1983 (3) TMI 108 - AT - Income Tax

Issues Involved:
1. Liability of the non-resident American company (assessee) under the Income-tax Act for compensation receivable from Indian companies.
2. Determination of the place where the agreement was completed.
3. Accrual or deemed accrual of income in India.
4. Business connection in India.
5. Classification of the word "Intercontinental" as property or asset.
6. Attribution of compensation to the use of the word "Intercontinental".
7. Application of Rule 115B and treatment of interest loss as business loss.

Detailed Analysis:

1. Liability of the Non-Resident American Company:
The primary issue was whether the assessee, a non-resident American company, was liable under the Income-tax Act for compensation receivable from East India Hotels Ltd. and Indian Hotels Co. Ltd. The Income-tax Officer (ITO) held the assessee liable, applying Rule 10 of the Income-tax Rules, 1962, and calculated 20% profit on the turnover. However, the Commissioner (Appeals) accepted the assessee's plea that no income accrued or deemed to have accrued in India under the Membership and Service agreements.

2. Determination of the Place Where the Agreement Was Completed:
The ITO raised the issue of the agreement's completion location for the assessment years 1971-72 and 1972-73, asserting it was signed abroad and completed in India. However, evidence showed the acceptance was communicated outside India through the foreign agent of the Indian party, and the agreement was completed only outside India. This objection was not raised in subsequent years.

3. Accrual or Deemed Accrual of Income in India:
Under Section 5(2)(b) of the Income-tax Act, the total income of a non-resident includes all income that accrues or arises in India. The Tribunal found no activity or operations carried out by the assessee in India, no office or business dealings, and no agent in India. The agreement was entered into and the compensation paid outside India. Thus, there was no income accrued or arisen in India.

4. Business Connection in India:
Section 9(1) of the Income-tax Act deems certain incomes to accrue or arise in India through business connections. The Tribunal found no business connection as the assessee had no operations, office, or personnel in India. No services were performed in India, and no portion of the membership fees was received in India.

5. Classification of the Word "Intercontinental" as Property or Asset:
The Tribunal examined whether the word "Intercontinental" could be treated as property or an asset. It concluded that "Intercontinental" could not be considered tangible property but could be seen as an asset. The word carried goodwill and reputation, and the right to use it was part of the agreement.

6. Attribution of Compensation to the Use of the Word "Intercontinental":
The compensation under the agreement was primarily for facilities and services rendered by the assessee. However, a small portion of the compensation was attributable to the right to use the word "Intercontinental". The Tribunal estimated this portion to be 5% of the receipts, directing the ITO to make the computation accordingly.

7. Application of Rule 115B and Treatment of Interest Loss:
The cross-objections for the assessment years 1971-72, 1972-73, and 1973-74 were dismissed. For the assessment year 1974-75, the Tribunal directed the ITO to consider Rule 115B and verify and allow the interest loss as business loss, as done for the assessment years 1975-76 and 1976-77. The cross-objections for the assessment years 1975-76 and 1976-77 were allowed in part, applying Rule 115B.

Conclusion:
The appeals were allowed in part, with the Tribunal determining that 5% of the compensation received by the assessee was taxable in India for the right to use the word "Intercontinental". The cross-objections for certain years were dismissed, while others were allowed in part, directing the ITO to apply Rule 115B and verify the interest loss.

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