MARRIOT WORLDWIDE CORPORATION, KARACHI VS TAXATION OFFICER, CIRCLE C-8, COMPANIES-I, KARACHI, 2011 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 508 (2008)

2011 P T D (Trib.) 508

[Income Tax Appellate Tribunal of Pakistan]

Before Khawaja Farooq Saeed, Chairperson, Jawaid Masood Tahir Bhatti, Judicial Member and Shahid Azam Khan, Accountant Member

Messrs MARRIOT WORLDWIDE CORPORATION, KARACHI

Versus

TAXATION OFFICER, CIRCLE C-8, COMPANIES-I, KARACHI

I.T.As. Nos.1472/KB to 1475/KB of 2004, 348/KB and 1681/KB of 2005, decided on 14/05/2008.

Per Shahid Azam Khan, Accountant Member.---[Minority view].

Income Tax Ordinance (XXXI of 1979)---

----Ss.12(5), 80AA, 62 & 55---Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and United States of America, Art.-III---Income deemed to accrue or arise in Pakistan---Fee for technical services--Reimbursement of marketing cost and reservation cost---Receipts were declared on account of reimbursement of marketing cost and reservation cost and claimed the same to be exempt from levy of tax---Assessing Officer confronted the assessee that claim of reimbursement of marketing cost under Article-III of the Pak-US treaty was not exempt from tax as the same was fee for technical services taxable in Pakistan under S.80-AA of the Income Tax Ordinance, 1979---Grounds for such objection was that agreement executed between the parties showed fixed percentage of gross room revenue (Hotel) receipts for reimbursement of cost as services, such as marketing, use of reservation system and property management system and were not exempt---Validity---Expenses actually incurred in the performance of certain duties and assessee at no stage of the assessment and appeal proceedings had produced any evidence that the expenses were actually incurred during the relevant accounting year and evidence had also not been produced to establish actual billing of expenses---Fact was that such claims had arisen only by virtue of agreement between the parties as a certain percentage of room reservation receipts and amounts had not been claimed by the assessee on actual re imbursement basis---Assessee had also not produced any evidence regarding any direct benefit accruing to the contracting party for the amounts claimed as exempt---Assessing Officer had based his conclusions on the basis of terms of agreement and charged the amounts to tax as fee for technical services---There could be no other evidence except the agreement itself to examine the nature of such receipts---Order of First Appellate Authority was declared fully justified in upholding the assessment or re-assessment orders.

2007 PTD (Trib.) 1550; 1979 PTD (Trib.) 44; 1999 PTD (Trib.) 3362; 142 ITR 493; 237 ITR 190; (2004) 91 ITR 133; 202 ITR 1014; 1983 PTD 300; 185 ITR 70; 138 ITR 326; 49 ITR 137; 41 ITR 615; 160 ITR 243; 178 ITR 496; 135 ITR 522; 156 ITR 275; 177 ITR 299; 1999 PTD 4144; 1994 SCMR 222 = 1994 PTD 174 and 1996 PTD (Trib.) 100 ref.

Income Tax Ordinance (XXXI of 1979)---

----Ss.80-AA, 143B, 12(5) & 62---Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and United States of America, Art.-III---Tax on income of non-residents from fees for technical service---Normal assessment---Deemed assessment---Receipts declared as exempt on account of reimbursement of marketing cost and reservation cost were charged to tax under the provisions of S.80AA of the Income Tax Ordinance, 1979 as fee for technical services---Assessee contended that when the provisions of normal income were applied the provisions of presumptive income were not applied; that where the provisions of presumptive income were applied those of normal income were not applied; that department had applied both the provisions in single order; that department though had passed the order under normal law but had applied the provisions of S.80AA of the Income Tax Ordinance, 1979 which was nullity in the eyes of law; and that if the department wished to proceed against the assessee under provisions of S.80AA read with S.12(5) of the Income Tax Ordinance, 1979 then the department should have asked the assessee to file statement under S.143B of the Income Tax Ordinance, 1979--Validity---Assessee filed returns of income under S.55 of the Income Tax Ordinance, 1979 and the legal course available to the Assessing Officer was to proceed under S.62 of the Income Tax Ordinance, 1979---It was only during the proceedings under S.62 of the Income Tax Ordinance, 1979 that it revealed on Assessing Officer that the amounts were chargeable to tax under S.80AA of the Income Tax Ordinance, 1979 as fee for technical services---Contentions of the assessee were repelled by the Appellate Tribunal since the assessee had not filed any statement under S.143B of the Income Tax Ordinance, 1979---No legal infirmity in the orders of Assessing Officer having been found appeal was dismissed being devoid of merit.

