I.T.AS. NOS.364/KB, 1300/KB TO 1305/KB OF 1999-2000 VS I.T.AS. NOS.364/KB, 1300/KB TO 1305/KB OF 1999-2000
2001 P T D (Trib.) 3132
[Income-tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Chairman and
Jawaid Masood Tahir Bhatti, Judicial Member
I.T.As. Nos.364/KB, 1300/KB to 1305/KB of 1999-2000, decided on 16/04/2001.
(a) Agreement for Avoidance of Double Taxation Between Pakistan and United States of America---
---- Art.II(1)(m)---"Permanent Establishment"---Connotation---Definition of permanent establishment as given in the Treaty enumerates the places which fall within the concept of "permanent establishment" and enlarge the scope of "permanent establishment" by including agents in its ambit---Definition of "permanent establishment" distinguishes between independent agent; or contractor and dependent agent or contractor---An agent is deemed to create a permanent establishment who has the authority to conclude contracts on behalf of a US enterprise or who actually exercises such authority; such are dependent agents---Agents of independent status acting in the ordinary course of their business are excluded from the scope of "permanent establishment- Mere agency for acting on behalf of US enterprises is not enough to constitute a permanent establishment and for such purpose the agent must fill orders from stock of goods or habitually exercise an authority to conclude contracts on behalf of or in the name of US enterprise---If the agent is independent and acting in the ordinary course of its business there is no permanent establishment of US enterprise in Pakistan.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.78---Agreement for Avoidance of Double Taxation Between Pakistan and USA----Liability of agents representing assessee---Permanent establishment ---Assessee was treated as an agent of non-resident principal under S.78 of the Income Tax Ordinance, 1979, and tax was charged on the income that had accrued to the non-resident principal in Pakistan in the hands of assessee on the ground that assessee had entered into the distribution agreement with non-resident principal whereby the assessee was responsible for payment of taxes which arose as a result of payment of sub-licence fee to the said non-resident principal ---Assessee contended that income of non resident principal was not chargeable to tax in Pakistan since it had no permanent establishment in Pakistan---Validity---Agreement between the assessee and the non-resident principal provided that the right to sub-licence the programmes was non-exclusive and the principal had the rights to distribute programmes directly in Pakistan and to appoint another agent in Pakistan---Only rights to use the intellectual property had been granted to assessee which could not be treated as goods or articles as had been referred to in the definition of "permanent establishment" in the Treaty---Subsequent sub-licensing the rights to use the programmes was not executed on behalf of non-resident principal, but the assessee in the capacity of licensor for its clients sub-licensed the rights to use the programmes ---Assessee was acting independently in the ordinary course of its business and did not represent "permanent establishment of non-resident principal in Pakistan---Non-resident principal having no "permanent establishment in Pakistan, in circumstances, its income would not be subjected to tax in Pakistan---Order of the First Appellate Authority as well as that of the Assessing Officer was vacated by the Tribunal.
CIT v. R.D. Aggarwal & Co., (1965) 56 ITR 20 (SC Ind.); B.P. Ray v. ITO, (1981) 129 ITR 295 (SC Ind.) and 1989 PTD 271 ref.
(c) Agreement for Avoidance of Double Taxation Between Pakistan and United States of America---
----Art.II(1)(m)---Income Tax Ordinance (XXXI of 1979), S.78--=Permanent Establishment---Principle---Technological progress in the field of communication has considerably changed the manner of doing business and affected the basic concepts of fiscal policies relating to cross-border transactions---Old concepts of geographical boundaries have been demolished and now a borderless world Internet business, known as E-business is rapidly progressing---Need of the persons to a transaction, or the middleman, to be present physically has been eliminated---Basic rule of the "permanent establishment" i.e. the fixed place of business and the agency rule of permanent establishment were crumbling---E-business was, therefore, heading towards the resident base taxation---E-business could deal in digital goods (technological goods) and not in merchandise, articles or services-- "Permanent establishment" was very much relevant to the cross-border transactions relating to the latter---Income arising from cross-border transfer of technological goods and services could not be taxed on the basis of traditional concepts of permanent establishment under the present provisions of the Income Tax Ordinance, 1979.
Khalil Ahmed Waggan, A.C.A. and Irfan Sadat Khan for Appellant.
