I.T.AS. NOS.530/IB TO 533/18 OF 1999-2000 VS I.T.AS. NOS.530/IB TO 533/18 OF 1999-2000
2001 P T D (Trib.) 888
[Income-tax Appellate Tribunal Pakistan]
Before Jameel Ahmed Bhutto, Accountant Member and Syed Masood-ul-Hassan
Shah, Judicial Member
I.T.As. Nos.530/IB to 533/IB of 1999-2000, decided on 27/11/2000.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.2(16)(c), 2(30) & 2(40)(c)---Company---Non-resident or resident-- Determination of status ---Company/assessee was registered in U.S.A.-- Branch Office in Pakistan claimed "resident status" being permanent establishment which was rejected by the Assessing Officer---First Appellate Authority found that company was resident with no head office expenses and was qualified for status of company as defined under S.2(16) of the Income Tax Ordinance, 1979---Validity---Pernussion letter showed that branch office was not a resident company the control and management of affairs of which were not in Pakistan---Expenses of branch office were met by transfer of funds from abroad through normal banking channels---Balance-sheet and P&L Account also showed that it was the head office of the foreign company which financed the branch office---Nothing was on record which suggested that branch office itself was a resident company but it was a body corporate incorporated in U.S.A. and fell within the definition of a company under S.2(16)(c). of the Income Tax Ordinance, 1979 but could not be treated as resident under S.2(40)(c) of the Income Tax Ordinance, 1979 in circumstance.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.12(5)(a)---Income deemed to accrue or arise in Pakistan---Fee for technical services---Fiction of place---Fees paid to non-resident were deemed to accrue or arise in Pakistan under S.12(5)(a) of the Income Tax Ordinance, 1979 if technical services were utilised in a business or profession carried on in Pakistan or for purposes of earning any income from any source in Pakistan---Effect of S.12(5)(a) of the Ordinance was to create fiction of place i.e. declaring an income of a non-resident from a source in Pakistan as income arising in Pakistan.
(c) Income Tax Ordinance (XXXI of 1979)--
----Ss.80-AA, 12(5)(7), 30(2)(b), 22 & 62---C.B.R. Circular No.2(3)IT/2, dated 20-11-1982---Convention between Government of -Pakistan and Government of U.S.A. for Avoidance of Double Taxation, Arts. II(1), III(1) & III(3)---Tax on income of non-resident from fees for technical services-- Assessee/company was registered in U.S.A. maintaining a branch office in Pakistan---Income of assessee was from consultancy services---Assessment was made under S.80-AA of the Income Tax Ordinance, 1979 which was set aside by the First Appellate Authority with the remarks that income had to be assessed under S.22 of the Income Tax Ordinance, 1979 on account of industrial and commercial profits in accordance with the Convention instead of under S.80-AA of the Income Tax Ordinance, 1979. on the pleas of the assessee to the effect that fee for technical services fell under industrial and commercial profits as defined in Art. II(1) of the Convention--Validity-- Section 30(2)(b) of the Income Tax Ordinance, 1979 treats the fees for technical services as income chargeable under the head "Income from other sources" and not as income chargeable under the head "income from business or profession" under S.22 of the Income Tax Ordinance, 1979---Fees for technical services were chargeable at the flat rate of tax under S.80-AA of the Income Tax Ordinance, 1979---For the purposes of S.12(5) read with S.30(2) & S.80-AA of the Income Tax Ordinance, 1979, income of assessee by way of fees for technical services Was taxable at flat rate in Pakistan and not under S.22 of the Income Tax Ordinance, 1979 as income from business or profession.
Black's Law Dictionary and 2000 PTD (Trib.) 1396 ref.
(d) Convention between the Government of Pakistan and Government of U.S.A. for Avoidance of Double Taxation----
----Arts. III(1) & III(3)---Income Tax Ordinance (XXXI of 1979), Ss.12(5)(a), 30(2) & 80-AA:--Fee for technical services---Overriding provisions---Convention did not lay down any rule in respect of fees for technical services, and therefore, the provisions of the Convention could not override the provisions of S.12(5)(a) read with Ss.30(2) & 80-AA of the Income Tax Ordinance, 1979.
