I.T.As. Nos.2600/LB to 2602/LB of 2000, decided on 29th September, 2001. VS I.T.As. Nos.2600/LB to 2602/LB of 2000, decided on 29th September, 2001., 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2906 (2001)

Sept. 29, 2001 INCOME TAX APPELLATE TRIBUNAL PAKISTAN 2002 PTD 2906

2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2906

I.T.As. Nos.2600/LB to 2602/LB of 2000, decided on 29th September, 2001. VS I.T.As. Nos.2600/LB to 2602/LB of 2000, decided on 29th September, 2001.

2002 P T D (Trib.) 2906

[Incomeâ€‘tax Appellate Tribunal Pakistan]

Before Muhammad Tauqir Afzal Malik, Judicial Member and Amjad Ali Ranjha, Accountant Member

I.T.As. Nos.2600/LB to 2602/LB of 2000, decided on 29/09/2001.

(a) Income Tax Ordinance (XXXI of 1979)â€‘â€‘â€‘

â€‘â€‘â€‘â€‘â€‘S.78â€‘â€‘â€‘Liability of agents representing assesseeâ€‘â€‘â€‘Explanationâ€‘â€‘ Assessee argued that S.78 of the Income Tax Ordinance, 1979 is an enabling section and the Department has the option to make an assessment on the person beneficially entitled to the income is in other words the Department can either assess the agent or the nonâ€‘residentâ€‘â€‘ Once the Department has exercised its option and assessed the non resident, it cannot assess the same income in the hands of the agentâ€‘â€‘ Appellate Tribunal agreed with the arguments of the assessee and accepted the appeals of the assessee and cancelled orders of both the Courts below passed under S.78 of the Income Tax Ordinance, 1979.

Suit Nos.736 of 1998 and 299 of 1999 rel.

(b) Income Tax Ordinance (XXXI of 1979)â€‘â€‘â€‘

â€‘â€‘â€‘â€‘Ss. 78(4)(a)(ii) (iii), 78(4)(c), 80AA, 50(3), proviso & 50(3A) First Sched., Partâ€‘I, item (DDDD)â€‘â€‘â€‘Convention for Avoidance of Double Taxation Between Canada and Pakistan, Cl. VII, P. 4.7 & XXIâ€‘â€‘â€‘Liability of agents representing assesseeâ€‘â€‘â€‘Tax on income of nonâ€‘residents from fee for technical serviceâ€‘â€‘â€‘Business profitâ€‘â€‘â€‘Deduction at .sourceâ€‘â€‘ Exemption certificateâ€‘â€‘â€‘Exemption certificate under S.50(3) of the Income Tax Ordinance, 1979 was issued for deduction at reduced rate of 5% and tax was deducted by the assessee accordingly on payment to non resident companyâ€‘â€‘Fee for technical services was assessed in the hands of nonâ€‘resident company under S.80AA of the Income Tax Ordinance, 1979 @ 15% under item (DDDD) of Partâ€‘I of the 1st Sched. of the Income Tax Ordinance, 1979â€‘â€‘â€‘Assessee was treated as an agent of such nonâ€‘resident company under S.78 of the Income Tax Ordinance, 1979 in the circumstances and the same was confirmed by the First Appellate Authorityâ€‘â€‘â€‘Validityâ€‘â€‘â€‘Appellate Tribunal agreed with the contention of the assessee that under S.78 of the Income Tax Ordinance, 1979 where a person was declared or treated to be an agent he was liable to assessment in his own name in respect of that incomeâ€‘â€‘â€‘Assessments having been framed on nonâ€‘resident company as the assessee, the provisions of S.78(4)(c) could not be invoked as the assessments for the relevant years had not been framed on assessee as an assessee and therefore, the order under S.78 of the Income Tax Ordinance, 1979 was ab initio voidâ€‘â€‘ Appellate Tribunal accepted the appeal of the assessee and order passed by both the authorities below under S.78 of the Income Tax Ordinance, 1979 was cancelled.

Asia Petroleum Limited v. Federation of Pakistan and others 1999 PTD 1313; Abdur Rehman v. Incomeâ€‘tax Officer (1983) 41 Tax 158; Commissioner of Incomeâ€‘tax, Karachi v. Pakistan Petroleum Limited (1984) 49 Tax 169; Premnath Diesel Grainvaying Division v. Commissioner of Incomeâ€‘tax 1986 ITR 575; 129 ITR 295 (SC); 2001 PTD (Trib.) 888 and PLD 1995 Lah. 409 ref.

Suit Nos.736 of 1998 and 299 of 1999 rel.

Sohail Hassan, F.C.A. and Iqbal Chughtai, I.T.P. for Appellant.

Qamarâ€‘udâ€‘Din Ahmad and Noorâ€‘ulâ€‘Amin Hotiana, D.R. for Respondent.

Date of hearing;18th September, 2001.

ORDER

MUHAMMAD TAUQIR AFZAL MALIK (JUDICIAL MEMBER). â€‘â€‘â€‘These are three appeals by the assessee, a public limited company, against the order of CIT(A) dated 12â€‘4â€‘2000 for the charge years 1995â€‘96,1996â€‘97 and 1997â€‘98. The grounds of appeal in all the years are the same which are as under:â€‘

(a) That the order of CIT(A) is against law and facts and he has erred in confirming the order issued by the DCIT under section 78 of the Income Tax Ordinance, 1979 treating the appellants as an agent of Nova Corporation International Limited, a nonâ€‘resident company.

Arguments heard. Record perused.

