Agreement for Avoidance of Double Taxation between Pakistan and Switzerland---

---- Art.vi(a), cl.(6)---Dividend income---Dividend derived from income of industrial undertaking---Taxability---Activities of the assessee in its entirety and not the various components of its income are relevant for the purposes of Art.(vi), cl. (6) of the Agreement---Taxation of entire dividend income has to be concessionally assessed accordingly.

Muhammad Majid, D.R. for Appellant.

Shabbar Zaidi, F. C. A. for Respondent.

Date of hearing: 11th February, 1998.

ORDER

MUHAMMAD MAHBOOBALAM(ACCOUNT NTMEMBER).---The Departmental appeal has been preferred against the CIT(A)'s Order No.678 of 1997, dated 18-10-1997. The Department has contested the direction of the learned CIT(A) for taxing the entire income received from dividend paid-.by M/s. Tetra Pakistan Ltd. amounting to Rs.37,230,000 at 10% in terms of Article (vi) of the agreement for avoidance of Double Taxation between Pakistan and Switzerland. The learned D.R. and A.R. had been heard. As the facts are, the appellant/assessee is a Swiss based company earning income from dividendn investment made with two Pakistani companies M/s. Packages Ltd, and Tetra Pakistan Ltd. The dividend income from Packages Ltd, amounting to Rs.17,20,015 was taxed at 15 % by the assessing officer and about it there is no dispute. The assessee had also declared dividend income from M/s. Tetra Pakistan Ltd. at Rs.37,230,000 on which tax at the rate of 10% was offered in terms of clause (a) of the said Article of the Double Taxation agreement between Pakistan and Switzerland. According to the assessing officer the dividend declared by M/s. Tetra Pakistan Ltd. did not fall for the purpose of tax within the concession offered by the provisions of Article (vi) of the Treaty which envisaged tax at reduced rate in respect of dividend derived income of an "Industrial Undertaking" in Pakistan only. According to the assessing officer examination of accounts of M/s. Tetra Pakistan Ltd, revealed that apart from "Industrial income it had also received other income being return on "deposits and others". Such other income constituted 1.29% of the total income. Accordingly the assessing officer bifurcated the dividend income in the ratio of 1.29%: 98.71 % in respect of dividend originating from income of the "Industrial Undertaking" and income derived from other source. When the , matter went to ,the CIT (A) he directed that the entire income from dividend from Tetra Pakistan Ltd, amounting to Rs.37,230,000 be taxed at 10% and made the following observations in this regard..

The term 'Industrial Undertaking' is a technical term which has been precisely defined in Clause (6) of Article VI of the Treaty. Now it is not the Department's case that the assessee/appellant is not an 'Industrial Undertaking' and therefore, while considering the applicability of Clause (6) of Article VI of the Treaty it will be activities of the assessee in its entirety (with regard to it being an industrial undertaking) and not the various components of its income which shall be relevant.

Even if it is held that Article VI of the Treaty is not a well worded and accurately defined piece of agreement, and therefore, capable of two different interpretations, the interpretation which is in favour of the assessee will prevail.

Under the circumstances, it is held that bifurcation of dividends as attempted by the assessing officer is erroneous and the entire income from dividends from Tetra Pak. Pakistan Ltd. amounting to Rs.37,230,000 be taxed @ 10% ."

2. Before us the learned D.R. has stressed the facts that it was only such dividend as derived from income attributable to "Industrial Undertaking" from Pakistan which was to be concessionally assessed at the reduced rate of tax at 10% . Dividend attributable to any other income of such "Industrial Undertaking was, however, to be taxed at the enhanced rate of 15 % as was done by the assessing officer. The learned counsel for the respondent assessee has on the other hand supported the treatment given by the learned CIT(A).

3. The matter has been considered by us. As the dispute has originated on account of interpretation of clause (a) of Article vi specifying the rate of tax applicable in respect of dividend income it will be pertinent to reproduce the same for consideration:

"(a) Where a Swiss Company owns shares carrying not less than one-third of the voting power of a Pakistan Company the rate of Pakistan tax payable in respect of the dividends declared of or after the 1st January, 1961, and paid by such Pakistan Company to such Swiss Company shall not exceed:--

(i)10 per cent. when such dividends are derived from the income of an industrial undertaking ir. Pakistan; and

(ii)20 per cent. in the case dividends derived from other income. "

4. The term "Industrial Undertaking" as used in Article (vi)(a) has also been defined as per clause (6) of the said Article (vi) as under:--

".(6) The terms 'Industrial Undertaking', as used in this Article, means an undertaking falling under any of the classes mentioned below:--

(a)the manufacture of goods or materials or the subjection of goods or material to any process which results in substantially changing the original condition;

(b)ship-building;

(c)electricity, hydraulic power, gas and water supply;

(d)mining, including the working of an oil well os any other source of miner deposits; and

(e)any other undertaking, which may be declared to be an 'industrial undertaking' by the competent Authority in Pakistan for the purposes of this Article."

5. As it has rightly been pointed out by the learned CIT (A) that there is no dispute about the fact that M/s. Tetra Pakistan Ltd is an "Industrial Undertaking in terms of definition given in clause (6) of the Convention the only dispute by the Department is that income in the form of return on deposits and sources other than manufacturing activities should be categorised apart from income occurring to the company from manufacturing activity for the purpose of determining the nature of dividend income attributable thereto. This interpretation by the Department is in our views not correct. The Income of "Industrial Undertaking" has to be taken as composite whole as there is no provision in clause (a)(i) of Article (vi) of the Convention denoting any bifurcation of income from manufacturing/industrial and non-industrial activity. The expression used is "divided derived from the income of an Industrial Undertaking in Pakistan".

In our view the only interpretation to be given to this expression is that the entire amount of dividend declared has to be treated as arising out of income from such "Industrial Undertaking" and for these reasons we confirm the', finding of the learned CIT(A) that "while considering the applicability of Clause (6) of Article (vi) of the Treaty it will be activities of the assessee in' its entirety (with regard to it being an Industrial Undertaking) and not the various components of its income which shall be relevant. " The taxation of the entire dividend income from Tetra Pakistan Ltd. @ 10% is accordingly confirmed.

6. The Departmental appeal fails.

M.B.A./518/Trib.Order accordingly.