(e) Convention between the Government of Pakistan and Government of U.S.A. for Avoidance of Double Taxation---
---- Arts. III(1) & III(3)---Fee for technical services---Industrial or commercial profit---Heads of income---Determination of---Term "industrial or commercial profits" given in the Convention could not be interpreted as fees for technical services which was distinguishable and different from industrial or commercial profits---Industrial or commercial profits had to be taken only in the context of trade or business of an assessee and not in relation to any other source of income.
2000 PTD (Trib.) 1396 rel.
Abdul.Jalil, D.R. for Appellant.
Aamir Ahmed, I.T.P. for Respondent.
Date of hearing: 22nd November, 2000.
ORDER
JAMEEL AHMED BHUTTO (ACCOUNTANT MEMBER).---The above captioned appeals at the instance of the department are directed against the appellate order, dated 30th September, 1999 (hereafter the impugned order) passed by the learned C.I.T.(A), Zone-I, Islamabad, in respect of the assessment years 1992-93 to 1995-96, whereby the assessee has been treated as a resident company and it has been held that the income was not assessable under section 80AA of the Income Tax Ordinance, 1979 (hereafter the Ordinance).
2. We have heard the arguments of the learned representatives of both the parties and considered the facts and circumstances of the case in .the light of the orders passed at, lower forums and the material on record.
3. Briefly stated, the relevant facts giving rise to these appeals are that the assessee was treated as a non-resident American company registered under the laws of District of Columbia, U.S.A., maintaining a branch office in Pakistan. The non-resident company was stated to have derived income from consultancy services. Original assessments in the case were made under section 80AA of the Ordinance for the assessment years 1992-93, 1993-94 and 1994-95. These were set aside by the learned Appeal Commissioner. Re assessments were made after due consideration of facts and perusal of Convention between the Government of Pakistan and the Government of U.S.A. for the Avoidance of Double Taxation (hereafter referred to .as the tax treaty). The assessment order was passed under sections 62/132 of the Ordinance and the receipts of the assessee-company were again subjected` to tax under section 80AA of the Ordinance. Being aggrieved with this order as well, the assessee-company filed another appeal and the learned C.I.T.(A) again set aside the case vide order, dated 3-2-1998. The case was taken up for fresh assessment and statutory notices under section 61 of the Ordinance were issued in response to which the authorised, representatives of the assessee attended the proceedings from time to time. The Assessing Officer also issued a notice under section 62, dated 12-5-1999, which is reproduced in the assessment order, dated 17-5-1999. Referring to the case law, on the subject and the provisions of the tax treaty, the assessee-company was confronted through this notice that the services rendered were "technical services" defined in the Explanation of subsection (5) of section 12 of the Ordinance and the same could not be included in the industrial and commercial activities as provided for and referred to in Articles III(1) and III(3) in the tax treaty. The fees for technical services were proposed to be subjected to assessment and tax under section 80AA of the Ordinance. Reliance was also placed on C. B. R. Circular C. No. 2(3)IT/2, dated 20-11-1982 which clarified that in respect of the fee for technical services, the provisions of the tax treaty did not override the provisions of section 12(5) of the Ordinance. In response to the said notice under section 62, -the learned A.R. of the assessee-company submitted reply dated 17-5-1999 which is also reproduced in the assessment order. The contention of the assessee-company was that it has a permanent establishment in Pakistan and accordingly its profits should be assessed under Article III(1) of the tax treaty. It was further contended that fees for technical services were falling under industrial and commercial profits as defined in Article II(1) of the tax treaty. The Assessing Officer examined the issues/points put up for the defence of the assessee-company and came to the conclusion that there was no ambiguity regarding the character of the services rendered by the assessee-company for which fee for technical services had been received. the total receipts for the assessment years 1992-93 to 1994-95 amounting to Rs.64,93,445 were assessed and taxed at 20% under section 80AA of the Ordinance vide assessment order, dated 17-5-1999. Another assessment order under section 62 of the Ordinance was passed for the assessment year 1995-96 on the same basis under normal law and total receipts amounting to Rs.4,90,850 were taxed at 20% under section 80AA of the Ordinance.
