I.T.AS. NOS.2758/KB, 2762/KB, 2761/KB, 2759/KB, 2760/KB, 1628/KB OF 1986-87 VS I.T.AS. NOS.2758/KB, 2762/KB, 2761/KB, 2759/KB, 2760/KB, 1628/KB OF 1986-87, 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1208 (1998)

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

----S. 79---Income from transactions with non-residents---Assessee a pharmaceutical manufacturing company using raw material in the production of medicines imported from its non-resident associate---Provision of S.79, Income Tax Ordinance, 1979 when could be invoked--Principles.

The question of invocation of section. 79 of the Income Tax Ordinance, 1979 shall arise after the Assessing Officer is able to prove that the raw material purchased by the respondent from its non-resident parent company was imported by any other importer or user in Pakistan at cheaper rates. The reason being that until and unless there is some material on record to show that the raw material has been imported through business connections with the non-resident parent company or sister concern at higher rate than ruling international price as a result of close relations, the question of any collusive arrangement does not arise. The burden prima facie lies on an Assessing Officer and until and unless the onus of proving the fact establishing import of raw material from parent or sister concern at higher price as compared to the international, ruling price is discharged, the provision contained in section 79 of the Income Tax Ordinance, 1979 shall not be attracted.

The material required to be available on record to warrant invoking provisions of section 79 would be the documentary evidence that the chemical being produced by the independent international source is duly enlisted in the standard pharmacopoeia, the documentary evidence that it is available in sufficient quantity in the international market, the documentary evidence that there is no restriction, legal or otherwise, on its import into Pakistan and the documentary evidence that the rate offered by the independent international source is lower than the rate at which it is imported by the assessee from a closely connected non-resident source. Actual import of such chemical/raw material from such independent source by one or more importers or users into Pakistan during the corresponding period was not a condition precedent to warrant invoking the provisions of section 79.

I. T. A. No. 1801/KB of 1986-87 applied.

I.T.As. Nos. 1528/KB of 1991-92; 2023/KB of 1992-93 and 616/KB of 1993-94 distinguished.

I.T.As. Nos. 1801/KB of 1986-87; 2669/KB of 1987-88; 1528/KB of 1991-92; 2023/KB of 1992-93 and 616/KB of 1993-94 ref.

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

----S.24(b)---Deduction---Interest paid to non-resident Bank ---Allowability.

1996 PTD (Trib.) 411 rel.

(c) Income-tax---

----Deduction---Bad debt ---Allowability.

Sikandar Aslam, D.R. for Appellant (in I.T.As. Nos.2758/KB to 2762/KB, 1628/KB of 1986-87, 402/KB, 403/KB of 1985-86 and 641/KB of 1987-88).

I.N. Pasha for Respondent (in I.T.As. Nos.2758 to 2762/KB, 1628/KB of 1986-87, 402/KB, 403/KB of 1985-86 and 641/KB of 1987-88).

I.N. Pasha for Appellant (in I.T.As. Nos.530/KB, 531/KB of 1985-86 and 719/HQ of 19.87-88.

Sikandar Aslam, D.R. for Respondent (in I.T.As. Nos.530/KB, 531/KB of 1985-86 and 719/HQ of 1987-88).

Date of hearing; 13th November, 1997.

ORDER

S. M. SIBTAIN (ACCOUNTANT MEMBER).---Nine out of these 12 appeals are instituted at the instance of the Department and three appeals are instituted at the instance of the assessee.

2. The only common objection taken on behalf of the Department in I.T.As. Nos.2758, 2762 and 2761/KB of 1986-87, in the assessment years 1979-80, 1980-81 and 1981-82 is as under:

"That the learned CIT(A) was not justified in canceling the assessment order under section 62/65 on the basis of A.R. argument and not considered the facts narrated in the assessment order. "

3. Mr. I.N. Pasha, the learned counsel of the respondent, has submitted that these three appeals are misconceived because the learned CIT(A) has in fact held that the additions on account of excess perquisite, in each of the 3 assessment years, have been made on agreed basis; hence confirmed but he has cancelled the orders of the learned assessing officer holding that the aforesaid additions amount to concealment of income. However, -Mr. Pasha has explained the background of mistake in calculations of the amount of excess perquisite and the voluntary offer of the respondent, of such amounts, for tax. The learned representative of the Department has conceded that the submissions of Mr. I.N. Pasha are correct and these appeals have been filed under a gross misconception.

