I.T.AS. NOS. 1660/LB TO 1663/LB OF 1992-93 DECIDED ON 21ST MARCH, 1993. VS I.T.AS. NOS. 1660/LB TO 1663/LB OF 1992-93 DECIDED ON 21ST MARCH, 1993.
1993 P T D (Trib.) 739
[Income Tax Appellate Tribunal Pakistan]
Before A.A. Zuberi, Accountant Member and Nasim Sikandar, Judicial Member
I.T.As. Nos. 1660/LB to 1663/LB of 1992-93 decided on 21/03/1993.
(a) Income Tax Ordinance (XXXI of 1979)---
-----Ss.163 & 80-AA---Convention for Avoidance of Double Taxation between Pakistan and Switzerland, Arts. II & III---Exemption---Fee for technical service---Industrial or commercial project---World renowned non-resident Swiss Company entered into an agreement with a company in Pakistan to act as consultant for sketch designs, mechanical engineering and to provide professional analyst, engineers, economist and specialist in business administration---Activity of such non-resident company could not be characterised as "technical or professional service" in complete disregard to its nature as a normal commercial endeavour---Such professional services were provided by the said company in the course of their normal business activity-- Predominant nature of the business of company should be the prime factor to determine the character of the income---Income of the company, therefore, vas covered by the terms of the Convention for Avoidance of Double Taxation between Government of Pakistan and Swiss Federal Council and was thus not liable to income-tax in Pakistan. "
In the present case the assessee company of Switzerland entered into an agreement with a Pakistani company to act as consultant for "sketch designs, mechanical engineering and to provide professional analyst, engineers, economist and specialist in business administration; not forgetting that the assessee is a world renowned consultant in the above field. Consequently it is difficult to characterise their activity in Pakistan as "technical (or professional) service" in complete disregard to its nature as a normal commercial endeavour.
The predominant nature of the business should be the prime factor to determine the character of the income.
The fact that the Convention with Switzerland does not exclude consultancy services from the scope of "industrial or commercial profits" and realizing that the business of the assessee is to provide consultancy service as is very much evident from their name the inference is irrestible that the professional services were provided by the assessee in the course of their normal business activity.
It is common knowledge that the Memorandums of companies describe a wide range of activities and these are couched in very generous (and general) terms providing scope to embark upon one (or several) businesses. Such Memorandums proclaim the object (or objects) for which a concern comes into existence. But, whether (or not) a specified activity or business was carried on by an enterprise is a relevant factor of vital import. It is only when a particular activity is actually undertaken that a concern can be treated as carrying on that particular business, profession or vocation.
Mere authorisation in the Memorandum to deal in shares and to invest into shares would not render the surplus arising out of the sale of the shares as liable to tax unless evidence exists that actual trading in shares was undertaken. The character as also the attending circumstances of transactions (or dealings) determine the line of an assessee's business, profession or vocation. Likewise the status and constitution of an undertaking also is a relevant factor in deciding the nature of its income. For example, property rentals in the case of an individual would be taxes as income from "house property" falling under section 19 of the Ordinance but similar rental in the hands of an Insurance Company would be termed as profit and gains of insurance business for classification under "income from business or profession" falling under section 26 of the Ordinance.
Purchase and sale of shares and stocks by an investment holding company cannot be treated as dealings in shares unless there is positive evidence to conclusively establish dealings on a commercial scale. Normally, these are to he taken as capital gains arising out of sale of capital assets, Concerns engaged in providing utility services like gas, electricity or water, can by no stretch of imagination be said to be engaged in any other activity than normal trading or commercial ventures.
The Company of Switzerland entered into an agreement with a Pakistani company to provide consultancy services for preparing (i) feasibility studies, (ii) developing management and information systems, and corporate strategy and (iii) studies and report on human development resources; in respect of a new plant at Wah; and that the assessee were world renowed specialists in the field and possessed required professional skills, personnel and technical resources as part of their normal business activities. Therefore, it was improper to characterise their pursuit of rendering technical services and the remuneration as Fee for Technical Services, in complete disregard of their normal and-purely commercial activity of providing consultancy services which was nothing but a commercial activity with the result that the resultant profits were pure and simple "industrial or commercial profits".
