W.T.AS. NOS. 553/HQ TO 555/HQ, 169/HQ TO 171/HQ OF 1989- 90 AND 313/KB AND 314/KB OF 1992-93 VS W.T.AS. NOS. 553/HQ TO 555/HQ, 169/HQ TO 171/HQ OF 1989- 90 AND 313/KB AND 314/KB OF 1992-93
1997 P T D (Trib.) 301
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mahboob Alam, Accountant Member and Muhammad Tauqir Afzal Malik, Judicial Member
I.T.A. No. 1614/KB of 1995-96, decided on 09/09/1996.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.80 & 50(3)---Interpretation of S.80, Income Tax Ordinance, 1979-- Non-resident owner carrying on business of operation of ship which carried oil to Pakistan from a destination port abroad---Amount of freight paid to such non-resident ---Chargeability to tax---Principles---Non-deduction of tax at source by resident payer under S.50 of Ordinance---Validity---Held, amount to be considered for levy of tax was to be determined as per S.80(2), Income Tax Ordinance, 1979 while same was to be charged to tax at the rate prescribed under S.80(3) and tax so worked out was to be collected as per S.80(4)(5) of the said Ordinance ---Chargeability to tax of the receipts of the non-resident "Principal" having not yet been independently established by the department, provisions of S.50(3) could not be invoked in isolation of the main charge on the recipient---Assessing Officer, in such a situation, would be travelling far beyond his jurisdiction in saddling the resident payer with burden of deduction of tax under S.50(3), Income Tax Ordinance, 1979.
1996 PTD (Trib.)1128 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
---S. 24(b)---Workers Profit Participation Fund---Interest on-- Disallowance---Validity---Source of finance were identifiable and payments of interest was confirmed by documents---Department had not proved that the payment was not related to the business of the assessee --- Disallowance of such interest, held, was not justified.
Agha Faqir Muhammad for Appellant.
Rahimuddin Ghori, D.R. for Respondent
Date of hearing: 22nd April, 1996.
ORDER
The appellant in this case is a private limited company carrying out marine transport services as subsidiary to M/s. Pakistan National Shipping Corporation Ltd. and has impugned the order passed by the G.I.T. (A) on the following issues:---
(i) disallowance under section 24(b) of the Income Tax Ordinance, of an amount of Rs. 236,098,119 representing freight paid to the non- resident shipping charterer without deduction of tax at source under section 50;
(ii) disallowance of interest on Workers' Profit Participation Fund at Rs.8,90,872.
(iii) disallowance under section 24(b) at Rs.236,098,119.
2. The admitted facts on this issue are that the appellant entered into a contract with a non-resident Shipping Co. i.e. M/s. Thanker Pacific Chartering Ltd., Liberia (hereinafter to be referred as the "non-resident"). Under the affreightment contract, the non-resident had agreed to transport crude oil from destination abroad to Karachi. It is also an admitted position that on the amount of freight paid by the assessee to the non-resident under the contract, the assessee did not deduct tax at source under section 50. while the assessing officer after confronting the appellant, disallowed the amount under section 24(b) in view of this default.
Before the assessing officer, the appellant's defence basically revolved around the arguments that the non-resident lacked a business connection with the tax net and, as such, section 24(b) could not be invoked. It was also contended by the appellant in support of its claim that the non- resident was exempt from tax as section 80 was only applicable to such shipping transactions which pertain to carriage from Pakistan to destination abroad and not vice versa. The assessing officer while relying upon a plethora of case-law which were duly confronted to the appellant and which are reproduced at para. 9 of the assessment order rejected the appellant's plea that the non-resident lacked a business connection with the appellant and was so exempt. Also the contention that section 80 brings to tax only shipping transactions from Pakistan to destinations abroad was not accepted by the assessing officer in para. 10 (iii) of the assessment order. while relying upon the very terms of section 80(2)(b) itself. At the stage of C.I.T. (A) the appellant took new pleas except (ii) below based upon written arguments, which were not taken at the time of assessment proceedings and which are summarised by the learned C.I.T .(A) as follows:---
"(3) ............................
(i) that section 80 contains a non obstante clause in view whereof the operation of other sections of the Income Tax Ordinance stand precluded including section 24(b) and section 50. Furthermore, since the tax liability would fall under section 80, the question of invoking section 24(b) or section 50 does not arise in view of the non obstante clause under section 80;
(ii) the non-resident had not at all its obligations and taxes were duly paid since Port Clearance Certificates had been issued and the Collector of Customs had doubly checked the legality of such arrangements;.