Vishno Raja Qavi, D.R. for Respondent.
Date of hearing: 4th January, 2001.
ORDER
JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).--- The appellant through these seven appeals have agitated the consolidated order of the learned Commissioner of Income Tax (Appeals), dated 16-12-1999 for the assessment years 1992-93 to 1998-99 on the following common grounds of appeal:---
(1)That the order passed by the CIT(A) is bad in law and on facts. It is contended that the action of the learned CIT(A) is arbitrary, misconceived and contrary to law.
(2)That the CIT(A) has erred in confirming the action of the Assessing Officer who treated the appellant as an agent of the Oracle Corporation U.S.A. under section 78 of the Ordinance. It is contended that the action of the learned CIT(A) is arbitrary, misconceived, contrary to law and facts of the case.
(3)That the CIT(A) has erred in confirming the action of the Assessing Officer who alleged Permanent Establishment (PE) of Oracle Corporation USA in Pakistan. It is contended that the action of the learned CIT(A) is arbitrary, misconceived, contrary to law and facts of the case.
(4)For the assessment years 1992-93 to 1995-96, the appellant has also challenged the order on the ground that the assessments framed under sections 62/78 of the Income Tax Ordinance, 1979 (the Ordinance) are barred by time."
2. The appellant, a private limited company, is engaged in computer application development programs, and providing related consultancy services. It also acts as a distributor of Oracle Corporation USA, a non resident company, for their Computer Software Programs. The Deputy Commissioner of Income Tax while monitoring withholding tax obligations of the appellant under section 50 of the Ordinance observed that the appellant was acting as a distributor in Pakistan for Oracle Corporation USA. It was further observed by the DCIT that the appellant had entered into the distributorship Agreement with the said non-resident company whereby the appellant was responsible for payment of taxes of whatsoever nature which may arise as a result of payment of sub-licence fee to the said non-resident company on the basis of that 'Distribution Agreement' as given in clause 3.3.13, which is reproduced hereunder:---
"3.3.B. Currency, free and clear payments.---All payments made to ORACLE shall be in United States currency and paid to Oracle's account at Barclay Bank PLC, P.O. Box 6880, St. Thomas, United States Virgin Islands 0081 or such other account as may be designated by ORACLE. All payments of sub-licence fees, or any other fees shall be made without deductions based on any currency control restrictions, import duties, or sales, use, value-added, or other taxes or withholdings. In the event that FATAKIA is prohibited by law from making payment hereunder free of deductions or withholdings, then FATAKIA shall pay such additional amounts which are required by Pakistan law without reducing the amount of the applicable payment required to be made to ORACLE."
The appellant has been referred to in the aforesaid Agreement as FATAKIA since the. word "FATAKIA" is interchangeable with the name of the appellant hence it reads as the name of appellant.
3. In view of the above discussed facts the DCIT issued a show-cause notice, dated 9th June, 1999 to the appellant confronting it as to why it should not be treated as an agent of the said non-resident company under section 78 of the Ordinance and as to why the tax chargeable on the income that was accrued to the said non-resident company in Pakistan should not be assessed on it. The appellant was further advised to file the return of income as an agent of the said non-resident company for the assessment years 1992-93 to 1998-99. In compliance to the above notice, authorized representative of the appellant Messrs Muniff Ziauddin & Co., Chartered Accountants vide their letter, dated 21-6-1999 filed the NIL return of income for the aforesaid years under protest. In response to the notice issued under section 61 of the Ordinance the appellant contended that the income of the said non-resident company was not chargeable to tax in Pakistan in view of the Articles of the Treaty for the avoidance of double taxation which Pakistan has with United States of America since it had no Permanent Establishment (PE) in Pakistan. The DCIT after examining the explanations filed by the appellant rejected the contention of the appellant that the said non-resident company had no PE in Pakistan by making the following observations and assessed the income after allowing expenses to the extent of 90 per cent. of the gross receipts during the each subject assessment years:
"The fact that assessee is a sole distributor in Pakistan of Oracle Corporation, USA clearly establishes permanent establishment as discussed in preceding paragraph clearly shows that Oracle Corporation, through distributor' in Pakistan has acquired a permanent establishment and their income is chargeable to tax in Pakistan. Moreover, in view of clause 3.3.13 of the agreement with Oracle Corporation referred to above assessee has assumed responsibility for payment of tax liability of Oracle Corporation as agent. "
4. The appellant agitated the issue in the first appeal. The learned CIT(A) dismissed all the seven appeals after discussing the contested issues in detail. The relevant portions of the appellate order passed by the learned CIT(A) are reproduced below:
