunal that the services rendered by the assessee-company being nontechnical services could not be covered by the scope of Article 12(4)(b) of the Indo-Ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case including especially the fact that other services to be rendered by the assessee as enumerated in the various Articles of the relevant agreements were merely ancillary or auxiliary in nature being incidental to the integral job undertaken by the assessee to provide the services in relation to advertisement, publicity and sales promotion of the hotel business worldwide, it is very difficult to accept the stand of the Revenue that the amount so paid by the Indian hotels/clients to the assessee-company or any part thereof was paid for 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 as envisaged in Article 12(3)(a), 12(4)(a) or 12(4)(b) of the DTAA or in section 9(1)(vii) read with Explanation 2. 78. 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 has been laid by the learned Special Counsel for the Revenue was made by the assessee to enable it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendering of the services in relation to advertisement, marketing and sales promotion. He has contended that since the same come within the purview of one or the other clauses contained in Explanation 2 to section 9(1)(vi) and (vii) as well as Article 12(3) and 12(4) of the DTAA between India and USA, the payment/consideration attributable to the same should be apportioned so as to bring the same to tax in India. In this regard, it is observed that a similar contention was raised before the Hon'ble Delhi High Court on behalf of the Revenue in the case of Mitsui Engg. Ship Building Co. Ltd. The same, however, was rejected by the Hon'ble Jurisdictional High Court holding that it was not possible to apportion the consideration for design on the one part and engineering, manufacturing, shop testing etc. on the other since the price paid by the assessee to the supplier was a total contract price which covered all the stages involved in the supply of machinery from the stage of design to the stage of commissioning. In the present case also, the entire price was paid by the Indian hotels/clients to the assessee-company in pursuance of the relevant agreements expressly for rendering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us to Article 12(4)(a) of the DTAA which 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 dated 15th May, 1989, 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). In this regard, we have already held that the payments received by the assessee in the present 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. 1t, therefore, follows that paragraph 4(a) of Article 12 also cannot be applied to cover any of the services rendered by the assessee-company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otels/clients was covered in this category. We, however, find it difficult to agree with this contention of the learned Special Counsel for the Revenue. First of all, it is the area which has been specified in the MoU for ascertaining the services relating thereto being of technical and consultancy nature making technology available whereas the services rendered by the assessee in the present case are in the field of hotel industries and such services are in relation to advertisement, publicity and sales promotion which are not in the nature of technical and consultancy services involving making of any technology available. Secondly, the interface between the computerized reservation system of the assessee and the computerized reservation system of the Indian hotels/clients was provided to facilitate the reservation of hotel rooms by the customers worldwide as an integral part of the integrated business arrangement between the assessee and the Indian hotels/clients. This interface thus was not separable from and independent of the main integrated job undertaken by the assessee-company of rendering services in relation to marketing, publicity and sales promotion and the same, in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there any development and transfer of a technical plan or design and, therefore, the fees payable by the Indian company to the American company would not be for included services. In another example No.7, the Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer stimulation of the world market for such oil and to advice it on market strategy. On analysis of these facts, it is clarified/explained that the fees payable by the Indian company to theUScompany would not be for included services. It is also explained that even though the American company is providing a consultancy service which involves the use of substantial technical skill and expertise, it is not making available to the Indian company any technical experience, knowledge or skill etc. nor is it transferring a technical plan or design. What is transferred, to the Indian company through the service contract is commercial information and the mere fact that technical skills were required by the performer of the service in order to perform the commercial information service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the