1999 PTD 3362 and 2004 PTD 2051 ref.

Per Jawaid Masood Tahir Bhatti Judicial Member, disagreeing with Shahid Azam Khan, Accountant Member--- [Majority view]

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss.80-AA, 143B, 12(5) & 62---Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and United States of America, Article-III---Fee for Technical Services---Reimbursement of marketing cost and reservation cost---Receipts were declared on account of reimbursement of marketing cost and reservation cost and claimed same to be exempt from levy of tax---Assessing Officer confronted the assesseethat claim of reimbursement of marketing cost under Article- III of the Pak-US treaty was not exempt from tax as the same was fee' for technical services taxable in Pakistan under S.80-AA of the Income Tax Ordinance, 1979---Grounds for such objection was given that agreement executed between the parties showed fixed percentage of gross room revenue (Hotel) receipts for reimbursement of cost asservices such as marketing, use of reservation system and property management system and the same was not exempted---Validity---Term `fee' for technical services envisaged a consideration for rendering technical and managerial services---Assessee had neither rendered any managerial nor technical services for which they had received the amount---Contracting party had simply reimbursed its fair and equitable share according to the terms of agreement to assessee---Department had not brought on record any justification to make out a case that such amount received by the assessee was in fact received by it by way of rendering any technical or managerial services which onus squarely lay on the shoulders of department---First Appellate Authority totally missed that the amounts reimbursed by the contracting party to assessee was neither for rendering any managerial nor technical services---Amounts reimbursed were nothing but fair and equitable share reimbursed---Assessing Officer had also failed to justify the basis for taxing the amount reimbursed, giving the amount at a certain percentage was nothing but a mere mode/mechanism to calculate the amount which would neither change the nature of the payment nor would make an amount chargeable to tax which otherwise was not chargeable---Amounts reimbursed could not be considered as fee for technical and managerial services and was not liable to tax and addition made in all the years needs to be deleted---Amount reimbursed by the contracting party to the assessee could not be treated as fee for technical services and was exempt under Article-III of the Agreement for Avoidance of Double Taxation between Pakistan and USA.

2007 PTD (Trib.) 1550 rel.

(b) Income Tax Ordinance (XXXI of 1979)---

----Ss.80-AA, 143B, 12(5) & 62---Avoidance of Double Taxation and Prevention of Fiscal Evasion 'between Pakistan and United States of America, Article-III---Tax on income of non-residents from fees for technical service---Normal assessment---Deemed assessment---Receipts declared as exempt on account of reimbursement of marketing cost and reservation cost were charged to tax under the provisions of S.80AA of the Income Tax Ordinance, 1979 as fee for technical services---Assessee contended that when the provisions of normal income were applied, the provisions of presumptive income were not applicable and where the provisions of presumptive income were applied, those of normal income were not applicable that department had applied both the provisions in single order; and department though had passed the order under normal law but had applied the provisions of S.80AA of the Income Tax Ordinance, 1979 which was nullity in the eyes of law; and that if the department wished to proceed against the assessee under provisions of S.80AA read with section 12(5) of the Income Tax Ordinance, 1979 then the department should have asked the assessee to file statement under S.143B of the Income Tax Ordinance, 1979---Validity---Assessee had claimed exemption from tax on the reimbursement of marketing and reservation cost and that could only be done by filing a return of income which was the correct course of action---Statement under S.143B of the Income Tax Ordinance, 1979 was required to be filed in those cases where income was subject to Presumptive Tax Regime as provided under Ss.80B, 80C, 8000, 80A, 80AA of the Income Tax Ordinance, 1979---Since reimbursement was claimed as exempt, the assessee was not legally required to file statement under S.143B of the Income Tax Ordinance, 1979 and had the assessee filed the statement, Assessing Officer would have impliedly accepted the taxability of the amounts reimbursed as fee for technical services'---Assessing Officer had no jurisdiction to proceed under normal law while assessing the income under S.80-AA of the Income Tax Ordinance, 1979; it was the responsibility of the department to call for the filing of statement under S.143B of the Income Tax Ordinance, 1979, if he was of the opinion that the amount claimed by the assessee fell under the provisions of S.80-AA of the Income Tax Ordinance, 1979.

1999 PTD 3362 and 2004 PTD 2051 rel.

(c) Income-tax---

----Administration of justice---Application of correct law---Court was bound to apply correct law whether claim had been made by the concerned parties or not.

PLD 1963 SC 382; PLD 1963 SC 564 and 1980 SCMR 469 rel.

Per Khawaja Farooq Saeed, Chairperson agreeing with Javaid Masood Tahir Bhatti, Judicial Member

(d) Income Tax Appellate Tribunal---

----Difference of opinion---Referee Member has to remain within the paramaeters proposed and questions or issues referred by the other Members for the reason of their respective difference of opinion with each other.