4. Accordingly, the 3 appeals are dismissed as misconceived.

5.The Department, in the next two I.T.As. Nos. 2759 and 2760/KB of 1986-87, in respect of assessment years 1980-81 and 1981-82, has objected to the combined order of the learned CIT (A) for cancellation of the orders imposing penalty under section III of the Income Tax Ordinance for alleged concealment of income on account of excess perquisite chargeable to tax. Since the facts leading to the impugned penalty orders have already been considered in the appeals relating to main assessment orders (supra), we need not repeat the same facts here. Since it has already been conceded by the learned representatives of the two parties that the assessments under section 62/65, making the additions on account of difference in calculation of excess perquisites, have been made on the basis of information volunted by the respondent, we find that the learned CIT(A) is justified in canceling the impugned penalty orders. Accordingly, the orders of the learned CIT(A) are confirmed and the two appeals are dismissed.

6. The Department in I.T.As. Nos.402, 403/KB of 1985-86 in assessment years 1982-83 and 1983-84, in I.T.A. No. 1628/KB of 1986-87 for assessment year 1984-85 and in I.T.A. No.641/HQ of 1987-88 for assessment year 1986-87 has taken common objection to the orders of the learned CIT(A) for deleting the additions made under section 79 of the Income Tax Ordinance. Additional objection is taken in the appeal in respect of 1986-87 for deleting the addition under section 24(b) of the Ordinance.

7.Regarding the impugned additions made under section 79 of the Income Tax Ordinance, the facts, briefly, are that the respondent has imported the undermentioned chemicals used as raw material in the production of medicines from it associate M/s. Pfizer, Dublin and M/s. Pfizer, Hong Kong. The rates at which the said chemicals have been imported by the respondent from its associates are, according to the learned DCIT, much higher than the rates at which the same chemicals have been imported during the same period from other sources. The relevant comparative figures for each of the 4 assessment years, as recorded in the assessment order, are reproduced hereunder:

ASSESSMENT YEAR 1982-83:

8. The learned DCIT, therefore, has concluded that the provisions of section 79 of the Income Tax Ordinance are to be invoked because the amount of profit which would have accrued to the respondent but by reason of conditions made or imposed between, the respondent arid its associates, in connection with import of chemicals supra, which differ from those which would have been made between independent persons, have not so accrued. He, therefore, has served notices under section 62, alleging that the course of, business has been arranged, by the respondent, in such a manner with the non-resident associates/affiliates, that lesser profits have arisen to it in Pakistan. The respondent, therefore, has been asked to explain why provisions of section 79 of the Ordinance should not be invoked. The explanation offered by the respondent has been held unsatisfactory. He, therefore, has included Rs.12,872,384 in the assessment year 1982-83, Rs.16,959,056 in the assessment year 1983-84, Rs.19,868,418 in the assessment year 1984-85 and Rs.39,493,806 in the assessment year 1986-87 to the total income of the respondent, under section 79 of the Ordinance.

9. The respondent has preferred appeals before the learned CIT(A), objecting to the additions supra. It has been pleaded, on behalf of the respondent, before the learned CIT(A), that the learned DCIT has summarily rejected the explanations offered on behalf of the respondent. The DCIT has ignored, inter alia, the plea that the notices issued under section 62 mention only the names of the chemicals and the rates per Kg., said to be imported from other/" independent" sources. Further, the learned counsel has submitted before the learned CIT(A) that only the name of the country, Brazil, has been mentioned in respect of the source of import of Pyrantal Pomate; name or names of importers in Pakistan, from the said "independent" sources, have not been mentioned; the quantity imported in Pakistan from such sources, its availability in the market have not been indicated and above all no evidence has been placed on record by the learned DCIT to establish the comparative efficacy of the chemicals from the two sources supra. The foregoing submissions have found favour with the learned CIT(A) who has held that the learned DCIT has failed to discharge his onus of placing sufficient evidence on record to establish the collusion envisaged under the law to prove diversion of profits by transfer pricing.