The A.R. of the assessee argued as under:

Novacorp International Inc. (hereinafter referred to as NOVA) is nonâ€‘resident company incorporated in Canada. During financial years ending June 30, 1995 to 1997 it rendered certain services to Sui Northern Gas Pipelines Limited (hereinafter referred to as SNGPL) and Sui Southern Gas Pipelines Limited (hereinafter referred to as SSGC). The DCIT framed assessments of NOVA as an assessee for the above years determining a balance tax demand after adjusting taxes withheld at source of Rs.13,775,963. The assessments were framed for 1995â€‘96 on January 30â€‘1997 and for the 1996â€‘97 and 1997â€‘98 on February 27, 1998 as under:

"Order under section 80AA of the Income Tax Ordinance, 1979.â€‘â€‘â€‘Return of total income under section 55 was filed on 7â€‘12â€‘1995 declaring loss of Rs.99,67,012. The return was accompanied with copy of final accounts and challans of deduction Assessment was taken up Statutory notices were issued and complied with. Specific notice under section 62 was also issued and explanation of the assesseeâ€‘Company was obtained. The case was discussed with Messrs Ford, Rhodes, Robson, Morrow Chartered Accountants, A.R. of the assessee and assessment is finalized as per following discussion. Assessee is Pakistan Branch of a nonâ€‘resident company incorporated in Canada and derives income from rendering technical services to the Sui Northern Gas Pipelines Ltd. Through Specific Notice bearing No.657, dated 16â€‘3â€‘1996 assessee was confronted that according to Note. No. 1 of final accounts you are providing technical services, and accordingly liable to be assessed under section 80AA of the Income Tax Ordinance, 1979. In their written reply bearing No. LHR 1720/96â€‘97, dated 11â€‘11â€‘1996 the A.R. of the assessee admitted that although income of the assessee is fee from Technical Services, yet the same is not assessable under section 80AA due to the following:

1. Exemption certificate under section 50(3) was issued for deduction at reduced rate of 5%.

2. As per treaty of Avoidance of Double Taxation with Canada in determining the income of Canadian Enterprises expenses would be deductable therefrom.

3. The treaty has precedence over contrary provision of Income Tax Ordinance.

The contentions of the A.R. are not convincing as issuance of exemption certificate and that too under section 51(3) and not under section 50(3A) for deduction at reduced rate does not bind the department for determining final tax liability under the Ordinance. Moreover, the clause of the Treaty regarding expenses is in respect of business income only and Fee for Technical Services come under Article XXI of Treaty.

From the above discussion, it is evident that income of the assessee from Fee for Technical Services is assessable under section 80AA and not under section 62. Accordingly tax liability is calculated as under:

Total receipts/Fee	Rs.27,225,599
Tax @ 15% under section 80AA	Rs. 4,083,840
Less Tax deducted	Rs. 1,371,958
Balance payable	Rs. 2,711,882

Assessment year 1996â€‘97

Order under section 80AA of the Income Tax Ordinance, 1979

Return of total income under section 55 was filed on 31â€‘12â€‘1996 declaring loss of (Rs. 8,144,439). The return was accompanied with computation chart: Tax depreciation. Schedules, copy of final accounts and challans of deduction. The declared income is arrived at as under:

Loss as per audited accounts	(8,088,580)
Less Accounting Depreciation	Rs.73,255
	(8,015.325)
Add. Tax depreciation as per schedule	(129,114)
Loss as per return	(8,144,439)

Assessment was taken up. Statutory notices were issued and complied. The case was discussed with representative of M/s. Ford, Rhodes, Robson, Morrow Chartered Accountants, A.R. of the assessee. Necessary details having bearing on assessment have been obtained, scrutinized and placed on record. The assessment is finalized as per following discussion.

Assessee is Pakistan Branch of a nonâ€‘resident company incorporated in Canada and derives income from rendering Technical Services to the Sui Northern Gas Pipelines Ltd. Through Specific Notice bearing No.541, dated 7â€‘1â€‘1997 assessee was confronted as under:

"Whereas the company has filed .the return of total. However, from Note No. 1 to the accounts as well as profit and loss account, it is evident that company is providing technical services and fee for this is being charged. Accordingly instead of return of total income under section 55 statement under section 80 AA should have been filed.

Paragraphâ€‘7 of Articleâ€‘VII of the Convention of Double Taxation provides that where profit include items of income which are dealt with separately in other Article of this Convention then, the provision of those Articles shall not be effected by the provision of this Article pertaining to business profits. Whereas Article XXI deals with the income not expressly mentioned and fee for technical services comes under this Article.

Accordingly you are hereby required to file statement under section 80AA or your written' version on the point in issue."

In response the assessee has filed written explanation vide his Letter No.LHR/2668/96â€‘97; dated 14â€‘1â€‘1997 as under:â€‘

"In your letter you have observed that fees for technical services is excluded from the purview of `business profits' and; therefore, from Article VII of the Tax Treaty with Canada, and that such income falls within the purview of Article XXI which deals with income not specifically provided.

In this connection, we would submit as follows:â€‘

(1) Para. 7 of Article VII deals with `items of income which are dealt with separately in other Articles'. Such other Articles from VI to XXI specify the various heads of income such as dividends property income, royalties etc. which may be included in business profits but are accorded the special tax. treatment specified in the respective Articles.

(2) Article XXI is only a residuary Article which deals with items which are neither business profit, not other special classes of income dealt with in appropriate Articles. If an item of income falls within the term of business profits, it has to be treated according to Article VII and only items which otherwise fall within the Article but have special Articles assigned to them, are treated according to those special Articles item falling within Article VII or any other special Article cannot he taken to the residuary Article XXI.

