AS. NOS. 1613/KB AND 1614/KB OF 1998-99, DECIDED ON 14TH JUNE, 1999 VS AS. NOS. 1613/KB AND 1614/KB OF 1998-99, DECIDED ON 14TH JUNE, 1999
1999 P T D (Trib.) 3362
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and Muhammad Mahboob Alam, Accountant Member
As. Nos. 1613/KB and 1614/KB of 1998-99, decided on 14/06/1999.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.80-AA, 22(c) & 12(5)---Tax on income of non-residents from fee for technical service---Tax on tax ---Assessee a non-resident received "fee for technical services" and tax was duly charged Q 15 %---Tax was paid by the client on behalf of the assessee in pursuance of contractual obligation-- Assessing Officer found that tax paid by the client/owner on behalf of the assessee was real income against which no expenses were incurred and the income was assessable under cl. (c) of S.22 of the Income Tax Ordinance, 1979 as value of benefit or perquisites ---Validity---Assessee had not provided any services other than the technical services, and the payment of tax by the client was for the same consideration for which "fee for technical services" had been paid i.e. rendering of managerial, technical and consultancy service-Tax: paid on, behalf of the assessee by the client on "fee for technical services" paid to the assessee fell within the purview of "fee for technical services" as defined in the Explanation to subsection (5) of S.12 of the Income Tax Ordinance, 1 979 and was out of purview of income under S.22(c) of the Income Tax Ordinance, 1979---Demand created in respect of income allegedly falling under S.22(c) while exercising jurisdiction to make assessment under S.80-AA of the Income Tax Ordinance, 1979, was without jurisdiction and void-- Assessee had rightly grossed up the sum paid to the assessee as "fee from technical services" and the taxes paid thereon and the tax on tax was rightly computed and worked out.
(1976) 33 Tax 1 (Trib.); Messrs Shukus v. CIT, Zone B (1986) 158 ITR 420 (AP) and North British Railway Company v. Scott VIII TC 332 ref.
(1976) 33 Tax 1 (Trib.) and 1994 PTD 1171 rel.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 80-AA---Tax on income of non-resident from fee for-technical services---Presumptive tax regime---Normal income-tax regime-- Jurisdiction--Assessing Officer had no jurisdiction to make any assessment at the same time in respect of any income under normal law under S.80AA of the Income Tax Ordinance, 1979---If at the time of completing assessment under S.80-AA the Assessing Officer formed opinion that income did not fall within the purview of presumptive tax regime governed under S.80-AA, he shall simply make an observation in that behalf and exclude any such normal income from the income determined under S.80-AA---Assessing Officer shall then serve a notice on the assessee calling upon him to file a return of total income and thereafter he will acquire jurisdiction to complete assessment under the normal law, reason being that the normal income-tax regime and the presumptive tax regime were totally different in their nature, scope, application, procedure and jurisdiction and had nothing in common to each other in their genens.
1997 PTD 1380 and 1998 PTD (Trib.) 1201 rel.
Mahfoozur Rehman Pasha, D.R. for Appellant. 1. N. Pasha for Respondent.
Date of hearing: 8th June, 1999
ORDER
MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). ---The above appeals at the instance of assessee are directed against the order, dated 8-12-1998 by the learned CIT(A), Zone-I, Karachi in I.T.As. Nos.292 and 293 relating to the assessment years 1997-98 and 1998-99.