1990 PTD 787 rel.

(e) Income Tax Ordinance (XXXI of 1979)---

----Ss.12 (5), 80AA, 62 & 55---Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and United States of America, Article-III---Income deemed to accrue or arise in Pakistan---Fee for technical services---Reimbursement of marketing cost and reservation cost (Hotel)---Receipts were declared on account of reimbursement of marketing cost and reservation cost and claimed it to be exempt from levy of tax---Assessing Officer confronted the assessee that claim of reimbursement of marketing cost under Article-III of the Pak-US treaty was not exempt from tax as the same was `fee' for technical services taxable in Pakistan under S.80-AA of the Income Tax Ordinance, 1979 for the reason that agreement executed between the parties showed fixed percentage of gross room revenue (Hotel) receipts for reimbursement of cost as services such as marketing, use of reservation system and property management system and the same was taxed---Validity---Relationship of the two parties did not involve any use of technology or trade mark and there was no benefit of technology involved---Services definitely were provided by use of computerized reservation system etc. of the Hotel but the independent and main integrated job undertaking by the assessee-company was rendering of services which basically was a sort of advertisement and subsequent booking of the clients were covered within the sales promotion-Re imbursement to assessee on account of marketing cost and reservation cost was not 'fee from technical services' and S.12(5) of the Income Tax Ordinance, 1979 was not applicable on the facts of the case.

Irfan Saadat Khan and Arshad Siraj for Appellant.

Basharat Qureshi, D.R. for Respondent.

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 assessment 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 (Assessment 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 assessment 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 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 assessment 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 assessment 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 -assessment 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, Assessment Years 1997-98 and 1998-99) confirmed the learned CIT(A)'s action to set aside the assessments. 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 assessment 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 assessment 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 Tribunal, vide order dated 6-2-2001 (I.T.A. No.308/KB of 2000-2001). For the assessment year 2000-2001, the assessment 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 know how 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 know how or knowledge to the customer whereas in the case in hand technical know how 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 assessment 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 assessments 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 assessment orders for the years 2001-2002 and 2002-2003 respectively on the same grounds on which re-assessments 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"). 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 assessment 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 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 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.

---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'---Assessment 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 allexpenses 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 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."

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'--Assessment 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 some what similar situation observed that reimbursement of expense to a non-resident 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 reimbursement cost received by a non-resident Company from its subsidiaries throughout the world, one of which was an Indian company also was held to be not liable to tax. The A.R. then invited our attention to an other decision reported as 237 ITR 190 wherein under identical circumstances an amount reimbursed to a non-resident Company was held to be not liable to tax. Some other decisions reported as (2004) 91 ITR 133 and 202 ITR 1014 were also cited by the learned AR to support his view-point.

10. While summing up the above arguments the learned A.R in a nut-shell submitted that the amounts reimbursed to MWC by HHL could not be considered as an income of MWC chargeable to tax under the provisions of section 12(5) read with section 80AA of the repealed Ordinance and are thus exempt under the provisions of tax treaty between Pakistan and U.S.A. The A.R also submitted that the A.O. has alleged that the assessee has not filed any appeal in the assessment years 1995-96 and 1996-97. While explaining this issue the A.R submitted that firstly the principles of res judicata and estoppel do not apply to the income tax proceedings and hence non-filing of appeal in respect of any year would not debar the assessee from agitating the issue in the subsequent years. In this regard, he has invited our attention to the following reported decisions:

1983 PTD 300, 185 ITR 70, 138 ITR 326, 49 ITR 137, 41 ITR 615, 160 ITR 243; 178 ITR 496, 135 ITR 522, 156 ITR 275, 177 ITR 299, 1999 PTD 4144; 1994 SCMR 222 = 1994 PTD 174 and 1996 PTD (Trib.) 100.

11. The A.R specifically invited our attention to the decision reported as 1996 PTD (Trib.) 100 wherein it was held that "non-filing of appeal by the department in a particular year would not debar it from agitating any particular issue in respect of the subsequent years". The A.R. submitted that if the present appeals are viewed in the light of the above decision no adverse inference could be drawn on the premise that no appeal has been preferred by the assessee in the previous assessment years.

12. The learned A.R then argued that as an alternative plea, if this amount is treated as business profit even then it is exempt from tax. On pointing out by the Bench that the alternative plea does not arise out of the impugned orders of both the authorities below, the learned AR willingly dropped his alternative plea for further elaboration.

13. The additional ground taken in all the captioned appeals, the learned AR has argued that the learned Taxation Officer has erred in proceeding under section 80AA of the repealed Ordinance while making the assessment 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. According to the learned AR, the Income Tax Ordinance provides two mechanisms of assessments, the one known as normal assessment and the other is known as deemed assessment. Some sections of the Ordinance deal with normal assessment whereas some deals with the other. These two mechanisms do not overlap each other. Where the provisions of normal income are applied then the provisions of presumptive income are not applied and where the provisions of presumptive income are applied then those of normal income are not applied. The A.R continues to argue that in the instant appeals the department has applied both the provisions in a single order. The department though has passed the orders under the normal law i.e. under section 62 of the repealed Ordinance but has applied the provisions of section 80AA, which as per the A.R. is a nullity in the eyes of the law. The A.R. stated that if the department wished to proceed against the assessee under the provisions of section 80AA read with section 12(5) of the repealed Ordinance then the department should have asked the assessee to file the statement under section 143B of the Ordinance. The A.R. invited our attention to the decisions reported as 1999 PTD 3362 and 2004 PTD 2051 wherein it has been held that the A.O. cannot proceed under the normal provisions of income while assessing the income of the assessee falling under the provisions of section 80AA of the Ordinance. He then submitted that as the department has violated this basic provision of the law hence, the assessments are liable to be annulled being ab initio void.

