(a) Agreement for Avoidance of Double Taxation between Pakistan and United Kingdom---

----Art. VIII ---Royalty---Exemption---Assessee, a non-resident appointed as consultant and technical advisor of Pakistani Company was entitled to exemption under Art. VIII from Pakistan income only in respect of payments made by Pakistani Company to the Assessee for services rendered for manufacturing, informations, factory administration, training of technical staff, patents and storage and control---Payments made for availability of consultants personnel and inspection being not "royalty" were not exempt under Art. VIII.

Glaxo Laboratories Ltd. v. Commissioner of Income Tax, Karachi 1991 PTD 195 fol.

Glaxo Laboratories Ltd. v. Commissioner of Income Tax, Karachi 1991 PTD 195 ref.

Commissioner of Income Tax v. Abbot Finance Company 1982 PTD 31 distinguished.

(b) Agreement for Avoidance of Double Taxation between Pakistan and United Kingdom--

---- Art. II(1)(k)---"Industrial and commercial profit"---Definition---Provision of Art. 11(1)(K) to be interpreted with reference to its ordinary meaning.

(c) Words and phrases--

--- Expression "personal service contract"---Definition.

Ballentine's Law Dictionary, 3rd Edn., p.924 ref.

(d) Agreement for Avoidance of Double Taxation between Pakistan and United Kingdom--

---- Art. II(1)(k)---Services required to be rendered by the assessee were in the nature of technical service as assessee through its staff or staff of its associated companies was to advise the Pakistani Company on the utilization. of its machinery and equipments etc. and also to advise about maintenance of high standard of quality of the specialised products and such advice was to be rendered through regular inspection by the assessee--By making such advice or services assessee made available its expertise, technical and special knowledge and experience to the Pakistani Company---Such technical services by assessee to Pakistani Company were covered by the term "personal services"---Payments of such personal "services" thus were not exempt from income tax having specifically been excluded from the definition of "Industrial or commercial profit" in Art. II(1)(k) of the Treaty.

Ballentine's Law Dictionary, 3rd Edn., p.924 rel.

Fathe Ali W. Vellani for Applicant.

Shaikh Haider for Respondent.

Date of hearing: 2nd October, 1991.

JUDGMENT

NASIR ASLAM ZAHID, ACTG. CJ.---On the application under section 66(1) of the repealed Income Tax Act, 1922, made by the applicant/assessee to the Income Tax Appellate Tribunal, arising out of assessment proceedings for assessment years 1975-76, 1976-77 and 1977-78 of the assessee, the Tribunal has referred the following question to this Court for opinion:---

"Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the entire manufacturing royalties received from Glaxo Laboratories (Pakistan) Ltd., were not exempt from Pakistan Tax under the Agreement for Avoidance of Double Taxation between Pakistan and the United Kingdom?"

2. The applicant company (hereinafter referred to as "the Assessee") is incorporated in United Kingdom and has been assessed in Pakistan under the Income Tax laws as a non-resident company. The Assessee had entered into what is described as the "Consultancy Fee and Manufacturing Royalty Agreement" dated 31-12-1973 (hereinafter referred to as "the Agreement") with Glaxo Laboratories (Pakistan) Limited (hereinafter referred to as "the Pakistan Company") whereby the Assessee was appointed as Consultants and Technical Advisor of the Pakistan Company for a period of five years with effect from 17-12-1971 to render certain general and manufacturing services detailed in the Agreement. Clause 2 of the Agreement related to general services to be provided by the Assessee to the Company and it read as follows:

"2. General Services.---The Consultant shall provide the Pakistan Company with such information and services as the Company may reasonably require in respect of all management, marketing, selling and advertising problems in relation to the Pakistan Company's organisation and the specialised products which it is within the competence of the Consultant to provide. Such services shall include:--

(a) Medical information.-All medical information necessary for the general background of the Pakistan Company's business Information as to trends in medicine and medical science. Clinical reports concerning the diagnosis, cure, mitigation, treatment or prevention of diseases of men and/or animals as may be appropriate to the Pakistan Company's business.

