1997 P T D (Trib.) 13
[Income‑tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and S.M. Sibtain, Accountant Member
I.T.As. Nos. 206‑AIKB of 1985‑86, 1512/KB of 1986‑87, 3489/KB of 1987‑88, 3490/HQ of 1987‑88, 1722/KB of 1988‑89 and 604/KB of 1991 92, decided on 10/07/1996.
(a) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S.163‑‑‑Agreement for Avoidance of Double Taxation between Pakistan and Federal Republic of Germany, Art.XVII(2)‑‑‑Avoidance of double taxation and prevention of fiscal evasion‑‑‑Mutual agreement in pursuance of Art.XVII(2) of the Agreement covered the assessment years under consideration as well.
(b) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss.163 & 78‑‑‑Agreement for Avoidance of Double Taxation between Pakistan and Federal Republic of Germany, Art.XVII(2)‑‑‑Avoidance of double taxation and prevention of fiscal evasion‑‑‑Mutual agreement arrived at between the two Governments is applicable to the assessment years under consideration in which the assessments were already completed at the time of arriving at the mutual agreement and the appeals were pending before the Tribunal.
An appeal is continuation of the original proceedings and the Appellate Court is required to decide the issue as prevailing at the time of decision in the appeal. By virtue of the provision contained in section 163 of the Income Tax Ordinance, 1979 the agreement for avoidance of double taxation is not only a part of the international law but it has become a part and parcel of the law of land as well and is, therefore, required to be acted upon in the same manner as a statute law. By virtue of the non abstante clause in section 163 of the Income Tax Ordinance, 1979 the provisions contained in the agreement for avoidance of double taxation and the mutual agreement arrived at in pursuance of the provisions contained in the said agreement, the provisions contained in the main statute has been relegated to the secondary position as the provisions contained in the agreement for avoidance of double taxation and the mutual agreement in pursuance thereof shall have overriding effect.
For fulfilling the commitment made by the Government of Pakistan with the Government of West Germany the Government of Pakistan is further obliged to honour its commitment with the Government of Germany in obedience to the various provisions contained in the Constitution of the Islamic Republic of Pakistan including the Islamic provisions.
The contracting parties are bound to fulfil their contracts and they would remain liable for any contravention obviously both here and hereafter.
The fulfilment of the commitments and obligations referred .to in Holy Qur'an include all kinds of promises, commitments, agreements and treaties. They are inclusive of commitments with the Almighty Allah. The commitment between individuals and the commitments and agreements between the two groups or parties or two Governments. The agreements are inclusive of international agreements, mutual agreements, commercial agreements, financial agreements, participatory agreements, lease, so on and so forth.
The Government of Pakistan is bound to honour its commitment with the Government of Germany in pursuance of the agreement for avoidance of double taxation made under section 163 of the Income Tax Ordinance, 1979 and in pursuance of the provisions contained in the Constitution of the Islamic Republic of Pakistan, in compliance with the Injunctions of Almighty Allah in his Holy Book "Quran" and as a respectable law‑abiding honourable member of the comity of nations.
I.T.A. No.826/KB of 1983‑84; Province of East Pakistan v. Muhammad Hussain Mia PLD 1965 SC 1; Mst. Amina Begum v. Ghulam Dastagir PLD 1978 $C 220; Mian Aziz A. Sheikh v. C.I.T. 1989 PTD 894; CIT v. Sieman A.G. 1991 PTD 488 and Commentary on Holy Qur'an namely Muarif‑ul‑Qur'an by Mufti Muhammad Shaft ref.
(c) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss.78 & 163‑‑‑Agreement for Avoidance of Double Taxation between Pakistan and Federal Republic of Germany, Art. XVII(2)‑‑Avoidance of double taxation and prevention of fiscal evasion‑‑‑Liability of agents representing assessee‑‑‑Issue relating to transfer pricing is not to be dealt with in accordance with the provisions contained in S.79, Income tax. Ordinance, 1979 or on any other consideration of fact or law but has to be dealt with on the basis of mutual agreement arrived at between the Government of Pakistan and the Government of Germany‑‑‑Finding of Department relating to the additions under S.79, Income Tax Ordinance, 1979 were set aside by the Tribunal with direction to the Assessing Officer to decide the issue in the light of directions and observations of the Tribunal.
The issue relating to the transfer pricing is not to be dealt with in accordance with the provisions contained. in section 79 of the Income Tax Ordinance, 1979 or on any other consideration of fact or law but has to be dealt with in accordance with the mutual agreement arrived at between the Government of Pakistan and the Government of Germany as contained in the letter, dated 3rd of March, 1993 by the Federal Minister of Finance, Government of Germany addressed to the Government of Pakistan and in the same manner as acted upon in respect of the Assessment years 1990‑91 to 1993‑94. The findings relating to the additions under section 79 in all the assessment years under appeal were therefore, set aside and the assessing officer was accordingly directed to decide the issue in the light of directions and observations made in the order.
Haseeb‑ul‑Haque, D.R. for Appellant.
Fateh Ali W. Vellani, I.M. Zubairi, Miss Akbar and Mr. Amin for Respondent.
Date of hearing: 18th December, 1995.
ORDER
The above appeals are directed against the order dated 4‑6‑1985, 9‑7‑1986, 24‑8‑'987, 30‑8‑1988 and 16‑3‑1991 by the learned C.I.T.(A), Zone‑II, Karachi relating to the Assessment years 1983‑84, 1984‑85, 1985‑86, 1986‑87, 1987‑88 and 1989‑90. A common objection has been raised on behalf of the department in all the above appeals to the deletion of additions under section 79 of the Income Tax Ordinance, 1979 in the Assessment years 1983‑$4, 1984‑85, 1985‑86 and 1986‑87 and setting aside of the addition in the Assessment years 1987‑88 and 1989‑90 made under section, 79 of the Income Tax Ordinance, 1979.