14. On the other hand, the learned Departmental Representative supported the orders passed by the two officers below. He has submitted that the Taxation Officer was justified in treating the two amounts i.e. reimbursement of marketing cost and reimbursement of reservation cost as fee for technical services. The assessee has failed to substantiate the claim of reimbursement of cost with tangible evidence. The Assessee kept mum as it never contested this issue for the assessment years 1995-96 and 1996-97 at any forum. It means that the assessee has itself agreed to the treatment meted out by the Assessing Officer. It is a well-settled principles of law that history of the assessee itself is a best guideline for determining the issue. The learned DR further submitted that reimbursement of marketing and reservation cost under Article-III of the U.S.A. and Pakistan Tax treaty falls under the category of fee of technical services which is not exempt from' tax under the said treaty. He therefore submitted the order of the CIT(A) being in accordance with the provisions of law be maintained for all the years.

15. We have considered arguments of the learned representatives of both the parties and have also perused the impugned orders as well as the orders passed by the learned CIT(A). We have also gone through the Agreement between MWC and HHL, the relevant provisions of the tax treaty between Pakistan and USA, the various decisions cited by the learned counsel appearing on behalf of the assessee and other relevant documents. We have observed that in all the cases cited by the learned AR at bar, the expenses were actually incurred in the relevant year of account in the performance of certain duties. We have also found that the appellant, at no stage of the assessment and appeal proceedings has produced any evidence that the impugned expenses were actually incurred by Messrs MWC during the relevant accounting year and evidence has also not been produced .to establish actual billing of impugned expenses. Whereas, the fact is that these claims have arisen only by virtue of the said agreement between MWC and HHL as a certain percentage of room reservation receipts of Messrs HHL. Therefore, in our considered opinion, the impugned amounts have not been claimed by the appellant on actual reimbursement basis. The appellant has also not produced any evidence regarding any direct benefit accruing to Messrs HHL for the impugned amounts claimed by the appellant as exempt. On the other hand, the Assessing Officer has based his conclusions on the basis of the terms of the said agreement and charged the impugned amounts to tax as fee for technical services. There could be no other evidence except the said agreement itself to examine the nature of such receipts. Accordingly, we hold that the learned CIT(A) is fully justified in upholding the impugned assessment or re-assessment orders.

16. As far as, additional ground is concerned, we have observed that the appellant filed returns of income under section 55 of the repealed Income Tax Ordinance, 1979 and the legal course available to the Assessing Officer was to proceed under section 62 of the said Ordinance notwithstanding the fact that re-assessments for the assessment years 1997-98 to 2000-2001 were framed in consequence of appellate orders. It was only during the proceedings under section 62 that it revealed on Assessing Officer that the impugned amounts were chargeable to tax under section 80AA as fee for technical services. The learned AR's arguments on additional ground of appeal are also not acceptable since the appellant, in the first place, had not filed any statement under section 143-B of the repealed Income Tax Ordinance. Accordingly, we find no legal infirmity in the orders of the Assessing Officer.

17. In view of the foregoing, we find no merit in the captioned appeals which are hereby dismissed being devoid of merit.

(Sd.)

(Shahid Azam Khan)

Accountant Member

JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).-17A. I have carefully gone through the judgment recorded by my learned brother Accountant Member and with utmost respect I find myself unable to agree with his findings on the issue under consideration. The simple issue raised in the aforesaid appeals was whether the amounts reimbursed by HHL to MWC on account of marketing cost and reservation cost could be considered as fee for technical services as enshrined under the provisions of section 12(5) of the repealed Ordinance, 1979 or the same could be treated as an exempt income falling squarely under the clauses of the Treaty for the Avoidance of Double Taxation and Prevention of fiscal evasion between Pakistan and USA.

18. I need not go through the facts of the case which already have been dilated upon by my learned brother in the earlier paragraphs of this order. The main reasons given for dismissing the appeals being that appellant at no stage of assessment or appeal proceedings produced any evidence regarding actual incurring of the expenditure by the MWC, secondly the appellant has not produced any evidence to establish actual billing and finally the appellant also failed to produce any evidence regarding benefit accruing to HHL for paying this amount to MWC. The other reason given by my learned brother for dismissing the appeal on additional ground being that the appellant has not filed any statement under section 143B of the repealed Ordinance. I have further noted that my learned brother Accountant Member has not considered the case-law referred by the learned counsel for appellant during the course of arguments.