"The learned A.R. has been heard, orders are perused and the issues are decided as under: In view of the provisions of section 12(2), any profits of the non-resident which can be reasonably' attributable to such part of operations carried out in Pakistan through business connections in Pakistan are deemed to be earned in Pakistan. The term 'business connections' has not been defined in the Income Tax liOrdinance, 1979. There is, however, plethora of case-law from an jurisdictions on the subject, which are relevant and material. In CIT v. R.D. Aggarwal & Co., (1965) ITR 20 (SC Ind.), it was held that a business connection involves the relation between a business carried out by non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of the continuity between the business of the non-resident and the activity in the taxable territory, but excluding a stray or isolated transaction. Further, business connection may take several forms; it may include carrying on a part of the main business or activity incidental to the main business of the non-residents through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on that business. Thus a relation, to be a business connection; must be real and intimate, through or from which income may accrue or arise whether directly or indirectly to the non-resident. It may be pointed out that section 12 does not seek to bring into the tax net the profits of non-residents which cannot reasonably be attributed to operations carried out in Pakistan. Besides, even if there be a business connection in Pakistan the whole of the profit accruing or arising from the business connection is not deemed to accrue or arise in Pakistan. It is only that portion of the profit, which can reasonably be attributed to the operations of the business carried out in Pakistan, which is liable to income-lax.
It is also well-settled that the definition of the expression 'business' given in section 2(11) of the Income Tax Ordinance, 1979 is an inclusive definition; and it is being used as including within its scope income from profession, vocation and callings as well. It may be mentioned that the ratio of the decision in B.P. Ray v. ITO (1981) 129 ITR 295 (SC Ind.) is also to the said effect. From the foregoing discussion, it is evident that sections 12 and 78 of the income Tax Ordinance, 1979 are comprehensive enough to include all heads of income mentioned in section 15 of the Income Tax Ordinance, 1979. The terms of the agreement between the non resident and the appellant clearly show that there is a continuity of business relationship between two and the course of dealings between the two is such that it can safely be described as a continuing business relationship. As there is continuity of business relationship between the appellant resident who helps to make the profits and his non-resident principal who receives or realizes the ~0 profits, therefore, treating the appellant as the non-resident's agent` by the learned DCIT was justified, as their relationship does constitute a business connection. Here, it may be clarified that in a case where the transactions between the resident and the non resident are made at arm's length and are on a principal to principal basis, non-liability will arise on accrual basis to the non-resident on the profits made by him. So also. where the non-resident exercises no control over the business of the resident and sales are made by the latter on his own account or the payment to the non-resident is made on delivery of documents and is not dependent in any way on the sales to be effected by the resident, it can be inferred that transactions are on the basis or principal to principal. Here, in the case under discussion, a reference to the terms of agreement between the appellant resident and his principal non-resident clearly shows that it is otherwise, and therefore, treating the appellant as agent and non-resident having a permanent establishment was justified which is upheld.
From the foregoing discussion, it is crystal clear that the appellant company being distributor computer software of the non-resident I principal company has an intimate and real business relationship with it, which is, moreover, of a permanent nature, and, therefore, permanent establishment of the non-resident company stands established. As the non-resident principal viz. M/s. Oracle Corporation of USA is doing business in Pakistan through its agent M/s. Ora-tech Systems (Pvt.) Ltd., as such, action of the Assessing Officer in treating the appellant resident (M/s. Ora-tech Systems (Pvt.) Ltd., as the agent of the non-resident and treating the total receipts under the head business income appears to be correct, and therefore, the impugned treatment is upheld. The adoption of the net income by assessing is at 10 % of the gross receipts in the facts and circumstances of the case likewise appears to be reasonable, which is, therefore, also upheld. Regarding the time-barred issue, the appellant must also fail as the returns had been filed. Also ratio of the decision reported as 1989 PTD 271 (Kar. H.C.), J.L Wei & Co. and others v. CIT may be referred to with advantage. It was held therein that when return of income under section 34 (corresponding to section 65 of the Income Tax Ordinance, 1979) is filed, then assessee cannot challenge its legality or validity. The appellant must, therefore, fail on this issue as well. All the appeals accordingly fail and are dismissed."
