Income Tax Ordinance (XXXIX of 1979)---

----S. 163---Convention for Avoidance of Double Taxation between Pakistan and Sweden, Art. XIII (i)---Avoidance of double taxation and prevention of fiscal evasion---While supervising the errection of machinery non-resident Swedish nationals were acting for and on behalf of a Swedish Company and were not employees of company in Pakistan---Stay of such persons in Pakistan was less than 183 days---Such persons, held, qualified for the exemption of tax under Art. XIII of the Convention.

Muhammad Amin Butt for Petitioner.

Muhammad Ilyas Khan for Respondent.

Date of hearing: 17th April, 1993.

JUDGMENT

M. MAHBOOB AHMAD, C.J.---This judgment shall dispose of Civil References Nos.30, 31, 32,. 33, 35 and 36 of 1976 in which controversy involved is the same.

2. The petitioners in all these petitions are non-resident Swedish nationals and were in the employment of M/s. Defibrator A.K. Ticlolag of Stockholm, Sweden, which was granted a contract by M/s. Crescent Sugar Mills and Distillery Ltd., Lyallpur (now Faisalabad), for the supply and erection of a plant for manufacture of soft board and semi-hard board in Pakistan. The first agreement in this behalf was executed between the parties on 16th August, 1966, which was supplemented by another agreement, dated 8th September, 1969. According to this agreement, the Swedish Company was to provide services of technicians, to supervise the erection of the machinery. It is common ground between the parties that the petitioners came to Pakistan in pursuance to that agreement and supervised the erection of the plant. It is also not in dispute that the charges for rendering these services were paid by M/s. Crescent Sugar Mills and Distillery Ltd., to the Swedish Company, which in turn paid emoluments to the petitioners.

3. The petitioners in all these petitions filed their returns of income which were processed by the Income Tax Officer, who vide his order, dated 31st May, 1971 was of the view that the petitioners were liable to pay tax on the various amounts received by them in Pakistan like DA., rent free accommodation etc. from the Mills.

4. Before the Income Tax Authorities, it was claimed by the petitioners that by virtue of an agreement for avoidance of double taxation arrived at between the Government of Pakistan and Sweden on 8th March, 1987, the income received by the petitioners, who were Swedish nationals, were exempt from payment of tax. This plea was repelled by the Income Tax Officer, who held the petitioners liable to pay income tax on the emoluments received by them.

5. This order of the Income Tax Officer was challenged by the petitioners by filing appeal which was dismissed by the Income Tax Appellate Tribunal on 12th June, 1974. However, on an application made by the petitioners, the learned Tribunal has referred to this Court the following questions for answer:--

(1) Whether on the facts and in the circumstances of the case the Tribunal rightly held that the assessee technician having not acted on behalf of Swedish Company was not entitled to exemption under Article XIII (i) of the Agreement between Pakistan and Sweden for avoidance of double taxation of Income?

(2) Whether on facts and in the circumstances of the case, the Tribunal was right in holding that the action of the Income Tax Officer in imposing tax was right at law?

6. We have heard Ma. Muhammad Amin Butt, Advocate in support of these petitions and Mr. Muhammad Ilays Khan, Advocate, for the respondent.

7. From the order of the Income Tax Appellate Tribunal, it is clear that the exemption from payment of tax under the agreement for avoidance of double taxation of income has been denied to the petitioners by it on the finding that the petitioners while performing services in Pakistan, were not doing so on behalf of the Swedish Company but were working for M/s. Crescent Sugar Mills and Distillery Ltd., Lyallpur (now Faisalabad) a Company incorporated in Pakistan. In fact, question No. l reproduced above proceeds on this assumption.

8. On a careful consideration of the arguments of the learned counsel and the terms of the agreement between Swedish Company and M/s. Crescent Sugar Mills and Distillery Ltd., we are clearly of the opinion that the findings of the Tribunal, as noted above, are not sustainable being based upon misreading and misinterpretation of the agreement, on account of its failure to consider various clauses of the agreement as a whole. The supplementary agreement, if read in its true perspective leaves no room for doubt that while supervising the erection of machinery the petitioners were acting for and on behalf of a Swedish Company and were not the employees of M/s. Crescent Sugar Mills.

9. The supplementary agreement, dated 8th September, 1969, was executed in contemplation of clause 11 of the earlier agreement, dated 16th August, 1966. It is unfortunate that the learned Tribunal completely omitted to notice clause 8(c) of the supplementary agreement which reads as under:--

"During their stay in the Country of installation the personnel shall still be considered employees of the contractor. The customer shall not be entitled to employ the personnel for other work than was envisaged when the personnel were despatched or than has been subsequently agreed upon between the contractor and the customer. Undertakings or engagements made by the personnel shall not be binding without the written approval of the contractor:"

It is not understandable as to how in the presence of this clear stipulation the technicians could be considered to be employees of the Swedish Company, while staying in Pakistan, the Tribunal could record a finding to the contrary. The other important clause, which has been kept out of consideration by the Tribunal is clause 10 which provides that the responsibility for any damage occurring due to carelessness of the erectors shall be that of Swedish Company. Clearly, if the petitioners were not employees and were not acting for the Swedish company, there would be no question of the liability for their acts falling upon the Swedish Company.

10. We are, therefore, of the view that the findings recorded by the income Tax Appellate Tribunal that the petitioners while performing their duties in Pakistan were not acting on behalf of the Swedish Company are not sustainable.

11. We may also observe that Mr. Muhammad Amin Butt, during the course of his arguments stated that the- salary which was received by the petitioners while performing their duties in Pakistan, was not taxed and it is only with regard to incidental charges that the claim for payment of income tax has been made. The learned counsel for the department was not in a position to dispute the correctness of this statement. We are unable to understand the logic in levying tax on incidental charges, like over-time, daily allowances etc. when no such charge was made by it in respect of the salary drawn by the petitioners.

12. The agreement between Pakistan and Sweden, dated 18th March, 1957 which provides for avoidance of double taxation is not disputed. According to Article 13 of this agreement any individual, who is resident of Sweden is exempt from payment of tax in Pakistan on profit or remuneration received by him in respect of services performed in Pakistan, if his stay in Pakistan, does not exceed 183 days during an assessment year and secondly that services are performed by him for and on behalf of the resident of Sweden. It is not denied that the stay of the petitioners in Pakistan was less than 183 days. In view of the finding that they were performing services for and on behalf of Swedish Company, they clearly qualify for exemption of tax under Article 13.

In view of what has been stated above, we proceed to answer both the questions in negative and against the department.

There shall be no orders as to costs.

M.B.A./L-53/L Reference answered in negative.