For the reasons assigned hereinabove, there could be no hesitation in accepting the appeals by holding that the income of the company was covered by the terms of the Convention for Advoidance of Double Taxation between Government of Pakistan and the Swiss Federal Council and was thus not liable to income-tax in Pakistan.
Re: Abbott Finance Company SARL 1982 PTD 31; Glaxo Group Ltd.'s case 1992 PTD 6.'36; Vallentine's Law Dictionary (3rd Edn.); 1983 PTD 126; 1980 PTD 322; American Life Insurance Ltd.'s case PLD 1975 Kar. 848; Habib Insurance Co. Ltd. 1988 PTD (Trib.) 140 and 1988 PTD (Trib.) 132 ref.
(b) Income Tax Ordinance (XXXI of 1979)--
----Ss.163 & 80AA ---Convention for Avoidance of Double Taxation between Pakistan and Swiss Federal Council, Arts. III, CIA, 11(1)(iv)---Exemption- Technical Assistance Fee ---Assessee, a non-resident company---No solid ground existed to presume that the assessee had any "permanent establishment" as visualised by the Convention ---Assessee, held, was entitled to exemption.
In the present case activities of Swiss non-resident company were confined only to the preparation of tender documents and their evaluation in the capacity of engineering consultants, the service for which were wholly performed in Switzerland and the remuneration also was remitted in foreign exchange by the Company in Pakistan to Switzerland for payment to the assessee. The overall impact of terms of the Contract Agreement leaves no room for doubt that the assessee had no permanent establishment in Pakistan, having the character of "a fixed place of business in which the business of the enterprise was wholly or partly carried on" or even "an office, a branch, a place of management, a factory, workshop" etc. Of course, some of their personnel visited the office of the Company in Pakistan and inspected sites but surely such occasional visits could not be designated as a "permanent establishment". Even if it was assumed that some sort of establishment existed at certain times: there was no evidence to show that the set up lasted for more than 12 months so as to oust the assessee from the protection provided by sub-clause (iv) of clause (1) to Article 11(i) of the Convention.
No solid grounds existed to presume that the assessee had any "permanent establishment" as visualized by Convention and consequently they were entitled to exemption.
ITA Nos. 533 to .535 (Pb) of 1986-87 and Re: Abbott Finance Co. SARL 1982 PTD 31 ref.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss.163 & 80AA ---Convention for Avoidance of Double Taxation between Pakistan and Swiss Federal Council, Arts. III, cl. 4, II(1)(iv)---Exemption-- Non-resident assessee---Fee for technical services and Industrial or Commercial profits as per Convention with Switzerland---Distinction---Fee for technical services was exempt from tax.
Glaxo Group Ltd.'s case 1992 PTD 636 ref.
(d) Income Tax Ordinance (XXXI of 1979)---
----Ss.80-AA & 163---Convention for Avoidance of Double Taxation between Pakistan and Swiss Federal Council, Arts. 111, cl. 4 & II(1)(iv)---Scope and application of S.80-AA ---Non-resident assessee had performed the services in Switzerland and payments were also received in Switzerland ---Assessee had no permanent establishment in Pakistan---No definite or categorical finding by Assessing Officer was available on record to show that the assessee was covered by the provisions of S.11(1)(b) of the Income Tax Ordinance-- Assessee thus could not be burdened with any tax liability on an income which accrued abroad, was earned abroad and also was received outside Pakistan.
Section 80-AA, Income Tax Ordinance, 1979 would come into operation only when fee for technical services "is received or is deemed to be received by, or accrues or arises, or is deemed to accrue or arise, to a non -resident" in Pakistan. In present case the services were predominantly performed in Switzerland and that the payments (except for reimbursement) were received in Switzerland. Moreover, the assessing officer had nowhere specifically held that the remuneration was received or was deemed to have been received/accrued in Pakistan.