2. Briefly stated the relevant facts as contained in the assessment order are that the respondent is a non-resident joint venture of two companies namely; K & M Engineering and Embasco. Both the companies are incorporated in U.S.A They entered into an agreement, dated 15-1-1993 with Messrs Hub Power Company Limited (HUBCO) for certain services namely preliminary services, design review and construction supervision. There is no dispute in respect of the sum received by the respondent on account of "fee for technical services" and the tax payable thereon. There is dispute between the respondent and department on the point of nature of income covered under the concept of tax on tax. As per agreement between the respondent and HUBCO the taxes and duties imposed on the respondent were to paid by HUBCO. Thus in pursuance of the agreement between the parties (respondent and HUBCO) taxes on all the payments made under the agreement were paid by HUBCO. So far the payments on account of "fee for technical services" is concerned the Assessing Officer charged tax at 15 %. However, in respect of taxes paid by HUBCO the Assessing Officer formed opinion that it was deemed income of the respondent liable to be taxed at normal rate applicable to income under section 22 of the Income Tax Ordinance, 1979 and not at the rate applicable to presumptive income as per the treatment given in the earlier years. The Assessing Officer further observed that the tax paid by the client on behalf of the consultant was real income against which no expenses were incurred and the income was assessable under clause (c) of section 22 of the Income Tax Ordinance, 1979 as value of benefit or perquisites. The Assessing Officer further observed that the benefits in shape of payment of income-tax liability by client on behalf of assessee arises from rendering of consultancy services and it represents the net income of assessee which should be subjected to tax at rates applicable to income under section 22 of the Income Tax Ordinance, 1979 at the rate of 43 % The assessee was, therefore, confronted on this point. The Assessing Officer intended to charge tax on tax, treating the same as income from other sources. It was explained on behalf of respondent/assessee that when there is a contract between two parties and the person making the payment also undertakes to bear the tax liability, the tax so paid is also considered to be the same income of the recipient as other payments made under the contract, which is also liable to tax. It was further stated that it is for this reason that the tax liability is grossed up to work out the tax, on tax on tax basis. Reliance was placed in this behalf on a judgment from English Jurisdiction and the decision of Income-tax Appellate Tribunal reported as (1976) 33 Tax 1 (Trib.) wherein it was held as follows:
"An employer under section 18 of the Income-tax Act is required to deduct the tax at source and it is the net salary after deduction of the tax that is paid to the employees. Here too the position is that the employees are paid the net salaries and the appellant having undertaken to pay the tax. The mere fact that the employees are in term of their service agreement paid tax free salaries would not really change the character of the tax since to all intents and purposes this is tax paid on behalf of the employees and thus a part of their salary notwithstanding that the tax calculated in this manner is higher than the tax which the employees would have paid had they not been paid tax free salaries and the taxes were deducted from their salaries at source. The tax on tax cannot, therefore, be properly regarded as a perquisite but a part of the salary of the employees."
3. On the basis of above judgment it was contended that in view of the fact that the tax paid by employer on behalf of the employee was held to be salary or, the same analogy tax paid by HUBCO on behalf of K&M Engineering and Embasco is fees from technical services' and, therefore, it has been correctly grossed up on tax on tax basis as the tax also becomes part of the income of recipient. It was further contended that under section 22 (c) which is sought to be invoked benefits or perquisites are taxable as income from business or profession provided they arise from business or the exercise of a profession. According to respondent in this casem tax was paid by HUBCO in pursuance of contractual obligation and, therefore, it is not a benefit or perquisite but squarely falls under the same head i.e. 'fees from technical services'.
4. 'The Assessing Officer did not accept the contentions for the following reasons:---
(a) That the payment of tax is not on account of the services rendered but same is in fact the real income of the assessee against which no expenses have been incurred. This income is assessable under clause ('c) of section 22 of the Income Tax Ordinance, 1979.
(b) That the benefit in shape of payment of income-tax liability by the owner on behalf of the assessee-company although arises from tendering of services but the same represented the net income of the company which should be subjected to tax Q 43 % applicable to income under section 22 of Income Tax Ordinance, 1979. The contention of assessee that such income per se forms part and parcel of receipts on account of "fee for technical services" which should be subjected to tax Q 15 % is fallacious and legally unbelievable as such receipts do not fall under section 80-(1A but instead these fall under section 22 of the Income Tax Ordinance, 1979.
(c) That the income earned by rte assessee-company falls under section 80-AA of Income Tax Ordinance, 1979 and this aspect is immaterial whether the same is earned under express terms of Agreement or otherwise. Thus the contention of the A.R. on behalf of the assessee on this account is untenable.