copies of various judgments of the Hon'ble Supreme Court and High Courts filed in Compilation 22A(C-l) to explain the concept of "colourable device" and "playing fraud upon the statute". In one of these cases cited by Shri Kapur, viz., Bhagat Construction (P.) Ltd v. CIT [2001] 250 ITR 291, Hon'ble Delhi High Court has explained the meaning of 'a colourable device' as a colourable transaction which is seemingly valid but a feigned or counterfeit transaction entered into for some ulterior purpose. It was also observed by the Hon'ble Jurisdictional High Court in the said judgment that a conclusion about the nature of a transaction, whether it was a colourable or otherwise, if supported by material or evidence, is essentially one of fact. As further pointed out by Shri Kapur, it was held by Hon'ble Supreme Court in the case of Bhaurao Dagdu Paralkar v. State of Maharashtra [2005] 7 SCC 605 that suppression of material document would also amount to a fraud on the Court. He also relied on the decision of Hon'ble Supreme Court in the case of McDowell Co. Ltd v. CTO [1985] 154 ITR 148 wherein it was held that colourable devices cannot be part of tax planning and it is wrong to enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id payment of tax by artificial device showing apparently the nature of income to be different than the actual one. He contended that the tax was clearly chargeable in India on the amount attributable to such use being in the nature of 'royalties' which has been avoided by the assessee by adopting a dubious method or colourable device by drafting the relevant agreements to serve its purpose. 87. The learned counsel for the assessee submitted that the relevant agreements entered into by the assessee-company with the Indian hotels/clients were not only approved by the different Government authorities like RBI etc. but even the same were examined by the Income-tax Department before issuing no-objection under section 195(2) from time to time treating the amount received by the assessee-company from the Indian hotels under the said agreements as its business profits. He contended that it is, therefore, not permissible for the Revenue now to say that the said agreements are the colourable device adopted by the assessee-company to avoid payment of tax especially when the orders under section 195(2) were consistently passed up to assessment year 1994-95 treating the amounts received by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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'. Copies of these orders passed from time to time during the relevant period have been placed on record by the learned counsel for the assessee before us. Further, as pointed out by the learned counsel for the assessee before us, 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. Having regard to all these facts and circumstances of the case, it is 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. 89. As is evident from the impugned orders of the learned CIT(A) as well as the contentions raised by Shri Kapur before us, the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at arms' length, it cannot be alleged that there was some sort of collusion between them to draft the agreement in such a way to serve the purpose of the assessee-company to avoid tax in India especially when there was no evidence whatsoever to support and substantiate the said allegation. On the other hand, due compliance of all the statutory requirements was apparently done by them by obtaining the necessary permissions and approvals from time to time and even all the agreements were produced before the Income-tax authorities from time to time for getting the no-objection under section 195(2). The concerned income-tax authorities thus not only had the knowledge of the said agreements but after examining the terms and conditions thereof,' orders under section 195(2) were passed on different occasions treating the amount received by the assessee under the said agreements as its 'business profit'. In the case of Bhagat Construction Co. (P.) Ltd, Hon'ble Delhi High Court has held that a conclusion about the nature of a transaction whether it was a colourable or otherwise is essentially one of fact and the same is required to be considered on the basis of supporting material or evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the absence of any such rate prescribed by the CBDT or any other competent authority of Indian Government or any instructions or guidelines specifically issued by them, in this regard, the Assessing Officer is not competent to charge tax on such income in India by pressing into service Article 12(2). In support of this contention, he has relied on the decision of Delhi Bench of ITAT in the case of Modiluft Ltd wherein while dealing with a similar issue in the context of DTAA between India and Germany, the Tribunal held that the relevant Article 12(2) of DTAA being vague and there being no guidelines issued by the CBDT or any competent authority as to when such amount can be taxed in India and what may be the criterion for arriving at appropriate rate of tax, the benefit of this lacuna has to be extended to the assessee. The