19. I am afraid it is not the case of the department for making the addition on the alleged default on the part of the assessee for non-furnishing of certain evidences. The department in this case has neither challenged the veracity/mode of the payment nor has ever alleged that the addition is being made due to non-production of certain evidence/ record or any other evidentiary support or document. My learned brother has very rightly reproduced certain relevant paragraphs from the assessment orders but however, has not appreciated that it is not on the basis of non submission of some material document etc., on which the addition was made by the department rather it was the opinion of the department that the said sums reimbursed by HHL to MWC falls under the definition of the term "fee for technical services". On paragraph 3 of this order while recording the facts my learned brother himself has observed which at the cost of repetition is again, reproduced as under:--

"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." (underlining is for emphasis by me)

20. Though my learned brother has reproduced some portions of the assessment orders but I would like to reproduce them once again at the cost of repetition to fortify my view:--

"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 80-AA 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 U.S.A. and Pakistan Tax Treaty is rejected by holding it to be fee for technical services.

(underlining is mine for emphasis)

Likewise the learned CIT(A) has upheld the above referred treatment of the Assessing Officer with the following observations:

... Admittedly the agreement executed between the appellant and Messrs Hashwani Hotel Ltd. which clearly speaks that funds on account of International Marketing reimbursement 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 know how 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 know how or knowledge to the customer whereas in the case in hand technical know how 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". (Underline is mine for emphasis)

21. A perusal of the above observations would reveal that both the officers below have made the said additions as per their opinion the amounts reimbursed by HHL to MWC is fee for technical services which is taxable under the provisions of section 12(5) of the repealed Ordinance. In my view MWC executed a franchise agreement with HHL which allowed it to operate the hotels under the banner of Marriott in Islamabad and Karachi as a member of Marriott chain and use the name as Marriott and its proprietary mark. MWC does not hold any equity holding or interest in UHL and the parties therefore are totally independent in their dealings. The main controversy between the department and the appellant is whether the amount received by the appellant reimbursed to it could be treated as fee for technical services as envisaged under the provisions of section 12(5) read with section 80AA of the repealed Ordinance, 1979 or not. Section 12(5) of the Ordinance states as under:--

Section 12(5). Any income by way of fees for technical services payable by-

(a) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside Pakistan or for the purposes of making or earning any income from any source outside Pakistan; or

(b) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in Pakistan or for of making or earning, any income from any sources in Pakistan shall be deemed- to accrue or arise in Pakistan.

22. The term fee for technical services in my view envisages a consideration for rendering technical and managerial services. The department does not seem to have appreciated that the assessee has neither rendered any managerial nor technical services for which they have received the amount under question HHL in my view has simply reimbursed its fair and equitable share according to the terms of the Agreement to MWC. In fact the department has not brought on record any justification to make out a case that the said amount received by MWC was in fact received by it by way of rendering any technical or managerial services which onus in my view squarely lies on the shoulders of the department. The CIT(A) has also totally missed this point that the said amounts reimbursed by HHL to MWC was neither for rendering any managerial nor technical services. The, amounts reimbursed are nothing but fair and equitable share reimbursed by HHL to MWC and the decision cited by the learned counsel reported as 2007 PTD 1550 supports his view-point. As in that decision also an amount reimbursed to a non resident company was treated by the department as fee for technical services chargeable to tax under the provisions of section 12(5) read with section 80AA of the repealed Ordinance, 1979 was held to be not taxable. In my view the other decisions cited by the learned counsel also support his view-point. Moreover, the Assessing Officer has also failed to justify the basis for taxing the amount reimbursed by HHL to MWC, giving the amount at a certain percentage is nothing but a mere mode/mechanism to calculate the amount which would neither change the nature of the payment nor would make an c amount chargeable to tax which otherwise is not chargeable.

23. After going through all these facts of the case, in view of the above discussion in my view the amounts reimbursed could not be considered as fee for technical and managerial services and is not liable to tax. The above additions thus made in all the years under appeal needs to be deleted.

