I.T.AS. NOS. 1008/KB TO 1014/KB OF 1995-96, DECIDED ON 30TH DECEMBER 1998. VS I.T.AS. NOS. 1008/KB TO 1014/KB OF 1995-96, DECIDED ON 30TH DECEMBER 1998.
1999 P T D (Trib.) 2515
[Income-tax Appellate Tribunal Pakistan]
Before S. M. Sibtain, Accountant Member and Tahseen Ahmed Bhatti, Judicial Member
I.T.As. Nos. 1008/KB to 1014/KB of 1995-96, decided on 30/12/1998.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.12(2), proviso---Agreement for Avoidance of Double Taxation between Republic of Italy and Pakistan, Art. 7---Deemed income ---Assessee, a non resident company having permanent establishment in Pakistan entered into a contract with Electricity Supply Corporation for supply, erection, testing and commissioning of turbine generator plant and accessories as well as of electrical, measuring and control equipment---Electricity Corporation made payment through letter of credit in foreign currency in Italy to the assessee towards cost of imports of machinery, equipment and accessories-- Chargeability of tax on "deemed income" accrued on payment in Italy-- Validity---Business operation of procurement and supply of equipment and material was carried out by the assessee out of Pakistan---Income from such operation, thus, was not attributable to operation carried out in Pakistan-- Income deemed to accrue or arise on payment made by Electric Corporation to assessee in Italy, therefore, would be covered by proviso to S.12(2), Income Tax Ordinance, 1979.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss.80C(2) & 50(4)---C.B.R. Circular No.2 of 1975---Tax on income of contractors and importers---Assessment year 1992-93 & 1993-94--Agreement for Avoidance of Double Taxation between Republic of Italy and Pakistan, Art.7---Deemed income ---Assessee, a non-resident company having permanent establishment in Pakistan---Contract between assessee and Electricity Supply Corporation for supply, erection, testing and commissioning of turbine-generator plant and accessories as well as for electrical, measuring and control equipment---Option to be out of presumptive tax regime---Income attributable to assessee's operation carried out in Pakistan was assessed by applying rate of gross profit on the basis of Instructions contained in C.B.R. Circular No.2 of 1975---Validity---Income attributable to assessee's operation carried out in Pakistan was covered by presumptive tax regime---Neither Income Tax Ordinance, 1979 provides for the non-resident contractor to opt out of presumptive tax regime nor the Assessing Officer has any option but to accept/treat the chargeable receipts of the assessee as "deemed income" under S.80-C of the Income Tax Ordinance, 1979.
Amjad Jamshed, D. R. and Mumtaz Shaikh, Commissioner for Appellant.
Khalil Wagan, F.C.A. and Irfan Saadat Khan for Respondent.
Date of hearing: 16th May, 1998.
ORDER
S. M. SIBTAIN (ACCOUNTANT MEMBER).---All these seven appeals are instituted on 12-12-1995 at the instance of the Department. While the respondent in the first four appeals is Ansaldo SPA, Pakistan Branch, Karachi the respondent in the later three appeals is Ansaldo Componed Pakistan Branch, Karachi.
2. The only objections taken, to the order of the learned CIT(A) recorded on 20-9-1995, on behalf of the Department, common in all the first four appeals, are on the following grounds:
"The learned CIT(A) was not justified in segregating the plant and machinery supplied by M/s. Ansaldo SPA Italy and exempting income thereon considering it as separate business activity not attracting tax in Pakistan and in holding that income arising out of erection and installation only which is undertaken by Pakistan Branch was taxable in Pakistan.
The learned CIT(A) was not justified in directing to pass 80-C order disregarding the assessee's return of normal income (which the assessee did file) filed exercising option under the Agreement for Avoidance of Double Taxation.
The learned CIT(A) erred in directing to invoke proviso to subsection (2) of section 12 of the Income Tax Ordinance, 1979 because, from the perusal of the contract it is evident that there is one contract and, therefore, the business operations cannot be arbitrarily split-up into two operations but must be regarded as a whole.
The learned CIT(A) erred in explaining as to why compliance of Circular No.2 of 1975 issued by C.B.R. be made, according to which profit of the contract completed in assessment years 1989-90 to 1993-94 was allocated to each of the 5 pending assessment.
The learned CIT(A) was not justified in allowing relief in P&L expenses."
3. We have heard at length Mr. Mumtaz Ahmad, the learned C.I.T., representing the Department and Mr. Khalil Wagan and Mr. Irfan Saadat Khan, the learned counsel for the respondent.