learned Special Counsel for the Revenue, on the other hand, has put forth the Revenue's stand on this issue in the written submissions at page Nos. 26 to 31. The main plank of his arguments is that having regard to all the facts of the case, the payments in question received by the assessee-company from Indian hotels/clients gave rise to income which has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the payer and considering this repercussion of non-deduction of tax at source by the payer, the department exercises due diligence before granting of no-objection certificate for making remittance to a non-resident without deduction of tax at source. He submitted that the remittances of the amount in question to the assessee-company by the Indian hotels/clients in the present case were permitted by the department without deduction of any tax at source as per the orders passed under section 195(2) from time to time and even the said payments were allowed as deduction in the assessments completed regularly in the cases of Indian hotels/clients. He contended that the said amounts thus were treated as "business profits" of the assessee-company not only in the orders passed under section 195(2) but even in the regular assessments completed in the cases of Indian hotels/clients being payers of the said amounts. He contended that this treatment given earlier in a period spanning for nearly nine years, however, was changed by the Assessing Officer while issuing notices under section 148 initiating reassessment proceedings for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o final assessment. In this regard, he relied on the decision of Hon'ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd v. CIT [1999] 239 ITR 587 wherein it was held that the order passed under section 195 does not affect the rights of parties and the taxability of receipt in the hands of recipient has to be examined independently in the assessment proceedings without having regard to issuance of no-objection certificate issued under section 195(2). He also relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Tata Engg. Locomotive Co. Ltd [2000] 245 ITR 823 and in the case of CIT v. Bibee Services (P.) Ltd [2001] 247 ITR 109 for the similar proposition. He contended that the initiation of reassessment proceedings in the present case thus was not based on the change of opinion as alleged by the learned counsel for the assessee and there was no infirmity much less an illegal infirmity in the reassessments completed in pursuance of the said initiation. 97. We have considered the rival submissions and also perused the relevant material on record. It is observed that the case of change of opinion has been attempted to be made out by the learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt/contrary view is based on change of opinion. It is pertinent to note here that, even the intimation issued under section 143(1)(a) is held to be not an order of assessment expressing any opinion, in the similar context by the Hon'ble Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. v. Chairman, CBDT [2000] 246 ITR 173 observing that there being no assessment as such under section 143(1)(a), there is no question of change of opinion in issuing notice under section 148. In the case of Dr. Amin's Pathology Laboratory v. T.N. Prasad, Jt. CIT No. 2 [2001] 252 ITR 683 (Bom.), the return of income filed by the assessee was accepted under section 143 (1)(a) and there being no assessment of the assessee made under section 143(3) for the relevant year, it was held by the Hon'ble Bombay High Court that there was no question of the reopening of assessment on change of opinion as alleged. To the similar effect is the decision of Hon'ble Rajasthan High Court in the case of Suman Steels v. Union of India [2004] 269 ITR 412 wherein it was held that the original assessment having been done under section 143(1)(a) and not under section 143(3), there was no occasion for the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the four years under consideration i.e., assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 as alleged by the learned counsel for the assessee, we dismiss the common ground No.1 taken on this issue in the assessee's appeals. 99. The other preliminary issue relating to the scope of set aside proceedings is raised by the assessee-company in common ground Nos. 1 and 2 of its appeals for assessment years 1997-98 and 199899 which read as follows:- "1 (a) That the Assessing Officer erred in not following the directions contained in the order of the Hon'ble Tribunal while restoring the matter to the file of the Assessing Officer for readjudication. 