The assessee had no permanent establishment in Pakistan. As a consequence, they would be liable for income received/accrued (or deemed to have been received /accrued) in Pakistan as could be said to be covered by the provisions of clause (b) of subsection (1) of section 11 of the Ordinance. But, there was neither any definite evidence nor categorical finding by the assessing officer in this behalf, hence the assessee non-resident could not be burdened with any tax liability on an income which accrued, abroad, was earned abroad and also was received outside Pakistan. Even if it were so received/accrued, the operation of the terms of the Convention provided an umbrella for its exemption from Pakistani taxes.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.163---Scope and application of 5.163.
Section 163 of the Income Tax Ordinance authorises the Federal Government to enter with Government of any country agreements for the avoidance of double taxation and prevention of fiscal evasion in respect of income liable to tax under the Income Tax Ordinance. When such an agreement is made the provisions of that agreement override the provisions of the Ordinance "notwithstanding anything contained in any law for the time being in- force". Therefore, the relief in respect of tax, the determination of income (accruing or arising or deemed to accrue or arise etc.) are all to be with reference to the terms of the inter-Government agreements known as the Conventions.
Nawaz Khan, I.T.P. for Appellant.
F.D. Qaiser, D.R. for Respondent
Date of hearing: 21st February, 1993.
ORDER
These four appeals have been filed at the instance of a Joint Stock Company of Switzerland having the status of non-resident in Pakistan and carrying on business to provide professional services in the field of corporate affairs, financial analyst, engineers, economist and specialist in business administration. The appeals impugn consolidated order, dated 7-10-1992 passed by the learned Commissioner (Appeals) Lone-III, Lahore in respect of the assessment years 1988-89 to 1991-92.
The learned counsel explained that during the years under consideration, the Appellant rendered services only to the State Cement Corporation (hereinafter referred to as "SCCP") to provide, through separate contracts:
(a) feasibility studies for a new plant at Wah, its designing and the preparation of the tender specification/documents.
(b) management information system and corporate strategy.
(c) studies and reporting on human development resources.
The Appellants were initially issued a certificate by the assessing officer under the proviso to subsection (3) of section 50 of the Income Tax Ordinance, 1979 (herein after called the `Ordinance') read with the Convention for Avoidance of Double Taxation existing between Pakistan and Switzerland (hereinafter called the `Convention'), for deduction of tax at `nil' rate on the fact that they had no `permanent establishment' in Pakistan. However, subsequently this certificate was cancelled resulting in deduction of tax under subsection (3A) of section 50 of the Ordinance. As tax was deducted (at source) by the SCCP, return was filed for the assessment year 1988-89 claiming refund for the reason that the Appellant had no `permanent establishment' in Pakistan hence not liable to any incidence of tax in terms of the Convention with Switzerland. Various explanations were sought and queries made by the assessing officer in reply to which the consistent stand was that the business of the Appellant being rendering of professional services, their income fell for assessment under section 22 of the Ordinance and for the reason that they had no `permanent establishment' of the character spelled out at clause `1' of sub-Article (1) of Article II of the Convention read with Article III thereof, was not subject to tax in Pakistan. This stand was rejected in the year 1989-90 alleging:
The Appellant has a `permanent establishment' in Pakistan.
Receipts have accrued through agreements implemented in Pakistan.
Major part of the income does relate to the activities carried on in Pakistan.