(b) Competitive information Examinations of competitive products, Advance information, concerning the products of competitors and competitors' activities in other markets in order that the Pakistan Company may be placed in a favourable position to meet competition as and when it arises.

(c) Technical star-Information on the training and control of technical sales staff.

(d) Consumer relations.--Information and assistance concerning consumer relations, advertising and presentation of the specialised products for the purpose of ensuring that the specialised products are made available to the medical profession and the general public in Pakistan in the most acceptable and economical form.

(e) Office Organisation Methods.-Advice will be available upon the most efficient distribution of clerical functions including statistical records, budgeting, order recording and documentation, purchase records, goods in procedures and filing systems. In addition the Consultant will make available its experience as to the merits or demerits of office mechanisation, office equipment and its suitability for use in connection with any particular system, where the scale of operation makes such appropriate.

(f) Pakistan Company's Higher Personnel.-The facilities of the Consultant and its Associated Companies for the training of the Pakistan Company's higher administrative, sales and advertising staff at the Consultant's or Associated Companies premises in England are at the disposal of the Pakistani Company on the same conditions as set out in clause 4(c) thereof. Provided however that the posting of the Pakistan Company's staff abroad for training would be governed by Exchange Control Regulations in force from time to time. In addition the Consultant shall where requested so to do engage on behalf of and in the name of the Pakistan Company and at the expense Pakistan Company managers, administrative or sales staff for service with the Pakistan Company in Pakistan. Any person engaged by Consultant on behalf of the Pakistan Company shall be deemed to be the servant of the Pakistan Company and his/her salary or wages and expenses shall be paid by the Pakistan Company from the date of his/her engagement. Provided, however, that the engagement of foreign technicians, period of their stay in Pakistan and their remuneration would be subject to prior approval of the Department of

Investment Promotion and Supplies.

(g) Availability of Consultant's Personnel.-The Consultant shall additionally and as it may deem to be necessary send or procure its Associated Companies to send members of its or its Associated Companies' staff to Pakistani to advise the Pakistan Company on administration, organisation, sales and advertising in which event the Pakistan Company will be responsible for and pay such reasonable expenses as are incurred by the Consultant and/or its Associated Companies including all reasonable salaries and allowances and the travelling and other expenses in Pakistan of such members of the Consultant's or its Associated Companies' staff provided, however, that if the Consultant shall send a member or members of its own staff to Pakistan then the salary of such member or members and the travelling expenses of such member or members from England or from the country in which they normally work to Pakistan and return shall be borne by the Consultant".

Clause 4 of the Agreement relating to manufacturing services is also reproduced here:--

"4. Services in connection with manufacturing:---In so far as it lies within the competence of the Consultant the Consultant shall provide the following services to the Pakistan Company in connection with manufacturer of specialised products in Pakistan (for the purpose of this Agreement the term "manufacture" means those operations which take place at the Pakistan Company's premises in Pakistan having for their object the conversion of raw materials into specialised products:---

(a) Manufacturing information.-Manufacturing, production and technological information of all kinds including in particular secret processes, flow shetts, charts, diagrams, production trial records and pilot plant experiment reports for the purpose of ensuring that the Pakistan Company may be enabled to attain the maximum degree of efficiency and economy in production with the minimum of delay, subject always to there being no statutory or contractual obligation upon the Consultant not to disclose such information in respect of any of the specialised products.

(b) Factory administration.-The Consultant will make available to the Pakistan Company its experience in the organisation and administration of its factories in order that the Pakistan Company may be enable to make the most efficient use of the materials, equipment, machinery and like facilities at its disposal.