5. The appellant is now before us on the grounds as set forth in the memo. of appeals and are reproduced in the first para. of this order. Mr. Khalil A. Waggan, ACA alongwith Mr. Irfan Sadat Khan, Advocate stated that the appellant had entered into an agreement with Oracle Corporation USA, a non-resident company, whereby the appellant was granted a licence for sub-licensing the rights to use the specified Oracle Computer Software Program (Programs) in Pakistan for the consideration of fee equal to 50-55 per cent. of sub-licence fee received by the appellant. Mr. Khalil Waggan vehemently contended that Oracle Corporation USA had no PE in Pakistan, therefore, the learned DCIT had wrongly made income of Oracle Corporation USA subject to tax in Pakistan and had wrongly treated the appellant as its agent under section 78 of the Ordinance. It was argued that Article III of the Treaty provides that a US Enterprise shall not be subject to tax in Pakistan in respect of its income unless it is engaged in trade or business in Pakistan through a PE situated therein. Mr. Waggan referred to the definition assigned to the term "Permanent Establishment" in the Treaty and argued that the relationship between Oracle Corporation USA and the appellant which was of a creator and independent contractor would not constitute PE. Definition of 'Permanent Establishment' as provided in Article II(1)(m) of the Treaty is reproduced below:
"Article 11(1)(m) The term 'Permanent Establishment' when used with respect to an enterprise of one of the contracting States, means a branch, management, factory or other fixed place of business, but does not include as agency unless the agent had, and habitually exercised, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. In this connection:--
(i)An enterprise of one of the contracting States shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business dealings in that other contracting State through a bona fide broker or general commission agent acting in the ordinary course of his business as such; and
(ii)The fact that a corporation or company which is resident of one of the contracting States has subsidiary corporation or company which is a resident of the other contracting State or which is engaged in trade on business in such other contacting State (whether through a permanent establishment of otherwise) shall not of itself constitute that subsidiary corporation or company a permanent establishment of its parent corporation or company."
The learned counsel submitted that it is an established fact that Oracle Corporation USA has no branch, management, factory or other fixed place of business in Pakistan, nor it appointed an agent who negotiates and concludes contract on its behalf or who keeps stock of merchandise on its behalf. Mr. Waggan submits that the appellant was an independent licensee who was acting in the ordinary course of its business. At this juncture he referred to clause 9.4 of the Agreement which defines the relationship between the parties, the same is reproduced hereunder:
"9.4 Relationship between parties.---FATAKIA will in all matters relating to this agreement act as an independent contractor. The relationship between ORACLE and FATAKIA is that of creator/licensor and distributor; this Agreement does not establish a joint venture, agency or employer-employee relationship. "
The learned counsel argued that it could not be inferred from any clause of the Agreement that the appellant was authorized to act on behalf of Oracle Corporation US nor the appellant habitually exercises a general authority to negotiate and conclude contracts on behalf of Oracle Corporation USA. He submitted that the Agreement only grants the appellant a non-exclusive licence to sub-license the currently available Programs. The learned counsel submitted that it was evident from the assessment records that all sub-licence agreements were between the appellant and its clients and bills for sub licensing fee were raised by the appellant and it was independently responsible to its clients. The learned counsel argued that since the appellant was functioning independently of Oracle Corporation USA in the ordinary course of its business, therefore, it could not be treated as PE, of Oracle Corporation USA.
7. While explaining another aspect of the definition where the agent who has stock of merchandise from which he regularly fills orders on behalf of its principal comes within the ambit of PE, at the outset Mr. Waggan vehemently contended that the appellant sub-license the rights to use Programs on its own responsibility and not on behalf of Oracle Corporation USA, he further contended that the definition refers to goods and merchandise which are things or articles whereas under the argument the appellant was granted a licence to sub-licence the rights to use Programs which were intellectual property in their nature and the appellant or sub licensees have only beneficial interest in such Programs. Mr. Waggan submits that such rights are incorporeal rights which could only be enforced by action and could not be construed as goods or article as have been referred to in the definition of PE.