(iii) apart from the Collector of Customs, no one else could collect tax from the non-resident ;
(iv) the appellant could have defaulted by failing to deduct tax at source under section 50(4) and not section 50(3) as alleged by the assessing officer."
The learned C.I.T. (A) dismissed the contentions of the appellant with the following observations:---
(4).......... There is no doubt that section 80 is equipped with a non obstante clause, however, the same would not mean that all other provisions of the Ordinance would stand precluded and would have no application whatsoever. It is only these provisions of the Income Tax Ordinance which are inconsistent with section 80 which shall stand superseded by the latter: There is no doubt that section 80 provides for a final discharge of liability of the non-resident owner or charterer of the ship, however, the same does not prohibit any deduction of tax at source on very payment made to it, if the same qualifies for such a deduction under section 50. Also very significantly, section 80 is couched in such terms which only create and reflect the liability of the non resident and not the appellant. The obligation of the appellant under section 50 read with section 24(b) shall stand unaltered by the non-obstante clause of section 80 for the very simple reason that the said section 80 shall have no applicability in relating to chargeability of tax in the hands of the appellant. However, the section 80 although a non obstante clause but other section of the Ordinance entertain it for the operation of the Ordinance e.g. explanation to section 78 of the Income Tax Ordinance, 1979. The explanation (4) to section 78 clearly provides to treat a resident to be the agent for the non-resident with which the resident has any business connection or through whom any amount is paid to non-resident, whether directly or indirectly: In this manner, the contention of the appellant as summarised at para.(1) above, is devoid of any merit.
(5) As regards the contention of the appellant at paras. 3(ii) and 3(iii) above, the same also lack reasoning and force. The construction mooted by the appellant's A/R that it is only the Collector of Custom who can collect any tax from the non-resident and that the Income Tax Officer cannot look into the matters doubly checked by the Customs Authorities, is based upon non-reading of the provisions of section 80. A plain reading of section 80 would defy any such interpretation which has been invited by the appellant's A.R. also to say that in income-tax matters, the Customs Authorities have the final say, would also fly in the face of law and reasoning.
6. As regards the appellant's contention summarised in para. 3(iv) above, it is also of no consequence. Mere misstating the numbers of the subsections, can hardly absolve the appellant of his duty under the Income Tax Ordinance. Whether the appellant has defaulted the provisions of section 50(3) or 50(4), would have no bearing upon the applicability of section 24(b) of the Ordinance. Accordingly, the addition made by the assessing officer on this score is maintained."
3. Before us, the appellant has reiterated the arguments taken before the C.I.T. (A). The matter has been considered by us. These are two questions which have to be answered:---
(a) Is the amount of freight paid to the non-resident principal chargeable to tax in Pakistan. If so, under what provision of Income Tax Ordinance and in what manner?
(b) Is the resident company liable to deduct tax under section' 50(3) for the payment made to the non-resident shipping Company?
The answer to the first question rests on the true construction of the relevant provisions of section 80. The said section makes special provision for levy and recovery of tax in the case of any ship belonging to or chartered by a non-resident which carried passengers, live-stocks, mail or goods shipped at a port in Pakistan. The provisions read as follows:---
"80. Shipping business of non-residents.---(1) Notwithstanding contained in this Ordinance, where a non-resident carries on business of operation of ships as the owner or charterer thereof (hereinafter in this section referred to as the 'Principal') tax shall be levied and collected in respect of such business in accordance with the provisions of this section.
(2) Before the departure from any port in Pakistan of any ship, the master of the ship shall prepare and furnish to the Deputy Commissioner a return showing (a) the amount paid or payable (whether in or out of Pakistan) to the principal, or to any person on his behalf, on account of the carriage of passengers, livestock, mail or goods shipped at that port since the last arrival of the ship and (b) the amount received, or demand to be received, in Pakistan by, or on behalf of, the principal on account of the carriage of passengers, livestock, mail or goods at any port outside Pakistan.
(3) On receipt of the return, the Deputy Commissioner shall determine the aggregate of the amounts referred to in subsection (2) and, for this purpose, may call for such particulars, accounts or documents, as he may require and .the aggregate of the said documents so determined shall be deemed to be income received in Pakistan by the. principal from the said business chargeable to tax under this Ordinance under the head 'income from business or profession' and tax thereon shall be charged at the rate of eight per cent of such income.
(4) Where the Deputy Commissioner is satisfied that it is not possible for the master of the ship or the principal to furnish the return required under subsection (2) before the departure of the ship from the port and the principal has made satisfactory arrangement for the filing of the return and payment of the tax by any other person on his behalf, the Deputy Commissioner may, if the return is filed within thirty days of the departure of the ship, deem the filing of the return by the person so authorised by the principal as sufficient compliance with subsection (2).