2. Briefly stated the relevant facts are that the respondent is a multi national pharmaceutical company deriving income from manufacture of various drugs. In all the assessment years under consideration the assessing officer observed that the respondent imported certain raw material from the associated undertaking, M/s. Hoechst Germany, on much higher rates as compared to the rates obtaining in the open market. The assessing officer further observed that the respondent‑company made purchases from associated undertaking on much higher rates as compared to the rates on which same raw materials were imported in Pakistan from other sources by other pharmaceutical companies. Thus according to the assessing officer the respondent/assessee‑company so arranged its course of business with the non resident associated undertaking that lesser profit accrued to the respondent/assessee than were normally expected to arise in the course of business. According to the assessing officer this arrangement attracted the provision of section 79 of the Income Tax Ordinance, 1979. The assessing officer therefore issued notice under section, 62 of the Income Tax Ordinance calling upon the respondent to show cause as to why appropriate addition may not be made by recourse to the provision contained under section 79 of the Income Tax Ordinance, 1979. The respondent company objected to the proposed action inter alia for the following reasons:‑‑‑
(I)The comparison undertaken by the assessing officer between original raw material of a research based company and those of imitators irrespective where these are chemically similar or identical is to be rejected for the following reasons:‑‑‑
(a) The medicines of Hoechst, A.G., Frankfurt, West Germany are marketed throughout the world with the same and uniform high quality, standard for which Hoechst A.G. holds the unrestricted responsibility for quality, safety and all time availability. This sole responsibility cannot be shared by any body else.
(b) The Hoechst, A.G. further undertakes constant, monitoring internationally with regard to the highest standards taking differences of the climatic condition and other influencing factors prevailing in each country which form part of continuous know‑how transfer.
(c) The imitators do not undertake the continuous monitoring and research the matter of judging whether an imitation product is of the same medical standard as the original raw material, is a technical and scientific one.
(II) The provisions contained in by section 79 were not attracted because there was no arrangements whereby the appellant had either no profit or less than the ordinary profit.
(III) The prices of drugs are controlled in Pakistan by the Ministry of Health and the prices are fixed keeping in view the prices structure and cost of the raw material used with particular reference to the efficacy and high quality standard of the raw material used.
3.The above contentions raised on behalf of the appellant were not accepted by the assessing officer and the following additions were made under section 79 in the assessment years under appeal:
| Assessment year | 1983‑84 | 68,74,533 |
| `` | 1984‑85 | 3,29,29,193 |
| `` | 1985‑86 | 1,30,63,503 |
| `` | 1986‑87 | 21,16,952 |
| `` | 1987‑88 | 3,06,22,179 |
| `` | 1989‑90 | 1,91,05,830 |
4. The respondent assailed the above additions in the first appeal. In the Assessment year 1983‑84 the learned C.I.T.(A) held that although the Income Tax Officer was justified in invoking the provisions of section 79 but in doing so he failed to realise that the onus of proving the close connection lay on the I.T.O. concerned and the onus could be discharged by establishing or proving the following facts:‑‑‑
(I)The drug in question was available in sufficient quantity with the other pharmaceutical concerns who had imported the same at a lower value.
(II)The I.T.O. has failed to establish that the quality and strength of the drug available at a lower rate was the same as that of the drug imported by the appellant at a higher price from Hoechst Germany by chemical analysis.
(III) The I.T.O. has also failed to establish that the prices charged by the parent company in Germany from the resident subsidiary in Pakistan are higher than the prices charged from other customers/subsidiaries of the parent company in other parts of the world.
(IV) The I.T.O. has also not stated as to whether the prices quoted by him and the price of the parent company are F.O.B. or C.I. and F price. This is material because there is bound to be difference in the freight rates from Germany and from Hungary.
5. The learned C.I.T.(A) thus deleted the addition under section, 79. For the similar reasons the learned C.I.T.(A) deleted the addition in the Assessment years 1984‑85, 1985‑86 and 1986‑87. In the Assessment year 1987‑88 the same learned C.I.T.(A) set aside the addition for the reason that the I.T.O. has not considered the evidence brought on record by the assessee. The assessing officer was directed to re‑examine the issue and in case the evidence produced by the assessee was not acceptable then concrete finding was directed to be given regarding the same. The assessing officer was further directed‑ to take into consideration the judgment of I.T.A.T. dated 15‑3‑1988 in I.T.A. No.826/K.B. of 1983‑84. Similar direction was given by another learned C.I.T.(A) in respect of the Assessment year 1989‑90. The department feeling aggrieved has assailed the deletion/setting aside of the additions.