In the succeeding years of 1989-90 to 1991-92 the reasons assigned by the assessing officer for rejection of claim for exemption were that as per provisions of section 80AA of the Income Tax Ordinance "fee for technical services is taxable on a fixed rate of 20% and there being no specific provision in the Convention as respects this source of income, tax was to be levied in accordance with the provisions of UN Model Convention" particularly when in the preceding year the claim for exemption stood rejected. As a result of the above interpretation by the Revenue, the Appellant was subjected to tax at an income of Rs.202,901 in 1988-89 against a claimed loss of Rs.162,122. In 1989-90 against a claimed loss of Rs.573,310, tax @ 20% was charged on Receipts aggregating Rs.18,846,065. In 1990-91 the claimed loss at Rs.654,400 was ignored and Receipts aggregating Rs.13,637,700 were charged to tax @ 20%. Similarly tax was charged charge 20% in 1991-92 on Receipts aggregating Rs.2,864,484. This dispensation was upheld in appeal by the learned Commissioner on the grounds:
(a) Exemption of technical fee is not covered by definition of profits from business exempted by the agreement.
(b) Technical fees are liable to tax under Article III, clause (4) of the Agreement.
(c) Agreement for Avoidance of Double Taxation has a clear-cut distinction between technical fees etc. and industrial and commercial profits derived from a non-permanent establishment; and
(d) There was no case for taxation under the provisions of section 22 of the Ordinance as the Ordinance creates a special charge under section 80AA .in respect of fees for technical services and special legislation abrogates the general hence supremacy of the provisions of section 80AA of the Ordinance.
The learned counsel for the appellant emphasised that section 15 of the Income Tax Ordinance classifies income into five heads, besides the sixth residuary head for "income from other sources". Procedure for computation of income under each of these heads has been separately laid down in various sections of which section 30 deals with the residuary head (i.e. income from other sources) which includes "income of every kind ....if not included in the total income under any other head". In particular, and without prejudice to the generality of the provisions of subsection (1), subsection (2) of section 30 specifies certain incomes which "save as otherwise provided in this Ordinance be chargeable under the head `income from other sources'." Of these five heads (from `a' to `e') clause (b) refers to: Interest, Royalties and Fee for Technical Services. From this the learned counsel developed the argument; Fee for Technical Services, if not chargeable under any other head is to fall for determination under clause (b) of subsection (2) of section 30 of the Ordinance read with subsection (4) of section 31 and rule 23 of the Income Tax Rules. For this particular type of income (i.e. fee for Technical Services) section 80AA was enacted vide Finance Act, 1987 and at the same time Fee for Technical Services was deleted from subsection (4) of section 31 thus leaving only interest and Royalty. The learned counsel pleaded the effect of deletion of `Fee for Technical Services' from subsection (4) of section 31 and insertion of a new section 80AA treating Fee for Technical Services as a separate block for charge of tax at a fixed percentage was in respect of those Fees for Technical services which were chargeable under the head "income from other sources under section 30, which, on and from the assessment year 1987-88 onwards, become chargeable in the manner prescribed in section 80AA but remuneration for those Technical Services having the character of `Income from Business or Profession' continued to be subject: to section 22 hence unaffected by the insertion of section 80AA or amendment in section 31(4) obviously because (i) such income could not be classified as "income from other sources", and (ii) for its determination a method already existed in the Ordinance as per sections 22 to 24. Here, the learned counsel emphasised on the words "save as otherwise provided in this Ordinance" as appearing in section 30(2) of the Ordinance. The learned counsel referred to the correspondence (obtaining on record) particularly letter, dated 12-12-1988 in which the CBR mistakenly treated the appellant as "providing experties in the actual completion of the erection work". It was insisted that in all their communications it was made abundantly clear that the appellant's activities were confined only to "the preparation of tender documents and their evaluation in the capacity of engineering consultants", the services for which were wholly performed in Switzerland and the remuneration also was to be remitted by the SCCP to Switzerland for payment to the appellant in foreign exchange on receipt of invoice from them. It was conceded by the learned counsel that for the performance of the required services, a few visits by the functionaries of the appellant did take place for the purpose of design check (etc.) but no permanent establishment as such was maintained in Pakistan. The learned counsel attempted to rebut the finding by the assessing officer that a permanent establishment, as per sub-clause (iv) of clause (1) of sub-Article (1) of Article 11 of the Convention existed in Pakistan, by elaborating that sub- clause (iv) was further concession to the exemption available to those having no permanent establishment in Pakistan inasmuch as if any establishment was at all set tip for a duration not exceeding 12 months, it was still not to be treated as a `permanent establishment. The learned counsel then took us to the Convention dated l8-10-1960 which continues to be in force. Our attention was drawn to Article III, which grants exemption to "industrial or commercial profits" earned by a resident of one country in the other country, unless the enterprise carried on trade or business through a permanent establishment in the other State. Strength for his argument was sought by the learned counsel from a decision by the Karachi High Court in re: Abbott Finance Co. SARL reported as 1982 PTD 31 where it was held that Technical Fees are to fall under the head "industrial or commercial profits". The learned counsel summed up by submitting that the remuneration for professional services rendered by the appellant were covered under "industrial or commercial profits" assessable under section 22 of the Income Tax Ordinance but due to the appellant having no permanent establishment in Pakistan such "industrial or commercial profits" were exempt under Article III of the Convention. It was prayed that officers below did not fully appreciate all relevant aspects, hence their orders he vacated and the return, as declared, be accepted. The learned DR in his argument vociferously supported the dispensation by the officers below.