(d) That the income of the assessee-company is not presumed income and is not covered under section 80-AA of Income Tax Ordinance, 1979 but such income is real income as no expenditure has been incurred against the same. Moreover, this view gains support from the case of Messrs Shukus v. CIT, Zone-B (1986) 158 ITR 420 (AP) wherein it was held that tax due and payable by foreign employer paid under the agreement by the foreign employer and Indian company is income of the employee who is an assessee and the same is assessable as income from 'other sources'. (See Chatirvedi and Pitsoria Income Tax Law, 1991; Volume 24th Edition, page 2134, 56 Serial No-33). However, in the same of one of the sub-contractors of the client NT No.14-12-070018 identical treatment has been upheld by the learned C.I.T. (Appeals) Zone V, Karachi vide Appeal No. 225/V, dated 21-5-1998."
5. As a result of above findings the Assessing Officer subjected the amount of tax paid by HUBCO to charge of land at the rate of 43% taking the same to be income from business. Being aggrieved with the above treatment the assessee preferred first appeal contending that since very inception of the contract the method of grossing up of the tax payable was being adopted and accepted by the department. It was for the period from 1-1-1997 to 30-6-1997 and 1-7-1997 to 31-12-1997 that the DCIT deviated from the past treatment. It was contended that under section 80-AA where any consideration by way of "fee for technical services" referred to in the explanation to subsection (5) of section 12 is received or is deemed to be received by, or accrues or arises or is deemed to accrue or arise to a non -resident the whole of such consideration shall be deemed to be income of the non-resident and tax thereon shall be charged at the-rate of 15 % of such income. It was urged that the assessee received entire consideration including the payment of tax by HUBCO in consideration of technical services provided by them and thus the total receipts come within the purview of fee from technical services to which section 80-AA was applicable. Reliance was placed on subsection (5) of section 80-AA which provides that the tax under section 80-AA shall be deemed to be final discharge of tax liability and no return of total income was required to be filed. Subsection (5) of section 80-AA reads as follows:---
"Section 80-AA(5)-The tax paid under this section shall, to the extent that the income of the non-resident is chargeable under this section, be deemed to be the final discharge of his tax liability under this Ordinance, and he shall not be required to file the return of total income under section 55 or be entitled to claim any refund or adjustment on the basis of such return."
6. It was further submitted that the authority of Assessing; Officer was limited to the determination of income referred to in subsection (2) of section 80-AA and charging tax thereon in accordance with the provisions of section 80-AA. Reliance was placed on subsection (3) of' section 80-AA which reads as follows:---
"Section 80-AA(3): On receipt of such return, the Deputy Commissioner may, after calling for such particulars, accounts or documents as he may require, determine the income referred to in subsection (2) and charge tax thereon in accordance with the provisions of this section."
7. It was further contended that the assessee was engaged in Pakistan solely providing technical services under contract with HUBCO and all payments received or deemed to be received by it were part and parcel of the consideration by way of 'fee for technical services' and there was no other activity whatsoever to which such receipts could be assigned to warrant any consideration in any other provision of the Ordinance.
8. The learned CIT(A) accepted the contentions and held that the entire consideration generated from the contract in question was income accruing or arising from the contract and the whole of such income was taxable under section 80-AA. The assessment order was modified accordingly. Being aggrieved with the above finding the department has preferred above appeals. The learned D.R. has supported the findings of the Assessing Officer and has submitted that the point in issue stands decided in India by Andhra Pradesh High Court vide judgment reported as (1986) 158 ITR 420 on which the Assessing Officer has placed reliance. He has submitted that so far the fee received by the respondent from HUBCO for providing consultancy and technical services is concerned, there is no dispute that it is governed under section 80-AA and the Assessing Officer has taxed the receipt accordingly. He has further submitted that the payment of tax, on such receipts by HUBCO does not fall within the purview of fee from technical services' and, therefore, it has to be charged as income from other sources and other source is income from business and profession by virtue of the provisions contained in section 22(c). On the other hand Mr. I.N. Pasha learned counsel for the respondent/assessee has assailed the assessment order and has supported the impugned order of learned CIT(A) for the reason that admittedly the only source of income of the respondent is fee from technical services governed under section 80-AA of the Income Tax Ordinance. He has submitted that the tax paid by the HUBCO is in pursuance of contractual liability arising out of the same contract under which fee for technical services is paid and the consideration for payment of income-tax is the same which is for payment of fee from technical services. Thus when the liability to pay fee from technical services and the tax payable on such receipts spring from the same contract and in consideration of same activity, the source of both the payments is to be taken as same with the result that the entire income in the hands of respondent should be' treated as fee for technical services. Mr. Pasha has submitted that the point for consideration is whether the tax paid is fee from technical services or not. He has contended that the point