6. We have heard Mr. Haseeb‑ul‑Haque, learned representative for the department and M/s. Fateh Ali W.Vellani, Advocate assisted by I.N. Zubair, I.T.P., Miss Akbar, Advocate and Mr. Amin, Advocate. Mr. Haseeb‑ul Haque, the learned. D.R. has assailed the impugned direction of the learned C.I.T.(A) contending that the point in issue has been considered in the case of various pharmaceutical companies * the Tribunal and the addition has been maintained under section 79. He has submitted that the Honourable Sindh High Court and the Honourable Supreme Court of Pakistan have also maintained the additions under section 79. On the other hand Mr. Fateh Ali W. Vellani has submitted that although the additions are not sustainable in facts and law as well but the issue is to be governed in accordance with the provisions contained in the treaty for avoidance of the double taxation between the Government of Pakistan and Federal Republic of Germany read with section 163, of the Income Tax Ordinance 1979 and the subsequent agreements arrived at between competent authorities of the two Governments. He has contended that the issues relating to the transfer pricing and the arrangement envisaged under section 79 of the Income Tax Ordinance, 1979 as it stood before its substitution by Finance Act, 1992 whereby the I.T.O. was empowered to determine the amount of profits which may reasonably be deemed to have accrued to the resident in case he finds that business is carried on between a resident and non‑resident and owing to the close connection between them the course of business has been so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, fall within the purview of fiscal evasion referred to in subsection (1) of section, 163 and determination of income to be attributed to any person resident in Pakistan having any special relationship with a non‑resident referred to in clause(d) of subsection, (2) of section 163. He has maintained that these issues fall within the purview of section, 163 of the Income Tax Ordinance, 1979 which provides for entering into an agreement by the Federal Government with a Government of any country for avoidance of double taxation and the prevention of fiscal evasion with respect to the taxes on income leviable under the Income Tax Ordinance, 1979. He has further submitted that under subsection (2) of section, 163 where any agreement for avoidance of double taxation is made, it shall notwithstanding anything contained in any law for the time being in force have effect in so far as they provide for relief from the tax payable under the Income Tax Ordinance, 1979 and determining the income to be contributed to any person resident in Pakistan having any special relationship with a non‑resident. According to Mr. Vellani by virtue of the non obstante clause in subsection (2) of section 163 the provisions contained in any agreement for avoidance of double taxation and prevention of fiscal evasion shall override the provisions contained in the Income Tax Ordinance, 1979. He has proceeded on to argue that particularly for determining of income to be attributed to any person resident in Pakistan having any special relationship with a non‑resident as is alleged in the present case, the provisions contained in the agreement for avoidance of double taxation shall prevail over the provisions contained in the Income Tax Ordinance, 1979. He has further drawn our attention to the provisions contained in subsection (4) of section, 163 which provides that notwithstanding anything contained in subsections (1), (2) and (3) any such agreement may include provisions for relief from tax for any period before the commencement of the Income Tax Ordinance, 1979 or before the making of the agreement. He has thus contended that the provisions contained in the agreement for avoidance of double taxation may include issues relating to relief from tax for any period before the commencement of the Ordinance or making the agreement and as such any agreement in this behalf entered into between the Federal Government of Pakistan and the Government of any other country (in the present case the Government of Federal Republic of‑Germany) entered into during the pendency of proceeding shall be equally effective in respect of the pending proceedings. In support of his contention he has placed reliance on the judgment of Honourable Supreme Court of Pakistan in case of Province of East Pakistan v. Muhammad Hussain Mia PLD 1965 SC 1 wherein it has been held as follows:‑‑‑
"It remains now to consider only one other point raised on behalf of the Government by the learned Advocate‑General, namely, that since the amended provisions of section, 9(1‑A) came into operation only in 1961 after the lease had been created and forfeiture effected in 1960, the provisions of that subsection would not be available to the respondent. This argument overlooks the fact that the amendments made to section 9 in 1961 were expressly given retrospective effect and that even in 1961 the matter had not been concluded, as the appeal before the Commissioner was decided only on the 15th December, 1961, after the amendments had come into force and the second appeal was not decided by the Member, Board of Revenue, till the 12th of January, 1962. On the filing of the appeal the entire matter became reopened and sub judice and had to be decided in accordance with the law then prevailing."
7. He has further placed reliance on another judgment of Honourable Supreme Court of Pakistan in the case of Mst. Amina Begum v. Mr. Ghulam Dastagir PLD 1978 SC 220 wherein it has been held that, "an appeal being in the nature of re‑hearing of a case the Court in second appeal can consider the effect of legislation which came into force after the disposal of the suit by the trial Court and during the pendency of the appeal in the Appellate Court".
8. The Honourable Supreme Court of Pakistan cited with approval a judgment from the Supreme Court of U.S.A. wherein Hughes, CJ observed as follows:‑‑‑
"We have frequently held that in the exercise of our appellate jurisdiction we have power not only to correct error in the judgment under review but to make such disposition of the case as justice requires. And in determining what justice does require the Court is bound to consider any change, either in fact or in law which has supervened since the judgment was entered."
9. Coming to the provisions contained in the agreement for avoidance of double taxation and prevention of fiscal evasion with respect to the taxes on income between Government of Pakistan and Federal Republic of Germany, Mr. Vellani has drawn our attention to Article XIV(1) which reads as follows:‑‑‑
"The law in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where the express provisions to the contrary is made in this convention."
10. Mr. Vellani has further contended that in the presence of agreement for avoidance of double taxation the provisions contained in section 79 of the Income Tax Ordinance, 1979 are not applicable as the agreement contain in Article IV, a provision regulating the taxation of profits accruing to an enterprise in Germany and its subsidiary in Pakistan where conditions are imposed between them which differ from those which would be made between independent enterprise. Article IV of the agreement for avoidance of double taxation between Pakistan and Federal Republic of Germany reads as follows:‑‑‑
"Article IV
Where‑‑‑
(a)the person carrying on enterprise of one of the territories participates directly or indirectly in the management, control or capital of an enterprise of the other territory, or
(b)the same person participates directly or indirectly in the management, control or capital of an enterprise of one of the territories and an enterprise of the other territory, and in either case, conditions are made or imposed between the two enterprises, and in either case commercial or financial relations, which differ from those which would be made between independent enterprises, then any profits which would but for those conditions have accrued to one of the enterprises but by reason of those conditions have not so accrued may be included in the profits of that enterprise and taxed accordingly."
11. However, the main thrust of argument by Mr.Vellani is not on the application of Article IV of the Agreement between Pakistan and Germany but on Article XVII of the said Agreement which provides that where a resident of one of the territories shows proof that the action of tax authorities of the contracting State has resulted or will result in double taxation contrary to the provisions of this Convention, he shall be entitled to present his case to the State of which he is resident and competent authority of the State to which claim is made shall endeavour to come into an agreement with the competent authority of the other State and that for the settlement of difficulties or doubts in the interpretation or application so this convention or respect of its relation to the convention of the contracting State with third State, the competent authorities of the contracting States shall reach a mutual agreement as quickly as possible. Article XVII of the said Agreement is as follows:‑‑‑
"Article XVII
(I)Where a resident of one of the territories shows proof that the action of the tax authorities of the contracting States has resulted or will result in double taxation contrary to the provisions of this Convention, he shall be entitled to present his case to the State of which he is a resident. Should his claim be deemed worthy of consideration the competent authority of the State to which the claim is made shall endeavour to come to an agreement with the competent authority of the other State with a view to avoidance of double taxation.