24. Apropos, the additional ground is concerned, my learned brother has dismissed the appeal on the ground that no statement under section 143B of the Repealed Ordinance, 1979 has been filed by the assessee hence, no legal infirmity is found in the order passed by the department. Here again I tend to disagree with the findings recorded by my learned brother. The assessee has claimed exemption from tax on the reimbursement of marketing and reservation cost and this could only be done by filing a return of income which is' the correct course of action as provided under the provisions of the repealed Ordinance. The statement under section 143B of the late Ordinance, 1979 was required to be filed in those cases where income is subject to PTR as provided under, sections 80B, 80C, 8000, 80A, 80AA etc. Since the above reimburse ment was claimed as exempt therefore the assessee was not legally required to file statement under section 143B of the Ordinance and had they filed the said statement they would have impliedly accepted the taxability of the amounts reimbursed to them as fee for technical services. Further it is a trite law as held in various decisions by the Honourable superior courts that it is the duty of the court to apply the correct law whether any claim in this regard has been made they concerned parties are not. In this respect reliance may be placed on the decisions reported as (PLD 1963 SC 382, PLD 1963 SC 564 and 1980 SCMR 469). If the assessee has not filed any statement under section 143B, the department could have asked the assessee to file the said statement and then proceeded in accordance with the law, which in the instant case is totally lacking. The two decisions cited by the learned counsel of the assessee reported as 1999 PLD 3362 and 2004 PTD 2051 also supports the version of the assessee. In these two decisions it has been held that/Assessing Officer has no jurisdiction to proceed under normal law while assessing the income under section 80AA of the repealed Ordinance, 1979. Hence, in my opinion it was the responsibility of the department to call for the filing of the statement under section 143B if they were of the opinion that the exempt amount claimed by the assessee falls under the provisions of section 80-AA of the repealed Ordinance.

25. Hence, in view of the above narrated facts, I am of the view that the amount reimbursed by HHL to MWC could not be treated as fee for technical services and is exempt under Article-III of the Agreement for the Avoidance of Double Taxation between Pakistan and USA.

26. Since difference of opinion has arisen in this case the matter is referred to the Hon'ble Chairman for Third Member opinion on the following issue:

"Whether on the facts and in the circumstances of the case the amounts reimbursed by HHL to MWC on account of marketing cost and reservation cost is fee for technical services as defined in section 12(5) of the repealed Ordinance or is exempt from the levy of tax in terms of the Treaty for the Avoidance of Double Taxation between Pakistan and USA.?"

(Sd.)

(Jawaid Masood Tahir Bhatti)

Judicial Member

27. I have considered the question framed in paragraph 26 of this order by my learned brother, the Judicial Member. In addition to the said question. I deem it appropriate to propose the following further questions for consideration of the third Member:--

(1)Whether any expenditure has actually been incurred by the appellant during each of the relevant accounting years under consideration?

(2)Whether the payments by Messrs HHL to the appellant can be termed as re-imbursement when no expenditure is actually incurred during each of the relevant accounting years under consideration?

(3)Whether the burden of proof of having incurred the expenditures and their billing to Messrs HHL for reimbursements does not rest with the appellant when it claims the impugned amounts to be reimbursement?

(4)Whether the appellant's claim of the impugned amounts to be re imbursements can be admitted when the appellant has neither filed any evidence of any incurred expenses nor their billing to Messrs HHL despite being requisitioned by the Assessing Officer?

(5)Whether the impugned receipts of the appellant are not its income when incurring of expenditures during the relevant accounting years and the billing for their reimbursements have not been established by the appellant?

(6)Whether the appellant has not rendered continued technical assistance in the form of its computer software provided to Messrs HHL for the management of Messrs HHL's hotel rooms reservations etc. and does not fall within the meaning of technical services in the light of Explanation to section 12(5)(b) of the repealed Income Tax Ordinance, 1979?

(7)Whether "fees" are not excluded from the scope of "industrial or commercial profits" by virtue of Article II(1)(i) of the Tax Treaty between Pakistan and the USA?

(8)Whether "fees for technical services" does not fall outside the scope of the Tax Treaty between Pakistan and the USA when no provision has been made in the said treaty to decide taxation of "fee for technical services"?

(9)Whether Pakistan does not hold exclusive right to tax "fees for technical services" when this type of income has not been covered by the tax Treaty between Pakistan and the USA?

(10)Whether the incomes falling under sections 80A and 80AA do not fall outside the scope of section 143-B of the repealed Income Tax Ordinance, 1979 read with Rule 202-C of the repealed Income Tax Rules, 1982?

(Sd.)

(Shahid Azam Khan)

Accountant Member

AS PER KHAWAJA FAROOQ SAEED, CHAIRPERSON

KHAWAJA FAROOQ SAEED, (CHAIRPERSON).---In this case of difference of opinion the learned brothers have disagreed on the status of the amount received by this assessee claimed to be as reimbursement of the expenditures incurred on advertisement and other allied expenses from the Marriot Hotels Pakistan. My learned brother Accountant Member has treated the receipt of the said amount to be "as fee from Technical Services" while learned Juridical Member has considered it as commercial transaction and reimbursement of the expenditures hence not taxable in Pakistan. Both the brothers have mentioned the basic facts, repetition of the same, therefore, is unnecessary. However, reproduction of the questions raised jointly shall obviously be of help for further proceedings. The same are as follows:

(1)Whether any expenditure has actually been incurred by the appellant during each of the relevant accounting years under consideration?

(2)Whether the payments by Messrs HHL to the appellant can be termed as reimbursement hence no expenditure is actually incurred during each of the relevant accounting years under consideration?