4. Briefly, the facts are that the respondent is' a company established and existing under and by virtue of the Laws of Republic of Italy with registered office in Genova, Italy. It has entered into two Contract Agreements on 10th July, 1988 with Karachi Electric Supply Corporation Ltd., Karachi (KESC), in pursuance of Bids offered by it (1) for the supply, erection, testing and commissioning of Turbine-Generator Plant and Accessories' (Lot-C) and (2) for the supply, erection, testing and commissioning of Electrical, Measuring and control Equipment (Lot-D) of the Bin Qasim Thermal Power Station Extension Units 3 and 4 Project which have been accepted by the KESC (the owner) as per Letters of Acceptance No. PU(3)/3.00/1821 and 1822, dated July 10, 1986 and the Contracts have been awarded as per Letters of Intent No. PE-PU(3)/7.00/2436 and 2437, dated September 14, 1986.
The Agreements witness as follows
(1) In this Agreement, the words and expressions shall have the same meaning as are respectively assigned to them in the General Conditions of Contract hereinafter referred to.
(2) The following documents shall constitute the Contract between the Owner and the Contractor and the term "the Contract" shall in all such documents be construed accordingly.
The Contract Agreement
Performance Bonds Nos. LG 564 and 562/87, 560 and 561/87, 563 and 565/87 and 558 and 559/87.
Amendment No. 1 (annexed herewith) to Letter of Intent, indicating changes agreed since the issuance of Letter of Intent.
Contractor's Letter No.COM/AZM/KHI/020, dated September, 14, 1986 acknowledging receipt of Owner's Letter of Intent, and accepting the same.
Owner's Letter of Intent (together with all its Annexures attached thereto) bearing No. PE-PU(3)/7.00/2436 and 8.00/2437, dated September 14, 1986.
Contractor's Letter of July 28, 1986 acknowledging receipt of Owner's Letter of Acceptance, and accepting the same.
Owner's Letter of Acceptance No. PE-PU(3)/3.00/1821 and 1822, dated July 10, 1986.
The Bid bearing No.COM/OFF/009778/Bni/gd, dated July 19, 1985 and PRT1/PRE/700552/LOR/bf, dated July 24, 1985 for Units 3 and 4 for Lot-C, Turbine-Generator Plant and Accessories and Lot-D, Electrical, Measuring and Control Equipment, incorporating subsequent clarifications and modifications as agreed and recorded in the Letter of Intent (together with annexures attached thereto).
Bidding Documents comprising Volumes I, IL, II-A, II-B, II-C, II-D, III and IV.
Addenda Nos. l, 2, and 3 and 1 and 2 (except the parts deleted as recorded in the Amendment No. 1 annexed herewith) and Owner's instructions telexed on July 15, 1985 advising delinking option for Unit No.5 from the Bid reading as:
"You are hereby informed that KESC has decided to delink option Bid for Unit-5 from Bin Qasim Unit-3. You may now quote option Bid for Unit-4 alongwith Unit-3 Bid."
(3) It is an express condition of this Contract Agreement that if there shall be any discrepancy or difference between the conditions stated in the Bidding Documents and other documents listed in para. 2 hereof, and the conditions stated in this Contract Agreement, then this Contract Agreement shall take precedence.
(4) In consideration of the payments to be made by the Owner to the Contractor as mentioned in the Contract, the Contractor hereby convenants with the Owner to supply, erect, test and commission the Turbine-Generator Plant and Accessories (Lot-C) and the Electrical, Measuring and Control Equipment, Lot-D, and to remedy defects therein, in conformity in all respects with the provisions of the Contract.
(5) The Owner hereby convenants to pay the Contractor, in consideration of the supplying, erecting, testing and commissioning the Turbine-Generator Plant and Accessories (Lot-C) and the Electrical, Measuring and Control Equipment, Lot-D, and the remedying of the defects therein, the Contract Price or such other sum as may become payable under the provisions of the Contract, at the times and in the manner prescribed by the Contract.
(6) The date of commencement of the works shall be deemed to be the date of award of Contract i.e., September 14, 1986. The Contractor guarantees and is held responsible and bound to the Owner to complete the works comprised in the Contract so that Unit 3 shall be ready for commercial operation on or before June 13, 1989 and Unit 4 shall be ready for commercial operation on or before October 13, 1989.
6. The break down of Contract Price as per letters of Intent (supra) are as under
CONTRACT FOR LOT-C-Letter No.2436.
AND
CONTRACT FOR LOT-D-Letter No.2437.
