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Petitioner: Messrs MARRIOT WORLDWIDE CORPORATION, KARACHI VS Respondent: TAXATION OFFICER, CIRCLE C-8,COMPANIES-I, KARACHI
Court Name: Income Tax Appellate Tribunal Judge(s): Khawaja Farooq Saeed, Jawaid Masood Tahir Bhatti, Shahid Azam Khan Title:Messrs MARRIOT WORLDWIDE CORPORATION, KARACHI vs TAXATION OFFICER,
CIRCLE C-8,COMPANIES-I, KARACHI Case No.: I.T.As. Nos.1472/KB to 1475/KB of 2004 Date of Judgment:2008-05-14 Reported As: 2011 PTD (Trib.) 508 Result: Appeal accepted Judgment ORDER ' The captioned appeals under sections 62/135 relating to the assessment years 1997-98 to 2000- 2001 have been filed by the assessee against the combined order passed by the learned Commissioner of Income Tax (Appeals) dated 12th August, 2004. The captioned appeals relating to the assessm ent years 2001-2002 and 2002-2003 under section 62 have been filed against the learned CIT(A)'s orders dated 23-11-2004 and 22-9-2005 respectively. In all these appeals, the appellant has agitated against the learned CIT(A)'s order to confirm the Departmental action in treating the reimbursement of marketing expenses and reservation cost as "Fee for Technical Services" and charging these to tax disallowing claim of exemption made by the appellant. 2. For all the years under appeal, the appellant has also taken the following additional ground of appeal which was permitted vide Tribunal's order dated 18-5-2007 in MAs (AG) Nos.35 to 40/KB/2007 (Assessm ent years 1997-98 to 2002-2003):-- ' That the learned Taxation Officer has erred in proceeding under section 80AA of the repealed Ordinance while making the assessme nt of your applicant under sections 62/135 of the repealed Ordinance, hence the action of the T.O. Is coram non-judice, without jurisdiction, ab initio void and illegal." 3. Brief facts leading to these appeals are that the appellant filed returns of income for the years under appeals declaring receipts on account of reimbursement of marketing cost and reservation cost claiming it to be exempt from the levy of tax in terms of the Treaty for the Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and the USA. Whereas, the Assessing Officer has treated the reimbursement of marketing cost and reservation cost as 'Fee for Technical
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Services' and subjected these to levy of tax accordingly. For the assessment years 1997-98 to 1999- 2000, the appellant filed appeals before the learned CIT(A) who vide his order dated 7-1-2000 set aside the issue for de novo orders. In the fresh proceedings, the Assessing Officer issued notices under sections 61 and 62 of the repealed Income Tax Ordinance, 1979 which were complied with by Mr. Ali Ashraf Siddiqui of Messrs Ford Rhods, Sidat, Hyder and Company, C.As. The Assessing Officer in his notice under section 62 has confronted the appellant that the claim of reimbursement of marketing cost under Article-III of the Pak-US treaty was not exempt from tax. It was pointed out that the same is fee for technical services which is taxable in Pakistan under section 80-AA of the repealed Income Tax Ordinance, 1979 for the reason that agreement executed between the appellant and Messrs Hashwani Hotels Limited shows fixed percentage of gross room revenue receipts for reimbursement of cost as services such as marketing, use of reservation system and property management system were in the nature of fee for technical services and not exempt under the Pak-US treaty. In this view of the matter, the Assessing Officer has taxed the same in the hands of the appellant for all the years under consideration. The Assessing Officer has also made the basis for this treatment keeping in view the history of the case wherein for the assessment years 1995-96 and 1996-97 the same treatment was accorded to the appellant which was not agitated at any appellate fora. It is also worthwhile to mention here that for the assessment years 1997-98 to 1999-2000, it is the second round of litigation before the Tribunal. Whereas, for the assessm ent years 2000-2001 and 2002-2003, it is the first round of appeals in which the appellant, under the same facts and circumstances, filed appeals before the learned CIT(A) who vide orders mentioned supra confirmed the treatment accorded by the Taxation Officer. Hence, the present appeals have been filed. For all the years under consideration, the appellant had filed returns of income under section 55 of the repealed Income Tax Ordinance, 1979 claiming exemption from tax on receipts declared as reimbursement of the reservation and marketing expenses. For the assessm ent years 1997-98 and 1998-99, the Assessing Officer passed orders under section 62 both dated 30-10-1999 treating these receipts as fee for technical services on the grounds that the payments are in the nature of technical services and were also taxed as fee for technical services for the assessm ent years 1995-96 and 1996-97 which treatment was not agitated in appeals. The learned CIT(A), vide his combined order