(a) Convention for the Avoidance of Double Taxation between Pakistan and France-

---- Arts. III & XI(1)---Exemption was granted to industrial or commercial profits on an enterprise of one territory unless the enterprise carried on trade or business in other territory through a permanent establishment situated therein---Where a non-resident company incorporated in France had entered into a contract with a resident company concerning oil drilling projects etc. and claimed exemption under cl. (1) of Art. III of the Convention for the Avoidance of Double Taxation on the ground that it had no permanent establishment in Pakistan and its income presented commercial profits entitling to its exemption, the plea was rejected on the ground that since on the basis of contract the appellant was required to provide professional services for production, testing and allied work, its profits were not commercial so as to attract the exemption under Art. III---Professional services having been rendered by the assessee company, it was taxable under Art. XI (1) of the Convention.

Black's Law Dictionary and C.I.T., Karachi v. Abbot Finance Co. (SARL) Civil Reference No. 26 of 1972; ref.

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

----S. 132(1)(c)---Expression "as he thinks fit"---Import and scope---Appeal filed by assessee was rejected by Appellate Assistant Commissioner on a ground other than taken by the Assessing Officer below---Validity-- Contention before the Income-tax Appellate Tribunal that Appellate Assistant Commissioner was not justified under S. 132 of the Ordinance to bring in a new dimension to the case which was not subject-matter of appeal before him, was found to be without substance---Words "as he thinks fit" occurring in S.132(1)(c) of the Ordinance are not circumscribed by any condition-- Appellate Assistant Commissioner can confirm an addition made for different reasons and such finding has to be contended on its own merits.

Khalid Majid, FCA for Appellant.

Noor Muhammad, DR for Respondent.

Date of hearing: 25th February, 1992.

ORDER

NASIM SABIR SYED, (ACCOUNTANT MEMBER): --The appellant is a non-resident company incorporated in France which renders various kinds of services to oil drilling companies such as production testing and allied services etc. Appeal has been filed for the assessment year 1985-86.

The facts of the case are that the assessee had returned income at Rs.18,97,299 claiming that it was exempt under Article III of the Convention between Pakistan and France for the Avoidance of Double Taxation and the avoidance of Double Taxation etc. (the Convention). Article III of the said Convention reads as under: --

"(1) The industrial or commercial profits of an enterprise of one of the territories shall not be subjected to tax in the other territory unless the enterprise carries on a trade or business in the other territory through a permanent establishment situated therein. If it carries on a trade or business in that other territory through a permanent establishment situated herein, tax may be imposed on those profits in the ... .... .... .... ...............so much of them as is attributable to that permanent establishment.

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

(3) In the determination of the profits of a permanent establishment, there shall be allowed as a deduction expenses which are reasonable allocable to the permanent establishment includes executive and general administration expenses so allocable, whether incurred in the state in which the permanent establishment is situated or elsewhere.

(4) The term industrial or commercial profits' as used in this Article does not include income from the operation of ships or aircraft, interest on bonds, securities or debentures or any other form of indebtedness, dividends or royalties, fee or other remuneration derived from the management, control or supervision of the trade, business or other activities of an enterprise or remuneration for labour or personal (including professional) services, except any such income which, under the laws of any of the Contracting States and in accordance with this Article is attributable to a permanent establishment situated therein."

From clause (1) of Article III above it is clear that the industrial or commercial profits of an enterprise of one of the territories shall not be subjected to tax in the other territory unless the enterprise carries on trade or business in the other territory through a permanent establishment situated therein. It was emphasised by the learned AR of the assessee that as far as his client was concerned which is a non-resident company established in France it had no permanent establishment in Pakistan and so it could not be subjected to tax. The Income Tax Officer did not agree with this contention of the assessee for the reason that the letter sent by the assessee explaining his position to him was accompanied by the copy of the Convention between the Republic of Pakistan and the Republic of France for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to tax on income. According to the ITO the perusal of the contract agreement by the assessee with Pirkoh Gas Company Ltd. from which the money was received for the services rendered showed that the contracts were signed in Islamabad by Chief Executive of Pirkoh Gas Company Ltd. and the Representative of the assessee. From it he concluded that the premises used by Representative of the assessee company during his visit for the purpose of signing the contract were partly used as business premises and could thus be treated as permanent establishment as defined in the Convention and so he subjected the income declared to tax. Before taxing the income declared specific notices were issued by the Income Tax Officer to the assessee and the replies given were considered which included the definition of the term commercial profits from Black's Law Dictionary to illustrate that their client's income presented commercial profits. Reference was also made by the AR of the assessee to judgment of the Sindh and Balochistan High Court at Karachi vide Civil Reference No. 26 of 1972 and to Sindh High Court Karachi in the case of CIT, Karachi v. Abbott Finance Co. (SARL) During the proceedings it was also claimed that the contract was not signed in Pakistan but was signed outside Pakistan. Another notice under section 62 of the Ordinance was issued to the assessee vide Letter No. 1265, dated 17-6-1986 in which the Income-tax Officer conveyed his opinion that the activities of the assessee constituted technical services and not income from commercial profits and thus was liable to tax. Certain details about Head Office expenses etc. were also called for. The AR's reply was that the profits of his client constituted commercial profits and also in view of the fact that the company did not have permanent establishment in Pakistan, the same could not be taxed. The ITO on receipt of the replies from the assessee and after consulting the relevant records came to the following conclusions: --