| Description | Foreign Currency (DM) | Local Currency (Pak Rs.) |
| | LOT-C | LOT-D | Lot-C | LOT-D |
| Unit - 3 A Equipment and to Material D excluding Spare Parts | | | | |
| A. F.O.B | 52,552,009 | 33,317,232 | Nil | Nil |
| B. Marine Transport (max. ceil ing) | 3,394,200 | 918,000 | Nil | Nil |
| C. Marine Insurance (Max ceiling) | 267,100 | 179,300 | Nil | Nil |
| D. Unloading, loading and Trans portation from Port to Site. | Nil | Nil | 1,217,500 | 308,900 |
| E. Indigenous Equipment and Material | Nil | Nil | Nil | Nil |
| F. Erection and Commissioning | 5,136,100 | 2,117,200 | 36,648,140 | 7,425,972 |
| G. Contract Price excluding Spare Parts-A to F | 61,349,409 | 36,531,732 | 37,865,640 | 7,734,872 |
| H. Spare Parts CIF cost | 5,286,720 | 1,685,300 | 92,700 | 23,700 |
| I. Contract Price including Spare Parts-G + H | 66,636,129 | 38,217,032 | 37,958,340 | 7,758,572 |
| Unit-4. A Equipment and to Material D excluding Spare Parts. | | | | |
| A. FOB | 47,749,900 | 21,216,800 | Nil | Nil |
| B. Marine Transport (Max. ceiling) | 3,288,500 | 583,900 | Nil | Nil |
| C. Marine Ins.(max. ceiling) | 258,900 | 114,600 | Nil | Nil |
| D. Unloading loading and Transportationfrom Port to site | Nil | Nil | 1,297 | 206,200 |
| E. Indigenous Equipment and Material | Nil | Nil | Nil | Nil |
| F. Erection and Commissioning | 3,643,680 | 1,521,010 | 28,190,790 | 5,330,574 |
| G. Contract Price excluding Spare Parts-A to F | 54,940,980 | 23036,310 | 29,487,790 | 5,536,774 |
| H. Spare Parts CIF cost | 1,017,510 | Nil | 17,070 | Nil |
| I. Contract Price including Spare Parts-G + H | 55,958,490 | 23,436,310 | 29,504,860 | 5,536,774 |
| Training of Owner's Personnel for Units 3 and 4 | | | | |
| Training Cost | 162,108 | 136,512 | Nil | Nil |
| Provision of Daily Allowance | 68,400 | 57,600 | Nil | Nil |
| Total Contract Price For Units 3 and 4 | 122,825,127 | 61,847,454 | 67,463,200 | 13,295,346 |
7. Terms of Payment as per Letters of Intent (supra) are:
"A: Payment for the Contract Price will be made as follows:
| (a) For Imported Equipment and Material - FOB |
| 10% (Ten per cent) | Advance payment as soon as the Italian Government soft loan funds become available and upon submission of an acceptable Bank Guarantee of equivalent amount in favour of the Owner. |
| 70% (Seventy per cent) | Pro-rata on shipment and upon submission of shipping documents in accordance with Clause CC-59 of the Conditions of Contract. |
| 10% (Ten per cent) | Pro-rata upon arrival at the Site of every shipment and upon submission of receiving and/or damage report countersigned by the Engineer. |
| 10% (Ten per cent) | Final Payment; upon Provisional Acceptance of each Unit and upon submission of documents (one certified copy) in accordance with Clauses CC.44 and CC.53 of the Conditions of Contract. |
| (b) For Marine Transport and Insurance. |
| 100% (Hundred percent) | Pro-rata upon submission of invoices and supporting documents, payable at actual cost of Marine Transport and Insurance and subject to the maximum ceiling allowed in the Contract Price. |
| (c) For Indigenous Equipment and Material. |
| 10 % (Ten percent) | Advance payment; within 60 days after issuance of Letter of Intent by the Owner and upon submission of required Performance Bond and an acceptable Bank Guarantee of equivalent amount. |
| 80% (Eighty per cent) | Pro-rata upon arrival at the Site and upon submission of receiving and/or damage report, countersigned by the Engineer. |
| 10% (Ten per cent) | Final payment; upon Provisional Acceptance of each Unit and upon submission of documents (one certified copy) in accordance with Clauses CC.44 and CC.53 of the Condition of the Contract. |
| (d) For Erection and Commissioning. |
| 10% (Ten per cent) | Advance payment; upon shipment of imported Equipment and Material amounting to 20% of the FOB Value of the Contract. This payment will be released upon submission of an acceptable Bank Guarantee of equivalent amount. |
| 80% (Eighty per cent) | Pro-rata upon submission of monthly progress invoices duly certified by the Engineer. |
| 10% (Ten percent) | Final payment; upon Provisional Acceptance of each Unit and upon submission of Documents (one certified copy) in accordance with Clauses CC.44 and CC.53 of the Conditions of Contract. |
| (e) For Unloading, Loading and Transportation from Port to Site. |
| 100% (Hundred per cent) | Pro-rata upon receipt of imported Equipment and Material at the Site, of each shipment payable in proportion to the relation of transported FOB value of that shipment to total FOB Value of the Contract and upon submission of receiving and/or damage report countersigned by the Engineer. |
| (f) For training of Owner's Personnel. |
| 100% (Hundred percent) | Upon submission monthly invoices. |
Note:The Advance Payment Bank Guarantee mentioned above will be reduced pro-rata the value of each shipment and of monthly progress.
Similarly the Mode of Payment is Agreed as under:
"MODE OF PAYMENT
(a) Separate invoices/payment documents shall be submitted for foreign and local currency payments.