(2)For the settlement of difficulties or doubts in the interpretation or application of this Convention or in respect of its relation to Convention of the contracting States with third States the competent authorities of the contracting States shall reach a mutual agreement as quickly as possible."
12. Mr. Vellani has submitted and it is admitted fact that Hoechst Germany is the principal of Hoechst Pakistan Ltd. The appellant Hoechst Pakistan Limited is subsidiary and the Hoechst Germany is controlling the management of the Hoechst Pakistan Limited, therefore the issue if the conditions imposed between the two enterprises in their commercial or financial relation depleted the profits of Hoechst Pakistan Ltd. feel within the purview of Article IV of the Agreement and as such in order to settle the difficulties or doubts in the application of Article IV of the Agreement for avoidance of double taxation the competent authorities of the contracting States by virtue of the provisions contained in Article XVII(2) reached to a mutual agreement and now the entire issue is to be governed under the said Agreement. Mr. Vellani has produced in this behalf a letter dated 3‑3‑1993 from the Government of Germany to the Government of Pakistan which reads as follows:‑‑‑
Der Bundes minister der finanzen5300 Bonn 1
IV C 6 ‑ S 1301 Pakistan ‑ 17/92
Graurheindorfer
Strasse 108
Telefon: (02281 682‑4637)
Fax (02281)682‑2555
Tlx: 228354 = BMF
Mr. M. Iqbal Farid, Central
Board of Revenue, Government
of Pakistan, Islamabad .
Pakistan 3 March 1993.
Subject: Application of our Double Taxation Agreement;
In this case:Mutual agreement procedure concerning Hoechst
A.G., Frankfurt, and Hoechst Pakistan Ltd.,
Karachi.
Ref:Our mutual agreement talks on the occasion of the negotiations on revising the
German, Pakistan tax treaty held in Bonn from 28 September to 2 October 1992.
Dear Mr. Farid,
The result of the mutual agreement talks we had in Bonn on 29 September 1992 was that the transfer prices Hoechst A.G. charges foreign group member companies for metamizol and glibenclaimed should be compared with the prices it charges Hoechst Pakistan Ltd. If the prices charged group member companies in five countries which are comparable to Pakistan are higher than the prices charged by Hoechst A.G. to Hoechst Pakistan Ltd. Pakistan agrees to refrain from correcting its tax notices as regards the transfer prices.
In the meantime the Federal Finance Office has conducted the necessary audits at Hoechst A.G. and presented the figures.
The point of departure for the comparison was the prices charged by Hoechst A.G. in rupees according to the tax notices of Pakistan's Tax Administration.
The prices Hoechst charges foreign group member companies in other countries comparable to Pakistan were compared with the prices ascertained by Pakistan's tax administration. An examination of Hoechst A.G.'s records for the period 1982‑1990 gave the following results:‑‑‑
| The transfer prices charged Foreign group member companies are the same or higher than the prices for Pakistan | For metamizol For glibenclaimed |
| 1982 | | in 13 countries |
| 1983 | in 9 countries | -------- |
| 1984 | in 13 countries | in 14 countries |
| 1985 | in 13 countries | in 12 countries |
| 1986 | in 11 countries | in 11 countries |
| 1987 | in 18 countries | in 10 countries |
| 1988 | in 19 countries | -------- |
| 1989 | in 16 countries | -------- |
| 1990 | in 16 countries | -------- |
This result shows that in accordance with the agreement reached by us in our mutual agreement talks on 29 September, 1992 no correction of the transfer prices for the years 1982‑1990 should be made. In fact, the number of countries in which the transfer prices are the same or higher than those charged Hoechst Pakistan Ltd. far exceeds the number five mentioned in the mutual agreement talks on 29 September, 1992.
The requirements set for a solution of the case at our mutual agreement talks have thus been met. I should be grateful if you would instruct the competent tax authorities to implement the agreement procedure as described above. Would you please send me a confirmation that the case has been dealt with.
Yours sincerely,
For the Minister
13. He has further placed reliance on the letter, dated 27‑3‑1993 from the Second Secretary, C.B.R., addressed to the R.C.I.T., Southern Region, Karachi which reads as under;
GOVERNMENT OF PAKISTAN
CENTRAL BOARD OF REVENUE
C.No.2(18)I.T.‑2/75 Islamabad, the 27th March 1993
From; Mr. Imtiaz Anwar, Second Secretary (Int. T‑I)
To The Regional Commissioner of Income Tax, Southern Region, Karachi.
Subject:German‑Pakistan Convention M/s. Hoechst A.G., Frankfurt, Am Main M/s. Hoechst Pakistan Limited
I am directed to refer to your. Letter No.Cos.II/Jud‑1/50(3)/ 1991‑92/3055, dated 21‑3‑1992, on the subject and to say that the dispute about transfer pricing in the case of M/s. Hoechst Pakistan Limited came up for detailed discussion between Pakistan and German sides during the last round of negotiations held in Bonn for concluding a revised bilateral tax convention. Various proposals for resolving the issue were considered and it was finally decided that if the German competent authority certified that M/s. Hoechst A.G. Frankfurt was indeed selling the same products as sold to M/s. Hoechst Pakistan Limited at about the same prices to other country group companies as was being charged from Hoechst Pakistan Ltd. the tax authorities in Pakistan would accept the said verification to be valid evidence against any transfer pricing malpractice in respect of the said products. The German side has now certified (copy enclosed) that no exceptional high price was being charged by Hoechst A.G. Frankfurt from Hoechst Pakistan Limited.
