COMMISSIONER OF INCOME-TAX, CENTRAL ZONE `A', KARACHI VS GLAXO LABORATORIES (PAKISTAN) LIMITED, KARACHI
1991 P T D 393
[Karachi High Court]
Before Saleem Akhtar and Hussain Adil Khatri, JJ
COMMISSIONER OF INCOME-TAX, CENTRAL ZONE `A', KARACHI
versus
GLAXO LABORATORIES (PAKISTAN) LIMITED, KARACHI
I.T.R. No.108 of 1982, decided on 22/11/1990.
Income-tax Act (XI of 1922)---
----S: 42(2)---Applicability of S.42(2) depends on clear finding that purchases from non-resident associate suppliers of raw material were made at higher price and the real profit was depleted, reduced or made extinct by manipulation and arranged transaction.
Commissioner of Income-tax v. Pfizer Ltd. 1989 PTD 612 ref.
Shaikh Haider for Applicant.
Fateh Ali W. Velliani for Respondent
JUDGMENT
SALEEM AKHTAR, J.---The assessee/respondent is a subsidiary company of Glaxo Laboratory U K. and Glaxo Group U.K. Ltd. and is engaged in manufacturing and vending of pharmaceutical products in Pakistan. The major shares of the respondent are held by the non-resident affiliates like Glaxo Group. The respondent is engaged in regular purchase of raw material from its non-resident associates. During the assessment years 1971-72, 1972-73 and 1973 74 the Income Tax Officer noticed that purchases of certain raw material which were made from the non-resident associate companies were at a higher rate than the price of very items in international market. From these facts, the Income Tax Officer concluded that a method was devised to arrange the course of business with the non-resident so as to produce through the respondent lesser profit than ordinary profit which might have arisen to it. He invoked section 42 of the Income Tax Act and added to the income the amount which according to him was paid in excess by such arrangement. So far the assessment year 1971-72 is concerned respondent filed appeal directly before the Tribunal but in respect of assessment years 1972-73 and 1973-74 the respondent filed appeal before the Appellate Assistant Commissioner. In these two appeals the Appellate Assistant Commissioner of Income Tax set aside the assessment and remanded for re-examination of the case particularly the dealings between the respondent and its principal. The department filed appeal against this order before the Tribunal which decided alongwith the assessee's appeal filed for the year 1971-72, by a common order dated 8-1-1978. The Tribunal relying on its own decision held that profit accrued on the sale and not on purchases and whatever profit arose on the sale by foreign non-resident principal would be required to be taxed by invoking provisions of subsection (1) of section 42 as income of the non resident after treating some residents as their agent but the purchase could not be taxed for any deemed profit on purchases. The department filed application under section 66 (1) and the following question has been referred to us:--
"Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that subsection (2) of section 42 of the Income Tax Act was not applicable in this case?"
2. Before dealing with this question we have noticed that the finding of the assessing officer that there has been manipulation and price higher than the international market price was paid to the principal of the assessee/respondent, was set aside by the Appellate Assistant Commissioner. But he refrained from giving any finding either way and remanded it to the Income Tax Officer to reconsider it and then give a clear finding. Therefore, the appellate authority kept this question open subject to fresh determination by the assessing authority. The assessee/respondent filed an appeal against this order but Tribunal also did not give specific finding confirming or controverting the finding of the Income. Tax Officer, nor did the Tribunal set aside in clear terms the order of remand passed by the Appellate Assistant Commissioner. The Tribunal proceeded to follow its own judgment in the case of Pfizer Ltd. and held that section 42(1) was applicable. Even in the statement of facts the Tribunal is silent about the finding of the assessing officer. From this order two situations may emerge (1) that order of the Appellate Assistant Commissioner has been maintained and fresh inquiry has to be made and (2) that section 42 (1) is to be applied and no further inquiry is necessary but no order to this effect has been passed and the situation has completely been confused. Mr. Shaikh Haider the learned counsel for the department has relied on Commissioner of Income Tax v. Pfizer Ltd., 1989 P T D 612. In this case the assessing officer had found that the purchase was made by the assessee from abroad at higher price than the normal price but the Tribunal applied section 42(1). However, by the aforestated judgment while holding that section 42(2) was applicable the following observation was made:--
"Where in the account maintained for such dealings between a resident in taxable territory and non-resident the profit which normally should have accrued has not been declared due to managed or manipulated devices the Assessing Officer is entitled to tax such profit. The object of section 42(2) is to bring to the net of taxation such profit which in the normal course of business should have accrued to the resident assessee. The Assessing Authority has therefore, to evaluate and examine the dealing between the non-resident and resident and to find out whether in the normal course in such transactions any profit could have accrued or a higher profit could have been earned. Where finding is in the affirmative section 42 (2) will be applicable.
Section 42, subsection (2) intends to put a curb on the manipulation and secret business deal between a resident and its close business associate by which the normal profit which would have accrued does not find place in the books of account but actually it is presented in a reduced or depleted form. A further criteria laid down is that the depleted profit declared should be less than the ordinary profit which in the normal course is expected in such dealings. By adopting such device law does not permit an assessee to evade the tax by manipulated and arranged dealings between two close associates one being resident and the other non-resident. The profit which would accrue normally in such dealing shall be deemed to be the profit of the resident assessee and will be taxed as income:"
It is thus clear that the applicability of section 42 (2) depends on clear finding that purchases were made at higher price and the real profit was depleted, reduced or made extinct by manipulation and arranged transaction.
3. Mr. Fateh Ali Velliani the learned counsel for the respondents contended that there is no finding of the I.T.O. as it was set aside and has not been restored by the Tribunal. The contention seems to be correct. The necessary finding for application of section 42 (2) has been set aside. As observed earlier the Tribunal is silent about it because it was applying section 42 (1) and did not feel it necessary to examine this aspect of the case. In these circumstances we are of the opinion that in case, the finding of the Income Tax Officer is not restored, section 42 (2) cannot be applied but if de novo proceedings are taken as observed by the Appellate Assistant Commissioner and purchase of material at a higher rate than the prevalent international market is established then in view of the judgment reported in 1989 P T D 612 (Pfizer's case) section 42 (2) will apply.
We answer the question accordingly.
M.B.A./C-177/KOrder accordingly.