10. The learned representative of the Department has submitted that the learned CIT(A) is not justified in holding that the learned DCIT has failed to discharge his onus. He submits that the learned DCIT has confronted the respondent with the sources in the international market where the three chemicals/drugs, imported by it from its Principals, are available at much cheaper rates. According to him it is not the onus of the learned assessing officer to identify any local importer from the aforesaid sources. He has further submitted that at least in cases of Methacycline and Dexycycline HCL the source is specifically identified as M/s. Pierrel, U.S.A., in assessment years 1982-83 to 1984-85 and M/s. CCI & EC, China. In case of Pyrantal Pomate M/s. Unico & Co., Hong Kong is specifically identified in assessment year 1986-87.

11. The learned D.R. has further submitted that the respondent has not asked at any stage, during assessment proceedings for any of the years under appeal, about any other Pakistani importers from the sources identified by the learned DCIT. The learned CIT(A), according to the learned D.R., therefore, is not justified in admitting this plea at the appellate stage. Regarding the onus of the learned DCIT to place evidence on record about the comparative therapeutic efficacy of the chemicals being produced by the independent sources, identified by the learned DCIT, the learned representative of the Department has submitted that it is specifically recorded in the impugned assessment order for 1986-87:

"Raw materials including Pyrantal Pomate and Dexycyline HCL are described in various pharmacopoeas e.g. British Pharmacopoeas-BP, United States Pharmacopoeas-USP, European Pharmacopoeas-EUP etc. If a raw material, irrespective of its' origin/source of supply complies with the specifications as laid down in respectivepharmacopoeas then it ought to be treated of standard quality.

Pyrantal Pomate and Dexycycline HCL' imported by other pharmaceutical companies during the period under consideration, is of pharmaceutical quality, in support of which certificates of analysis were furnished by these companies to Drug Authorities at the time of import of each consignment of Pyrantal Pomate and Dexycycline on the basis of which Clearance Certificates were issued by respective Assistant Drugs Controllers."

12. He, therefore, submits that the learned DCIT has discharged his onus.

13. Mr Iqbal Naeem Pasha, appearing on behalf of the respondent, on the other hand, has submitted by placing reliance upon decision of the Tribunal in respondent's own case in I.T.A. No.1528/KB of 1991-92 (Assessment year 1989-90), I.T.A. No.2023/KB of 1992-93 (Assessment year 1990-91) and I.T.A. No.616/KB,of 1993-94 (Assessment year 1991-92) dated 12-12-1994 that if the freedom of purchase from international market does not exist on account of protection of the rights of the manufacturer under the Patent and Design Act, the provisions of section 79 cannot be invoked. However, we find that the plea is irrelevant in the instant appeals because the respondent has not offered any evidence to substantiate the claim at any stage of proceedings.

14. His next submission is that the question of invoking the provisions of section 79 of the Income Tax Ordinance, 1979 shall arise after the assessing officer is able to prove that the raw material purchased by the respondent from its non-resident parent or sister company has been imported by other importers or users in Pakistan at cheaper rates. Reliance has been placed on the decision of the Tribunal in I.T.A. No.1801/KB of 1986-87 (Assessment year 1984-85) dated 2-5-1995. According to him the raw materials in questions, as per quarterly "Quick Index of Medical Preparations" of corresponding years, have not been imported by any other importer or user in Pakistan from the independent sources identified by the learned DCIT. Neither any importer in Pakistan has been identified in any of the impugned assessment orders by the learned DCIT. He has submitted that similar addition under section 79 has been deleted in appellant's own case in 1985-86 by the Tribunal in I.T.A. No.2669/KB of 1987-88 dated 16-1-1996.