in issue stands decided by this Tribunal in the judgment reported as (1976) 33 Tax 1 (Trib.) wherein it has been held that if employees are paid the net salaries and the employer has undertaken to pay the tax, the tax paid shall be regarded as salary of the employee and not a perquisite. Mr. 1. N. Pasha has submitted that in this case a principle has been laid down that when the source of receipts and income-tax paid thereon is same the nature of income shall remain same. Mr. Pasha has further placed reliance on the judgment from Indian Supreme Court reported as 1994 PTD 1171 (203 ITR 881). In this case question before the Supreme Court of India was whether interest income can be assessed as income from other sources when it was received on account of delayed payment on execution of contract. The relevant facts were that an assessee carried a business of executing Government contracts. In the. case of execution of contract there were disputes with the State Government with regard to the payments under the contracts. Dispute was referred to arbitration. The matter was ultimately decided in favour of assessee who received certain amounts under the awards of arbitrators including interest for delayed payment of the amounts due to it. The assessee claimed that the interest received was of the same nature as other trading receipts and since assessment had been completed by applying a net, profit rate of 10% of the trading receipts only 10% thereof was assessable in its hands. It was held by the Appellate Tribunal that the amount of interest had to be delinked from trading receipts and .was fully taxable under the head income from other sources. The Supreme Court of India held that if the amounts under a contract were not paid at the proper time and interest was awarded to the assessee for such delay, the interest was only an accretion to the respondent's receipts from the contract and was attributable to and incidental to the business carried on by it. The principle was laid down by the Supreme Court of India that, "the interest payable to the respondent partook .of the same character as the receipts for the payment of which it was otherwise entitled under the contracts and which payment had been delayed as a result of disputes between the parties. The interest awarded could not be separated from the other amounts granted to the respondent under the awards as 'income from other sources;" Mr. I.N. Pasha has further placed reliance on a judgment from English Jurisdiction in the case of North British Railway Company v. Scott reported as VIII TC 332 wherein it was held by the House of Lords that the contract to pay salaries free of Income-tax constituted in effect an agreement to pay the salaries plus the tax thereon. Mr. I.N. Pasha has next contended that the judgment of Andhra Pradesh High Court reported as (1986) 156 ITR 420 has been wrongly relied upon by the Assessing Officer as the facts in that case were quite distinct. He has taken us through the above judgment to show that some Polish Nationals in the employment of Polish Firm were working in India for Hindustan Shipyard Limited under the terms of contract. The assessees were paid salary by their Polish employer and their allowances were also paid by the Polish while the income-tax was payable by Hindustan Shipyard Limited. 1n these circumstances it was held by Andhra Pradesh High Court that the assessee was not an employee of Hindustan Shipyard Limited and, therefore, the tax paid by them was not perquisite. It was income assessable from other sources. Mr. Pasha has submitted that in the case cited above the source of salary was from employer while the tax was paid by Hindustan Shipyard Limited which was not employer of the assessee and, therefore, the sources being different' the tax paid could not partake the colour of salary income and, therefore, it was held to be income from other sources. Mr. Pasha has submitted that in the present case the source of payment of fee from technical services and the tax thereon is same and under the same contract for providing consultancy and technical services and the consideration also being same the tax paid is to be treated as fee from technical services and, therefore, the tax on tax is to be paid on grossing up of the fee for technical services and the tax paid as rightly held by the learned CIT(A).
9. Mr. I.N. Pasha has next submitted that under section 22(c) only such income shall be chargeable under the head income from business or profession which represent value of any benefit or perquisite which arises from the business or exercise of a profession. He has submitted that in order to bring an income within the purview of section 22(c) the condition precedent is that there should be some benefit or perquisite whether convertible into money or not and it should arise from business or exercise from a profession. If all the, conditions are not fulfilled the provisions contained in section 22(c) shall not be attracted. He has submitted that in the present case the respondent has no business or profession but the only source is providing of consultancy and technical services for which 'fee for technical services' is received which is governed under the special provision contained in section 80-AA with the result that the special provision shall exclude the applicability of general provision contained in section 22. He has further submitted that the Tribunal has already held in the judgment reported as (1976) 33 Tax 1 (Trib.) that the tax on tax cannot be regarded as perquisite but a part of the salary of employee and on this score also the provision contained in section 22(c) shall not be attracted. Mr.. Pasha has next contended that the tax paid is not in the nature of benefit but it is on account of consideration for providing consultancy and technical services and, therefore, the payment of tax being a consideration for services provided by the respondent it comes within the purview of fee from technical services as defined in the explanation to subsection (5) of section 12.