(c) Training of technical staff.-The Consultant will afford specialised technical training at its or its Associated Companies' premises in England to technical employees of and selected by the Pakistan Company from time to time and intended to work for the Pakistan Company in Pakistan subject to the Consultant agreeing in each case that the person in question is suitable for training. Provided, however, that the posting of the Pakistan Company's staff abroad for training would be governed by Exchange Control Regulations in force from time to time. In addition the Consultant shall where requested so to do engage on behalf and in the name of the Pakistan Company and at the expense of the Pakistan Company production and technical staff for service with the Pakistan Company in Pakistan. Provided, however, that the engagement of foreign technicians, period of their stay in Pakistan and their remuneration would be subject to prior approval of the Department of Investment Promotion and Supplies. Every employee of the Pakistan Company and any person engaged by the Consultant on behalf of the Pakistan Company shall whilst under training at the premises of the Consultant or of any of its Associated Companies be deemed to be the servant of the Pakistan Company by whom the salary or wages, travel, living and other expenses of every such employee or person as aforesaid shall be paid a-lid the Pakistan Company hereby agrees to indemnify the Consultant and its Associated Companies against all claims whatsoever which may be made by or in respect of any such employee or person so under training for compensation or damage by reason of accidents, injury or otherwise.

(d) Availability of Consultant's personnel.--The Consultant shall additionally and as it may deem to be necessary send or procure its Associated Companies to send members of its or its Associated Companies staff to Pakistan to advise the Pakistan Company on the utilization of its machinery and equipment and on processes, manufactures and production in which event the Pakistan Company will be responsible for and pay such reasonable expenses as are incurred by the Consultant and/or its Associated Companies including all reasonable salaries and allowances and the . travelling and other expenses in Pakistan or such members of the Consultant's or its Associated Companies staff provided however that if the Consultant shall send a member or members of its own staff to Pakistan then the salary of such member or members and the travelling expenses of such member or members from England or from the country in which they normally work to Pakistan and return shall be borne by the Consultant.

(e) Patents.-The Consultant will grant to the Pakistan Company free of all payment (but at the expense of the Pakistan Company as to any out-of-pocket expenses incurred by the Consultant) licences to make, use, exercise and vend the specialised products under any Pakistan Patents owned by the Consultant or its Associated Companies which it is necessary or desirable for the Pakistan Company to utilise in connection with the specialised products. In addition the Consultant shall undertake on behalf of the Pakistan Company searches for any surveys of issued patents and applications for Patents which are open to public inspection and shall make available advice and assistance in connection with possible infringements of Patents belonging either to the Consultant, the Pakistan Company or third parties and searches in technical publications.

(f) Storage and Control.-Technical and scientific information pertaining to storage and control, keeping properties and stability of the specialised products.

(g) Inspections.-The Consultant will conduct regular inspections of the specialised products manufactured by the Pakistan Company and will advise the Pakistan Company how to ensure that the high standards of quality of the specialised products are maintained by the Pakistan Company".

Relevant part of clause 6 of the Agreement with regard to payment of consideration for services rendered under the Agreement is as follows:---

"(a)In consideration of the benefits hereby conferred upon the Pakistan Company, the Pakistan Company shall make the following payments to the consultants (i.e. the Assessee) during the continuance of this agreement:--- .

(i) In payment of the services specified in clause 2 (general services) hereof, an amount equal to 1/2% (One half percentum) of the Pakistan Company's net receipts from all sales (such sales to be computed in the manner described in sub-clause 6(c) of the specialized products subjected to deduction of Pakistani taxes, if any).

(ii) In payment for the services specified in clause 4 (services in connection with manufacturing) an amount equal to 2-1/2% (two and half percentum) of the Pakistan Company's net receipts from all sales (such sales to be computed in the manner described in sub-clause 6(c) of the specialized products subjected to deduction of Pakistani taxes), if any."

Here reference may be made to the Agreement for Avoidance of Double Taxation with respect to taxes on income between Pakistan and the United Kingdom (hereinafter referred to as "the Treaty"). Articles III of the Treaty dated 19-1-1962 being relevant is reproduced here:---

ARTICLE III

(1) The industrial or commercial profits of a United Kingdom enterprise shall not be subject to Pakistan tax unless the enterprise is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by Pakistan, but only on so much of them as is attributable in that permanent establishment.