15. We have carefully considered the submissions of the two sides as well as the decision of the Tribunal (ibid). We find that in I.T.A. No. 1528/KB of 1991-92 (Assessment year 1989-90) . I. T. A. No. 2023/KB of 1992-93 (Assessment year 1990-91) I.T.A. No.616/KB of 1993-94 (Assessment year 1991-92) when it has been pleaded before the Tribunal that the provisions of section '79 of the Income Tax Ordinance cannot be invoked on the basis of alleged purchases on higher rates firstly, as purchases themselves cannot produce any profit, secondly, it cannot be invoked because there are no parameters of high or low profits, thirdly, the Department has not been able to prove that raw material of similar chemical composition imported by other manufacturers in Pakistan are of the same efficacy, fourthly; the parent company has the protection of intellectual property right through the Patents and Designs Act, it is held:

"All the contentions have already been considered by us in the case of another pharmaceutical company vide order dated 14-9-1994 in I.T.As. Nos.1796 and 1374/KB of 1993-94 and 1992-93 relating to the assessment years 1990-91 and 1991-92. The points in issue have been considered by this Tribunal as well as by the Hon'ble High Court of Sindh and the Hon'ble Supreme Court of Pakistan particularly in the following judgments:

(1) I.T.A. No.1796/KB of 1993-94 order dated 14-9-1994 (ITAT). I,VI/s. Bayer Pharma (Pvt.) Ltd. v. ITO.

(2) (1988) PTD (Trib.) 447 ITO v. Beecham Pakistan Limited.

(3) (1989) PTD 612 (Sindh High Court) CIT v. Pfizer Laboratories Ltd.

(4) (1991) PTD 393 (Sindh High Court) CIT v. Glaxo Laboratories Ltd. '

(5) Civil Appeal No.237-K of 1991 Glaxo Laboratories Ltd. v. CIT. (Supreme Court of Pakistan order, dated 21st April, 1992, unreported).

The point that purchases can generate profits has been settled finally by the Hon'ble Supreme Court of Pakistan, All other points have also been decided against the assessee and in favour of department except that if the freedom of purchase from the International market did not exist the provisions of section 79 of the Income Tax Ordinance, 1979 shall not apply. This Tribunal has held in various orders including I.T.A. No.2202/KB of 1987-88 (Smith Kline and French of Pakistan Ltd. v. I.A.C. Range-1, Companies-2 Karachi) vide order dated 26-2-1994 that so long the right of the manufacturer is protected under the Patents and Designs Act it would be deemed that the freedom of purchase does not exist and, therefore, in such circumstances the provisions of section 79 shall not be attracted".

16. Further, in the decision recorded on 2-5-1995 in I.T.A. No. 1801/KB of 1986-87 (Assessment year 1984-85) the Tribunal has held:

"In view of the facts obtaining on record and discussed above, we are of the considered opinion that the question of invocation of section 79 of the Income Tax Ordinance, 1979 shall arise after the Assessing Officer is able to prove that the raw material purchased by the respondent from its non-resident parent company was imported by any other importer or user in Pakistan at cheaper rates. The reason being that until and unless there is some material on record to show that the raw material has been imported through business connections with the non-resident parent company or sister concern at higher rate than ruling international price as a result of close relations, the question of any collusive arrangement does not arise. The burden prima facie lies on an Assessing Officer and until and unless the onus of proving the fact establishing import of raw material from parent or sister concern at higher price as compared to the international ruling price is discharged, the provision contained in section 79 of the Income Tax Ordinance, 1979 shall not be attracted."