10. Mr. Pasha has lastly contended that the creation of demand by the Assessing Officer is illegal and without jurisdiction. Mr. Pasha has pointed out that return was filed under section 80-AA which is covered under the presumptive tax regime and, therefore, while determining tax liability on the basis of return under subsection (2) of section 80-AA the authority of the Assessing Officer is restricted and confined to the presumptive tax under section 80-AA which is evident from the provisions contained in sub section (3) of section 80-AA which provides that "on receipt of such return the Deputy Commissioner may, after calling for such particulars, accounts or documents as he may require, determine the income referred to in sub section (2) and charge tax thereon in a accordance with the provision of this section". He has further submitted that under subsection (5) of section 80-AA the tax paid under section 80-AA to the extent that the income of the non-resident is chargeable under this section, be deemed .to be the final discharge of tax liability under this Ordinance and shall not be required to file the return of total income under section 55. Mr. Pasha has thus submitted that the respondent did not file any return of income under section 55 and the Assessing Officer did not issue any notice under section 56 or 65 and merely issued notice under section 62, which is without jurisdiction. Mr. Pasha has submitted that for assessment of income under section 22 the Assessing Officer shall acquire jurisdiction either on filing of return under section 55 or the service of notice under section 56 or 65 as the case may be. Mr. Pasha has submitted that ii' the Assessing Officer was of the opinion that the respondent has earned any income not covered under the presumptive tax regime under section 80-AA and the said income is assessable under section 22 he ought to have issued a proper notice for filing of return in that behalf and then only he could acquire jurisdiction for assessing income under section 22 by a assessment order under section 62. He has submitted that the point in issue stands decided by the Tribunal in the judgments reported as 1997 PTD 1380 and 1998 PTD (Trib.) 1201.
11. We have carefully considered the contentions raised by the learned representatives for the parties and have gone through the judgments referred to during the course of arguments. We have carefully considered the material brought on record and the relevant law relied upon by the parties. Our findings are as under:---
12. The contentions and arguments advanced by Mr. I.N. Pasha contain substance and force. Respectfully following the earlier decision of this Tribunal reported as (1976) 33 Tax 1 (Trib.) it is held that if the employer undertakes to pay the taxes on the salary paid to the employee and thereby net salary is paid to the employee, the tax so paid shall be regarded a salary of the employee and not a perquisite or benefit other than salary
13. We further agree with the principle laid down by the Indian Supreme Court to the judgement reported as 1994 PTD 1171 (203 ITR 881) and hold that if there` is accretion in receipts under the same contract the nature of accretion shall remain same and it shall partake the colour of same receipts on which accretion takes place, irrespective of the tact whether it takes place directly under the contract or because of some subsequent events so long the source remains the same contract. The accretion is not to be delinked from the original receipts. We further agree with the submission of Mr. Pasha that if the principle receipts and the tax paid thereon spring from the same contract and same source the nature of both the, receipts shall certain same. In the facts and circumstances of the present case we are further persuaded to agree with the contention that the tax paid by HUBCO, or, the 'fee from technical services' is for the consideration of same services 'provided by the respondent and, therefore, by virtue of the definition of the expression 'fee for technical services' contained in explanation to sub section (of section 12 of the Income Tax Ordinance the tax paid is also included in the 'fee for technical services'. In order to fully appreciate the contention, it would be appropriate to reproduce the Explanation to subsection (5) of section 12 of the Income Tax Ordinance, 1979 which reads as follow;---
Explanation: Subsection (5) of section 12. For the, purposes of this subsection (clause (b) of section 24, subsection (2) of section `30, subsection (3A) of section 50 and section 80-AA) 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of the services of technical or other personnel) but does not include consideration for any construction, assembly or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salary'. "