dated 7-1-2000 set aside the issue with the directions that the DCIT must record his findings in the assessment order after giving proper opportunity to the appellant. The Tribunal vide combined order dated 7-7-2001 (I.T.As. Nos.1746 and 1747/KB of 1999- 2000, Assessm ent Years 1997-98 and 1998-99) confirmed the learned CIT(A)'s action to set aside the assessm ents. In the re-assessments under sections 62/135 dated 28-6-2003, the Taxation Officer has again subjected the impugned receipts to taxation on the following grounds:-- "The reply furnished by the assessee is far from satisfactory hence rejected on the grounds that the said reimbursement is fee from technical services and assessable under section 80AA of the Income Tax Ordinance, 1979. The agreement executed between Messrs Hashwani Hotels Ltd., and the assessee shows that the reimbursement of cost is of a certain percentage of gross receipt for services such as for marketing, use of reservation system and property management system. Such payment falls under the category and nature of fee for technical services which is not exempt from tax under treaty agreed between Pakistan and USA, therefore, the issue of claim of amount of Rs,20,933,660 on account of reimbursement of marketing and reservation cost under Article-III of the USA and Pakistan Tax Treaty is rejected by holding it to be fee for technical services. Moreover, is discussed above, for the assessme nt years 1995-96 and 1996-97 the treatment of taxing the reimbursement of the said cost as fee for technical services under section 80-AA of the Income Tax Ordinance, 1979 was not contested of appeal." 4. Similarly, the assessm ent framed under section 62 for the assessment year 1999-2000 was set aside by the learned CIT(A), vide his Order No,931, dated 31-6-2000 which was confirmed by the
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Tribunal, vide order dated 6-2-2001 (I.T.A. No,308/KB of 2000-2001). For the assessment year 2000- 2001, the assessm ent under section 62 dated 28-6-2003 was completed by taxing the impugned receipts. The learned CIT(A) vide his combined order dated 12-8-2004 for the assessment years 1997-1998, 1998-1999, 1999-2000 and 2000-2001 confirmed the assessment orders in the following words:-- ' Admittedly the agreement executed between the appellant and Messrs Hashwani Hotels Ltd. Which clearly speaks that funds on account of International Marketing re-imbursement shall be used by the MIC in lieu of providing marketing programme for the chain as per terms of agreement at 403-A at page 16 which very clearly reveals that MIC was providing/transmitting the technical knowhow to the appellant and in this view of matter the payment received by the appellant falls within the definition of fees for technical services, hence were taxable in Pakistan. ' I must make it clear that the case relied by the AR very clearly at para. 18 very clearly as spoken of transmission of technical knowhow or knowledge to the customer whereas in the case in hand technical knowhow in the terms of programming for reimbursement of marketing cost are reimbursement of reservation cost and designing etc. Was agreed by the appellant to provide to Messrs Hashwani Hotel and as such the payment received by the appellant were certainly fees for technical services. Moreover the same treatment was accorded to the appellant for the assessm ent years 1995-96 and 1996-97 which was not agitated at any forum meaning thereby that the appellant admitted that such payment were fees for technical services and as such were taxable in Pakistan. Holding so my mind is clear that treatment given by the Assessing Officer to the appellant for all years under appeal was fully justified, hence call for no interference which is upheld and confirmed." 5. The assessm ents for the years 2001-2002 and 2002-2003 were completed under section 62 vide orders dated 28-6-2004 and 22-6-2005 respectively by subjecting the impugned receipts to tax on the same grounds as were taken for the earlier assessment years under appeal before us. Whereas the learned CIT(A) through two different orders dated 23-11-2004 and 22-9-2005 confirmed the impugned assessm ent orders for the years 2001-2002 and 2002-2003 respectively on the same grounds on which re-assessm ents for the years 1997-98 to 2000-2001 were confirmed by him through his supra orders. 