(b) The Engineer shall, within 21 days of receipt of invoices/payment documents from the Contractor, either forward the invoices/payment documents duly certified as required under Terms of Payment, or return to the Contractor indicating the reasons for which it is not being certified.
(c) All foreign currency payments will be made from the Funds made available by Italian Government to Pakistan Government and relent to the Owner.
All foreign currency payment shall be made through Letter of Credit (L/C), to be established in favour of the Contractor."
9. The respondent has applied for NTN, through M/s. Sidat Hyder Aslam & Co., Chartered Accountants, on July 4, 1988. First return of income is filed for assessment year 1988-89, declaring nil receipts and nil income is assessed.
10. The respondent has declared receipts and losses in the subsequent returns as under:
| "Assessment year | Receipts | Loss/Income |
| | Rs. | Rs. |
| 1989-90 | 46,940,905 | (69,374,861) |
| 1990-91 | 27,725,157 | (82,523,033) |
| 1991-92 | 2,083,518 | (59,362,338) |
| 1992-93 | 974,192 | (30,074,591) |
| 1993-94 | 21,009 | (37,982,618) |
| Total: | 77,744,781 | |
11. Original assessment orders have been passed in respect of assessment years 1989-90, 1990-91 and 1991-92, wherein incomes are assessed amounting to Rs.515,452, (Rs.1,587,649) and Rs.14,531,654 respectively.
12. The assessment in respect of 1989-90 has been set aside by the learned CIT(A) on 21-1-1993. Revised assessment for 1989-90, made on total income of Rs.4,990,694, in pursuance of the order under. section 132, has been set aside again on 11-2-1995 alongwith the original assessment order for 1991-92.
12. However, the assessment order in respect of assessment year 1990-91 has been upheld by the learned CIT(A) vide his order in Appeal No.281, dated 30-6-1994. The learned CIT(A) has upheld the order of the DCIT holding that instructions contained in C.B.R. Circular No.2 of 1975, regarding assessment of income from running Construction Projects, are applicable in the instant case and that the estimate of G.P. Q 25% of the receipts is fair and reasonable.
13. Ultimately the revised assessment orders for the assessment years 1989-90 and 1991-92 and original assessment orders for assessment years 1992-93 'and 1993-94 have been passed on 22-3-1995.
14. The learned DCIT has noted in his assessment orders that while the respondent has declared its gross receipts in the returns of income for 5 years supra at Rs.77,744,781, its actual gross receipts are amounting to Rs.812,101,791 as under:
"CONTRACT PRICE:
(a) The firm lump sum total Contract Price, for the complete Scope of Work taking into account the price Adjustments for agreed modifications and Additional Items, as detailed in the enclosed Annexures A. l to A.5, for Units 3 and 4 is as follows:---
| Description | Foreign Currency (DM) | Local Currency (Pak. Rs.) |
| Unit-3 (Ref: Annexure A.1) | 38,217,032 | 7,758,572 |
| Unit-4 (Ref: Annexure A.2) | 23,430,310 | 5,536,774 |
| Training of Owner's Personnel for Units 3 and 4 (Ref: Annexure A.5) | 194,112 | NIL |
| Total Contract Price: | 61,847,545 | 13,295,346" |
15. The amounts paid in DM are converted @ Rs.13.0412 (average of rates as on 7-1-1988, 4-1-1990 and 1-1-1990)
| DM: 61,847,454 x Rs.13.042 | Rs.806,565,017 |
| | Rs.13,295,346 |
| Total | Rs.812,101,791 |
(The correct aggregate of the two amounts (supra) is Rs.819,860,363)
16. The learned DCIT has further observed that the respondent has claimed an amount of Rs.64,193,256 on account of Exchange Loss from assessment years 1989-90 to 1993-94. Briefly, the facts in this respect are that Branch Office in Pakistan has been advanced a sum of money by Ansaldo SPA, Italy to carry out work in Pakistan. Due to devaluation of Pak Rupee the cost of the Advance (supra) has gone up by Rs.64,193,250. The learned DCIT has held that it is inadmissible because firstly, it is not a revenue expenditure, secondly it is not incidental to business and thirdly, the claim disallowed in 1990-91 stands upheld by the learned CIT(A). Further, he has decided to make add backs out of P & L expenses in proportion to add backs upheld by the learned CIT(A) in the assessment year 1990-91.