14. A perusal of above definition shows that 'fees for technical services means any consideration including any lump sum consideration for the rendering of any managerial, technical or consultancy services. Thus if amount is paid for consideration of, rendering managerial, technical or consultancy services by whatever name or expression it is described it shall be treated as 'fees from technical services'. Clause 33 of the agreement between the respondent and HUBCO contains that client (HUBCO) shall pay all taxes duties Government charges, import and export licence fee and all similar fee (taxes) imposed on the consultant K & M Embasco for the owners o: affiliated thereof or on any employees thereof by the Islamic Republic of Pakistan relating to payments under this agreement. The HUBCO has thus under the same agreement under which 'fees for technical services' has been paid, undertaken to pay the taxes etc. relating to the payments under the agreement. It is admitted position that the respondent have not provided any services other than the technical services for which they have been paid 'fee for technical services' and thus the payment of tax by HUBCO is for the same consideration for which fee for technical services' have been paid i.e. rendering of managerial, technical and consultancy services. Thus in addition to the general principles stated above, in the facts and circumstances of the present case the taxes paid by the HUBCO on 'fee for technical services' paid to the respondent fall within the purview of 'fee for technical services as defined in the explanation to subsection (5) of section 12 of the Income Tax Ordinance, 1979.
15. We further agree with the arguments of Mr. Pasha that in order to attract the provisions contained in section 22(c) of the Income Tax Ordinance there should be benefit or perquisite, the value whereof is convertible into money, or not and the said benefit or perquisite should arise from business or the exercise of a profession. If any payment/receipt does not amount to benefit or perquisite then it shall not be chargeable as income from business or profession and if it is benefit or perquisite but it does not arise from business or the exercise of a profession then also it shall not be chargeable 'as income under the head income from business or profession under section 22(c). In the present case the tax paid by HUBCO on the 'fee for technical services' received by respondent is neither a benefit nor perquisite but is in the nature of 'fee for technical services' itself and as held earlier it does not arise from business or exercise of a profession, therefore, the provisions contained in section 22(c) are not attracted.
16. We further agree that the demand created by the Assessing Officer is per se without jurisdiction and void. Reason being that while completing assessment under section 80-AA on receiving the return under section 8b-AA the authority of the Assessing Officer is confined to the determination of income under section 80-AA and charging tax thereon in accordance with the provisions of section 80-AA. The Assessing Officer has no jurisdiction to determine total income under any of the heads of income classified in section 15 and has no jurisdiction to determine total income under the normal law and charge tax thereon at the normal rate specified in First Schedule. In short, while exercising jurisdiction under section 80-AA the Assessing Officer has no jurisdiction to make any assessment at the same time in respect of any income under normal law. If at the time of completing assessment under section 80-AA the Assessing Officer forms opinion that it does not fall within the purview of presumptive tax regime governed under section 80-AA, he shall simply make an observation in this behalf and exclude any such normal income from the income determined under section 80-AA. He shall then serve a notice on the assessee calling upon to file a return of total income and thereafter he will acquire jurisdiction to complete assessment under the normal law. The reason being that the normal income-tax regime and the presumptive tax regime are totally different in their nature, scope, application, procedure and jurisdiction. They have nothing in common to each other in their genesis. The point in issue has been deliberated in detail in the judgments reported as 1997 PTD 1380 and 1998 PTD (Trib.) 1201 and, therefore, it is held that in addition to our finding that the tax paid by HUBCO on 'fee for technical services' paid to the respondent fell within the definition of 'fee for technical services' and was arms out of the purview of income under section 22(c), the demand created by the Assessing officer in respect of income allegedly falling under section 22(c) while exercising jurisdiction to make assessment tinder section 80-AA, was without jurisdiction and void.
17. For the foregoing reasons it is held that the respondent had rightly grossed up the sum paid to the respondent as 'fee from technical services' and the taxes paid thereon and the tax on tax was rightly computed and worked out. The impugned direction of learned CIT(A) is, therefore, not open to any exception which is hereby upheld. The appeals at the instance of department are without force and stand dismissed accordingly.
C.M.A./M.A.K./73/Tax(Trib.) Appeals dismissed.