6. At the very outset the learned A.R. Submitted that Messrs Marriot International Corporation (MIC) subsequently changed the name to Marriot Worldwide Corporation (hereinafter referred to as "MWC") is engaged in operating distinctive first class hotel services including food and beverages facilities, banquet facilities, meeting and convention facilities and all other high quality facilities required in this particular field of business and are being registered worldwide as "Marriott". That is why, the returns of income have been filed in the name of Messrs MWC which entered into an agreement on 30-9-1992 with Hashwani Hotels Limited (hereinafter referred to as "HHL") whereby it provided that HHL, will reimburse MWC its fair and equitable share in respect of Reservation System reimbursement. As per Clause (4.02) of the agreement, HHL shall pay to MWC with respect to each accounting period the hotel's fair and equitable share of reimbursement of transaction system reimbursement as determined by MWC for each reservation transaction. The Clause (4.03) of the said agreement further provides that HHL will pay to MWC its fair and equitable share incurred by MWC in managing the marketing and the administrative costs known as International Marketing reimbursement. The said Clauses 4.03.A and 4.03.B of the agreement mentioned supra are reproduced hereunder:-- "4.03.A. Hashwani shall pay MIC, commencing with the Conversion Date and continuing throughout the Term of this Agreement, a sum equal to (and not to exceed) two and one- half percent (2.5%) of Gross Room Revenues during each Accounting Period for MIC's use in implementing the Marketing Programs developed by MIC for the Chain (the International Marketing Reimbursement").
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All sums received by MIC pursuant to this section 4.03.A shall be deposited in an account (the 'Marketing Fund') under the control of MIC, and shall be used by MIC to provide Marketing Programs for. The Chain. Administrative costs incurred by MIC in managing the Marketing Fund and providing the Marketing Programs shall be reimbursed from the Marketing Fund. MIC reserves the right to terminate the Marketing Fund and to establish other methods of financing Marketing Programs developed for the Chain. ' Franchised hotels in the Chain shall be promoted together with non-franchised hotels in the Chain as a single, international Chain; however, a Chain-wide Marketing Program need not be a single Marketing Program which is chain-wide in scope, but may, for instance, be a series of regional Marketing Programs which in their totality are chain-wide in scope. Upon the written request of Hashwani, MIC shall provide Hashwani with an annulized accounting (covering the most recent full Fiscal Year) of the income and expenses of the Marketing Fund; provided, however, any such accounting shall be made available no earlier than ninety (90) days after the end of such Fiscal Year. ' 4.03.B. In addition to the Marketing Programs, MIC has and continues to develop additional special promotional, advertising marketing and customer loyalty programs in which the hotels in the Chain participate (such as, without, limitation, the Honored Guest Award Program and group reservation programs) which are in MIC's judgment, best funded outside of the Marketing Fund. If such programs are implemented on a Chain-wide basis, Hashwani shall participate in such programs and the costs shall be allocated on a fair and equitable basis, which basis shall be designed to treat similar hotels within the Chain on a similar basis. If such programs are not implemented on a Chain-wide basis and do not directly benefit the Hotel, Hashwani shall not be required to participate in such programs. If Hashwani elects to participate in any of the programs which are not Chain-wide, Hashwani shall pay the costs of participation in such programs which shall be allocated on a fair and equitable basis, which basis shall be designed to treat similar hotels within the Chain or a similar basis." 7. The learned counsel has submitted that as the two payments i,e, marketing expenses and reservations costs were simply reimbursement by HHL of the costs incurred by the MWC hence are not the income of the MWC and; therefore, while filing, the return of the total income the amount of reimbursement was duly shown as exempt under the provisions of Pakistan/USA Tax Treaty. The learned counsel has further submitted that the Assessing Officer while examining the return taxed this reimbursement of the amount by alleging as under. (i) For finalization of the set aside the issue of regarding the claim of amount of Rs,13,072,638 on account of reimbursement of marketing cost, under Article III of the U.S.A. Pakistan Tax Treaty, the same is Fee from Technical Services and assessable under section 80AA of the Income Tax Ordinance, 1979. (ii) Reimbursement of cost is of certain percentage of the gross receipts for services such as marketing use of reservation system and property management system. Such payment is in the nature of Fee for Technical Services, which is not exempt from tax under the tax agreed between Pakistan and U.S.A., therefore said reimbursement of cost being fee for technical services is taxable. (iii) Moreover, for the assessm ent years 1995-96 and 1996-97, the treatment of taxing the reimbursement of the said cost as Technical services under section 80-AA of the Income Tax Ordinance, 1979 was not contested in appeal. 8. Elaborating his point of view, the learned A.R has submitted that the T.O. Has simply failed to understand the term Fee for Technical Services. The amount received was nothing but reimbursement of the expenses incurred by the MWC which each hotel of the chain has to compulsorily pay as its fair and equitable share as per the terms of the agreement. He further explained that the method of calculation as given in Clauses (4.02) and (4.03) are nothing but a