2. In view of this development; the present position of the case vis‑a vis the appeal proceedings may please be conveyed to the Board alongwith your views about the course of action which may now be adopted to resolve the matter.
(Sd. )
(Imtiaz Anwar),
Second Secretary (Int.T‑I)
Encl: As above.Tel: 812899
OFFICE OF THE
REGIONAL COMMISSIONER OF INCOME TAX
SOUTHERN REGION, KARACHI
No.: RCIT‑Jud‑110/23/V‑2193/2501 Dated 4‑4‑1993
Forwarded to the Commissioner of the Income Tax, Companies‑II, Karachi for immediate compliance.
(Sd.),
(Muhammad Saleem) Staff Officer‑I
14. He has next placed reliance on the letter dated 20‑6‑1993 from the Second Secretary, C.B.R. to the R.C.I.T. of Southern Region, Karachi which is as under:‑‑‑
"GOVERNMENT OF PAKISTAN
CENTRAL BOARD OF REVENUE
C.No.2(18)IT‑2/76 Islamabad, the 20th June, 1993
From: Mr. Imtiaz Anwar, Second Secretary (Int. T‑I)
To;Mr. A.S.K. Sheeram, Regional Commissioner of Income Tax Southern Region Karachi
Subject:‑‑German‑Pakistan Convention M/s. Hoechst A.G Frankfurt AM Main M/s. Hoechst Pakistan Limited
I am directed to refer to your Letter No. Cos.II/1ud‑1/50(3)/ 1992‑93/2721 dated 8‑6‑1993, on the subject and to say that no evidence contrary to the certificate given by the German Tax authorities that no exceptionally high prices were being charged by Messrs Hoechst A.G. Fankfurt from Messrs Hoechst Pakistan Limited regarding Assessment year 1990‑91 is available with us so far. Therefore, assessment for that period may kindly be completed honoring the aforesaid certificate. However, assessment for the subsequent years may be completed on the basis of merit in the light of concrete evidence available with the department.
(Sd.)
(Imtiaz Anwar),
Second Secretary (Int. I‑I
Tel: 812899. "
15. Mr. Vellani has further stated that the Government of Pakistan honoured the agreement between the competent authorities of the two countries and issued directions vide letter dated 4‑12‑1993 to complete the assessment for the Assessment years 1990‑91 to 1993‑94 in accordance with the certificate given by*the German tax authorities. However, the F.B.R. refused to honour the agreement in respect of the Assessment years 1983‑84 to 1989‑90 for the reason that the appeals were pending before the Income Tax Appellate Tribunal. The only concession given in respect of these years was that the decision given by the I.T.A.T. shall be abided by the Income Tax Department and no further appeal shall be filed. A letter from C.B.R. is reproduced below:‑‑‑
GOVERNMENT OF PAKISTAN
MINISTRY OF FINANCE, REVENUE AND ECONOMIC
AFFAIRS (REVENUE DIVISION)
C.No.2(18)IT‑2/75‑PT‑I Islamabad, 4‑12‑1993
From:Mr. Ahmed Khan Chief (Direct Tax Policy),
ToMr. Shabir Ahmed Hashmi, Regional Commissioner
of Income‑tax Southern Region,
Karachi ,
Subject: M/s. Hoechst Pakistan Limited
Reference above subject. In continuation of its letter of 20th June, 1993, C.B.R. desired that unless there is any evidence contrary to the certificate given by the German tax authorities regarding the excessive charge of inter‑company transfer prices by M/s. Hoechst A.G., Fankfurt from Messrs Hoechst Pakistan Limited regarding Assessment years 1990‑91 to 1993‑94, the certificate from German tax authorities may be accepted and the assessments completed in the light thereof. The assessment proceedings may be taken‑up right way, and C.B.R. informed of the assessment results soon after the assessments are completed.
2. With regard to the departmental appeals before the I.T.A.T. in respect of the Assessment years 1983‑84 to 1989‑90, it has been decided that the Regional Commissioner of Income Tax, Southern Region may immediately take‑up this matter with the I.T.A.T. and request for priority hearing of the cases. In case any difficulties are faced, Board may be informed so that Law Division may be moved to direct the I.T.A.T. for priority fixation of the cases for hearing.
3. Further, it has been decided that Department will abide by the I:T.A.T. decision and will not file any appear against such orders
(Sd.)
(Ahmad Khan)
Chief (DTP).
16. Government of Germany took notice of the directions given by C.B.R. vide. letter dated 4‑12‑1993 and addressed a letter to the Government of Pakistan on 21‑4‑1995 which is as under:‑‑
Bundesminsterium der Finanzen
IVC6‑5 1301 Pak‑2/95 53003 Bonn
Telefon (0228)682
Telefax(0228)682‑4420
Telex 22850701 BMF
TelefaxNo.009251821941
Central Board of Revenue,
Government of Pakistan, Islamabad,
Pakistan.
Application of the German‑Pakistan double taxation agreement; mutual agreement procedure concerning Hoechst A.G.
1 enclosure
Dear Mr. Farid,
In the mutual agreement talks which were conducted in Bonn on 29 September 1992, we agreed on a solution in the case of Hoechst AF for the years 1982 to 1988, which I again summarised in my letter of 3 March 1993 (enclosure).
Although in my letters of 4 June 1993, 28 October 1993, 26 January 1994 and 9 June 1994 I reminded you of the implementation of the solution we had agreed on, according to Hoechst A.G. the solution has to date still not been put into effect. Nor have you advised me of any reasons which might stand in the way of the implementation of this solution.
In the meantime I have been informed that the Pakistan revenue administration is continuing appeal proceedings against Hoechst A.G. before the Income Tax Tribunal concerning the problems on which we already reached final agreement in 1992. In the German view‑‑‑and in line with international practice‑‑‑one of the fundamental features of a solution reached in a mutual agreement procedure is that any appeals at law which may be pending concerning the same problem are withdrawn. Since Hoechst A.G. is willing for this to be done, the Pakistan revenue administration should also not insist any more of conducting these appeal proceedings and should instead implement the solution we agreed upon in the mutual agreement procedure.