17. The learned DCIT, thus, has proceeded to assess the total income in each of the four assessment years (supra), as under:
| "Loss declared in assessment of assessment year | 1989-90 | Rs.69,374,861 |
| | 1991-92 | Rs.59,362,338 |
| | 1992-93 | Rs.30,040,591 |
| | 1993-94 | Rs.37,982,618 |
| | (-) | Rs.196,760,408 |
| Less: Exchange loss: Rs.64,193,256 | | |
| 2.Contract price is subjected to tax G. P. rate of 25% as discussed above | | |
| Contract price in foreign & Local currency as discussed above Rs.812,101,791 G.P. rate applied at 25% | | |
| | Rs.203.025,447 | Rs.267,218,703 |
| | (-) | Rs.70,458,295 |
| Add backs out of P.&L.A/c. | | |
| (1) Travelling Total expenses claimed in the years under review at Rs.2,130,743, following the treatment given in assessment year 1990-91, 1/3rdis disallowed | 710,247 | |
| (2) Rent, rate & Taxes claimedRs.9,247,700, following the treatment given in assessment year1990-91, 1/3rd is disallowed. | 3,083,566 | |
| (3) Vehicle upkeep & maintenance claimed at Rs. 1,160,778, following the treatment given in assessment year 1990-91 1/4th is disallowed. | 290,195 | |
| (4) Entertainment expenses claimed Rs.776,777. Following the treatment given in assessment year 1990-91, 1/3rd is disallowed. | 258,925 | |
| (5) Printing & stationery claimed Rs.2,901,940. Following the treatment given in assessment year 1990-91, 1 /5th is disallowed. | 580,388 | |
| (6) Repairs & maintenance claimed Rs.1,096,026. Following the treatment given in assessment year 1990-91, 1 /4th is disallowed. | 274,006 | |
| (7) Telephone telex, postage claimed at Rs.06,417,700, following the treatment given in assessment year 1990-91, 1/5th is disallowed. | 1,283,540 | |
| (8) Car hiring charges claimed Rs.08,100,367. Following the treatment given in assessment year 1990-91, 1/3rd is disallowed. | 2,700,122 | Rs.9,179,989 |
| | | Rs.79,638,284 |
| Less: Loss upheld for assessment year 1990-91 by CIT(A) vide appellate Order No.281, dated 30-6-1994. | | Rs. 1,587,649 |
| Total Income | | Rs.78,050,636 |
Total profits of the contract, as determined at Rs.78,050,636 is assessed in the assessment years 1989-90, 1991-92, 1992-93 1993-94 equally and therefore, income of each of the assessment year in lieu of profits of the contract comes to Rs.10,512,650."
18. Appeals are preferred before the learned CIT(A) against the orders of the learned DCIT (supra) for treating receipt of Ansaldo SPA, Italy liable to tax in Pakistan by invoking provision of section 12(2)(a) of the Income Tax Ordinance, 1979 (the Ordinance), for applying gross profit @ 25 % flat rate on foreign and local receipt of Rs.182,101,791, for disallowing exchange loss of Rs.64,193,256 and for partly disallowing expenses claimed under the heads repair, maintenance, telephone, telex and postage, travelling, vehicle hiring charges, rent, rate and taxes, vehicle up-keep, entertainment and printing and stationery.
19. It has been submitted before the CIT(A), on behalf of the assessee that the payments made by KESC outside Pakistan are not chargeable to Pakistan tax because deeming provisions of subsection (2) of section 12 are restricted by the Proviso which provides that in case of a business all the operations whereof are not carried out in Pakistan, the income of the business deemed under this subsection, to accrue or arise in Pakistan, shall be only such part of the income as is reasonably attributable to the operations carried out in Pakistan. Thus, the payments made through L.C. in foreign currency outside Pakistan, towards cost of imports of machinery, equipment and accessories, under the Agreement, by the KESC, are .not chargeable under the Income Tax Ordinance in Pakistan.
20. Further, it is submitted that the receipts in Pakistan are chargeable under section 80-C for assessment years 1992-93 and 1993-94 under presumptive tax regime due to substitution of subsection (2) of section 80-C by Finance Act, 1992, and do not warrant assessment of income by estimating any rate of gross profit in these two years.
21. Regarding the disallowances made out of overhead expenses, it is submitted, on behalf of the assessee, that the earlier decision of the learned CIT(A), dated 11-2-1995 has not been properly complied with.
22. The learned CIT(A), therefore, has held that it is apparent from records that the transformers have been imported into Pakistan, from the non-resident assessee, by the KESC and not by the assessee itself; the income ' deemed to accrue or arise on payment made by the KESC, to the assessee outside Pakistan, therefore, would be covered by the Proviso to sub section (2) of section 12 of the Ordinance. He has further held that for assessment years 1992-93 and 1993-94 the income attributable to assessee's operations carried out in Pakistan is covered by presumptive tax regime because the provision's of sections 50(4) and 80-C(2) of the Ordinance, leave no option to the assessee engaged in construction activity.
23. Regarding the disallowances out of expenses claimed in the P&L A/c, the learned CIT(A) has held that the directions given vide his earlier order, dated 11-2-1995 in respect of assessment years 1989-90 and 1991-92 have been ignored and he has directed due compliance thereof. The objections on this ground in respect of assessment years 1992-93 and objects 1993-94 the learned CIT(A) has held, have become infructuous in view of his finding that incomes in these two years are chargeable under section 80 Cof the Ordinance.