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mere mechanism to calculate the amount reimburse-able by each hotel of the chain to the appellant. The learned A.R in support of his contentions has invited our attention to the following reported decisions:-- "2007 PTD (Trib)1550 '---Ss. 12(5) & 80AA---Income deemed to accrue or arise in Pakistan---Fee for technical services of reimbursement of cost---Burden of proof---Departmental officers had not discharged their onus and burden to establish that the payments made to the assesses constituted its income was not discharged---There was no material evidence in the assessment order which could be relied upon to hold that the payments made to assessee were fees for technical services in contrast to reimbursement cost as was claimed by the assessee--No evidence as opposed to claim of assessee had been brought on record despite specific request by the assessee during the assessm ent proceedings which fact had not been denied---If a receipt was not income, it could not be charged under section 12(5) read with. Section 80AA of the Income Tax Ordinance, 1979. '---Ss. 12(5) & 80AA---Income deemed to accrue or arise in Pakistan---Reimbursement of cost was treated as fee for technical services but no evidence was led in support of such treatment--- Validity---Evidence proved that the assessee had received only reimbursement---Departmental officer failed to establish that the receipt of the assessee was the income, which was pre-requisite for charge of tax under S.12(5) of the Income Tax Ordinance, 1979---Departmental officer had not brought anything on record to suggest that the receipt had the character of income or it had accrued during the year under consideration or it fell within the definition of fee for technical services---Evidence was available on record that the payments received by the assessee were mere reimbursement of certain costs and did not fall under the definition of 'income'--- Assessm ent was not sustainable in law which had rightly been annulled by the First Appellate Authority." 1979 PTD (Trib.) 44 ' (The Order was passed by A.A. Dareshani, President)--The assessee, in this case was a public limited company, engaged in the manufacture and sale of fertilizers. In September, 1968, the assessee company entered into an agreement with E.E. Chemical Incorporated of U.S.A. By which agreement, various engineering and other miscellaneous services were to be provided, by the foreign company. Under Clause (3) of that agreement, the assessee-company undertook to reimburse the American Company, in respect of all expenses incurred by them, in connection with the "project whether prior or subsequent of this agreement, it being clearly understood that, such expenses were to be established on a cost basis. The project, referred to above, was described in para 2 of the agreement, as under:-- "Whereas, the company (assessee-company) will be engaged in the manufacture, distribution, sale import of all kinds of artificial, manual, fertilizers chemicals and minerals and any products and by-products which may be derived therefrom, and for this purpose, will construct a fertilizer plant and related facilities at D District, Pakistan, and such activities are hereinafter referred to as the project." ' 2(sic) In charge year 1973-74, the assessee-company had paid to the non-resident foreign company, a total sum of Rs,2,37,877,17, by way of reimbursement, under three different heads. The assessee had claimed that these charges were billed on a cost basis, and no element of profit was involved in the payment. Consequently, no tax had been deducted by the assessee-company, on these payments. The assessee-company had also filed a copy of the agreement and a copy of the Auditors Report, in the course of assessment proceedings, and furnished complete details of the said charges, which were examined by the Assessing Officer. In their explanation, the assessee again stated that, the charges had been billed, strictly on cost basis, for services rendered to the assessee-company, outside Pakistan and that, no profit had accrued to the non-resident