(3) It is not contended by you that the income of Nova Gas is not within the definition of `business profits'. It is also fact that such income is derived from a permanent establishment in Pakistan. This income does not fall within any special category but that of `business profits' and is to be taxed accordingly.

As an illustration, your attention is drawn to the Treaty with U.K. (1988) wherein there is separate Article for fees for Technical Services. However, it is stated in that Article that where such fees are derived through a permanent establishment, they would be taxed according to the provisions of the Article dealing with business profits.

It would not be out of place to mention that this position was discussed at great length in earlier years and accepted by the department. As a consequence, it was agreed that the income of the company was assessable under section 22 'and accordingly, certificates of reduced withholding were issued under section 50(3) of the Ordinance for the years ended, June 30, 1994 and June 30, 1995 with the specific approval of the Commissioner of Income Tax Companies Zoneâ€‘I, Lahore: No change of circumstances have occurred to warrant any change of opinion on your part.

In view of the above, we submit that the income of the company is assessable under section 22 and not under section 80AA of the Ordinance."

The contentions of the A.R. are not convincing at all as issuance of exemption certificate and that too under section 50(3A) for deduction at reduced rate does not bind the Department for determining final tax liability under the Ordinance. Moreover, the clause of Treaty regarding expenses is in respect of business income only land fee for Technical Services come under Article XXI.

From the above discussion, it is evident that income of the assessee from Fee for Technical Services is assessable under section 80AA as per history of the case and not under section 62. Accordingly tax liability is calculated as under:â€‘

Total receipts/Fee	Rs.70,404,533 (including Misc. income).
Tax @ 15% under section 80AA	Rs.10,560,680
Less tax deducted	Rs. 1,065,542
	Rs. 9,495,542

Assessment year 1997â€‘98

Order under section 80AA of the Income Tax Ordinance, 1979

Return of total income under section 55 was filed on 31â€‘12â€‘1997 declaring loss of Rs. (6,202,076). The return was accompanied with computation chart. Tax depreciation Schedules, copy of final accounts and challans of deduction. The declared income is arrived at as under:

	Rs.
Loss as per audited accounts	6,205,858
Less Accounting Depreciation	24,344
	6,181,514
Add. Tax depreciation as per schedule	20,562
Loss as per return	6,202,076

"Whereas the Company has filed the return of total. However, from Note No. 1 to the accounts as well as profit and loss account, it is evident that company is providing Technical Services and fee for this is being charged. Accordingly instead of return of total income under section 55 statement under section 80AA should have been filed.

Accordingly you are hereby required to file statement under section 80AA or your written version on the point in issue."

In response the assessee has filed written explanation vide his Letter No.LHR/2668/96â€‘97, dated 14â€‘1â€‘1997 as under:â€‘

"In your letter you have observed that fees for technical services is excluded from the purview of `business profits' and, therefore, from Article VII of the Tax Treaty with Canada, and that such income is falls within the purview of Article XXI which deals with income not specifically provided.

In this connection, we would submit as follows:

(1) Para. 7 of Article VII deals with `items of income which are dealt with separately in other Articles'. Such other Articles from VI to XXI specify the various heads of income such as dividends, property income, royalties etc. which may be included in business profits but are accorded the special tax treatment specified in the respective Articles.

(2) Article XXI is only a residuary Article which deals with items which are neither business profits nor other special classes of income dealt with in appropriate Articles. If an item of income falls within the term of business profits, it has to be treated according to Article VII and only items which otherwise fall within the Article but have special Articles assigned to them, are treated according to those special Articles item falling within Article VII or any other special Article cannot be taken to the residuary Article XXI.

(3) It is not contended by you that the income of Nova Gas is not within the definition of `business profits'. It is also fact that such income is derived from a permanent establishment in Pakistan this income does not fall within any special category but that of `business profits' and is to be taxed accordingly.

It would not be out of place to mention that this position was discussed at great length in earlier years and accepted by the department. As a consequence, it was agreed that the income of the company was assessable under section 22 and accordingly, certificates of reduced withholding were issued under section 50(3) of the Ordinance for the years ended. June 30, 1994 and June 30, 1995 with the specific approval of the Commissioner of Income Tax, Companies Zoneâ€‘I, Lahore. No change of circumstances have occurred to warrant any change of opinion on your part.

In view of the above, we submit that the income of the Company is assessable under section 22 and not under section 80AA of the Ordinance."

The contentions of the A.R. are not convincing at all as issuance of exemption certificate and that too under section 50(3) and not under section 50(3A) for deduction at reduced rate does not bind the Department for determining final tax liability under the Ordinance. Moreover, the clause of Treaty regarding expenses is in respect of business income only and fee for Technical Services come under Article XXI of Treaty.

Total receipts/Fee	Rs.1 4,474,111 (including Misc. income)
Tax @ 15 % under section 80AA	Rs. 2,171,117
Loss tax deducted	Rs. 606,707
	Rs.1,564,410

The DCIT through his order, dated June 17, 1999 has held Sui Northern Gas Pipelines Limited (hereinafter referred to as SNGPL), the appellant as the agent of Novacorp International Inc. a nonâ€‘resident Canadian Company under section 78 of the Income Tax Ordinance, 1979.

(1) Novacorp International Inc. is a Company incorporated in Canada. It is a nonâ€‘resident for tax in Pakistan.

(2) The Company established a branch in Pakistan. It entered into a contract with the appellant Sui Northern Gas Pipelines Limited (hereinafter referred to as SNGPL) on June 2, 1994, for rendering certain services to SNGPL. According to Note 1 to the accounts of Nova for the year ended June 30, 1995 (reproduced below) it was also engaged in providing services to Sui Southern Gas Company Limited.