(2) The industrial or commercial profits of a Pakistan enterprise shall not be subject to United Kingdom tax unless the enterprise is engaged in trade or business in the United Kingdom through a permanent establishment situated therein. If it is engaged, tax may be imposed on those profits by the United Kingdom, but only on so much of them as is attributable to that permanent establishment.

(3) Where an enterprise of one of the territories is engaged in trade or business in the other territory through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to drive in that other territory if it were an. independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment.

(4) In determining the industrial or commercial profits of a permanent establishment, there shall be allowed as deductions all expenses which would be deductible if the permanent establishment were an independent enterprise in so far as they are reasonably allocable to the permanent establishment, including executive and general administrative expenses so deductible and allocable whether incurred in the territory in which the permanent establishment is situated or elsewhere."

It would be noticed that Article VIII of the Treaty refers to "royalty" and in Article III reference is made to the "industrial or commercial profits" of a United Kingdom enterprise. Article 11(1)(k) of the Treaty defines the term "industrial or commercial profits" to include "rent or royalties in respect of motion pictures and films for use in connection with television but does not include income in the form of dividends, interest, or royalties, or a fee or other remuneration derived by an enterprise for the management, control or supervision of the trade, business or other activity of another enterprise or concern, or remuneration for labour or personal services, or income from the operation of ships or aircrafts."

Pakistan had entered into the Treaty pursuant to section 49-AA of the repealed Income Tax Act, 1922 and by S.R.O. No.56(K), dated 9-1-1962 issued by the Government of Pakistan, Ministry of Finance, in exercise of the powers conferred by the aforesaid section 49-AA, it was directed that all the provisions of the Treaty shall be given effect to in Pakistan.

3. During the assessment years in question, the assessee claimed exemption on payments, received from the Pakistan Company for services rendered under clause 4 of the Agreement basing its claim on Article III of the Treaty. The Income Tax Officer, who framed the assessment for the three years, held that only the following two out of the several types of services listed in clause 4 of the Agreement could be considered as royalty:--

(a) Manufacturing, production and technological information of all kinds in particular secret processes flow sheets, etc.

(b) Patents.

Payments for the following remaining five kinds of manufacturing services mentioned in clause 4 of the Agreement were held by the Income Tax Officer to the consultancy fee and, therefore, liable to be taxed under the Income Tax Act, 1922: '

(i) Factory administration;

(ii) Training of technical staff;

(iii) Availability of foreign personnel for advice;

(iv) Technical and scientific information pertaining to storage and control; and

(v) Inspection.

The Income Tax Officer then allowed exemption to the extent of 2/7th of the respective sums received by the Assessee in each year and subjected to tax the remaining 5/7th as consultancy fee. This was done apparently on the basis that payments in respect of only two out of the seven types of services listed in clause 4 of the Agreement were held to be entitled for exemption under Article VIII of the Treaty. The Assessee went in appeal before the Appellate Assistant Commissioner who rejected the appeals filed by the Assessee. In second appeal before the Appellate Tribunal, it was, inter alia, submitted that the payment in question was exempt as "industrial or commercial profits" under Article III of the Treaty especially when the Income Tax Officer had himself assessed them as business profits under section 10 of the repealed Income Tax Act, 1922. The Tribunal by its consolidated order,, dated 12-8-1982 rejected the Assessee's appeals in respect of exemption from tax under the Treaty. The Tribunal held as follows:---