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company, in Pakistan, hence no tax had been deducted. The Assessing Officer, however, observed that there had been no commitment, On the part of the Government of Pakistan that, these remittances would be exempt from levy of Income Tax. He further observed that, the assessee was bound to deducted tax under section 18(3B) on all sums, paid to a non-resident party and chargeable under the Act. The Assessing Officer also observed that, the assessee had failed to prove that, the non-resident company had not charged any profit, in their bills." (Emphasis given by us) 1999 PTD (Trib.) 3362: "Tax on income of non-resident--Reimbursement of cost of expenses paid by assessee on behalf of power project---Deemed income and subjected to tax--Annulment of assessment by CIT(A)--- Validity--Whether no material evidence could be found from assessment order which could be relied to believe that payment to assessee are fees for technical services in contrast in reimbursement cost as is claimed by assessee--Held yes--Whether the departmental officers has not brought anything on record to suggest that in receipt has the character of income or it has accrued during the year under consideration or it falls within the definition of fee for technical services--Held yes---Whether assessment made by Taxation Officer is not sustainable in law which has rightly been annulled by CIT(A)--Held yes Income-tax--Evidence--If the evidence produced by the assessee was not reliable in the opinion of Taxation Officer, then he should have recorded his reasons for the same indicating its infirmities or have discarded its probative value-- income deemed to accrue or arise in Pakistan--Fee for technical services or imbursement of cost- -Burden of proof--Departmental officers had not discharged their onus and burden to establish that the payments made to the assessee constituted its income was not discharged--There was no material evidence in the assessment order which could be relied upon to hold that the payments made to assessee were fees for technical services in contrast to reimbursement cost as was claimed by the assessee-No evidence as opposed to claim of assessee had been brought on record despite specific request by the assessee during the assessment proceedings which fact had not been denied--If a receipt was not income it could not be charged under section 12(5) read with section 80AA of the Income Tax Ordinance, 1979--Income deemed to accrue or arise in Pakistan-Reimbursement of cost was treated as fee for technical services but no evidence was led in support of such treatment--Validity--Evidence proved that the assessee had received only re- imbursement--Departmental officer failed to establish that the receipt of the assessee was the income, which was pre-requisite for charge of tax under section 12(5) of the Income Tax Ordinance, 1979--Departmental officer had not brought anything on record to suggest that the receipt had the character of income or it had accrued during the year under consideration or it fell within the definition of fee for technical services--Evidence was available on record that the payments received by the assessee were re-imbursement of certain costs and did not fall under the definition of 'income'--Assessm ent was not sustainable in law which had rightly been annulled by the First Appellate Authority--" 9. The learned A.R. Has submitted that, in the above referred judgments, the reimbursement of an amount was taxed under the provisions of section 12(5) of the Ordinance and thereafter the provision of section 80AA were applied by the department. Explaining the facts of the appeals in hand, the learned A.R. Submitted that in the instant appeals also, Messrs HHL, being part of the Marriott chain just like other hotels of the chain simply reimbursed to MWC its fair and equitable share in respect of the expenses incurred by MWC. Hence, according to the learned A.R., the amount reimbursed could by no stretch of imagination be considered as an income of MWC falling under the provisions of section 80AA of the repealed Ordinance. The learned A.R invited our attention to the decision reported as 1979 PTD (Trib.) 44 and has stated that the learned ITAT while dealing with somewhat similar situation observed that reimbursement of expense to a nonresident
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do not fall within the ambit of income. The learned AR has contended that in the said decision, the assessee-company, incorporated in U.S.A., claimed certain charges incurred by it abroad from a local company were taxed by the Department treating it to be the income of the non-resident Company. The I.T.A.T. While dealing with the issue observed that the said amount was claimed by the non-resident Company without any element of profit and was nothing but simply reimbursement of the expenses incurred by the non-resident Company hence, could not be considered as income of the non-resident Company. The A.R stated that in the instant appeals also, the main reason given by the department for taxing the said amount of reimbursement being that in their wisdom it is Fee for Technical Services. The A.R explained that the said amount could not be considered as Fee for Technical Services as it is mere' reimbursement of the expense without any element of profit and if examined in view of the above reported decision the only irresistible conclusion which could be drawn is that this amount is not an income and hence could not be taxed under any of the provisions of the Ordinance. The learned A.R. Then invited our attention to an Indian decision reported as 142 ITR 493 wherein, as per the learned A.R., under identical circumstances…
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