I should be grateful if you would confirm to me by telefax (telefax No.2 28/6 82‑30 3) that you have received this letter and that you continue to be willing to keep our agreement of 29 September,
Yours sincerely For the Minister (Sd.)
17. Mr. Fateh Ali Vellani has submitted that a perusal of the above correspondence shows that the mutual agreement talks on the occasion of negotiations for revising the German‑Pakistan Tax Treaty held in Bonn from 28th September, 1992 to 2nd of October, 1992 were not restricted to the Assessment years 1990‑91 to 1993‑94 but the agreement covered the issue pertaining to the earlier years as well and, therefore, Finance Minister of the Government of Germany specifically stated in his letter dated 3rd March, 1993 that, "this result shows that in accordance with the agreement reached by us in our mutual agreement talks on 29th September, 1992 no correction of the transfer prices for the year 1982‑90 should be made". Mr. Vellani has submitted that the C.B.R. has never denied or refuted the assertion on behalf of the Government of Germany that the agreement was applicable to the assessments from the Assessment year 1982 onward. Mr. Vellani has vehemently argued that the C.B.R. unilaterally acted upon the agreement for the Assessment years 1990‑91 to 1993‑94 while has backed out from the agreement for the Assessment years 1983‑84 to 1989‑90 which is not permissible in law. He has contended that by virtue of the provisions contained in section, 163 the agreement for avoidance of double taxation and the subsequent mutual agreement between the competent authorities in pursuance of the provisions contained in Article XVII (2) of the said Agreement has for treaty avoidance of double taxation, become part and parcel of the law of land and is binding for all intents and purposes on the C.B.R. and all other authorities ‑subordinate to it. Mr. Vellani has argued with sufficient force that the conduct of C.B.R. whereby the agreement arrived at by its own official has been acted upon in part in respect of the Assessment year 1990‑91 onward and backing out from the commitment in respect of the earlier assessment years although specifically referred in the letter, dated 3rd of March, 1993 by the Finance Minister, Government of Germany in the fetter addressed to the C.B.R. intimating the terms of mutual agreement (which has never been denied or refuted by the C.B.R.) is not in conformity with the conduct of a civilized law‑abiding and Hon'ble Member of the comity of nations which Pakistan is. He has contended that such conduct on the part of C.B.R. would adversely affect the credibility of the Government of Pakistan in its international transactions and commitments, which is not in the larger interest of the State. Mr. Villani has very vehemently argued that in. the presence of an agreement which can be very clearly read from the correspondence between the Government of Germany and the Government of Pakistan and the C.B.R. officials to the subordinate income‑tax authorities, instead of considering in issue in the light of any other fact of law the income‑tax authorities may be directed to accord same treatment to the assessments under appeal as accorded to the Assessment years 1990‑91 to 1993‑94, on the basis of certificates from the German Tax Authorities as agreed upon in the mutual agreement.
18. The learned D.R. has submitted that the Government of Pakistan has not backed out from its commitment and has accepted the same in respect of the Assessment years 1990‑91 to 1993‑94. He has submitted that though the mutual agreement was not applicable to the Assessment years 1983‑84 to 1989‑90, the C.B.R. has directed the department not to file any further appeals against the order of Income Tax Appellate Tribunal and has left the issues to be decided by the Income Tax Appellate Tribunal on merits in accordance with the law as in force in Pakistan.
19. We have very carefully considered the contentions raised by the learned representatives for the parties and the material produced before us. We have already reproduced the relevant provisions from the agreement for avoidance of double taxation and prevention of fiscal evasion and the correspondence relied upon the parties. It would be appropriate to reproduce section 163 of the Income Tax Ordinance, 1979 as well for appreciating the contentions raised before us. Section, 163 of the Income Tax Ordinance, 1979 reads as follows:‑‑‑
"163. Avoidance of double taxation and prevention of fiscal evasion.‑‑(I) The Federal Government may enter into an agreement with the Government of any country for the avoidance of double taxation and the prevention of fiscal evasion with respect of taxes on income leviable under this Ordinance and under the corresponding law in force in that country, and may, by notification in the official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where any agreement is made in accordance with subsection, (1), the agreement and the provision made by notification for implementing the said agreement shall, notwithstanding anything contained in any law for the time being in force, have effect in so far as they provide for:‑‑
(a)relief from the tax payable under this Ordinance; or
(b)determining the income accruing or arising or deemed to accrue or arise, to non‑residents from sources within Pakistan; or
(c)where all the operations of business or profession are not carried on within Pakistan, determining the income attributable to operations carred on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of such persons, including their agents, branches or establishments in Pakistan; or
(d)determining the income to be attributed to any person resident in Pakistan having any special relationship with a non‑resident; or
(e)exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding law in force in that other country.
(3)The provisions of the Seventh Schedule shall have effect where an agreement provides that the tax payable under the laws of the country concerned shall be allowed as a credit against the tax payable in Pakistan.
(4)Notwithstanding anything contained in subsections, (1), (2) and (3) any such agreement may include provisions for relief from tax for any period before the commencement of this Ordinance or before the making of the agreement."
20. In view of the fact that the agreement between the Federal Minister of Finance, Government of Germany and Member, C.B.R., Government of Pakistan, has not been denied before us the controversy has been narrowed down. The first point which requires our consideration is whether the mutual agreement between the Federal Minister of Finance, Government of Germany and the Member C.B.R. was restricted to the Assessment year 1990‑91 onward or it covered the assessment years under consideration as well. The first letter in this behalf produced on record is dated 3rd of March, 1993 wherein the Federal Minister of Finance, Government of Germany has specifically dealt with the issue of transfer pricing for the years 1982‑90 and the contents of this letter have never been denied by the C.B.R., therefore, we find no hesitation in holding that the mutual agreement in pursuance of Article XVII (2) of the agreement for avoidance of double taxation covered the assessment years under consideration as well.