The learned counsel of the appellant have also submitted that the assessments for the assessment years 1992-93 to 1995-96 were, barred by time in view of the provisions of section 65 of the Ordinance.
9. On the other hand, Mr. Vishno Raia Qavi, learned representative of the respondent has argued that the appellant was a sole agent of US-based company in Pakistan, which was evident from the business activities that had been carried out by the appellant. Learned D.R. has referred to the various clauses of the Agreement between the Oracle Corporation USA and the appellant and has tried to establish that there was P.E. in Pakistan. In this respect, he has referred to Clauses 3.5, 4.1, 4.2, 5.2B, 6.2A and 6.213 of the Agreement which are also incorporated hereunder:
2.5. Fatakia Commitment:
In consideration for the rights granted herein, FATAKIA agrees to use its best efforts to market the programs in the Territory. FATAKIA agrees that, during the term of this Agreement, it will commit the following marketing and technical support efforts on behalf of the programs; (a) during the first year of the Agreement, a staff of at lease one (1) full time salesperson and one (1) full time technical support representative; and (b) for the remaining term of this Agreement FATAKIA will add an additional person in both roles.
FATAKIA agrees that to adequately perform the functions as distributor of ORACLE Programs it is necessary for it to avoid conflicting interests which interfere with performance of its distributorship duties. Therefore, in consideration of its appointment as an ORACLE distributor, FATAKIA agrees not to market any other product which performs substantially the same functions as ORACLE Programs.
4.1. Fatakia Sub-License Reports:
Within three (3) days of the last day of each month, FATAKIA shall provide ORACLE with a report detailing for that month;
(a)Programs sub-licensed, including details of which programs and number of copies akeach program sub-licensed;
(b)A list of all sub7licences, including names, addresses, and relevant CPU type;
(c)A detailed amount of all sub-licence fees, technical support fees and other fees due to or to be paid to ORACLE under this Agreement; and
(d)Forecasted sub-licenses for the following month presented in format to be designated by ORACLE.
In addition, FATAKIA shall maintain copies of all agreements with its sub-licenses. Upon reasonable request from ORACLE,
FATAKIA agrees to make these a4reements available for inspection to ORACLE.
4.2. Records; Inspection:
FATAKIA shall maintain books and records in connection with activity under this agreement for the term of this agreement and for at least one year from the date this agreement terminates or expires. The records that FATAKIA shall Maintain shall include, but are not limited to, the information required to be reported in Paragraph 4.1 above.
ORACLE; or its representative tray audit the relevant books and records of FATAKIA to ensure compliance with the terms of this Agreement. Any such audit shall be conducted during the regular business hours at FATAKIA's offices and shall not interfere unreasonably with FATAKIA's business activities. Audits shall be made no more than once annually. If an audit reveals that FATAKIA has underpaid fees to ORACLE in excess of five per cent. (5 %); then FATAKIA shall pay ORACLE's reasonable costs of conducting the audit in addition to the underpaid amount.
ORACLE may inspect sub-licence lists upon reasonable notice to FATAKIA.
5.2b. Cessation of Support Services:
ORACLE may discontinue Technical Support to FATAKIA for any programs or for any portions thereof, provided that ORACLE generally discontinues Technical Support for such Programs or portions thereof. Should ORACLE elect to discontinue Technical Support while this Agreement is in effect, FATAKIA shall receive a copy of the source code that is relevant to the unsupported program or portion thereof. The source code shall be used by FATAKIA solely for the purpose of continuing technical support for sub licences outstanding and shall be subject to the terms of this Agreement. FATAKIA shall not provide the source code to any third party. Other than as provided for in this paragraph FATAKIA shall not have access to the source code for the programs.
6.2A. Right to reproduce
ORACLE hereby grants to FATAKIA the right to reproduce Documentation and promotional material and to use such material to further FATAKIA's marketing efforts on behalf of the programs, subject to the obligations set forth in this Agreement.
6.213. Right to translate:
ORACLE hereby grants to FATAKIA subject to the obligations set forth in Paragraph 6.2C below, the right to translate promotional material and Documentation relating to the programs and to see such material to further FATAKIA's marketing efforts on behalf of the programs.