"We have given our earnest consideration to the submissions made by the learned Authorised Representative of the appellant. Both the authorities below have rightly held that the ratio of the Tribunal's decision in I.TAs. Nos.223 to 226/KB of 1973-74, dated August 26, 1976 is squarely applicable to the facts of the instant case. A perusal of our aforesaid order makes it absolutely clear that the Tribunal has, after elaborate discussions, held that the payments made to the assessee, a non-resident U.K. company, in that case, like the appellant before us, for the services rendered or agreed to be rendered by it, save as mentioned in sub-clauses (a) and (e), under the Head Services where the company is manufacturing "which is described in the instant case under the caption "Services in connection with manufacturing"), cannot legitimately be said to fall within the ambit of the definition of "Royalty" as given in Article VIII of the ADTA. The Tribunal has also in the said judgment considered the applicability of the provisions of Article III of the ADTA to the almost identical set of facts as invoked herein and has, for reasons recorded in paragraph 8 of the order, held it in negative. For the reasons as given in our above judgment, dated August 26, 1976 adverted to above, we would repel the contentions of the appellant's counsel as the facts of instant case are in no way different than those found in that case.

So far as the last abovementioned contention of the appellant's Authorised Representative is concerned, i.e., the proportion. applicable to `Royalty' should be taken at 11/15th of the total instead of 2/7th as taken by the Income Tax Officer, we are of the opinion that the Income Tax Officer has rightly placed reliance on assessee's own voluntary act of offering to tax 40% of the gross receipts in respect of almost similar services to be rendered by the appellant to the Pakistani company under the head "General Services". The order of the Income Tax Officer, it may be observed, in this behalf, is well reasoned and we do not therefore, consider it advisable and necessary to interfere with it."

4. It may be observed here that prior to the Agreement, dated 31-12 1973 between the Assessee and the Pakistan Company, there was an earlier agreement, dated 17-12-1951 valid for twenty years between the assessee and the Pakistan Company containing similar terms and conditions and exemption had been claimed by the Assessee for earlier assessment years also and the matter came up to this Court and, by judgment, dated 6-12-1990 in the case of Glaxo Laboratories Ltd. v. Commissioner of Income Tax, Karachi 1991 PTD 195, the matter was decided. For the earlier years, the Income Tax Appellate Tribunal had allowed exemption in respect of consideration paid by the Pakistan Company to the assessee for services specified in clauses 4(a) and 4(e) i.e. for manufacturing information and patents respectively and the main reason for not accepting claims for exemption under other sub-clauses was that income derived from other service categories in clause 4 did not fall within the meaning of the word "royalty" as defined in Article VIII of the Treaty. The matter was brought before this Court in respect of the earlier years in a reference under section 66(1) of the repealed Income Tax Act where the contention raised was that the considerations paid for all the services enumerated in clause 4 of the Agreement were covered by the definition of the term "royalty". After a detailed examination of the questions involved in that case, the Division Bench of this Court in 1991 PTD 195 came to the conclusion that the Assessee was entitled to exemption from payment of income-tax on payments made by the Company to the assessee in respect of services under sub-clauses (a), (b), (c), (e) and (f). It may be observed that in 1991 PTD 195, the aforesaid view was taken with reference to Article VIII of the Treaty. In that case, an argument had been raised on behalf of the Assessee that the payments made by the Pakistan company to the Assessee were "industrial or commercial profits" as defined in Article 11(1)(k) and as such the said payments were exempt under Article III of the Treaty. In the facts of the case, the Court declined to give a finding on the basis of Article III of the .Treaty holding as follows:---