(3)Whether the burden of proof of having incurred the expenditures and their billing to Messrs HHL for reimbursements does not rest with the appellant when it claims the impugned amounts to be reimbursements?

(4)Whether the appellant's claim of the impugned amounts to be reimbursements can be admitted when the appellant has neither filed any evidence of any incurred expenses nor their billing to Messrs HHL despite being requisitioned by the Assessing Officer?

(5)Whether the impugned receipts of the appellant are not its income when incurring of expenditures during the relevant accounting years and the billing for their reimbursements have not been established by the appellant?

(6)Whether the appellant has not rendered continued technical assistance in the form of its computer software provided to Messrs HHL for the management of Messrs HHL's hotel rooms reservations etc. and does not fall within the meaning of technical services in the light of Explanation to section 12(5)(b) of the repealed Income Tax Ordinance, 1979?

(7)Whether 'fees' are not excluded from the scope of 'industrial or commercial profits' by virtue of Article 11(1)(1) of the Tax Treaty between Pakistan and the USA?

(8)Whether 'fees for technical services' does not fall outside the scope of the Tax Treaty between Pakistan and the USA when no provision has been made in the said treaty to decide taxation of 'fee for technical services'?

(9)Whether Pakistan does not hold exclusive right to 'tax 'fee for technical services' when this type of income has not been covered by the Tax Treaty between Pakistan and the USA?

(10)Whether the income falling under sections 80-A and 80-AA does not fall outside the scope of section 143-B of the repealed Income Tax Ordinance, 1979 read with Rule 202-C of the repealed Income Tax Rules, 1982?

Before proceedings in this case it was pointed out by the court to both the Representatives that the issue is only one which is covered by Questions No.8-10 and rest are in fact the ancillary issues. Both agreed that the basic question to be decided. remains that whether the amount received by this taxpayer namely Messrs Marriott Worldwide Corporation from its subsidiary company namely Marriot Hotel Pakistan is fee from technical services taxable in Pakistan or is in the nature of commercial transaction hence exempt.

Before dilating upon the.issue, the jurisdiction to be exercised by this court as a referee judge requires mentioning. This is a settled principle that a referee judge has to remain within the parameters proposed and questions or issue referred by the other Honourable members for the reason of their respective difference of opinion with each other. Since the Division Bench has agreed on some of the points and have disagreed only on the issue of 'the status of the transaction', this court shall remain within the said sphere. Reliance is 1990 PTD 787.

As mentioned above facts have already been dilated and the ' difference is with regard to the nature of receipt and its chargeability in Pakistan. The arguments of two sides vis-a-vis opinion of learned brother is further dilated hereafter.

The assessee claim remained that the avoidance of double taxation treaty within Pakistan and United States' of America does create a charge of the commercial profits arising in Pakistan. However, the nature of the present transaction being of commercial profits the Assessing Officer could proceed to tax it accordingly. The taxation of commercial profit in a country as per Article III of the Treaty referred supra requires existence of a permanent establishment in the charging country. It was for the reason of non-availability of permanent establishment in Pakistan that the said receipt could not be charged.

The Assessing Officer has embarked upon the transaction by making a futile effort for holding it a 'fee for technical services.' The learned counsel reiterated its old argument that fee from technical services is on use of some specialized skill, a patent or goodwill of an organization etc. Present receipt is against providing of services by recommending people outside Pakistan the accommodation in Pakistan. The assessee also does booking on behalf of Marriott in Pakistan which transaction is not within the territory of this country. For example the booking made in United States of America, U.K or any other country in the world where this taxpayer has got some set up for a person/persons to come for stay in Marriott Hotels Pakistan, in his opinion is not fee for technical services. On a question from the court the learned counsel informed that the taxpayer receives this amount from the various subsidiary hotels in a fix proportion. In this regard the Article IV Sub-Article 4.02A of the agreement is relevant.

The A.R. further argued that the agreement between this assessee and the Marriott Hotel in Pakistan clearly describes the status of the relationship which the department has totally ignored. The relationship between the parties is always covered by the contract through which the said relationship is established. When two parties to a contract determine the status of a transaction in their mutual relationship, the third party including revenue department of Pakistan has no right to doubt its status. This court and the senior courts in a number of cases have directed not' to go beyond the actual nature of the transaction between the parties concerned especially when there is a counter proof available. Calling such a transaction to be a colorable arrangement which even otherwise is not the case of revenue by the learned Accountant Member is' not as per facts. Reliance is on a judgment of Indian origin in terms of Director of Income Tax, New Dehli v. Sheraton International Inc. New Dehli. The learned counsel argued that the same is on all fours on the facts and circumstances of this case. It was commented that the basic law and the language of the two countries in respect of charge and liability of the expenses relationship with other countries through avoidance of tax treaty etc. is more or less the same. Furthermore, the facts and law discussed is identical hence ignorance of judgment by learned Accountant Member is not fair.