1. The Branch and its operations:

The branch was established in Pakistan in September, 1993 and is engaged in providing services comprising corporate restructuring system expansion and organizational and technical enhancement to Sui Northern Gas Pipelines Ltd. in Punjab and N.â€‘W.F.P. and Sui Southern Gas Company Ltd. in Sindh and Balochistan.

2. Significant Accounting Policies

The significant accounting policies adopted for preparation of these accounts are as under:â€‘

2.2 Tangible fixed assets

Fixed assets are stated at Cost loss accumulated depreciation. Depreciation is provided to write off the cost of tangible fixed assets as fairly as possible over their effective normal lives in their current location. Depreciation rates in general are determined in accordance with local commercial practice, but typical asset lives used are:â€‘

Furniture and Fixture	up to 10 years.
Plant and equipment	up to 10 years.

Depreciation is charged for full year in the year of purchase and no depreciation is charged in the year of disposal.

2.3 Foreign currency transactions

Assets and liabilities in foreign currencies are translated at the rate of exchange ruling at June 30, 1995, difference arising on the translation is included in the profit and loss account.

(3) Payments for services made by SNGPL to Nova under the contract and withholding tax deducted therefrom were as follows:

Year ending	Payment for Services US$	Rate %	Withholding Tax Deducted US$	Equivalent Rs.
June 30, 1995	884,588	5	44,229	1,371,953
June 30,1996	330,387
June 30, 1997	305,519

Withholding tax at 5% was deducted on the basis of certificates, dated July 17, 1993 and November 29, 1994 specifying that tax was to, be withheld at 5% from payments made to Nova. No tax was deducted on payments made after June 30, 1995 as an amendment was made in the Income Tax Ordinance specifying that no taxes were to be deducted at source where payments were made to branches of nonâ€‘residents in Pakistan. The certificates are reproduced as under:â€‘â€‘

"No. 13OFFICE OF THE INCOME TAX

OFFICER COMPANIESâ€‘12,

LAHORE

Dated July 17, 1993

CERTIFICATE

In exercise of powers conferred by subsection (3) of section 50 of the Income Tax Ordinance, 1979, the rate of withholding tax is fixed at 5% to all payments made by Messrs Sui Northern Gas Pipelines Ltd. to Messrs Novacorp International Consulting Inc.

(2) This certificate shall be valid up to 30â€‘6â€‘1994

(Sd.) Anwarâ€‘ulâ€‘Haq

Deputy Commissioner of

Income Tax Companiesâ€‘12,

Lahore. "

"No.272

Office of the

Deputy Commissioner of

Income Tax Circleâ€‘14,

Companies Zoneâ€‘I, Lahore,"

Dated 29â€‘11â€‘1994

CERTIFICATE

(1) In exercise of powers conferred by subsection (3) of section 50 of the Income Tax Ordinance, 1979, the rate of withholding tax is fixed at 5% applicable to payments made by Messrs Sui Northern Gas Pipelines Ltd. to Messrs Nova Corp. International Consulting Incorporated.

(2) This certificate is valid till 30â€‘6â€‘1995.

(3) This issues with the approval of the Commissioner of Income tax, Companies Zoneâ€‘I, Lahore vide his Letter No. Kâ€‘156 (section 50(3))11.000 , dated 2â€‘11â€‘1994

(ZULQARNAIN TIRMIZI)

Deputy Commissioner of Income

Tax Circleâ€‘14, Companies Zone

1, Lahore."

Code No. 1â€‘87â€‘0428

6. Under clause 1.9 of the contract Nova was to bear the taxes on its income in Pakistan. Accordingly Nova itself, filed its returns of income for the above years namely June 30, 1995 to 1997. Clause 1.9 of the contract is reproduced as under:â€‘â€‘â€‘

1.9 Tax and Duties

Novac6rp.â€‘â€‘â€‘Subâ€‘contractors and the personnel shall pay taxes, duties, fees, levies and other impositions levied under the applicable law. Tax on income for technical services rendered by Nonâ€‘residents is chargeable under the Income Tax Ordinance, 1979."

7. Assessments were framed by the DCIT in the name. of Nova as an assessee in respect of the above years through assessment orders, dated January 30; 1997 for 1995â€‘96 and each dated February 27, 1998 for 1996â€‘97 and 1997â€‘98 determining net tax payable of Rs.13,775,430 for the three years, referred supra.

8. On June 3, 1999 after the assessments had been framed a show cause notice was served on the .appellant SNGPL by the DCIT declaring his intention to treat SNGPL as an agent of Nova under section 78 of the Income Tax Ordinance, 1979 on the following grounds:

"The following tax demand was created against Nova Corporation international for the assessment years 1995â€‘96, 1996â€‘97 and 1997â€‘98.

1995â€‘96	2,711,882
1996â€‘97	9,497,138
1997â€‘98	1,568,903
Total	13,775,963

You executed a contract with Messrs Nova Corporation International for rendering technical services and being a non resident the assessee was in receipt of Turn Key contract receipts from Messrs Sui Northern Gas Pipelines Limited. 'By virtue of this, show cause under section 78(4) proviso (b) you are required to please explain as to why you should not be treated as the agent of Messrs Shimizu Corporation under section 78(4)(a)(ii), under section 78(4)(a)(iii), and under section 78 4 (c) of the Income Tax Ordinance, 1979. "

9. A response dated June 4, 1999 to the notice was filed by SNGPL referring therein to an earlier letter filed with the DCIT in which it was stated that SNGPL had duly deducted the tax on the payments made and as Nova was no longer rendering any services to SNGPL at the date of the notice, the provisions of section 78 were not attracted. The reply by SNGPL dated 24â€‘6â€‘1999 is reproduced below:â€‘â€‘â€‘

"We refer to your Letter No.170728/17, dated 20â€‘6â€‘1998. It is pointed out that at present Messrs Nova Corporation International are no more rendering technical services to us. However, on their technical services in the past, we have deducted applicable income tax on payments made to them.