(5) No port clearance shall be granted to the ship until the Collector of Customs, or other officer duly authorised to grant the same, is satisfied that the tax payable under subsection (3) has been duly paid or that satisfactory arrangements have been made for the payment thereof.
(6) Nothing contained in this Ordinance shall be so construed as to allow any expense against the aggregate amount of receipts as determined under subsection (3).
(7) The tax paid under this section shall be deemed to be the final discharge of the tax liability of the assessee under this Ordinance. and the assessee shall not be required to file the return of total income under section 55 nor shall he be entitled to claim any refund or adjustment on the basis of such return."
4. Section 80 occurs in Chapter VIII of the Ordinance which is titled as "liability in special cases" and the sub-heading of the section is "Shipping business of non-residents". It creates a tax liability in respect of "business operation of ships" carried on by non-residents as the owner and charterer thereof. The object of the section is to ensure levy and recovery of tax in the case of ships belonging to or chartered by non-residents. The section brings to tax the amount paid or payable to the principal or to any person on his behalf on account of carriage of passengers, livestock, mail or goods shipped at any port in Pakistan since the last arrival of the ship and the amount received or deemed to be received in Pakistan by, or on behalf of the non -resident on account of carriage of passengers, livestock, mail or goods at any port outside Pakistan. The charging provision is contained in subsection (3) of section 80, the relevant part of which provides that 8% of the total receipts as mentioned in subsection (2) shall be payable by the non-residents on the basis of returns furnished by Master of the ship. The format of the returns has been prescribed by the Central Board of Revenue and is given below:
"Return of income for shipping business of non-residents:
1.Name of vessel ..
2.Date of arrival of the vessel ................
3.Date of departure of the vessel ...........
4Name of Owners/Charters/Carriers .............
5.Head Office of Principal Company ................
6Flag and Port of Registry of vessel ...............
7 Name and address of Agent at Karachi ..........
8.Number of passegers embarked at Karachi
9.Quantity of Livestock shipped at Karachi ............
10.Tonnage of Cargo including mail laded at Karachi ......
11.Amount paid or payable in or outside Pakistan and the amount received or deemed to be received in Pakistan on account of:
(a) Item No.8 of above ..Rs.
(b) Item No.9 of above ..Rs.
(c) Item. No. 10 of above ..Rs
TotalRs
12. Tax payable at the rate of 8 % on aggregate of amounts in item 11 Rs ................................
(a)Tax paid ...........
(b)Date of payment
13. No. and date of Port Clearance Certificate issued by the Income Tax Department .................................
14.Documents to be furnished:---
(a)Freight manifest.
(b)Bills of lading.
(c)Charter party of fixture note, where applicable.
(d)Copy of challan of payment of tax.
15. In case, the freight earnings of the vessel are claimed to be exempt under any bilateral treaty, specific article(s) of the treaty under which exemption claimed ...........................
VERIFICATION
I, the undersigned, solemnly declare that to the best of my knowledge and belief---
(a) the information given in the return and the Annexures and statements accompanying it is correct and complete;
(b) the amounts of income and other particulars are truly stated. I further declare that I am compete to make this return and verify it in my capacity as of Date ..
Signature of ..
Agent/Principal ...
Name and address ......... .
It will be seen that the amount on which tax has been held to be payable is to be quantified in terms of para. 11 of the return on the basis of information provided under paras. 8, 9 and 10 mentioned therein and the final tax liability is determined as per para. 12 of the same return. For the recovery of the liability as per subsection (3) the provisions are contained in subsections (4) and (5) of section 80. It has been laid down that the payment of tax has to be made before the departure of ship. In case this is not possible arrangement for subsequent payment should be made to the satisfaction of the department and in fact no port clearance is to be granted to the ship before such payment.
5. By virtue of the above provisions made in section 80, it becomes an independent code for both the chargeability and the recovery of the tax payable by non-residents carrying on business of operation of ship as owners or charterers. So structured it becomes a piece of presumptive taxation comparable to the provisions of section 80-A (relating to Air transport business of non-resident), 80-AA (Tax on income of non-residents from fees 8 for technical services), 80-B, (Tax on income of certain person from dividends and bank profits etc.), section 80-C (Tax on income of certain contractors and importers) and section 80-CC (Tax on income of certain exporters). All these sections which are in the nature of special non obsante clauses can be divided in two groups from the point of view of advance payment of tax or deduction of tax at source by the payer. Sections 80-B, 80-C and 80-CC fall in one group. Section 80-B taxes the block of income consisting of dividends and Bank profits where there is a prior deduction of tax at source in the following manner:---
"80-B. Tax on income of certain persons from dividends and bank profits, etc. (1) ................................