Learned counsel of the Revenue on his turn, however, supported the narration of learned Accountant Member with full emphasis. He said that the question of determination of permanent establishment of the assessee will arise only when the said amount is treated as a commercial profit. However, the amount having been received in Pakistan and Marriott Hotel Pakistan being its agent must be assessed within its territory.

The learned Representative of Department further added that:--

(i)The names of the two organizations are the same i.e. Marriot hotels and Marriot International Ltd.

(ii)The relationship of member and agent is not being denied.

(iii)The amount is paid in Pakistan and use of the brand, name and good will of the Marriott International.

(iv)Booking is outside Pakistan for clients in Pakistan by the assessee,

The amount in his opinion has validly been taxed in Pakistan.

Record perused, A.R. and D.R both have been heard. The judgment in terms of I.T.As. Nos.924/2007, 921/200'1, 92/2007, 932/2007, 933/2007, 1033/2007, 1037/2007, 1044/2007, 1050/2007 and 1092/2007 re; Sheraton International Inc. New Delhi delivered on 30-1-2009 in fact is quite relevant. The reason of referring the same, though it is of foreign origin is that it is direct and the discussion therein is very relevant. Besides, it is on the basis of the identical law and the facts. The re-production of the relevant para therefrom shall be of help:--

"Having heard both the learned counsel for the Revenue, as well as, the assessee we are of the view that the impugned judgment of the Tribunal deserves to be sustained for the reasons given hereunder: 12.1 But first, the findings of the fact returned by the Tribunal: (i) the main purpose of the agreement entered into between the assessee and its client-hotels was to promote business keeping in mind their mutual interest, 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 trademark, brand name, as well as, the stylized 'S' given by the assessee to its client-hotels was examined by the Tribunal. It returned a finding that there was nothing on record for it to come to conclusion that the real transaction was other than what was stated in the agreement, that is, the use of the trademark etc. was not free of cost but was camouflaged in the composite payment made for various services; (ii) the assessee, ITC Ltd., had its own brand by the name of 'Welcome group' which, as noted in the impugned judgment, was used alongside the assessee's brand name 'Sheraton'. Furthermore, ITC hotels Ltd., like the assessee also had its own network by the name of "WELCOMNET" which was used for reservations within the country; (iii) 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 trademark, trade name, computer reservations were incidental to the main purpose as stated above; (iv) it found as a matter of fact that the payments received by the assessee were neither in the nature of royalty under section 9(I)(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. See observations in paragraph 85 of the impugned judgment. The relevant portion of the finding is extracted below: As such, considering all the facts of the case, the relevant provisions of the Income Tax Act, 1961 as well as that of DTAA between India and USA and keeping in view the legal position emanating from various judicial pronouncements discussed above, we are of the opinion that the amount received by the assessee from the Indian hotels/clients for the services rendered under relevant agreements was not in the nature of 'royalties' within the meaning given in section 9(1)(vi) read with Explanation-2 thereto of the Income Tax Act, 1961 or as given in Article 12(3) of Indo-American DTAA. The same was also not 'fees for technical services' or 'fees for included services' as defined in Section 9(1)(vii) read with Explanation-2 thereto of the Income Tax Act, 1961 or Article 12(4) of the Indo-American DTAA respectively."

Drawing inference from the above para. I am in agreement with my, learned brother J.M. that it was not a case of 'Royalty'. It is not possible for me to agree with the learned DR that a memorandum of understanding for providing or ascertaining certain services which are in relation to advertisement, publicity, sales promotion can be called as 'Fee from technical services'. The relationship of the two parties here does not involve any use of technology or trade mark and there is no benefit of technology involved. The services definitely. are provided by use of computerized reservation system etc. but the independent and main integrated job undertaking by the assessee company is rendering of services which basically is a sort of advertisement and subsequent booking of the clients are covered within the sales promotion. I, therefore, have no doubt in my mind and I hold that the findings of the learned J.M. are correct.

In earlier para of the judgment I have discussed the scope, jurisdiction and the role of the referee judge in a difference of opinion case. I sincerely feel that the issue of the P.E. in this case is not the subject matter of the discussion. The same, therefore, does not require Any deliberation on my part. In fact this is the issue which should have been discussed at the Assessing Officer's stage as well as by the appellate forums.

In any case, considering the scope of the referee judge I hereby conclude that re-imbursement of HHL to MWC on account of marketing cost and reservation cost is not 'fee from technical services' and section 12(5) of the repealed Ordinance is not applicable on the facts of this case.

The other questions though have been jointly referred by my learned brothers but they are mostly arguments and discussion and the decision already made by me above covers all the questions.

This judgment, therefore, is concluded with my concurrence note to the findings of the learned brother J.M. The same is accordingly decided.

C.M.A./208/Tax(Trib.)Appeal accepted.