24. It is submitted before us, on behalf of the Department, that Article 7 24. Convention between the Republic of Italy and the Islamic Republic of the for the Avoidance of Double Taxation and the Prevention of Fiscal Pakistan 'on with respect to Taxes on Income is applicable to the respondent. It is Evasion hereunder for the benefit of reference:
"ARTICLE 7 BUSINESS PROFITS
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on or has carried on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them, as is attributable to:---
(a) that permanent establishment; or
(b) sales of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that permanent establishment.
2. Subject to the provision of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
3. In the determination of the profits of a permanent establishment there shall be allowed as deduction expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.
4. Notwithstanding the provisions of paragraph 3, no deduction shall be allowed in respect of amounts paid or charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of:---
(a) royalties, fees or other similar payments in return' for the use of patents or other rights;
(b) commission for specific services performed or for management; and
(c) interest or money lent to the permanent establishment except in case of banking institution.
5. In so far as it -has been - customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles embodied in this Article.
6. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
7. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
8. Where profits include items of income, which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. .
25. It is further submitted that provisions of Article 7 (supra) apply because, admittedly, the respondent has entered into Agreements to supply, erect, test and commission the Turbine-Generator Plant and Accessories as well as the Electrical, Measuring and Control Equipment, including its delivery at Site in Pakistan and the storage thereof at such site till the time of its erection etc. Further, the respondent, admittedly, has set up an office in Pakistan mantled by its own personnel to carry on the operation envisaged under the Agreement and such operations have already continued for over six months prior to and during the income year corresponding to assessment year 1989-90 and thereafter. As such, it is submitted that the respondent has carried out the operations through a permanent establishment (P.E.) in Pakistan, as defined under Article 5.2.(h) of the Treaty
"2. The term 'permanent establishment' shall include especially:---
(h) a building site or construction, installation or assembly project or supervisory activity in connection therewith, where such site, project or activity continues for a period of more than six months. "
26. It is appropriate to note at this juncture, the submission made on behalf of the respondent, that regarding Contractor's Income Tax liability in Pakistan, the Bidding Documents, referred to in the Agreement reproduced at paragraph 5 on page 3 (supra), provide:
"CC.9 INCOME TAX
The Contractor shall be responsible for all Contractor's corporate or Company income tax payable in Pakistan. The income tax if payable in Pakistan will be local currency costs. Normally income tax is paid out of profit. Contractor should, therefore, not make any provision in Bid CIF cost. In case any provision is made in the Bid local currency cost such provisions shall be shown separately. "
27. It has been further submitted that it is in order to meet the commitment in the Bidding Document (supra) that an amendment has been made in paragraph (c) of Clause (mode of Payment) of the Agreement, reproduced on pages 7 and 8 in paragraph 8 (supra), vide Document Amendment No.l, dated 10-7-1988. Paragraph (c) ibid originally read as under:
"(c)All foreign currency payments will be made from the Funds made available by Italian Government to Pakistan Government and relent to the Owner. The invoices/payment documents shall be submitted to the Owner supported by necessary documents and payments will be made by the Italian Government, upon approval of the withdrawal applications presented by the Owner in accordance with the Loan Agreement."
28. However, vide document "Amendment No. 1 " made on 10th day of July, 1988 to the Letters of Intent (supra), following amendment is made:
"Letter of intent, page-B, Item 4,
Mode of Payment
Para (c), lines 3rd to 8th
Following is deleted:
"The invoices/payment documents shall be submitted to the Owner supported by necessary documents and payments will be made by the Italian Government, upon approval of the withdrawal applications presented. by the Owner in accordance with the Loan Agreement."
and in its place following is inserted
"All foreign currency payment shall be made through Letter of Credit (L/C), to be established in favour of the Contractor. "
29. It has been submitted on behalf of the respondent that the drafts of Bidding Documents for International Tenders, Letters of Intent/Agreements as well as Amendments etc. thereto are, admittedly, issued/entered into with prior approval of the Government of Pakistan and no manipulation can be imputed thereto. Further, it is admitted that the respondent has a P.E. in Pakistan otherwise even filing of any return of income is not warranted. However, according to the learned Authorised Representative of the respondent, the payments made to the respondent out9ide Pakistan, by the KESC against Letters of Credit opened to import the stipulated equipment, supplied by the respondent from outside Pakistan, do not attract any tax liability in Pakistan either in terms of the Treaty provisions (supra) or under the normal provisions of the Income Tax Ordinance.