(2) The amount referred to in subsection (1) shall be the following, namely:---
(a) dividend or profit on which tax is deductible under subsection (6-A) of section 50;
(b) interest or profit on which tax is deductible under subsection (2-A) of section 50;
(bb) the amount received on encashment of bearer certificates on which tax is deductible under subsection (5-B) of section 50.
(c) interest or profit on which tax is deductible under subsection (7-D) of section 50;
(d) prizes and winnings on which tax is deductible or collectable under subsection (7-C) of section 50."
Section 80-C taxes the block of income relating to contractors and importers in the following manner:---
"80-C. Tax on income of certain contractors and importers.---(1) .
(2) The amount referred to in subsection (1) shall be the following, namely:
(a) Where the person is a resident---
(i) the amount representing payments on which tax is deductible under subsection (4) of section 50, other than payments on account of services rendered;
(ii) the amount as computed for the purpose of collection of tax under subsection (5) of section 50 in respect of goods imported, not being goods imported by an industrial undertaking as raw material for its own consumption; and
(b) where the person is a non-resident, the amount representing payments on account of execution of a contract for construction, assembly or like project in Pakistan on which tax is deductible under subsection (4) of section 50."
Section 80-CC taxes income of certain exporters from receipts in respect of which tax has been deducted at source under subsection (5-A) of section 50, the tax so deducted being the final discharge of tax liability. These three sections namely, 80-B, 80-C and 80-CC bring to chargeability the receipts for which deduction of tax at source has been provided for in various subsections of section 50. The deduction defines their character and determines their chargeability or otherwise to tax. The rate of deduction is invariably given for each item in the First Schedule. Conversely it lays responsibility on the paying agency to deduct tax at the prescribed rates, such deduction being a final discharge of liability to the extent of that portion of income. In contrast to this there is the other group consisting of sections 80, 80-A, 80-AA where the statute does not precondition the chargeability or receipts with such deduction at source at the paying stage. Under section 80 the Master of the Ship shall prepare the return of income as laid down in subsection (2), and make payment of tax in terms of subsection (3) 8 % of the income so determined, before departure of the ship from the Port in Pakistan. Where the filing of such return and payment of tax is not so possible by the Master of Ship the law requires in term of subsection (4) of the section 80, for satisfactory arrangements to be made for filing of the return and under subsection (5) for payment of tax by the authorised agent., In other words from filing of return to the payment of tax only the person of the non-resident owner or charterer is involved. There is no provision in section 80 which burdens the person paying for the carriage of passengers, live stock, mail or goods shipped to deduct any tax while making such payment. Since there is no provision for any pre-payment of tax or deduction at source there is no mention of any adjustment of the same towards the final liability of the non-resident charterer. In brief there is neither any concept of deduction of tax at source nor of consequential adjustment towards final liability of tax of the non-resident 'Principal' in respect of income from business of operation of 'ships' in terms of section 80 of the Income Tax Ordinance. The question then arises as to whether there is any such concept in terms of section 50(3). It is the provision of this section 50(3) which has been totally relied upon by the assessing officer for the purpose of deduction of tax at source. Section 50(3) reads as under:---
"50(3). Any person responsible for paying to a non-resident any sum chargeable under the provisions of this Ordinance/(other than income to which subsection (1) or subsection
(2) or subsection (2-A) or subsection (3-A) or subsection (4) or subsection (4-A) or subsection (3-A) or subsection (4) or subsection (4-A) or subsection (3-A) or subsection (4-A) or subsection (6-A) or subsection (7-A) or subsection (7-C) or subsection (7-D) applies/shall unless such person is himself liable to pay tax thereon as an agent, deduct, at the time of payment, tax at the rates specified in the First Schedule."