We have heard the arguments at length and" Rave scrutinized the record. The points which fall for adjudication are those on which the learned Commissioner (Appeals) laid foundation for rejection of the appeals viz:
(a) Exemption of technical fee is not covered by definition of profits from business exempted by the agreement.
(b) Technical fees are liable to tax under Article 111, clause (4) of the Agreement.
(c) Agreement for Avoidance of Double Taxation has a clear-cut distinction between technical fees etc. and industrial and commercial profit-, derived from a non-permanent establishment; and
(d) There was no case for taxation under the provisions of section 22 of the Ordinance as the Ordinance creates a special charge under section 80AA in respect of fees for technical services and special legislation abrogates the general hence supremacy of the provisions of, section 80AA of the Ordinance.
We now address ourselves to the resolution of each of these issues:
Whether remuneration for professional consultancy services is covered by the term Industrial or Commercial Profits.
The issue whether professional consultancy services would fall under "personal services" and thus not covered by industrial or commercial profits came for consideration before the learned Judges of the Karachi High Court in Glaxo Group Ltd. 1992 PTD 636. This case entailed the interpretation of the provisions of Convention with the United Kingdom. The learned Judges after considering several earlier decisions and the definition of personal services, personal services contract and industrial and commercial profits as contained in Vallentine's Law Dictionary (3rd Edition), finally held as under in paragraph 10 of their judgment:
......Personal services as noticed, under sub-clause (d), the services 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 equipment etc. and under sub-clause (g) the advice to be given is about maintenance of high standard of quality of the specialised product and this advice is rendered through regular inspection by the assessee. As observed these types of advices of services can aptly be 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-clause by the assessee to be 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 companies, nevertheless, such services remained technical services rendered by the assessee:'
Despite the above finding, characterising the services rendered as `technical services', looking to the nature of the personal services, the payment was finally held not to be exempt by the High Court for the reason that the relevant Articles of the Convention with the UK excluded these from the definition of "industrial or commercial profits". It is thus manifest, had the definition of industrial or commercial profits' not excluded Technical Services from the definition, these were normally to be treated as "industrial or commercial profits". It goes to the advantage of the appellant that definition of "industries or commercial profits" at Article III(2) of the Convention between Pakistan and Switzerland does have no such exclusion (as in Convention with the UK. with the result that if the ratio of the Glaxo Group decision (ibid) is follower, the remuneration for professional consultancy services would be covered by the term "industrial or commercial profits". Moreover, the learned Judges of the High Court in their decision reported as 1983 PTD 126 in re: Raleigh Investment Company Ltd. have ruled that it would be incorrect to place an income under one head totally overlooking the predominant nature of the business which should be the prime factor to determine the character of the income. The learned Judges in the course of their judgment elaborated that "commerce" is a word of wide implication which not only means intercourse by, way of trade and tariff but also of all "commercial matters". On this interpretation, the fact that the Convention with Switzerland does not exclude consultancy services from the scope of "industrial or commercial profits" and realizing that the business of the appellant is to provide consultancy services as is very much evident from their name "Holder bank Management & Consulting Ltd. of Switzerland", the inference is irresistible that the professional services were provided by the appellant in the course of their normal business activity.