17. We find that the ratio of later decision of the Tribunal is applicable to the facts and circumstances of the instant appeals. The learned DCIT, in the instant case, although, has clearly identified the independent sources of availability of the chemicals in the international market and has confronted the respondent with their names, but he has neither indicated the names of any other importers or users in Pakistan to the respondent nor has mentioned their names in the impugned orders, who, according to him, have imported from the sources identified by him. Thus, the remarks of the learned DCIT reproduced in paragraph 11 supra, regarding the listing of Pyrantal Pomate and Dexycycline HCL in either of the three standard pharmacopoea or about submission of certificates of analysis by importers to the Drug Controllers in Pakistan, are found to be presumptive. The material required to be available on record to warrant invoking provisions of section 79 would, thus, be the documentary evidence that the chemical. being produced by the independent international source is duly enlisted in the standard pharmacopoea, the documentary evidence that it is available in sufficient quantity in the international market, the documentary evidence that there is no restriction, legal or otherwise, on its import into Pakistan and the documentary evidence that the rate offered by the independent international source is lower than the rate at which it is imported by the assessee from a closely connected non resident source. However, we do not subscribe to the view that actual import of such chemical/raw material from such independent source by one or more importers or users into Pakistan during the corresponding period is a condition precedent to warrant invoking the provisions of section 79.

18. Having considered all the factual and legal aspect supra we find that the learned DCIT, in the instant case, has not fully discharged his onus in so far as not only the respondent has not been confronted with the required documentary evidence but such evidence is not even available on record, as conceded by the learned D.R. We, accordingly, confirm the impugned orders of the learned CIT(A) and dismiss the appeals on this ground.

19. The issue relating to the claim of interest paid on borrowed capital to non-resident Banks held by the learned CIT(A) to be allowable although tax thereon has not been withheld under section 50, as required under clause (b) of section 24 of the Ordinance, already stands decided in favour of the respondent/assessee in the case reported as 1996 PTD (Trib.) 411. Accordingly, the impugned order is confirmed and appeal in 1986-87, on this ground is dismissed.

20. This brings us to the I.T.As. Nos. 530 and 531/KB of 1985-86 (Assessment year 1982-83 and 1983-84) and I.T.A. No.719/HQB of 1987-88 (Assessment year 1986-87) instituted at the instance of the assessee.

21. Common objection is taken in the first two appeals on the under mentioned ground:

"The learned Commissioner of Income Tax (Appeals) has erred in deciding that the Income-tax Officer was justified in invoking the provisions of section 79 of the Income Tax Ordinance, 1979 and that there was a marked difference between the provisions of the corresponding section 42(2) of the repealed Income-tax Act, 1922 and section 79 of the Ordinance."

22. Mr. Iqbal Naeem Pasha, the learned counsel of the appellant is not pressing the two appeals. Accordingly, the appeals are dismissed as not pressed.

23. The only objection taken by the assessee in the last appeal is on the following ground:

"The learned Commissioner of Income Tax (Appeals) erred in maintaining the disallowance of a sum of Rs.5,759,786 claimed as a deduction from income, in respect of a debt written off. "

24. As stated before the learned DCIT, the debt in question is on account of credit facility allowed by the appellant to M/s. Khyber Agencies, Sunny Plaza, 7 0[1]
bjbjUU, [1]7|7|,[1] l [1] [1] [1] [1] [1] [1] [1][1]r>r>r>r> 7 0[1]
bjbjUU, [1]7|7|,[1] l [1] [1] [1] [1] [1] [1] [1][1]r>r>r>r> circumstances of the case the assessee has failed to establish that the debt has become bad. According to Mr. Pasha the suit for recovery has been filed in the Court but it has not been pressed and actually written off because in the opinion of the appellant the debtor is not in a position to pay. Instead, business dealings have been continued with the debtor and an amount of Rs.l.l million has been recovered which is declared in the accounts for the year corresponding to the assessment year 1991-92. The learned CIT(A) has upheld the disallowance of the claim by the learned DCIT because she has found no substance in the submissions of the learned counsel of the appellant.

25. Considering the foregoing facts and the submissions of the learned counsel of the appellant, we find that the learned DCIT has not considered and verified the facts properly before deciding the issue. Accordingly, we vacate the impugned order of the learned CIT(A) and set aside the impugned assessment order, on this issue, with the directions to the learned DCIT to decide the issue afresh after verifying the bona fides of the explanation offered by the appellant.

M.B.A./472/Trib. Order accordingly.