"It was next contended that payments made in respect of clause 4 are "industrial or commercial profit" as defined by Article II(K). Such profits are exempted under Article 111. As the question referred by the Tribunal does not relate to exemption under article III, Mr. Vellani contended that the question may be refrained. Mr. Shaikh Haider has opposed this contention as it would amount to raising a fresh question' which was never agitated at any stage. The High Court on the facts stated by the Tribunal can reframe the question to bring about the real issue between the parties. But no new plea or point can be raised by refraining the question. Mr. Vellani referred to Kanga & Palkhivalla's The Law and Practice of Income Tax, 7th Edition, page 1167 where it has been commented that where the assessee claims exemptions but the question - referred contains a reference to a particular statutory provision the Court may reframe the question with reference to other provisions of law. There can be no cavil with this proposition but it has to be noted that in such a situation no new point can be introduced. The facts have to be accepted as stated by the Tribunal. If any new fact is required for deciding such question, it cannot be refrained. The applicant at no stage claimed exemption under Article. Throughout it pressed its claim under Article VIII. In the refrained question first it should be decided whether the profits of the applicant are "industrial and commercial profits" as defined by Article III. As there is no such finding by the Tribunal, the High Court would not examine and give such finding. Furthermore in view of the observations in Rolls-Royce case if the applicant is claiming know-how as an asset then the income cannot be treated as trading receipt. Therefore, inquiry will have to be made whether in United Kingdom the applicant has claimed the amount paid under the agreement as an asset or trading receipt. If it is an asset as held in Rolls Royce case then it cannot be treated as industrial and commercial profit. In these circumstances question cannot be refrained to press Article III for claiming exemption."

The decision in 1991 PTD 195 related to the assessment years 1969-70 to 1972-73 and on the basis of the earlier agreement, dated 17-12-1951 between the Pakistan Company and the Assessee. In the present Reference Application, the assessment years are 1975-76, 1976-77 and 1977-78 and the basis is the fresh Agreement dated 31-12-1973 entered into between the parties made effective from 17-12-1971 for a period of five years. The relevant clauses of the earlier agreement and the Agreement in question arc similar. According to the learned counsel for the Assessee, the decision in 1991 PTD 195 has been taken in appeal before the Supreme Court where the appeal is pending but in that appeal applicability of Article VIII of the Treaty is in issue. In the present case, the question referred to us is not restricted to Article VIII of the Treaty and as such both the learned counsel have addressed us on the applicability of Article VIII as well as Article III of the Treaty. Under Article VIII, a well reasoned and considered judgment of this Court in the case of the Assessee for the earlier years is available and reported in 1991 PTD 1.95, and we see no reason to take a different view that has been taken in that judgment. Following our earlier decision in 1991 PTD 195, we are of the view that under Article VIII of the Treaty, the Assessee is entitled to exemption from Pakistan Income-tax only in respect of payments made by the Pakistan Company to the Assessee during the assessment years in question for services rendered under sub clauses (a), (b) (c), (e) and (f) of clause 4 of the Agreement and not under sub-clauses (d) and (g) of clause 4.

5. Coming now to Article III of the Treaty, the question that requires consideration in this Reference Application is narrowed down and it is whether payments made for services rendered under sub-clauses (d) and (g) of clause 4 of the Agreement are covered by Article III of the Treaty and, therefore, exempt from Income-tax. It is not necessary to consider whether payments made in respect of services rendered under other sub-clauses of clause 4 of the Agreement are covered by Article III as it has already been held that such payments are covered under Article VIII of the Treaty.

6. Under sub-clause (d) of clause 4 of the Agreement, the Assessee can send its staff or staff of its associated companies to Pakistan to advise the Pakistan company on the utilization of its machinery and equipment and on the processes, manufactures and production in which event Pakistan Company is responsible for payment of such expenses as are incurred by the assessee and/or its associated companies including all salaries, allowances and travelling and other expenses in Pakistan of such staff. Under sub-clause (g) of clause 4 of the Agreement, the assessee is required to conduct regular inspections of the specialized products manufactured by the Pakistan Company and to advise the Pakistan Company to ensure that high standard of quality of the specialized product is maintained by the Pakistan Company. In respect of both these sub clauses in the earlier decision reported in 1991 PTD 195, it had been held that payments for such services are not covered by "royalty" and, therefore, the Assessee was not entitled to exemption under Article VIII of the Treaty.