It is common knowledge that the Memorandums of Companies describe a wide range of activities and these are couched in very generous (and general) terms providing scope to embark upon one (or several) businesses. Such Memorandums proclaim the object (or objects) for which a concern comes into existence. But, whether (or not) a specified activity or business was carried on by an enterprise is a relevant factor of vital import. It is only when a particular activity is actually undertaken that a concern can be treated as carrying on that particular business, profession or vocation. It may be of ' advantage to recall that the learned Judges of the Karachi High Court ruled in re: PICIC Ltd. 1980 PTD 322 that mere authorisation in the Memorandum to deal in shares and to invest into shares would not render the surplus arising out of the sale of the shares as liable to tax unless evidence exists that actual trading in shares was undertaken. The principle which emerges from the authoritative pronouncement by the learned Judges is that the character as also the attending circumstances of transactions (or dealings) determine the line of an assessee's business, profession or vocation. Likewise the status and constitution of an undertaking also is a relevant factor in deciding the nature of its income. For example, property rentals in the case of an individual would be taxed as income from "house property" falling under section 19 of the Ordinance but similar rentals in the hands of an Insurance Company would be termed as profit and gains of insurance business for classification under "income from business or profession" falling under section 26 of the Ordinance. The case-law on the point is familiar enough e.g. (1976) 35-TAX-268 (Kar.) = American Life Insurance Ltd. PLD 1975 Kar. 848 = Habib Insurance Co. Ltd. and 1988 PTD (Trib.) 140 = (disclosure not permitted by law). Further, we have already held in our decision reported as 1988 PTD (Trib.) 132 that purchase and sale of shares and stocks by an investment holding company cannot be treated as dealings in shares unless there is positive evidence to conclusively establish dealings on a commercial scale. Normally, these are to be taken as capital gains arising out of sale of capital assets. Is not it true that concerns engaged in providing utility services like gas, electricity or water, can by no stretch of imagination be said to be engaged in any other activity than normal trading or commercial ventures.
With the aforesaid principles firmly fixed in mind and the Karachi High Court judgment fresh in our memory, we infer that the appellant Company of Switzerland entered into an agreement with a Pakistani Company to act as consultant for `sketch designs, mechanical engineering and to provide professional analyst, engineers, economist and specialist in business administration'; not forgetting that the appellant is a world renowned consultant in the above field. Consequently it is difficult to characterise their activity in Pakistan as `Technical (or professional) service' in complete disregard to its nature as a normal commercial endeavour. This ground for rejection of appeal by the learned Commissioner is consequently overruled.
Technical Fees whether liable to tax under Article III Clause 4 of the Convention.
Although the learned Commissioner has not so mentioned specifically, the reference by him to Article III (4) clearly shows that this finding is based on the presumption that the appellant had a permanent establishment in Pakistan It is surprising that none of the officers below attempted to show the basis and factum to presume that a permanent establishment existed. It appears that as the work continued for more than 12 months, the officers below assumed that the exemption to a permanent establishment as admissible at sub-clause (iv) of clause (1) of Article II(1) was ousted. Here, after a perusal of the terms of contract agreement between the parties, we are inclined to agree with the counsel for the appellant that activities were confined only to the `preparation Of tender documents and their evaluation in the capacity of engineering consultants' the services for which were wholly performed in Switzerland and the remuneration also was remitted in foreign exchange by the SCCP to Switzerland for payment to the appellant. This conclusion gets support from the fact that clause (b) (page 1) of Contract Agreement No.PA-V-1274/88 clearly stipulates "the client (= SCCP) has requested the EC (= the appellant) to provide certain consultancy services required for the project (hereinafter called the `services')". Clause `p' (page 3) of this document defines services to mean "the work to be performed by the EC (= appellant) pursuant to the contract for the purpose of the project as described in Appendix A hereto". The Appendix-A under the sub-head Procedure of the head: Technical concepts, process designs: reads as under:---
"The EC will review all the preliminary studies on the project in FC's home office ....:'
Note.--EC in this case is the Appellant.