It may be noted that while the rate as given in Para. DDD to Part I of First Schedule for deduction of tax under subsection (3) of section 50 is I given as "30%" of the sum chargeable or the rate applicable to a resident' person whichever is greater, the rate prescribed under section 80 is 8% of the sum chargeable under the said section. This difference having been noted the main question now is as to how the receipts of the non-resident shipping 'Principal' attract the provision of section 50(3). It has already been held by this Tribunal vide order in I.T.A. No.279/KB of 1994-95 reported as 1996 PTD (Trib.) 1128 where the learned Chairman held that:---
"On perusal of entire provisions contained in Chapter VI of the Income Tax Ordinance which deals with the payment of tax before assessment and the provisions relating to the deduction of tax at source and advance payment of tax, I am of the considered opinion that these provisions are not independent in nature and have not to be read in isolation. The provisions contained in Chapter VI of the Income Tax Ordinance relating to deduction of tax at source and advance payment of tax are to be read with the relevant provisions in the Income Tax Ordinance whereby total income from various sources are detained and are subjected to tax. The deduction at source and advance payment of tax are to be adjusted from the final tax liability on completion of assessment. "
Following this decision the provisions of section 50(3) will become operative only if it has been established independently that the relevant payment on which it is to be applied is taxable in the hands of the recipient. As is the position obtaining in the instant case the recipient is a non-resident owner or charterer carrying on business of operation of ships. The business that he carried was carriage of oil to Pakistan from a destination port abroad. As per the Scheme of section 80 the amount to be considered for levy of tax was to be determined as per subsection (2) while it was to be charged to tax at the rate prescribed under subsection (3) and tax so worked out was to be collected as per subsections (4) and (5). It is not controverted by the department that no assessment, levy and collection of tax has been made in respect of the period relevant to the assessment year in appeal in the manner laid down under section 80. In fact no assessment has been made in this regard so far. In other words the chargeability to tax of the receipts of the non-resident "Principal" has not yet been independently established by the department. This being the position the provisions of section 50(3) cannot be' invoked in isolation of the main charge on the recipient. For these reasons it is held that the assessing officer had travelled far beyond his jurisdiction in I saddling the resident payer with the burden of deduction under section 50(3). The resident payer is further exonerated from this burden for the simple reason that the scheme of section 80 does not envisage deduction of any sort of tax at any stage and lays responsibility squarely on the Master of Ship for submitting the return and on the Income Tax Officer and the Controller of Customs having authority over the relevant port to the effect that the recovery or some arrangements for recovery is made before the ship leaves the Port. This being the scheme of section 80 the provision of section 50(3) are not at all attracted in respect of the payment made to non-resident principal by the resident payer. Since the payment did not attract the provisions of section 50(3), it could not be disallowed as an expenditure for any default on this ground in terms of section 24(b) of the Income Tax Ordinance.
6. In order to be more explicit and precise we would like to observe that the arrangement for payment and recovery of tax is contained in section 80 itself. The provisions contained in section 50 are also designed and intended in the same direction and same purposes. The provisions contained in section 24(b) is in the nature of penalty for default of the obligation under section 50. When the Legislature has provided for special arrangement under section 80, is shall exclude the normal and general provision in this regard. In the case of shipping business, there being no responsibility in law for making any deduction at source under section 50, and there being no arrangement for subsequent adjustment for such deduction towards the tax liability in normal course and in the absence of any provision treating the deduction under section 50 as the full and final discharge of tax liability under section 80, there shall be no default on the part of resident payer and consequently no penalty shall be entailed.
7. The other issue pressed by the appellant relates to disallowance of interest on Workers' Profit Participation Fund amounting to Rs.8,90,872. The amount was claimed by way of financial charges and was disallowed by the assessing officer with the following observations:
" .... It was observed that there was no justification for the assessee- Company to utilise the balances of W.P.P.F. in spite of sufficient liquid funds available with the Company in the shape of cash, bank balances, advances and receivables. When confronted through notice under section 62, the assessee could not furnish any plausible explanation. The claimed payment of interest on W.P.P.F. at Rs.890,872 is, therefore, disallowed and added towards total income as in last year. "
Before the C.I.T. (A) the learned counsel for the appellant took the plea that such additions were made in respect of earlier year also but deleted by the C.I.T. (A). The learned C.I.T. (A) however, upheld the addition for the year under appeal on the ground that the finding of the assessing officer regarding utilisation of Workers' Profit Participation Fund being a sham 'transaction was not rebutted by the appellant.
8. The matter has been considered by us. It is not the case of the Department that the interest on Workers' Profit Participation Fund was not paid. Instead the ground taken by the Department is that there was no justification for utilising the balance in Workers' Profit Participation Fund in spite of sufficient liquid funds being there available with the company in the shape of cash, bank balances, advances and receivables. In other words the Department has questioned the right of the assessee to utilise the balances under the head Workers' Profit Participation Fund. This right to so question, we are afraid, is not given by the Legislature to the Department. The appellant has the option to arrange funds from any source for its business so long as the source is identifiable. It can only be a sham transaction if the source of finance is not identifiable so that the payment of interest also becomes questionable. This is not the position in the present case. The source of finance is identifiable and payment of interest is confirmed by documents. The Department has not proved that the payment was not related to the business of the appellant and, therefore, the disallowance is without any justification. The order of the officers below is modified to this extent and the addition is deleted.
9. The appeal succeeds
M.B.A./276/Trib. Appeal allowed.