7. Mr. Fatehali W. Vellani, learned counsel for the Assessee first referred to the definition of term "industrial or commercial profits" in Article II (1)(k) of the Treaty submitting that the definition of the said term is not exhaustive inasmuch as the definition uses the word "includes" and not "means" and, therefore, the definition is not exhaustive and the ordinary meaning of the term will determine what is and what is not included in the term except in regard to payments which are specifically covered by the definition. It was submitted that the Agreement between the Assessee and the Pakistan Company is a commercial agreement under which, for services rendered, payments are received by the assessee from the Pakistan Company. According to the learned counsel, the ordinary meaning of the term industrial and commercial profits would include payments in respect of services rendered by the Assessee under sub-clauses (d) and (g) of clause 4 of the Agreement. In support of his contention, Mr. Fatehali W. Vellani placed reliance on the following reported decisions:---

(a) Commissioner of Income Tax v. Abbot Finance Company 1982 PTD 31. In this case, the assessee was a non-resident Association of Persons of Switzerland and it had earned royalty for use of patent rights on the net sales of a Pakistani company and had also received fee for technical services rendered by the assessee under an agreement between the assessee and the said Pakistani company. The assessee filed income tax return for the relevant year and claimed exemption from payment of income-tax for both kinds of payment in view of Article VII of the Agreement for Avoidance of Double Taxation between Pakistan and Switzerland. The claim for exemption was rejected by the Income-tax Officer. In appeal, the Appellate Assistant Commissioner allowing the appeals held that the amount earned on account of royalty or use of patents was exempt under Article VII of the Agreement (equivalent to Article VIII of the Treaty between Pakistan and United Kingdom) and that the fee earned for rendering technical services was exempt under Article III of the Agreement with Switzerland as the assessee had no permanent establishment in Pakistan. Clause III of the Agreement between Pakistan and Switzerland reads as follows:--

'The industrial or commercial profits of a Swiss Enterprise shall not be subject to Pakistan tax unless the Enterprise carries on a trade or business in Pakistan through a permanent establishment situated therein. If it so carries on a trade or business, tax may be imposed on those profits by Pakistan, but only on so much of them as is attributable to that permanent establishment."

The Department filed a further appeal before the Income Tax Appellate Tribunal which was dismissed. In a Reference Application, the matter came before this Court. A perusal of the judgment of this Court reported in 1982 PTD 31 shows that in that case there was no dispute before the Court that the fees earned by the assessee in that case were in the nature of commercial profits. In the circumstances, we are of the view that the said .decision reported in 1982 PM 31 does not help in the resolution of the question whether payments made on account of services rendered under sub clauses (d) and (g) of the Agreement in the present case are commercial or business profits or not.

(b) Raleigh Investment Company Ltd. v. Commissioner of Income Tax 1983 PTD 126: In this case relied upon by Mr. Fatehali Vellani, the question referred to the Court was as follows:---

"Whether under the facts and circumstances of the case, the Income Tax Tribunal was justified in finding that the surplus on sales of shares is not exempt from Pakistan tax?"

The applicant/assessee in that case was a British company and it had disposed of some shares of a Pakistan company held by it. On account of sale of the shares it earned a big profit. Exemption was claimed from payment of income tax by the British company under the provisions of the Agreement for the Avoidance of Double Taxation between Pakistan and the United Kingdom dated 19-1-1962 (the same Treaty which is under consideration in the present reference). The concerned Income Tax Officer rejected the claim, inter alia, on the ground that 4 capital gain accruing to the British company on sale of shares was not exempt under Article III of the Treaty as the exemption under the Treaty was available to the commercial or industrial profits and not to capital gain. The Income Tax Appellate Tribunal in appeal also held that the surplus was not commercial or industrial profits and the Treaty did not provide for exemption on capital gains. The matter then came before this Court in a reference application under section 66(1) of the repealed Income Tax Act. In the judgment in that case, it was observed that the decision of the question turned on the definition of the term "industrial or commercial profits" contained in Article II (1)(k) of the Treaty. After considering the meaning of the word "commercial" with reference to the Law Dictionaries and case law, the Court came to the conclusion that the surplus derived from the sale of shares by the assessee in that case was "commercial profits" and, therefore, covered by the definition given in Article II(1)(k) and resultantly exempt from taxation under Article III of the Treaty. The Court, therefore, answered the question in the negative.