In yet another paragraph it is envisaged that the EC's project team will hold discussion of the process, proposals, the technical concepts and the plant lay out with the client at Lahore ." Page A-3 of Appendix A to Tender Agreement No.PA-V-1274/88 it is stipulated:
"The client's team will join the EC in Switzerland, to review, discuss and finalize the tender documents."
Note.--Client in this case is the SCCP
The overall impact of these terms of the Contract Agreement leaves no room for doubt that the appellant had no permanent establishment in Pakistan as mentioned at clause `1' of Article II(1) having the character of "a fixed place of business in which the business of the enterprise is wholly or partly carried on", or even "an office, a branch, a place of management, a factory, workshop" (etc.). It may be true that some of their personnel visited the office of the SCCP and inspected sites but surely such occasional visits cannot be designated as a "permanent establishment". Even if it is accepted for argument's sake that some sort of establishment existed at certain times, there is no evidence to show that the set-up lasted for more than 12 months so as to oust the appellant from the protection provided by sub-clause (iv) of clause (1) to Article II(i) of the Convention. In a somewhat similar situation, where a limited activity was carried on in Pakistan without any permanent establishment of a character envisaged by the Convention, a Division Bench of this Tribunal held (as under) in consolidated order, dated 5-6-1988 on I.T.As. Nos. 533 to 535(PB) of 1986-87 of which one of us (the learned Accountant Member) was the author:
.It is clearly beyond controversy that no such authority was exercised nor do the facts and circumstances placed before us indicate that the appellant's erectors who visited Pakistan could do anything independently except merely to accomplish the business obligations of non-resident enterprise of Canada. In these circumstances in our view, quite identical to a case of Indian jurisdiction in re: Hindustan Shipyard Ltd. = (1977) 109-ITR-158 where the learned Judges held that the scope of services/works connected with the fulfillment of the contract for sale of equipment were merely incidental to such contract and could not attract the charge of tax. In this view of the matter, we hold that the appellant did not have a permanent establishment in Pakistan and therefore, could not be charged to tax on that basis."
Similar was the nature of finding by the Karachi High Court in re: Abbott Finance Co. SARL = 1982 PTD 31 where also in the context of Convention with Switzerland it was ruled:
"(1) So far as the question of exemption of Technical services is concerned, that depends on the application of Article II(l) of the Agreement .... ; and
(2) taxability of such receipt is beyond the scope of Income Tax Act in the face of the aforesaid agreement without the existence of a permanent establishment.
Appreciating the similarity of the facts on the ground, and the identical terms of the Conventions entered into by Pakistan with Canada and with Switzerland, we feel no hesitation in adhering to our verdict that no solid grounds exist to presume that the appellant had any permanent establishment as visualized by Convention and consequently they are entitled to exemption. The conclusion by the learned Commissioner is thus reversed.
Distinction between Technical Fees and industrial or Commercial Profits as per Convention with Switzerland
We have already held above, while dealing with exemption in respect of technical fees, that the Convention with Switzerland is different from the Convention with the United Kingdom inasmuch as while "industrial or commercial profits" in the convention with the UK specifically exclude the `personal services', the one with Switzerland does not separately deal with technical or personal services. This Convention has separate Articles for activities like: Management, control or capital of an enterprise; Operation of aircrafts (etc.); Dividends: Royalty (etc.) but no such independent Article deals with technical or personal services which are to be treated as "industrial or commercial profits" moreso when the decision by the Karachi High Court in Glaxo Group Ltd. = 1992 PTD 636 pronounced a different verdict simply because the agreement with the UK, had specifically excluded the fee `for technical services' from the scope of "industrial or commercial profits". Consequently, the non-exclusion according to the view of the learned Judges, means fee for technical services to fall under "industrial and commercial profits". This ground by the learned Commissioner thus stands eroded.