30. We have given our careful consideration to the facts and circumstances of the case (supra) and we find that Article 7 of the Convention supra provides that profits of an enterprise of a contracting state shall be taxable only if it, carries on business in Pakistan through a P.E. but only so much of such profits as is attributable either (a) to that P.E. or (b)(i) to sale of goods or merchandise of the same or similar kind as those sold through that P.E. or (b)(ii) to other business activities of the same or similar kind as those effected through that P.E. Thus, the impugned receipts of the respondent Enterprise outside Pakistan for supply of equipment stipulated in the Agreements, from outside Pakistan, are neither on account of carrying on business attributable to the P.E. nor attributable to any sale of goods or other business activity of the same or similar kind that is effected through the P.E. As stipulated in the terms of Agreements (supra) the respondent has neither carried on any business of sale of foreign equipment and material, including spare parts, through the P.E. nor has received any amount outside Pakistan attributable to any sale of goods or merchandise of the same or similar kind as those effected through the P.E. because it has effected only the other business of unloading from ship, loading on trucks and transportation of imported Equipment and Material, from Port to site; local purchase of spare parts; erection and Commissioning of such equipment. The receipts, thus attributable to the P.E., as per paragraph 6 (supra) are as under:
| Description | Foreign Currency D. M. | Local Currency Rs. |
| | LOT-C | LOT-D | LOT-C | LOT-D |
| Unit-3 D. Unloading, loading and Transportation from Port to Site. | | | 1,217,500 | 308,900 |
| F. Erection and Commissioning | 5,136,100 | 2,117,200 | 36,648,140 | 7,425,972 |
| H. Spare Parts | | | 92,700 | 23,700 |
| J. Contract Price | 5,136,100 | 2,117,200 | 37,958,340 | 7,758,572 |
| Unit-4 D. Unloading, loading and Transportation from Port to Site. | | | 1,297 | 206,200 |
| F. Erection and Commissioning | 3,643,680 | 1,521,010 | 28,190,790 | 5,330,574 |
| H. Spare Parts | | | 17,070 | |
| J. Contract Price | 3,643,680 | 1,521,010 | 29,504,860 | 5,536,774 |
| Total for Units 3 and 4 | 8,779,780+3,638,210 | 67,463,210 + 13,295,346 |
| | 12,417,990 | 80,758,556 |
| (There may be difference on161,945,490 account of conversion rate)x13.0412Rs.242,704,046 |
31. The components of total Contract Price comprising of F. O. B. value of Equipment and Material and C.I.F. of Spare Parts, thus, are not attributable to the Permanent Establishment or to the sale of the same or similar kind as those effected through the P.E. Further, we find that Price components comprising of Marine Transport and Marine Insurance are paid to PNSC and P.I.C. respectively as per paragraphs 10 and 11 of Letters of Intent/Agreements.
32. Similarly the Price components comprising of Training Cost and Daily Allowance is on actual basis as per sub-paragraph (d) of paragraph 2 of the Letters of Intent (supra).
33. Further we find that the import of Proviso to subsection (2) of section 12 read with C.(b) of subsection (1) of section 11, reproduced hereunder, is also the same:---
12. Income deemed to Accrue or Arise in Pakistan.---(2) Any income accruing or arising, whether directly or indirectly, through or from-
(a) any business connection in Pakistan;
(b) any asset, property or source of income in Pakistan; or
(c) transfer of a capital asset situated in Pakistan, shall be deemed to accrue or arise in Pakistan:
Provided that, in the case of a business all the operations of which are not carried out in Pakistan, the income of the business deemed under this subsection to accrue or arise in Pakistan shall be only such part of the income as is reasonably attributable to the operations carried out in Pakistan.
11. Scone of total income.---(1) Subject to the provisions of this Ordinance, the total income, in relation to any assessment year, or a person,---
(b) who is a non-resident, includes all income from whatever source derived, which--
(i) is received, or is deemed to be received, in Pakistan in the income year by, or on behalf of, such person; or
(ii) accrues or arises, or is deemed to accrue or. arise, to him in Pakistan during such year.
34. There is no dispute about the fact that the impugned receipts on account of Price of Equipment and Material is received by the respondent in Italy and it is neither actually received nor the learned Representative of the Department has referred to any provision of law under which it can be deemed to be received in Pakistan. As for the contention that it has accrued or arisen or is deemed to have accrued or arisen to the respondent in Pakistan we find that the contrary provision of subsection (2) of section 12 (supra) is quite unambiguous. There is no doubt about the fact that the business operation of procurement and supply of Equipment and Material have been arrived on by the respondent out of Pakistan hence income from such, operations is not reasonably attributable to operations carried out in Pakistan
35. Accordingly, the appeals on the first common objections supra are sound without any substance; hence dismissed and impugned orders of the learned CIT(A) confirmed.
36. Regarding the liability of chargeable receipts, in the assessment years 1992-9:5 and 1993-94, to the presumptive tax under section 80-C, we find that there is no provision in law for" the non-resident Contractors to opt out of the presumptive tax regime nor the learned assessing officer has any Option but to accept/treat the chargeable receipts of the two years as deemed income under section 80-C. Accordingly, the impugned orders of the learned CIT(A) in respect of assessment years 1992-93 and 1993-94 are hereby confirmed and the appeals are dismissed.