8. Mr. Shaikh Haider, learned counsel for the Department, on the other hand, argued that payments in respect of services rendered under sub-clauses (d) and (g) of clause (4) of the Agreement are not covered by the term "industrial or commercial profits" as defined in Article 11(1)(k) of the Treaty: According to learned counsel for the Department, payments for the aforesaid services rendered under sub-clauses (d) and (g) of clause (4) of the Agreement are included in the term "Fee or other remuneration derived by an enterprise from the management, control or supervision of the trade, business or other activities of another enterprise or concern or remuneration for labour or personal services" (ref: Article 11(1)(k) of the Treaty). According to the learned counsel, such fee or remuneration is specifically excluded from the definition of "industrial or commercial profits". It was submitted that services rendered under sub-clauses (d) and (g) are in the nature of "personal service". In reply Mr. Fatehali Vellani argued that such services were not "personal services" and as such not excluded from the definition of "industrial commercial profits".

9. We agree with Mr. Fatehali Vellani that the definition of "industrial or commercial profits". In clause (k) of Article II (1) of the Treaty is not exhaustive and it has to be interpreted with reference to its ordinary meaning. However, it is first to be considered whether payment for services rendered under the aforesaid two sub-clauses of clause (4) of the Agreement is covered by any of the exceptions in the definition clause. If that is so, it would not be necessary to consider the meaning of the term "industrial or commercial profits". Under sub-clause (d), the assessee is required to send members of its staff or the staff of its associated companies to Pakistan to advise the Pakistan company on the utilization of its machinery and equipments etc. This kind of service cannot be equated with management, control or supervision of the trade or business or other activities of Pakistan company. This is also our view in respect of services rendered under sub-clause (g) whereunder the Assessee conducts regular inspections of the specialised products manufactured by the Pakistan company and also to advise them to ensure high standard of quality of the specialised products.

10. Mr. Shaikh Haider had laid great stress on the submission that the services rendered under sub-clauses (d) and (g) by the Assessee were in the nature of "personal services" and as such stand expressly excluded from the definition of "industrial or commercial profits." "Personal service contract" has been defined at page 924 in Ballentine's Law Dictionary, 3rd Edition as a contract for the furnishing of service by promisor only i.e. services to be performed by no person other than the promisor and the illustrations of such contract have been given as a contract of a physician or an advocate to render professional services. "Personal services" have also been defined in the said dictionary as the work and labour of a certain person. In our view, both under sub-clause (d) as well as under clause (g), the services required to be rendered by the assessee are in the nature of technical service. As noticed, under sub clause (d), the service to be rendered by the Assessee through its staff or staff of its associated companies is to advise the Pakistan company on the utilization of its machinery and equipments etc. and under sub-clause (g) the advice to be given is about maintenance of high standard of quality of the specialised products and this advice is rendered through regular inspections by the Assessee. As observed, these types of advices or services can be aptly described as technical services. What the Assessee does is that it makes available its expertise, technical and special knowledge and experience to the Pakistan' company. The technical services rendered under the aforesaid sub-clauses by the assessee to the Pakistan company are covered by the term "personal services". Being a company, the Assessee has to render such services through its staff or staff of its associated company. Nevertheless, such services remain technical services rendered by the assessee.

11. As we have held that the services rendered under sub-clauses (d) and (g) of clause (4) of the Agreement are in the nature of personal services payments for such services are not exempt from income-tax as payments of such services have been specifically excluded from the definition of "industrial or commercial profits" in Article II(1)(k) of the Treaty.

The question referred to us is answered accordingly in the affirmative. There will be no order as to costs.

M.B.A./G-283/K Question answered in the affirmative.