21. The second point for consideration is if the mutual agreement arrived at between the two Governments is applicable to the assessment years under consideration in which the assessments were already completed at the time of arriving at the mutual agreement and the appeals were pending before the Tribunal. We have already referred to the rulings relied upon by Mr. Vellani according to which an appeal has been held to be continuation of the original proceedings and it has been held by the Hon'ble Supreme Court of Pakistan that the Appellate Court is required to decide the issue as prevailing at the time of decision in the appeal. We are persuaded to agree with the contention of Mr. Vellani that by virtue of the provision contained in section 163 of the Income Tax Ordinance, 1979 the agreement for avoidance of double taxation is not only a part of the international law but it has become a part and parcel of the law of land as well and is, therefore, required to be acted upon in the same manner as a statute law. By virtue of the non obstante clause in section 163 of the Income Tax Ordinance, 1979 the provisions 8 contained in the agreement for avoidance of double taxation and the mutual agreement arrived at in pursuance of the provisions contained in the said agreement, the provisions contained in the main statute has been relegated to the secondary position as the provision contained in the ‑ agreement for avoidance of double taxation and the mutual agreement in pursuance thereof shall have overriding effect.
22. In addition to the reasons assigned above for fulfilling the commitment made by the Government of Pakistan with the Government of West Germany the Government of Pakistan is further obliged to honour its commitment with the Government of Germany in obedience to the various provisions contained in the Constitution of the Islamic Republic of Pakistan including the Islamic provisions. The Hon'ble Supreme Court of Pakistan in the case of Mian Aziz A. Sheikh v. C.I.T. 1989 PTD 894 observed as follows:
"Article 2A read with Objectives Resolution of the Constitution according to some jurists, as well as some decided cases was enacted on account of an observation in the judgment of this Court in the case The State v. Ziaur Rehman and others PLD 1973 SC 49.
According to others it always formed part of the Constitutional set up of Pakistan. Be that as it may, the present position is that Article 2A read with Objectives Resolution, the Principles of Policy (which are being enforced by the superior. Courts in an indirect manner (See Miss Benazir Bhutto's case (PLD 1988 SC 416); Chapter 3A, Part VII of the Constitution, vis‑a‑vis the functioning of the Federal Shariat Court and the Shariat Appellate Bench of this Court, and Article 227, and other provisions of the Constitution relating to Islamisation are being interpreted and applied in various situations. This Court no doubt has, for the time being, left open the final verdict on the combined effect of these Constitutional provisions and mandates and other parts of our Constitutional setup in so far as the question of Islamisation is concerned‑‑‑See Sardar Ali's case. PLD 1988 SC 287.
Nevertheless in individual cases wherever necessary, .the superior Courts are already engaged in the process of interpretation and adjudication in this field. The judicial wisdom is accumulating; experience is being gained and considerable discussion in judgments and otherwise is going on. All this would ultimately assist the Supreme Court in rendering final verdict/s in this behalf regarding the action and operation of these provisions. That, however, does not mean that wherever a provision is clear and its effect is clear it would not be so stated and would not be acted upon.
Article 227(1) not only requires that all existing laws shall be brought in conformity with the injunctions of Islam but it also commands as a mandate that no law shall be enacted which is repugnant to such injunctions. It is command to all law‑making bodies and functionaries. It will be anomalous to assume that although in Article 227 there is a command to all the legislative bodies not' to enact any law which is repugnant to Islamic injunctions, nevertheless it permits the functionaries of the State at all levels to go on enacting rules like those of evidence which have the force of law and which are repugnant to the injunctions of Islam. It is in this context that the earlier made remarks about the conduction of State functionaries in Pakistan get illustrated, i.e. none would ever assert that he has power or would lay down a rule having the force of law, which is repugnant to Injunctions of Islam. In the context of the present case, neither the Legislature under the command contained in Article 227(1), has the power to enact a law in any field including those relating to taxes, which is repugnant to Injunctions of Islam; nor any other functionary including the Income Tax Authorities has any such power to lay down any un‑Islamic rule which has a force of law.
It is true that with regard to the statutory enactments Article 227 in its clause (2) commands that effect shall be given to the afore -discussed negative command in clause (1), only in the manner provided in this part (Part IX) and thus it may be argued, it is also applies to Statutory Rules, but, this prohibition in clause (2) of Article 227 does not apply to decisions by functionaries of State where in the judicial, quasi‑judicial or other spheres involving exercise of judgment, as distinguished from exercise of law-making or statutory rule‑making authority, they take decisions. In other words whatever a decision is contained in any such judgment of any such functionary which lays down a rule of law or declares so as a rule of law the superior Courts, shall be within their competence in a properly instituted proceedings to strike in down both under the general mandate contained in clause (1) of Article 227 as well as under Article 2A read with the Objectives Resolution.
This is in addition to the reasoning which prevailed in the case Muhammad Bghir v. The State PLD 1982 SC 139 which had approved the judgment of the Lahore High Court in the case of Haji Nazim Khan v. Additional District Judge, Lyallpur and others PLD 1976 Lahore 830. The approach then was that although it was not possible for the Courts to enforce Islamic law in those fields which were fully occupied by statutory dispensation, yet, it was not only open to the Courts but they were duly bound to apply common law of Islam its jurisprudence and philosophy, in fields which were not occupied by statutory dispensation. Various examples of those subjects are enumerated in the concluding part of the judgment of Haji Nazim's case. What was held in Muhammad Bashir's case and for that matter Haji Nazim's case, can now be further supported with reference to Articles 2A and 227(1) of the Constitution as also, what has been held and enforced from amongst the principles of policy by this Court, in the case of Miss Benazir Bhutto."