1(b) That accordingly, the order of the Assessing Officer and the order of the ld. CIT(A) confirming the order of the Assessing Officer are bad-in-law. 2(a) That the Assessing Officer erred in having differed from the original orders of his predecessors for the impugned assessment year wherein 25% of the total income was assumed to be fees for marketing, publicity and reservation services which was held to be "Business Profits" of the appellant and hence, not chargeable to tax in India in the absence of Permanent Establishment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts were set aside by the Tribunal and the matter was remanded to the Assessing Officer for making a fresh assessment, the power of the Assessing Officer was confined to such subject-matter only. He contended that since the issue relating to the taxability of 25% of the amount in question was not the subject-matter of the appeals before the Tribunal, it was not permissible to the Assessing Officer to travel beyond the scope of remand proceedings and consider and decide the said issue relating to taxability of 25% of the amount in question when the same had already attained finality and was not the subject-matter of appeal before the Tribunal. 101. Relying on the decision of Hon'ble Calcutta High Court in the case of V.P. Samtani v. CIT [1982] 135 ITR 313, the learned counsel for the assessee contended that even the powers of the Tribunal itself were restricted to the subject-matter of the appeal and the directions given by the Tribunal, in any case, were confined to such subject-matter. He also cited the decision of Hon'ble Mysore High Court in the case of Pathikonda Balasubba Setty v. CIT [1967] 65 ITR 252 wherein it was held that the Tribunal's powers are limited to passing such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of Hon'ble Madras High Court in the case of CIT v. D. Veerappan [1995] 215 ITR 533 wherein it was held that once the assessments are set aside and remitted back for doing the same afresh, it is open to the Income-tax Officer to redo the assessments under section 143(3) and his jurisdiction cannot be restricted in any sense. He also relied on the decision of Hon'ble Gauhati High Court in the case of CIT v. Highway Construction Co. (P.) Ltd [1997] 223 ITR 498 wherein it was held that when a direction given was to make a fresh assessment, the earlier assessment had become non est and it was open to the Assessing Officer to make the assessment afresh in accordance with law. Reliance was also placed by him on the decision of Hon'ble Orissa High Court in the case of CIT v. S. v. Diwakar [1993] 201 ITR 914 wherein it was held that wherever an assessment is set aside without imposing any restrictions or limitations, the Assessing Officer has the same power of making the assessment afresh as he could have originally done. He contended that the Tribunal while remanding the matter to the Assessing Officer in the present case for assessment years 1997-98 and 1998-99 did not pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length. After going through the orders of authorities below and considering the arguments of the parties, we are of the view that the issue has not been dealt with in the right perspective inasmuch as the Assessing Officer as well as CIT(A) had proceeded on the assumption as if the covenants of DTAA authorizes the levy of tax on the income of the non-resident. The parties before us also have not addressed any argument as to whether the income of non-resident assessee is chargeable to tax under the provisions of IT Act, 1961 or not. They simply have proceeded on the same footings on which lower authorities decided the issue. We are unable to uphold such approach adopted by the lower authorities for the simple reason that taxability of the income of non-resident has to be first determined in the light of the charging provisions of IT Act. The scheme of the Act is that taxability of the income of the non-resident has to be determined with reference to the charging provisions of sections 4, 5 and 9. However, section 5 is subject to the other provisions of the Act. Section 90 authorizes the Central Government to enter into an agreement with the Government of any other country for- (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations of the Tribunal, the learned Special Counsel for the Revenue has submitted before us that the decision of the Tribunal was clearly to the effect that the entire assessments had been set aside and the matter was restored to the file of the Assessing Officer for fresh consideration. He has contended that the entire matter was thus left at large by the Tribunal to the Assessing Officer to be decided in accordance with law without circumventing his powers in any manner during the remand proceedings. In support of this contention, he has cited the following case laws :- (i) CIT v. D. Veerapan [1995] 215 ITR 533 (Mad). (ii) CIT v. Highway Construction Co. (P.) Ltd [1997] 223 ITR 498 (Gau). (iii) CIT v. S.V. Diwakar [1993] 201 ITR 914 (Ori.) (iv) CIT v. Fundilal Rikhabchand [1994] 208 ITR 348 (Raj.). (v) CIT v. A.M. Zainalabdeen Musaliar [1995] 212 ITR 188 (Ker.). 