10. The learned D.R. has argued that there was proprietary rights of the appellant in "Programs" and it also enjoyed rights of modification and translation. He has also referred to clause 2.5 wherein the appellant agreed on to provide marketing and technical support on behalf of programs which according to learned D.R. should have been treated as the proprietary rights of the appellant in Pakistan. According to him, the Programs of the USA based company were stock-of-merchandise and the appellant had regularly filled the orders on behalf of the US-based company. He has contended that in case of cessation of the contract all the Programs would be the property of the US-based company. Learned D.R. has submitted that the definition of word "INDEPENDENT AGENT" in OECD (Model of Double Taxation Convention, 1977) as referred by the learned A.R. was not relevant as the said model was issued in 1977, whereas, the Treaty was executed in 1960 and has not based on the referred Model.
11. We have heard the learned' Representatives of both the parties and have also perused the impugned order of the learned CIT(A), all the assessment orders for the years under consideration, the distributorship Agreement between Oracle Corporation USA and the appellant, the relevant provisions of the Treaty and other relevant documents which have been referred to by both the parties. The main controversy between the parties is whether the appellant can be treated as PE of Oracle Corporation USA. Other issues are offshoots of the basic issue of PE. The definition for PE as has been given in the Treaty firstly enumerates the places which fall within the concept of PE. It then enlarges the scope of PE by including agents in its ambit. The definition distinguishes between independent agent or contractor and dependent agent or contractor. An agent is deemed to create a PE who has the authority to conclude contracts on behalf of US Enterprise or who habitually exercises this authority. Such are dependent agents. Agents of independent status acting in the ordinary course of their business are excluded from the scope of PE. Mere agency for acting on behalf of US Enterprises is not enough to constitute a permanent establishment. For this purpose the agent must fill orders from stock of goods or habitually exercises an authority to conclude contracts on behalf of or in the name of US Enterprise. If the agent is independent and acting in the ordinary course of its business there is no PE of US Enterprise in Pakistan.
12. The appellant, under the Agreement, has been granted a licence for sub-licensing the specified Computer Software Programs within the territory of Pakistan. In view of clause 9.4 of the Agreement the relationship between the US Corporation and the appellant is licensor and independent contractor. We have observed that sub-licensing activity is an independent activity of the appellant and is being carried on in ordinary course of appellant's business however, the US Corporation in order to protect its title, copyrights and other proprietary rights in the Programs and for the determination of fee, since it is based on sub-licence fee received by the appellant provides certain parameters for sub-licensing the Programs in the Agreement. We have perused the standard form of sub-licence agreement which is being used by the appellant. The relevant clauses of the "sub-licence agreement" are reproduced hereunder:
Ora-Tech Systems (Pvt.) Ltd. hereinafter known as "Ora-Tech" situated at 9-A, Block 6, P.E.C.H.S, Sharah-e-Faisal, Karachi and the client identified the signature page here agree that the following terms and conditions will apply to each and 'every program sub-licence ("Licence") granted' and to all allied services provided by Ora-Tech under this Agreement.
2.1.Rights ranted:
(A)Ora-Tech hereby grants to client a non-exclusive licence to use thePrograms. Client obtains pursuant to this Agreement, as follows.
5.1 Infringement indemnity:
Ora-Tech will defend and indemnify client against a claim that Program furnished and used within the scope of this Agreement infringes a United States and/or Pakistan copyright or patent, provided that (a) client notifies ORA-TECH in writing within 10 (ten) days of the claim (b); ORA-TECH has sole control of the defence and all related settlement negotiations and (c) Client provides ORA-TECH with the assistance, information, and authority necessary to perform the above, reasonable out of pocket expenses incurred by the client in providing such assistance will be reimbursed by ORA-TECH. ORA-TECH shall have no liability for any claim of infringement, based on (a) use of a superseded or altered release of programs if such infringement could have been avoided by the use of a current unaltered release of the Programs that ORA-TECH provides that client; or (b) the combination, operation, or use of any Programs furnished under this Agreement with- programs or data not furnished by ORA-TECH if any infringement would have been avoided by the use of the Programs without such programs or data.
In the event the Programs are held or are believed by ORA-TECH to infringe. ORA-TECH shall have the option, at its expense, to (a) modify the Programs to be non-infringing. (b) obtain for client., a licence to continue using the Programs or (c) terminate the licence for the infringing Programs and refund the licence fees paid for those Programs, prorated over a five-year term from the commencement.