37. The next objection is taken to the directions of the learned CIT(A) being reproduced hereunder
While framing the re-assessment for 1989-90, the assessing officer applied G.P. rate of 20% on Billing receipts declared in incomplete contract account, as against G.P. rate of 17.5% applied in the original assessment order, which had been set aside by my learned predecessor. The same rate was also applied in assessment year 1991-92, on the basis of 'previous history of the case'. The rate of 25 % was purportedly applied on the basis of a parallel case bearing NTN: 14-10-339227, in which similar G.P. was said to have been upheld in appeal.
I have also gone through the order of my learned predecessor for 1989-90 through which the original order had been set aside with certain specific directions. But it is regrettable to note that these were not followed. Not only that, the assessing officer enhanced the G.P. rate without bringing any fresh material in support of his action on record, except for relying upon a case with which the appellant was not confronted. Under the circumstances, his action in rejecting the declared version cannot be upheld.
The impugned orders are accordingly set aside with the directions that the assessing officer should keep himself within the confines of the directions given by my learned predecessor, while refraining the order for 1989-90 and to follow the 'previous history' of the case while framing assessment for 1990-91.
39. However, we find that both the orders of the learned CIT(A) Zohe-1, Karachi are per incuriam because the order of the learned CIT(A) Zone-IV, Karachi, dated 30-6-1994 in Appeal No.291 for assessment year 1990-91 has not been brought to his notice wherein it is held:
"The un controverted fact is that the receipts pertain to an on going and incomplete project, therefore, having regard to the C.B.R. Circular No.2, 1975, adoption of G.P. rate subject to adjustment on completion of the project justified. Further, as the learned assessing officer relied on a parallel case, adoption of the impugned G.P. rate which could not be rebutted by the learned A.R., therefore, the adoption of provisional G.P. rate at 25% in the appellant's line of business appears reasonable and is upheld."
40. Considering the foregoing facts, we cannot confirm the impugned directions of the learned CIT(A) (supra) in respect of assessment years 1989-90 and 1991-92. However, having held supra that the receipts for the assessment years 1992-93 and 1993-94 are chargeable under section 80-C, the impugned assessments orders for 1989-90 and 1991-92 cannot be sustained. Accordingly, the setting aside of the two impugned assessment orders by the CIT(A) is confirmed but with the modification that final assessment on the basis of the aggregate receipts chargeable to Pakistan tax as held by us (supra) during the income years corresponding to assessment years 1989-90, 1990-91 and 1991-92 may be made afresh after giving fresh opportunity to the respondent. It is appropriate to add here that the assessment in 1990-91 is also provisional.
41. This brings us to the three appeals instituted on behalf of the Department in the case of Ansaldo Component Pakistan Branch. The respondent, like Ansaldo SPA is a company registered in Italy. It has entered into an Agreement with Water and Power Development Authority (WAPDA) for Tarbela Hydro Power Third Extension Project, Contract EM-24 for Supply and Erection of 500 KV Generator Stapup Trans formers and Appurtenances vide Letter No.CMH/DHC/TAR/89/12710, dated 18-12-1986. The break up of the Contract Price as per Agreement is as under:
| Assessment Year | Description | Declared Receipts | Declared Income/Loss |
| 1991-92 | | NIL | NIL |
| 1992-93 | Receipts not covered under section 80-C | Rs.12,132,769 | (3,394,993) |
| | Covered under section 80-C | Rs.3,899,805 | |
| 1993-94 | Receipt not covered under section 80-C | Rs.114,800 | (278,778) |
| | Covered under section 80-C | Rs.1,023,071 | |
| 1994-95 | Covered under section 80-C | Rs.1,956,841 | 5,849 |
| | | Rs.19,127,286 | |
| 42. Receipts and incomes declared as per returns are as under: |
| | Cost of transformers, surge arresters and appurtenances | Rs.84,496,460 | |
| | Assembly /Errection | Rs.2,173,000 | |
| | Erection and Testing equipment and Maintenance tools | Rs.148,600 | |
| | TOTAL COST OF EQUIPMENT | Rs.86,818,060 | |
| | Performance Bond. | Rs.1,452,503 | |
| | Other specialised items (Provisional) | Rs.76,500,000 | |
| | Total cost of transformers and special items. | Rs.164,770,563 | |
| | Insurance, Erection and local transport of transformers and other equipments | Rs.16,792,280 | |
| | TOTAL BID PRICE AS PER CONTRACT | Rs.181,562,843 | |
43. The learned assessing officer, following the pattern of his assessment orders in the case of Ansaldo SPA Pakistan Branch (supra), has held that receipts amounting to Rs.181,562,843 representing the total contract price, irrespective of the fact that price representing the cost of Equipment etc : supplied to WAPDA from outside Pakistan against Letters of Credit opened by WAPDA is paid outside Pakistan, are chargeable to tax in Pakistan.
44. Since the facts of the instant case are similar to the facts of the case supra, we confirm the combined order of the learned CIT(A) impugned in the instant appeals in toto for reasons already recorded by us (supra).
45. The appeals are dismissed.
M.B.A./50/Tax(Trib.)Appeals dismissed