23. The Hon'ble Supreme Court again dealing with the subject in the case of C.I.T. v. Siemn A.G. 1991 PTD 488, held by placing reliance on the Injunctions of Quran contained in Verse (1) of Chapter Maida in the Holy Qur'an that the contracting parties are bound to fulfil their contracts and that C they would remain liable for any contraventions obviously both here and hereafter. Verse(1) of Chapter Maida of the Holy Qur'an reads as follows:‑‑
(O ye who believe!(Translation by Abdullah Yousuf Ali).
Fulfil all obligations.
24. While commenting on the above verse in the Holy Qur'an Abdullah Yousuf Ali has observed as follows:
"This line has been justly admired for its terseness and comprehensiveness. Obligations: uqad: the Arabic word implies so many things that a whole chapter of commentary can be written on it. First, there are the divine obligations that arise from our spiritual nature and our relation to God. He created us and implanted in us the faculty of knowledge and foresight, besides the intuition and reason which He gave us. He made Nature responsive to our need and His Signs in Nature are so many lessons to us in our own inner life; He further send Messengers and Teachers, for the guidance of our conduct in individual, social, and public life. All these gifts create corresponding obligations which we must fulfil. But in our own human and material life we undertake mutual obligations, express and implied. We made a promise; we enter into a commercial or social contract; we enter into a contract of marriage; we must faithfully fulfil all obligations in all these relationships. Our group or our State enters into a treaty; every individual in that group or State is bound to see that as far as lies in his power, such obligations are faithfully discharged.. There are tacit obligations; living in civil society, we must respect its tacit conventions unless they are morally wrong and in that case we must get out of such society. There pre tacit obligations in the characters of host and guest, wayfarer or companions, employer or employed, etc., etc, which every man of Faith must discharge conscientiously. The man who deserts those who need him and goes to pray in a desert is a coward who disregards his obligations. All these obligations are inter‑connected. Truth and fidelity are parts of religion in all relations of life."
25. A great Islamic Scholar of the recent times Mufti Muhammad Shafi in his well‑known commentary on Holy Qur'an, namely Muarif‑ul‑Qur'an has observed while explaining the above verse in the Holy Qur'an that thousands of pages can be written in explaining and elaborating the contents of the verse. He has observed that the fulfilment of the commitment ands obligations referred to in the above verse include all kinds of promises, commitments, agreements and treaties. They are inclusive of commitments with the Almighty Allah. The commitments between individuals and the commitments and agreements between the two groups or parties or two Governments. The agreements are inclusive of international agreements, mutual agreements, commercial agreements, financial agreements, participatory agreements, lease, so on and so forth.
26. The above observations by the two well‑known Scholars of the Islamic law leaves no manner of doubt in our mind that the Government of Pakistan is bound to honour its commitment with the Government of Germany in pursuance of the agreement for avoidance of double taxation E made under section 163 of the Income Tax Ordinance, 1979 and in pursuance of the provisions contained in the Constitution of the Islamic Republic of Pakistan, in compliance to the Injunctions of Almighty Allah in his Holy Book "Qur'an" and as a respectable law‑abiding honourable Member of the comity of nations.
27. For the foregoing reasons it is held that the issue relating to the transfer pricing is not to be dealt with in accordance with the provisions contained in section 79 of the Income Tax Ordinance, 1979 or on any other consideration of fact or law but has to be dealt with in accordance with the mutual agreement arrived at between the Government of Pakistan and the Government of Germany as contained in the letter dated 3rd of March, 1993 E by the Federal Minister of Finance, Government of Germany addressed to the Government of Pakistan and in the same manner as acted upon in respect of the assessment years 1990‑91 to 1993‑94. The findings relating to the additions under section 79 in all the assessment years under appeal are, therefore, set aside and the assessing officer is directed to decide the issue in the light of directions and observations made above.
28. Now we take up the other issues agitated in the grounds of appeal on behalf of the department. In the Assessment year 1983‑84 the second objection is to the setting aside of finding relating to the bad debts. With the consent of learned representatives for the parties the impugned directions of learned C.I.T. (A) is hereby maintained.
29. The next objection is to the setting aside of finding relating to exchange loss. The impugned direction of learned C.I.T.(A) is maintained with the consent of learned representatives for the parties.
30. The department has further objected to the setting aside of issue relating to excess perquisites. The learned counsel for the assessee has conceded that the I.T.O. rightly made the addition under the head excess perquisites. The impugned direction of learned C.I.T.(A) is, therefore, vacated and the addition as made under the head excess perquisites by the I.T.O. is hereby restored.
31. The next objection is to the setting aside of issue relating to bad and doubtful debts. The impugned direction of learned C.I.T.(A) is maintained with the consent of learned representatives for the parties.
32. The last objection is to the direction of learned C.I.T.(A) for giving opportunity to the appellant for completing formalities as required under the law for the purpose of availing tax credit under section 107. We do not find any reason to interfere with the impugned direction of learned C.I.T.(A) which is hereby maintained.
33. In the Assessment year 1984‑85 the only other objection is to the setting aside of issue relating to tax credit under section 107. The direction is maintained with the consent of learned representatives for the parties. In the Assessment year 1985‑86 the only other objection is to the deletion of addition made under section, 24(b) of the Income Tax Ordinance, 1979. The objection is not pressed by the learned representative for the department. The impugned finding of learned C.I.T.(A) is, therefore, maintained. In the Assessment year 1986‑87 also the only other objection is to the deletion of addition under section, 24(b) of the Income Tax Ordinance, 1979. The objection is not pressed by the learned D.R. and is hereby maintained.
34. In the Assessment year 1987‑88 there is no other objection except to the setting aside of addition under section 79 which is hereby maintained.
35. In the Assessment year 1989‑90 also there is no other objection. 36. All the six appeals stand disposed of as above.
M.B.A./233/TOrder accordingly.