(i)The contract was signed with Pirkoh Gas Co., Ltd., in Islamabad by the Company's Representative and Chief Executive of Pirkoh Gas Co. Ltd. Thus, there is reason to believe that the Company's Representative or some other person did visit Pakistan for the purposes of signing of contract agreement. The evidence filed by the learned AR of the assessee in support of the contention that the assessee's Representative never visited Pakistan was not accepted by the ITO as according to him if this evidence was accepted then it runs the which states: This contract is executed and delivered this 5th day of May, 1984 A.D. in Islamabad'. He was further of the view that even if this Agreement was signed by the assessee's Representative outside Pakistan various other Representatives and Executives of the Company must have visited this country while securing the contract and later while negotiating Agreement and its actual execution.

(ii)That assessee company themselves have not really contributed to the actual business of providing of well testing services to their client i.e. Pirkoh Gas Company Ltd. They have only acted as go between the purchaser and what has been defined is a sub-contractor i.e. Flopetrol International, actually carried out the services. This point is further illustrated when one notices that the Contract Agreement does not provide for a sub-contract.

The learned AR of the assessee took the position before the ITO, CIT(A) as well as before us that actually what happened was that the assessee got the contract and got it executed through its own subsidiary company in Pakistan which was commissioned to execute this contract on behalf of the assessee as they had the necessary expertise, machinery tools and laboratory equipment to do the same. It was maintained that the subsidiary company being an independent company its establishment in Pakistan, if any, was of no relevance as far as the assessee is concerned. It was once again emphatically argued that the assessee was not maintaining a permanent establishment in Pakistan to execute the job assigned to it and the profits earned were in the nature of industrial or commercial profits and so were exempt under Article III of the Convention. It is pointed out here that when the assessee went into appeal the learned CIT (A) was of the view that it was not Article III of the Convention, which was applicable in this case. According to him in the appellant's case on the basis of the contract, the appellant company was required to provide professional services for production, testing and allied work. Thus, according to him on the very face of it there was no chance, whatsoever, for mixing the same with industrial or commercial activity as envisaged in Article III of the Convention. He was of the view that the Income Tax Officer appears to have been unnecessarily labouring hard to find out whether or not the appellant company had any permanent establishment in Pakistan particularly when they made available copy of sub-contract document arrived at between the appellant company and the Flopetrol Internation SA Panama Corporation with its Registered Office at Panama on the same date i.e. 5th of May, 1994. On the perusal of the said subcontract document it becomes clear as to how production, testing and allied services were actually to be arranged by the appellant company in pursuance of their contract with Pirkoh Gas Company Ltd. He was of the view that the sub-contract had no legal sanctity as far as Pirkoh Gas Company Ltd. was concerned as the same was not admittedly arrived at with the explicit approval of the Pirkoh Gas Company Ltd. neither there was any clause providing for subletting of contract in the original contract deed which provided only for assignment. Besides this according to clause (2) of sub-contract document the arrangement between the two sisters companies namely the appellant and the sub-contractor was to be governed by the laws of England rather than Pakistan because it had been written clearly in clause (2) that "this Agreement shall be governed by the laws of England". Consequently, he was of the view, the sub-contract could be construed only as an arrangement made between two foreign companies outside Pakistan which had no direct bearing on the implementation of the main contract between the appellant company and Pirkoh Gas Company Ltd. From all this he concluded that notwithstanding the position taken by the assessing officer on the one hand and the appellant representative on the other hand the appellant's case clearly falls within the ambit of Article III (4) of the Convention which excludes personal and professional services. It was, therefore, clearly covered by Article XI (i) of the Convention, which reads as under: --

"Income derived by a resident of a contracting state in respect of professional services or other independent activities of a similar character shall be taxable only in the state where such services are exercised."

The learned AR of the assessee insisted that the learned CIT(A) was not justified in bringing in a new dimension to the case which was not the subject matter of appeal before him. To support his contention reference was made to section 132 of the Income Tax Ordinance, 1979 wherein the powers of the Appellate Assistant Commissioner which includes a Commissioner of Appeals have been defined when passing an appeal order. The section is reproduced hereunder for ready reference:

Section 132. Decision in appeal.--(1) In disposing of an appeal, the Appellate Assistant Commissioner may,--

(a)In the case of an order of assessment; -

(i)set aside the assessment and direct the assessment to be made afresh after making such further inquiry as the Appellate Assistant Commissioner may direct or the Income Tax Officer thinks fit;

(ii)confirm, reduce, enhance or annul the assessment; '

(b)in the case of an order imposing penalty, confirm, set aside or cancel such order or enhance or reduce the penalty; and

(c)in any other case, pass such order as he thinks fit.