Enclosed please find the copies of the under noted tax challans deposited in National Bank of Pakistan. WAPDA House Branch, Lahore.

Assessment year	Amount	Date and Place of Payment in Government Treasury
1995â€‘96	Rs.606,700.00	NBP, WAPDA House Branch, Lahore.
		On 1-2â€‘1995
1995â€‘96	Rs.452,204.00	â€‘doâ€‘22â€‘3â€‘1995
â€‘doâ€‘	Rs.106,740.00	â€‘doâ€‘30â€‘4â€‘1995
1996â€‘97	Rs.206,309.00	â€‘doâ€‘26â€‘7â€‘1995

10. Despite the response filed that SNGPL had deducted the tax as required on the basis of the certificates issued by the DCIT referred in paragraph 4 above and the fact that Nova was no longer rendering any services to SNGPL, at the date on which notice was served on the appellant. The DCIT on June 17, 1999 issued an order under section 78 treating SNGPL as an agent of Nova for the assessment years 1995â€‘96 to 1997â€‘98 on the following grounds.

(a) that SNGPL had failed to deduct tax under section 50(3) of the Ordinance from the payments made to Nova

(b) that since Nova the assessee had left the country after completion of contract, the response filed by SNGPL to the showâ€‘cause notice was hardly an explanation to the contention conveyed through the showâ€‘cause notice that SNGPL in view of the provisions of sections 78(4)(a)(ii), 78(4)(a)(iii) and section 78(4)(c) is to be treated as an agent of Nova Corporation International in this regard.

11. On the basis of the above order it held SNGPL liable for the outstanding demand of Rs.13,775,923 of Nova and served on SNGPL a notice of recovery, dated June 22, 1999 as under:â€‘

"You have been declared as agent of Messrs Nova Corporation International through. order passed under section 78 of the Income Tax Ordinance, 1979. Since an amount of Rs.13,775,923 is outstanding as income tax liability relevant to the assessment years 1995â€‘96, 1996â€‘97 and 1997â€‘98. You are requested to pay the said demand by 25â€‘6â€‘1999 positively. Please note in case of nonâ€‘compliance this office will be u constrained to recover the same through coercive measures as provided under the law."

12. Appeals were filed by SNGPL, the appellant, against the above order before the CIT (Appeals).

13. At the hearing before the CIT (Appeals) it was submitted by the appellant that the order of the DCIT under section 78 was an order contrary to and against the provisions of the law on the following grounds:

(a) That SNGPL had not failed to deduct tax under section 50(3) Tax was deducted by them on the basis of the certificates issued by DCIT prescribing the rate for deducting tax from payments made to NOVA referred supra.

(b) In his order the DCIT has given a finding that in view of the provisions of section 78(4)(a)(ii) and 78(4)(a)(iii) SNGPL is to be treated as an agent of Nova Corporation International. This finding is contrary to lawâ€‘

(c) Section 78(4)(a)(ii) and 78(4)(a)(iii) assume that before a person can be declared or treated as an agent, such person must on the date the order declaring or treating him as an agent is passed

* Have a business connection with the nonâ€‘resident or

* The nonâ€‘resident is in receipt of any income from or through such person at that date

(d) The order under section 78 treating the appellant as an agent was passed on June 17, 1999 Nova .completed the contract in February, 1997. The appellant consequently on June 17, 1999 the date when the order was passed neither had any business connection with Nova nor was Nova at that date in receipt of any income from SNGPL

(e) Consequently the order under section. 78 was not in accordance with section 78(4)(a)(ii) and 78(4)(a)(iii) as before the order was passed SNGPL in response to the Departments notice had informed them through their letter, dated June 24, 1998 that Novacorp was no longer rendering any services to them.

(f) A case of Asia Petroleum Limited v Federation of Pakistan and others 1999 PTD 1313 was cited in support of these contentions. In this case the Honourable High Court held as follows:

`Learned counsel has consequently submitted that, the impugned order was not in accordance with section 78(4)(a)(ii), (iii) and (iv) as much before the same was passed the Department had been informed in March, 1998 that the plaintiff had served all its business connections with defendant No.4 and did not have any amounts under its control belonging to said defendant whereby the demand of tax upon it could be satisfied through the plaintiff by declaring it an agent of the said defendant. Further, it is submitted that the word `assessee' as defined in section 2(6)(a) of the Ordinance can only mean, as appearing in section 78(1), a person against whom any proceeding has been taken for the assessment of his income in terms of said section. Consequently according to learned counsel as the first proceeding taken in the matter for assessment of the plaintiffs income as an agent of defendant No.4, was on 16â€‘5â€‘1998 when the plaintiff was put on notice that it would be treated as an agent for defendant No.4, it was on that day alone when the plaintiff could be lawfully considered to be an assessee as agent of defendant No.4. And as previously mentioned on that day no funds were available with the plaintiff belonging to defendant No.4, therefore, there could be no question of any relationship of principal and agent between the defendant No.4 and the plaintiff respectively. In order to fully appreciate this argument it would be beneficial to reproduce section 2(6)(a) of the Ordinance which defines an assessee as:

`every person in respect of whom any proceeding under this Ordinance has been taken for the assessment of his income or the income of any other person in respect of which he is assessable or of the amount of refund due to him or to such other person'."