4. The abovementioned assessments were contested-in appeal on the grounds that the Assessing Officer was not justified to make the assessments receipts. The rejection of the status of the company under section 2(16) of the Ordinance was also agitated. It was contended that the income of this resident-company was to be assessed under section 22 and not under section 80AA of the Ordinance, because it was income from industrial or commercial profits according to the definition given in the Black's Law Dictionary and the treaty wherein the term "industrial or commercial profits" was described as under:---
"The term 'industrial or commercial profits' does not include rents or royalties in respect of motion picture films or of oil wells, mines and quarries, or income in the form of dividends, interest, rents or royalties, or fees or other remuneration derived by an enterprise from the management, control or supervision of the trade, business or other activity of another enterprise or concern, or remuneration for labour or personal services, or income from the operation of ships."
The learned C.I.T.(A) accepted the contentions of the A.R. of the assessee company and held that the Assessing Officer erred in assessing the income under section 80AA of the Ordinance in view of the tax treaty and that the Assessing Officer had to tax the income under section 22 of the Ordinance on account of industrial and commercial profits in accordance with the tax treaty. The learned C.I.T.(A) also held that it was a resident-company with no head office expenses and qualified for the status of the company as defined under section 2(16) of the Ordinance. The assessment orders for the four years under appeal were, therefore, ordered to be modified in the light of the directions given in the impugned order. Hence these appeals.
5. Having examined all aspects of the case, we are of the considered view that the learned C.I.T.(A) was not justified in assigning the (resident) status of "company" as defined in section 2(16) of the Ordinance as against the status of non-resident (foreign company) determined by the Assessing Officer. The learned A.R. of the assessee-company has referred to section 2(40)(c) of the Ordinance and argued that it was a "resident" company the control and management of whose affairs were situated wholly in Pakistan in the years under consideration. The material on record does not lend any support to this argument. Admittedly, it was a company registered under the laws of District of Columbia, U.S.A., and had set up its branch office in Pakistan mainly to provide professional management, technical and consultancy services. Permission for opening of the branch office in Pakistan was accorded vide Investment Promotion Bureau, Karachi's Letter No.FTP-7(572)/89, dated 27th March, 1989 as further extended vide Bureau's letter, dated 27th June, 1992. The terms and conditions of this permission were incorporated in the first mentioned letter as under:---
"In view of the circumstances explained, this Bureau have no objection to your opening a Branch in Pakistan at Islamabad for providing technical, logistical and other assistance in the area of energy; survey and feasibility, to ENERCOM (an agency of the Federal Ministry of Planning) under Contract No.391-0478-C-00-5065-00, subject to the following terms and conditions:---
(i) The activities of the Branch Office will be restricted to the fulfillment of contractual obligations.
(ii) All expenses of the Branch Office including taxes, if any, shall be met by transfer of funds from abroad through normal banking channels.
(iii) No remittance facility will be claimed from Pakistan at any stage on any account.
(iv) Employment of foreign nationals should be with the prior clearance of IPB.
(v) Permission is granted initially for the period of three (3) years from date of issue of this letter.
(vi) Postal address of the proposed Branch Office at Islamabad may be intimated.
(vii) Registrar of companies may be approached for Registration of Branch Office."
The contents of the abovementioned permission letter show that the branch office of the foreign company was not a resident company the control and management of whose affairs were situated wholly in Pakistan in the relevant years. Foreign nationals were employed .to provide technical, logistical and other assistance to ENERCOM under a contract and all activities of the branch office were restricted to the fulfilment of the said contractual obligations. All expenses of the branch office were also met by transfer of funds from abroad through normal banking channels. The balance-sheets and related P&L Account together with notes and auditor's reports for the branch office also show that it was the head office of the foreign company which financed the branch office and such financing primarily included investment made by the head office to run the Pakistani branch. There is nothing' on record to suggest that the branch office was itself a resident-company, the control and management of whose affairs was situated wholly in. Pakistan in the relevant years. The branch office was definitely "non-resident" under section 2(30) of the Ordinance and the learned C.I.T.(A) erred in holding that it was a resident-company with no head office expenses and, therefore qualified for the status of a company as defined under section 2(16) of the Ordinance. No doubt, it was a body corporate incorporated in U.S.A and fell within the definition of a company under section 2(16)(c) of the Ordinance, but could not be treated as resident under section 2(40)(c) of the Ordinance for the foregoing reasons.