(2)The Appellate Assistant Commissioner shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has been given a reasonable opportunity of showing cause against such enhancement or reduction, as the case may be.

(3)Where, as the result of an appeal, any change is made in the assessment of a firm or an association of persons or a new assessment of a firm or an association of persons is ordered to be made, the Appellate Assistant Commissioner may authorise the Income Tax Officer to amend accordingly any assessment made on any partner of the firm or any member of the association.

(4)On the disposal of an appeal, the Appellate Assistant Commissioner shall communicate the order passed by him to the appellant and to the ITO and the Commissioner."

The learned AR was very emphatic in insisting that according to section 132(1)(a)(i) the Appeal Commissioner could only set aside the order under the circumstances and direct the Income-tax Officer to make further inquiries and give a finding based thereon because in other eventualities he could only confirm, reduce, enhance or annul the assessment. It was contended that it was neither a case of confirmation of income determined by [TO nor that of reduction, enhancement or annulment because the order of the Income-tax Officer as far as the quantum of income is concerned has been confirmed for a different reason than that given by the Income-tax Officer. His attention was drawn to clause (c) of section 132(1) wherein it had been laid down that "in any other case, pass such order as he thinks fit". The learned AR insisted that it did not give unlimited powers to the Appeal Commissioner because such order which be thinks fit to be passed has to be with reference to the order passed by the Income Tax Officer based on the arguments given by the Income Tax officer in support of his decision. We do not subscribe to this view of the learned AR. The words are "as he thinks fit" and they are not circumscribed by any conditionality. According to our understanding the Appeal Commissioner can confirm an addition made for different reasons given by the Appeal Commissioner and the finding given by the Appeal Commissioner has to be contended on its own merits. When this opinion was conveyed to the learned AR he took the plea that the services rendered by his client cannot be classified as professional services and in support of this he produced a Booklet titled "Flopetrol Johnston Testing--a new approach", According to this report a chart of the set-up has been given on the very first page of this Booklet which is reproduced as under: --

OUR APPROACH TO WELL TESTING

CUSTOMER OBJECTIVES

TEST DESIGN

using interpretation techniques

SELECTION OF EQUIPMENT

surface and downhole

DATA ACQUISITION

surface sensorsreal time monitoring

downhole gaugessurface/downhole sampling

TEST VALIDATION

COMPLETE REPORT

WELL TESTING PACKAGE WELL TESTING PACKAGE WELL TESTING

From this Chart it is very clear how the customer objectives are to be met by the company. Now a further question arises as, to what is the importance of this Chart when the job is actually done by a sub-contractor, which is a sister concern, and not by the assessee itself. In modern international business different corporate bodies are created by the same group which can be assigned to perform specific functions but the control of all the companies lies with the group and the job is actually assigned to one of those subsidiaries which is competent to do the job obviously on behalf of the contracting company. Now there are different ways of executing a job after a contract has been obtained. It can be executed by the contract obtaining company or it can be done through a subsidiary or even it can be got done by some other person who is specialised to do the job. So, one can say that although the actual job has been done by a subsidiary yet it is primarily a discharge of obligation contracted by the company with which the contract awarding authority has entered into agreement for the execution of the job. So, it can be concluded that as far as the contract awarding authority is concerned the job has been executed by the contract receiving company which is the assessee and it is immaterial who actually did the job. Secondly the nature of the services rendered is independent of the person rendering these services. From the Chart it is quite obvious that the services rendered are highly technical and they need not only specialised equipment but also a specialised approach and ultimately a report is submitted to the customer. Whenever such specialised functions are performed by a person or a body of persons or employees of a person who are technically competent to render such services it means that professional services have been rendered. One can say that even in some industrial or commercial activities some professional services may be necessary but even in such an industrial and commercial enterprise those services basically remain to be professional. Different articles dealing with the professional and industrial/commercial activities in the convention have deliberately been introduced to give a different treatment dependent on the type of the activity. Here, as observed before, professional services have been rendered and the CIT (Appeals) is justified in saying that they were taxable under Article XI (1) of the Convention and not under Article III of the Convention. It has to be appreciated that in the case of Article XI (1) it is not essential to have a permanent establishment situated within the taxable territories of Pakistan. To conclude the finding given by the learned CIT (Appeals) holding the income declared to be taxable is hereby confirmed although the reasons given by him are different than the reasons given by the Income Tax Officer. The appeal of the assessee stands rejected. We deem it necessary to further observe that when a sub-contractor executes a job on behalf of the contractor then the permanent establishment maintained by the sub-contractor for executing the job assigned to it becomes the establishment of the contractor for the limited purpose of executing the job. The contract entered into between the principal company i.e. the assessee in this case and the sub-contractor may be governable by the laws of England but this is not of any importance as far as the assessees assessment is concerned because the profits earned by the assessee company have to be taxed under Pakistan law.

As a result the appeal stands rejected.

M.BA./1729/T Appeal rejected.