5.3 Exclusive remedies/liability:
For breach of the warranties contained in paragraph 5.2 above, client's exclusive remedy, and Ora-Tech's entire liability shall be:
For tyro-grams:
'The. correction\of Program errors or replacement of Program media of Ora-Tech is unable to make the Program operate as warranted. Client shall be entitled to recover the applicable Licence fees paid to Ora-Tech prorated to one year in case of Supported licences and no other claims or damages whatsoever ....
5.4 Limitation of liability
In no event shall Ora-Tech be liable for any indirect incidental, special or consequential damages, including loss of profits, revenue, data, or use, incurred by Client or any third party, whether in an action in contract or tort.
The provisions of this Article allocates the risk under this agreement between Ora-Tech and Client. Ora-Tech's pricing reflects this allocation of risk and the limitation of liability specified herein.
The above clauses of the sub-licence agreement clearly show that only the appellant and its client are party to the sub-licence agreement had none of the acts of the appellant would bind the US Corporation.
13. The learned D.R. has contended that the appellant is an exclusive agent of Oracle Corporation USA in Pakistan. We have perused the agreement and find that the observation is not correct. Clause 2.6 of the Agreement clearly provides that the rights to sub-licence the Programs is E non-exclusive and Oracle Corporation USA has the rights to distribute Programs directly in Pakistan and to appoint another agent in Pakistan. For the facility of reference clause 2.6 of Agreement is reproduced hereunder:--
2.6. Marketing rights in the territory:
FATAKIA acknowledges that its right to market and sub-licence the programs is non-exclusive. FATAKIA acknowledges that ORACLE has the right to distribute directly in the territory, and to appoint OEMS and VARs in the Territory. FATAKIA will not negotiate or enter into any OEM, VAR or other distribution agreements without ORACLES prior written consent"
14. The learned D.R. has also contended that the appellant has maintained stock of merchandise wherefrom he regularly fills order on behalf of Oracle Corporation USA. Under the Agreement only the rights to use the intellectual property (Programs) have been granted to the appellant which cannot be treated as goods or articles as have been referred to in the definition of PE in the Treaty. Further, the subsequent sub-licensing the rights to use the Programs is not executed on behalf of Oracle Corporation USA, but the appellant in capacity of licensor for its clients sub-licence the rights to use the Programs.
15. In view of the above-discussed facts and the provisions of the law, we are of the view that the appellant is acting independently in the ordinary course of its business and do not represent PE of Oracle Corporation USA in Pakistan. Since the learned DCIT has not catered any other situations which may establish PE of Oracle Corporation USA in Pakistan, therefore, in the present set off circumstances Oracle Corporation USA has no PE in Pakistan , hence its income would not be subjected to tax in Pakistan during the subject assessment years 1992-93 to 1998-99 in view of the provisions of the Treaty which Pakistan has with the USA. Accordingly, the impugned order of the learned CIT(A) for the assessment years 1992-93 to 1998-99 wherein the treatment of the DCIT was confirmed who treated the appellant as PE and an agent of Oracle Corporation USA under section 78 of the Ordinance is vacated and all the seven appeals filed by the appellant are allowed.
16. As we have allowed all the seven appeals on the issue of PE, we, therefore, need not to adjudicate the other consequential issues.
17. Before parting the order we would like to emphasize that technological progress in the field of communications has considerably changed the manner of doing business. It affects the basic concepts of fiscal policies relating to cross-border transactions. Old concepts of geographical boundaries have been demolished. It is now a borderless world. Internet business, known as E-Business is rapidly progressing. The need of the persons to a transaction, or the middleman, present physically has been eliminated. The basic rule of the PE i.e., the fixed places of business and the agency-rule PE are crumbling. E-business is, therefore, heading towards the residents base taxation. In that context, the PE concept appears irrelevant. E-business could deal in digital goods (technological goods) and not in merchandise, articles or services. PE is very much relevant to the cross-border transactions relating to the latter. The above situation has provided the law makers plenty of foods for careful thought since income arising from cross-border transfer of technological goods and services may not be taxed on the basis of traditional concept of PE under the present provisions of the Income Tax Ordinance, 1979.
18. All the seven appeals are allowed in the manner as indicated above.
C.M.A./M.A.K./116/Tax(Trib.)Appeals allowed.