Further section 78(1) enjoins that

"Every agent shall in respect of the income for which he is, or is declared to be, or is treated as, an agent, be deemed to be an assessee for the purpose of this Ordinance and be subject to the same obligations and liabilities as if he were the assessee, and shall be liable to assessment in his own name in respect of that income. "

Finally section 78(4) defines an agent as subsections (i), (ii), (iii) and (iv) as:

"Any person in Pakistan who has any business connection with the nonâ€‘resident, or from or through whom the nonâ€‘resident in receipt of any income, whether directly or indirectly, or who holds, or controls the receipt or disposal of any money belonging to the nonâ€‘resident..." respectively.

From a cumulative reading of the above provisions it would therefore, appear that in the first instance section 78(4)(a)(iii) and (iv) cannot be interpreted to mean that in all cases, if the declared agent could show that on the date when proceedings were taken under section 78 of the Ordinance no funds of the nonâ€‘resident principal were available, this would be an adequate defence available to him. On the other hand perhaps, as submitted by Mr. Farough Naseem, if the declared agent could show that before proceedings were taken against him under section 78 he had lawfully parted with the money of his non resident principal which was under his control, this would be a sufficient defence against such proceedings. If this were not the case, then the intention of Legislature in enacting section 78 would be defeated as any prospective Agent could as soon as a notice were sent to him under section 78 declaring the Revenue's intent to treat him as agent, part with his principal's money in his control and thereafter, claim that he no longer "holds" or "controls" the same. In this context it would be further seen that the process of assessment under section 78 is at best twoâ€‘fold, in the first instance the Assessing Officer declares a person to be a statutory, agent after giving such person a hearing and this is then followed by an assessment of such statutory agent. Consequently, the intention of the Legislature seems to be that once notice is served upon a person under section 78, this would allow him the time and opportunity to withhold the funds of his nonâ€‘resident principal in order to meet the prospective tax demand. If then the agent fails to withhold the funds then he would bear the consequences of this lapse and would not be heard to say that as the provisions of section 78(4)(a)(ii)(iii) and (iv) are all couched in the present tense, therefore, he could not be held liable as he does not `Hold' or `control' his principal's money any more. However, as, held previously whereupon receipt of notice under section 78, the proposed agent has already parted with his principals funds this factum would be a complete defence available to him under section 78. It is only in this content that the provisions of section 78 (4) can be rationalized as it would be quite unreasonable to put a person on notice under section 78 when he no longer possesses the funds of his principals. Such an interpretation would not only be oppressive but would also be against the intention of the Legislature which is to tax the principal although through the Agent. "

(g) Since SNGPL before the proceedings under section 78 had lawfully parted with the money of the nonâ€‘resident under his control the order under section 78 was, therefore, invalid.

(h) That section 78(1) of the Ordinance provides that every agent in respect of the income for which he is or is declared to be or treated as an agent is deemed to be an assessee for the purposes of the Ordnance and is subject to the same obligations and liabilities as if he were the assessee and is liable to assessment in his own name in respect of that income.

(i) That section 78 is an enabling section that is the Department has the option to make an assessment on the agent or a direct assessment on the person beneficially entitled to the income. In other words the Department can either assess the agent or the nonâ€‘resident. But once the Department has exercised its option and assessed either the agent or the nonâ€‘resident, it cannot assess the same income in the hands of the agent.

(j) That the Department exercised its option to make an assessment on the nonâ€‘resident by making a direct assessment on Nova as an assessee in respect of the years 1995â€‘96 to 1997â€‘98 as is evident from assessment orders, dated January 30, 1997 for 1995â€‘96, dated February 27, 1998 for 1996â€‘97 and 1997â€‘98.

(k) That having made the assessment on Nova, the Department had exercised the option and could not after a lapse ~ of over two years in the case of 1995â€‘96 and one year in the case of 1996â€‘97 and 1997â€‘98 now in June 1999 declare or treat SNGPL as an agent.

(l) That under section 78 where a person is declared or treated to be an agent he is liable to assessment in his own name in respect of that income. That as the assessments had been framed on Nova as the assessee, the provisions of the section 78(4)(c) could not be invoked as the assessments for the relevant years had not been framed on SNGPL as an assessee and, therefore, the order under section 78 was again ab initio void.

(m) That the Karachi High Court again in the above cited case 1999 PTD 1313 while referring to several case laws on this issue held as follows:

`The second limb of Mr. Muhammad Sharif's argument is that in any event the law does not allow the revenue to tax the Agent under section 78 once the principal is tax under section 50 of the Ordinance as this would in fact amount to double taxation. Dr. Farough Nasim, learned amicus has fully supported learned counsel's viewâ€‘point and both have relied upon a number of Indian decisions as well as a few from our own jurisdiction. Amongst the Indian decisions to which reference has been made are Trustees of Chaturburgh Trust v. CIT (50 FTR 693) and Bawa Sitva Paul Singh v. The Incomeâ€‘tax Officer, New Delhi and others (62. ITR 147) in the former of which it was held by the respective High Court that section 41 of the Indian Income tax Act, 1922 provided for two alternative methods namely, either to tax income in the hands of the Trustees or to tax it directly in the hands of the person on whose behalf the income was receivable under the trust, consequently where one such option was availed of by the defendant, it was estopped in law from resorting to the other. In the latter case of Bawa Satya Paul Singh again the principle of section 41 was applied and it was held that where a receiver has been appointed by a Court the Department could either assess him directly or assess the person on whose behalf the receiver had been appointed but not both However, the cases more to the point are Abdul Azeez Dawood Marzook v. C.I.T., Madias (1958 ITR 154) where it was held that under section 42 of the Act, the I.T.O. had a choice to either assess the nonâ€‘resident principal or the resident agent. So also in C.I.T. v. Alfred Herbert India (Pvt.) Ltd. the same view was taken by the Calcutta High Court. In CIT v. M/s Pakistan Petroleum Ltd. 1984 PTD 171 a Division Bench of the Court also held that in terms of section 43 read with section 42 of the erstwhile Incomeâ€‘tax Act of 1922 the Revenue authorities had the choice to either tax the Principal or the agent and once this option had been exercised for a particular income the same income could not be reassessed against the Agent as well. In Messrs Noon Sugar Mills Ltd. v. C.I.T., Rawalpindi 1990 PTD 768 the Honourable Supreme Court also reached the same conclusion although for different reasons. The brief facts of that case were that the appellant purchased certain machinery for installing a Sugar Mills from Messrs Mitsubishi Heavy Industries Ltd., Japan under the terms of an agreement which stipulated inter alia that the foreign company would also provide engineers to erect and install the machinery on payment. Consequently the I.T.O. after putting the appellant on notice of his intention to appoint them as the agent of the foreign company did so and asked the appellant to file a return on behalf of the foreign company which was never done. However, notwithstanding the above position the concerned I.T.O. completed the assessment against the foreign company for the assessment years 1966â€‘67 and 1967â€‘68. Thereafter, the I.T.O. again passed an order under section 18(2) read with section 18(3â€‘B) of the Incomeâ€‘tax Act, 1922 (which corresponds to sections 50(3) and 52 respectively of the 1979 Act) raising a demand allegedly due from the foreign company in respect of the above assessment years as well as imposed penal interest on that amount. The appellant filed three appeals all three years, two against the orders regarding the foreign company and one against itself. The Incomeâ€‘tax Appellate Tribunal held that the first two appeals were incompetent on the grounds that the appellant had no locus standi whereas the third appeal was accepted on the basis that once the appellant had been declared to be an agent of the foreign company it was liable to pay taxes itself, and thus, could not be treated as having defaulted in deducting these taxes as provided in section 18(3â€‘B) of the 1922 Act. The department sought the High Court opinion on the issue whether the Tribunal was justified in cancelling the ITO's order in spite of the fact that the Tribunal did not admit the appellant to be an agent of the foreign company? The Honourable Lahore High Court answered this query in the negative on the basis that merely because the appellant had been appointed an agent of the foreign company in accordance with section 43 of the 1922 Act does not necessarily mean that the appellant was personally liable to pay any tax due from the nonâ€‘resident and this liability would only arise after the assessment has been completed in its name as an agent. Consequently until such completion that agent is charged with the continuing duty to deduct tax at source from payments to the nonâ€‘resident and upon failure to do so he would be deemed to be an assessee in default with all consequences to follow as prescribed by law. The Honourable Supreme Court, however, differed with this interpretation of the relevant sections and after dilating at length. upon the same as well as to the factual aspects of the case come to the conclusion that the effect of sections 42 and 43 read with section 18(3â€‘B) of the 1922 Act was that once a person company under section 43, the latter was under no liability to deduct tax at source from payments made to such nonâ€‘resident under section 18(3â€‘B) and hence could not be penalized under section 18(2) of the 1922 Act. In my opinion, this case is then adequate authority for the rover, i.e. .the proposition that once the Revenue has elected to tax the non resident through the mechanism of section 18(3â€‘B) (which corresponds to section 50 of the 1979 Ordinance) in order to treat the resident company as an Agent of the nonâ€‘resident. In my view, therefore, as per settled law, right up to the Honourable Supreme Court, the defendant No.2 erred in law while issuing the impugned order dated 21â€‘5â€‘1998."

(The above said citations are from order in a stay application under Order 39, rules 1 and 2 read with section 151, C.P.C. Therefore, the Tribunal ordered for producing copy of writ. The copy of order was produced. It was in terms of Civil Suit. The order find mentioned in subsequent part of this order).

DCIT's contentions

In this order dated June 17, 1999 the DCIT has held SNGPL as the agent of NOVA on the following grounds:â€‘

(a) That SNGPL had failed to deduct tax under section 50(3) of the Ordinance from the payments made to Nova.

(b) That since Nova the assessee had left the country after completion of contract, the response filed by SNGPL to the showâ€‘cause notice was hardly an Explanation to the contention conveyed through the showâ€‘cause notice.

(c) That SNGPL in view of the provisions of section 78(4)(a)(iii) and section 78(4)(c) is to be treated as an agent of Nova Corporation International in this regard.

Appellant's submissions

(1) In response to the DCITs contention SNGPL appellants submitted that the order of the DCIT under section 78 is illegal as it is contrary to facts and the provisions of the law on the following grounds:â€‘

SNGPL had not failed to deduct tax under section 50(3) Tax was duly deducted at 5 % as required by the DCIT on payments made during the year ending June 30, 1995 based on the certificate issued by the DCIT under section 50(3) referred supra.

(2) As NOVA had a branch in Pakistan, no taxes were withheld in 1996 and 1997 as in those years under section 50(3) on taxes were to be withheld from payments made to nonâ€‘residents with branches in Pakistan.

