Levy of tax on income earned by a foreign marketing company, which provides publicity and sales promotion services outside India, has been the subject matter of litigation. Generally, the fees earned for such services rendered outside India would be outside the jurisdiction of Indian tax authorities.
This issue came up before the Delhi High Court in Director of Income-Taxv. Sheraton International Inc (313 ITR 267). The facts in the case were that the assessee, a non-resident, was engaged in providing services to hotels in various parts of the world.
On January 27, 1979, it entered into one such agreement with ITC for providing services to three of its hotels. The scope of services envisaged in the agreement was publicity, advertisement and sales, including reservation services. The tenure of the agreement was fixed at 10 years.
In consideration of the services which the assessee was required to render, ITC agreed to pay a fee at the rate of 3%. of the room sales to the assessee. Due to a reorganisation, the rights and obligations, which enured to ITC under the agreement dated January 27, 1979, got vested in ITC Hotels. On May 9, 1985, the assessee entered into a similar agreement with ITC Hotels in respect of Hotel Windsor Manor, Bangalore.
The agreement dated January 27, 1979 was renewed on December 30, 1988. The assessee also entered into a similar agreement with Adyar Hotels. In respect of the period prior to India and USA entering into a Double Taxation Avoidance Agreement dated April 1, 1991, the fee received by the assessee was taxed as a business income .
After the coming into force of the DTAA, the assessee claimed that the fee received by it was not taxable in India as it had no permanent establishment in India. This was accepted by the revenue deparment and accordingly, the department gave its no objection certificate on October 28, 1991, whereby the assessee was permitted remittance of the fee earned in India without deduction of tax at source.
In November, 1999, a notice was issued to ITC Hotels under section 163, treating it as the agent of the assessee and notices were issued under section 142. The assessee did not comply with the notice and so the assessing officer proceeded to make a best judgment assessment.
The assessing officer concluded, on an analysis of the terms and conditions contained in the agreement, that what the assessee was making available to ITC Hotels were: technical and consultancy services; provision of training to its employees; the use of its trade mark, making available technical know-how, documentation and manuals, for which while the assessee was not charging a lump sum fee. The consideration received by the assessee was relatable to the business concluded by its client-hotels; and the reservation network. Based on the aforesaid facts, the assessing officer came to the conclusion that the payments received by the assessee were fees for included services as provided in article 12(4)(b) of the DTAA.
The assessing officer also concluded that the assessee had a business connection with India and hence, fees received on account of services rendered by the assessee were deemed to accrue or arise in India and therefore, the assessee s case was covered under section 9 of the Act. In the alternative, he held that the assessee s income was taxable under the provisions of article 12 of the DTAA.
The assessing officer estimated the income of the assessee at Rs 30 crore and having held that it was fee for included services taxed it at the rate of 15%. The assessing officer also issued notices under section 148 for assessment years 1995-96, 1996-97, 1999-2000 and 2000-2001. He also held that the entire amount received by the assessee from the Indian hotels including contribution towards SCI and FFP was taxable in India as royalty or fee for included services.
The tribunal found that the main purpose of the agreement entered into between the assessee and its client-hotels was to promote business keeping in mind their mutual interests, through worldwide publicity, marketing and advertisement. All other services rendered by the assessee as encapsulated in various articles of the agreement, were incidental and/or ancillary to its main object. The permission to use the trade mark, brand name as well as the stylised S given by the assessee to its client-hotels was examined by the Tribunal.
It returned a finding that ITC Hotels, like the assessee, also had its own network which was used for reservations within the country. Hence, the entire transaction entered into between the assessee and its client-hotels was an integrated business arrangement, under which the main purpose was to carry out advertisement, publicity and sales promotion for mutual benefit.
In this context all other services, i.e., use of trade mark, trade name, computer reservations were incidental to the main purpose. It found as a matter of fact that the payments received by the assessee were neither in the nature of royalty under section 9(1) (vi) read with Explanation 2 or article 12(3) of the DTAA, nor fee for technical services or fee for included services under section 9(1) (vii) read with Explanation 2 or article 12(4) of the DTAA.
It found that article 12(4)(b) had no application and for this purpose, it relied upon the memorandum of understanding dated May 15, 1988 and the examples set out therein. With regard to the agreement being a colourable device, the Tribunal noted that nothing was brought on record by the revenue authorities to show that the intention of the arrangement or even the action of the parties, as reflected in the agreement, was at variance with the terms of the agreement.
It concluded that the payments received were neither in the nature of royalty under section 9(1)(vi) read with Explanation 2, nor in the nature of fee for technical services under section 9(1)(vii) read with Explanation 2 or taxable under article 12 of the DTAA. The payments received were thus held by the tribunal to be in the nature of business income. Since the assessee admittedly did not have a permanent establishment under article 7 of the DTAA, the business income received by the assessee could not be brought to tax in India.
The high court held, dismissing the appeals, that in view of the findings of the Tribunal that the main service rendered by the assessee to its client-hotels were advertisement, publicity and sales promotion, keeping in mind their mutual interest and that the use of trade mark, trade name or the stylised S or other enumerated services referred to in the agreement with the assessee were incidental to the main service, the amounts received by the assessee were not assessable under section 9 of the Income-tax Act.
They were not assessable under article 7 of the DTAA. It is unfortunate that even in a straight-forward case like this, where the income is not taxable in India, the matter goes into long-drawn litigation. Hopefully, with the proposed introduction of section 144-C by the Finance Act, 2009, under which a dispute resolution panel is to be setup, litigation will not arise if the directions issued by the panel are fair, objective and acceptable to the foreign company.