106. A perusal of the aforesaid decisions cited by the learned Special Counsel for the Revenue, however, shows that they were rendered in the context of scope of proceedings in pursuance of remand by the first appellate authority i.e., CIT (Appeals), AAC etc. except the case of D. Veerappan decided by Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Hukum Chand Mills Ltd., the powers of the Tribunal in dealing with appeals are expressed in section 33(4) of the 1922 Act (which are analogous to the provisions of section 254 of the 1961 Act) in the widest possible terms, but the word "thereon" used therein restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. Further, as held by the Hon'ble Calcutta High Court in the case of V.P. Samtani the subject-matter of appeal is primarily the power of the Tribunal as circumscribed by the provisions of the statute and it is not open to the Tribunal to enlarge the subject-matter of the appeal. In the case of Pathikonda Balasubba Setty, it was held by the Hon'ble Mysore High Court that the Tribunal's powers are limited to passing such orders as they may think fit on the appeal and the expression "on the appeal" clearly and indubitably points to the conclusion that the powers of the Tribunal are limited to the subject-matter of the appeal. Explaining further, Hon'ble Mysore High Court observed that at the stage of second appeal to the Tribunal, the liberty is given to both the sides to go up in appeal to the Tribunal and when the Tribunal comes to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by the assessee-company from the Indian hotels/clients whereas the remaining portion of 25% deleted by the learned CIT(A) was not the subject-matter of the appeals before the Tribunal. This being the undisputed position and keeping in view the legal position emanating from the aforesaid judicial pronouncements including the fundamental principle explained by Hon'ble Mysore High Court in the case of Pathikonda Balasubba Setty, we are of the view that when the assessments for assessment years 1996-97 and 1997-98 had been set aside by the Tribunal and the matter was remanded to the Assessing Officer for making the said assessments afresh, the power of the Assessing Officer was confined to consider and decide only the issue relating to the taxability of 75% of the amounts in question received by the assessee-company from the Indian hotels/clients in India which was the subject-matter of the appeals disposed of by the Tribunal vide its common order dated 23-10-2002. He was not entitled to take up the issue relating to the taxability of remaining portion of 25% inIndiafor consideration and decision since the same was not the subject-matter of appeals before the Tribunal, notwithstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /clients in respect of 'Sheraton Club International' (SCI)/'Starwood Preferred Guest' (SPG) Programme and 'Frequent Flyer Programme' (FFP) for assessment years 1995-96, 1996-97, 1999-2000 and 2000-01 amounting to Rs. 1,06,17,408, Rs. 96,48,432, Rs. 62,99,457 and Rs. 46,52,763 respectively, it is observed that the additions made by the Assessing Officer on these counts were deleted by the learned CIT(A) for the following reasons given in his impugned orders which are identical for all the four relevant years :- "5.4 I have considered the submissions of ld. AR and have perused the material on record. From the perusal of the assessment order dated 20-3-2001 for the assessment year 1998-99 it is noticed that the appellant had shown contributions in respect of Sheraton Club International (SCI) and Frequent Flyer Programme (FFP) in the assessment year 1998-99 also but no addition in respect of these contributions was made either in this order or in the order under section 143(3) read with section 254 passed on 28-11-2003. To this extent the submissions of the AR are correct. However, the AR's contention that this issue was examined by the CIT(A) in the assessment year 1997-98 is factua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or subsidiary to the enjoyment of right or property or information for which payment described in paragraph 12(3)(a) is made. He submitted that the relevant programmes were going to augment the enjoyment of property or right to property and since they were going to help in generating revenue, the same clearly were covered under article 12(4)(a). He contended that by its very nature, the relevant programmes thus were going to increase the revenue for which the assessee had passed on information to the Indian hotels/clients and it was thus a clear case of information provided by the assessee of commercial nature based on its experience in the field of hotel industry. He also contended that this information was privy to the assessee and since supply of the said information was ancillary and subsidiary to the application or enjoyment of the right to property, the payment made for the same would fall within the category of 'fees for included services' as held by the Assessing Officer. 113. The learned counsel for the assessee, at the outset, pointed out that it was held by the Assessing Officer himself in the assessment order for assessment year 1998-99 that the amount received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Indian hotels/clients predominantly in relation to advertisement, publicity arid 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. 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 the main job undertaken by the assessee-company to render services relating to advertisement, publicity and sales promotion of the Indian hotels/clients. In these circumstances, it is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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