6. We are also of the considered view that the branch office of the foreign company was engaged in activities for the fulfillment of contractual obligations under Contract No.391-0478-C-00-5065-00 executed with ENERCOM, an agency of the Federal Ministry of Planning and the branch office was providing technical, logistical and other assistance in the area of energy, survey and feasibility to the ENERCOM. Further, as explained in. the notes to the audited accounts for the years under consideration, the branch office was set up in Pakistan to provide similar services as RCG/Hagler Bailly Inc. (USA) was providing elsewhere and whose main activities were to provide professional management, technical and consultancy services to energy, environmental, information technology, quality assurance and industrial sectors. The Assessing Officer gave the finding that the branch office in Pakistan was deriving income from consultancy services and the learned C.I.T.(A) also mentioned in the opening paragraph of the impugned order that it was anon-resident company deriving income from consultancy for providing professional management, technical and consultancy services to engineers, environmental, information technology; quality assurance and industrial sectors. These services were technical in nature and the entire income received by way of fees in respect of such services utilised in Pakistan was deemed to accrue or arise in Pakistan under section 12(5)(a) of the Ordinance read with the Explanation appearing therein as under:---
"Explanation.---For the purposes of this subsection, clause (b) of section 24, subsection (2) of section 30, subsection (3A) of section 50 and section 80AA, 'fees for technical services' mean's 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; .
A careful reading of the provisions of section 12(5)(a) of the Ordinance would show that fees paid to a non-resident are deemed to accrue or arise in Pakistan. if technical services are utilised in a business or profession carried on in Pakistan or for the purposes of earning any income from any source in Pakistan. The effect of this deeming provision is to create fiction of place i.e. declaring an income of a non-resident from a source in Pakistan as income arising in Pakistan. Section 30(2)(b) of Ordinance also treats the fees for technical services as income chargeable under the head "income from other source" and not as income chargeable under the head "Income from business or profession" under section 22 of the Ordinance. Besides, the deemed income of a non-resident from fees for technical services is chargeable at the flat rate of tax under section 80AA where any consideration by way of fees for technical services is received or is deemed to have been received or accrues or arises or deemed to accrue or arise to the non-resident. This section also overrides other general provisions of the Ordinance because of its non-obstante clause. We have therefore no hesitation in holding that for the purposes of section 12(5) read with section 30(2) and section 80AA of the Ordinance, the income of the assessee by way of fees for technical services was taxable at the flat rate in Pakistan and not under section 22 of the Ordinance as income from business or profession.
7. It is our firm opinion that in the facts and circumstances of this case, the tax treaty does not lay down any source rule in respect of fees for technical services and, therefore, the provisions of the tax treaty cannot override the provisions of section 12(5)(a) read with section 30(2) and section 80AA of the Ordinance. The description of the term "Industrial or commercial profits" given in the tax treaty (as reproduced in para. 4 of this order) cannot be interpreted in favour of the assessee as fees for technical services are clearly distinguishable and distinctly different from industrial or commercial profits. The various provisions of the tax treaty have also been critically examined in great detail in the case of a U.S.A. non-resident company reported as 2000 PTD (Trib.) 1396 wherein the validity of the expression "industrial or commercial profits" has been taken only in the context of trade or business of an assessee and not in relation to any other source of income.
8. For the facts and reasons stated above, we hold that the impugned order, being devoid of correct interpretation of the provisions of the Ordinance and. the tax treaty and based on improper appraisal of evidence and incorrect appreciation of facts of the case, is not sustainable in the eyes of law. It is, therefore, vacated and those of the Assessing Officers are restored.
9. Resultantly, the appeals of the department succeed.
C.M.A./M.A.K/59/Tax(Trib.) Order accordingly.