Applicability of section 80AA of the Income Tax Ordinance
Before examining this issue it appears appropriate to minutely examine the provisions of section 80AA. For facility of quick reference, the provisions of section 80AA are reproduced hereunder:
"80AA. Tax on Income of non-residents from fees for technical services.- (1) Notwithstanding anything contained in this Ordinance, where any consideration by way of fees for technical services referred to in the Explanation to subsection (5) of section 12 is received or is deemed to be received by, or accrues or arises or is deemed to accrue or arise to a non-resident, the whole of such consideration shall be deemed to be income of the non-resident and tax thereon shall be charged at the rate of twenty per cent. of such income."
It is evident that section 80AA would come into operation only when fee for technical services "is received or is deemed to be received by, or accrues or arises, or is deemed to accrue or arise, to a non-resident" in Pakistan. In the case-in-hand it is well established that the services were predominantly performed in Switzerland and that the payments (except for reimbursements) were received in Switzerland. Moreover, it is pertinent, the assessing officer has nowhere specifically head that the remuneration was received or is deemed to have been received/accrued in Pakistan.
Again we have already reversed the finding that the appellant had a permanent establishment in Pakistan. As a consequence, they would be liable for income received/accrued (or deemed to have been received/accrued) in Pakistan as could be said to be covered by the provisions of clause (b) of subsection (1) of section 11 of the Ordinance. But, there is neither any definite evidence nor categorical finding by the assessing officer in this behalf, hence the appellant non-resident cannot be burdened with any tax liability on an income which accrued abroad, was earned abroad and also was received outside Pakistan. Even if it were so received/accrued, the operation of the terms of the Convention provides an umbrella for its exemption from Pakistani taxes. The dispensation by the learned Commissioner, therefore, needs to be reversed.
CONCLUSION
It is not to be lost sight of that section 163 of the Income Tax Ordinance authorises the Federal Government to enter with Government of any country agreements for the avoidance of double taxation and prevention of fiscal evasion in respect of income liable to tax under the Income Tax Ordinance. When such an agreement is made, the provisions of that agreement 'override the provisions of the Ordinance "notwithstanding anything contained in any law for the time being in force". Therefore, the relief in respect of tax, the determination of income (accruing or arising or deemed to accrue or arise etc.) arc all to be with reference to the terms of the inter-Government agreements known as the Conventions. In the adjudication by us hereinabove, we have kept our attention constantly focussed on this subtility of law.
In the foregoing survey of attending circumstances and relying upon decisions by superior Courts as also our own views (ibid), we cannot resist the conclusion that the appellant company of Switzerland known as Holder bank Management and Consults Ltd. entered into an agreement with a Pakistani company known as State Cement Corporation of Pakistan (Pvt.) Ltd. to provide consultancy services for preparing (i) feasibility studies, (ii) developing management and information systems, and corporate strategy, and (iii) studies and report on human development resources; in respect of a new plant at Wah; and that the appellant are world renowned specialists in the field and possess required professional skills, personnel and technical resources as part of their normal business activities. Therefore, it is improper to characterise their pursuit of rendering technical services and the remuneration as Fee for Technical Services, in complete disregard of their normal and purely commercial activity of providing consultancy services which it in our considered view, is nothing but a commercial activity with the result that the resultant profits were pure and simple "industrial or commercial profits".
For the reasons assigned hereinabove, we feel no hesitation in accepting the appeals by holding the income covered by the terms of the Convention for Avoidance of Double Taxation between Government of Pakistan and the Swiss Federal Council thus not liable to income-tax in Pakistan.
M.B.A./2252/TAppeals accepted.