(3) SNGPL in response to the showâ€‘cause notice, dated June 3, 1999 (Page 29 of booklet) had explained the position through their letter, dated June 4, 1999 (page 30 of booklet). In the response the DCIT's attention was drawn to the appellant's earlier letter, dated June 24,1998 (page 31 of booklet) wherein it had been explained that NOVA were no more rendering services to SNGPL.

(4) Sections 78(4)(ii) and 78(4)(a)(iii) assume that before a person can be declared or treated as an agent, such person must on the date the order declaring or treating him as an agent in passed.

* have a business connection with the nonâ€‘resident or

* the nonâ€‘resident is in receipt of any income from or through such person at that date.

(5) The order under section 78 treating the appellant as an agent was passed on June 17, 1999 two years after NOVA completed the contract in February 1997. The appellant consequently on June 17, 1999 the date when the order was passed neither had any business connection with NOVA nor was NOVA at that date in receipt of any income from SNGPL. No opportunity of hearing was allowed before issuing the order.

(6) Consequently the order under section 78 was not in accordance 78(4)(a)(ii) and 78(4)(a)(iii) as before the order was passed SNGPL in response to the Departments notice had informed them through their letter, dated June 24, 1998 that NOVA was no longer rendering any services to them and had parted with the funds of NOVA.

(7) The A.R. of the appellant found supported by the following cases:

Asia Petroleum Limited v. Federation of Pakistan and others dated March 11,2000 H.C. Kar Suit No.736 of1998 = 1999 PTD 1313).

However, as held previously where upon receipt of notice under section 78, the proposed Agent has already parted with the principal's funds this factum would be a complete defense available to him under section 78. It is only in this context the provisions of section 78(4) can be rationalized as it would be quite unreasonable to put a person on notice under section 78 when he no longer possesses the funds of his principal. Such an interpretation would not only be oppressive but would also be against the intention of the Legislature which is to tax the principal although through the Agent.

Abdur Rehman v. Income Tax Officer (1983) 41 Tax 158 (H.C. Lah).

I have no doubt that before the respondent could do so he was obliged to show that the petitioner falls in any of the three category of persons against whom proceedings could be taken under section 43 of the Act. I am equally clear that section 43, which operates to impose a burden, shall have to be strictly construed and even if two interpretations were possible, the interpretation favourable to the subject shall have to be adopted. The impugned notice dated 4â€‘2â€‘1979 shows that the foreign company had been operating in Pakistan possibly during the previous years relevant to the assessment for the years 1976â€‘77, 1977â€‘78 and 1978â€‘79 but left Pakistan thereafter. The learned counsel for the respondent is unable to satisfy me that the provisions of section 43 will ensure to the benefit of the respondent even after the business connection has ceased to exist as in the present case.

(8) Since SNGPL before the proceedings under section 78 had parted with the money of the nonâ€‘resident under its control, the order under section 78 was, therefore, invalid in law.

(9) The order under section 78 is also invalid as section 78(1) of the Ordinance provides that every agent in respect of the income for which he is or is declared to be or treated as an agent is deemed to be an assessee for the purposes of the Ordinance and is subject to the same obligations and liabilities as if he were the assessee and is liable to assessment in his own name in respect of that income.

(10) Section 78 is an enabling section that is the Department has the option to make an assessment on the agentâ€‘or a direct assessment on the person beneficially entitled to the income. In other words the Department can either assess the agent or the nonâ€‘resident. But once the Department has exercised its option and assessed either the agent or the nonâ€‘resident, it cannot assess the same income in the hands of the agent.

(11) The department exercised its option to make an assessment on the nonâ€‘resident by making a direct assessment on Nova as an assessee in respect of the years 1995â€‘96 to 1997â€‘98 as is evident from assessment orders, dated January 30, 1997 for 1995â€‘96, dated February 27, 1998 for 1996â€‘97 and 1997â€‘98.

(12) That the department had exercised the option to make an assessment on NOVA is also evident from the order under section 78, which states that since NOVA the assessee had left the country'. As NOVA is the assessee, SNGPL cannot/be treated as an assessee for the same income.

(13) Having made the assessment on NOVA the Department had exercised the option and could not after a lapse of over two years in the case of 1995â€‘96 and one year in the case of 1996â€‘97 and 1997â€‘98 now in June 1999 declare or treat SNPL as an agent.

(14) Under section 78 where a person is declared or treated to be an agent he is liable to assessment in his own name in respect of that income. That as the assessments had been framed on NOVA as the assessee, the provisions of the section 78(4)(c) could not be invoked as the assessments for the relevant years had not been framed on SNGPL, as an assessee and, therefore, the order under section 78 was again ab initio void.

(15) The principle that the Department has the option to make an assessment on the agent or a direct assessment on the non resident entitled to the income but the Department having once exercised its option and assessed either the agent or the nonâ€‘resident, it cannot assess the same income in the hands of the agent is supported by the following case laws.

Asia Petroleum Limited v. Federation of Pakistan and others dated March 11, 2000, H.C. Kar Suit No.736 of 1998 (1999 PTD 1313).

In my opinion this case is then adequate authority for the converse i.e., the proposition that once the Revenue has elected to tax the nonâ€‘resident through the mechanism of section 18(3B.) (which corresponds to section 50 of the 1979 Ordinance) then recourse cannot be taken to section 42 (section 78 of the 1979 Ordinance in order to treat the resident company as an agent of the nonâ€‘resident in my 'view, therefore, as per settled law, right up to the Honourable Supreme Court.

Commissioner of Income Tax, Karachi v. Pakistan Petroleum Limited (1984) 49 Tax 169 (H.C. Kar).

In the present case the admitted facts were that the receipt of payment by Morton Air Services Ltd. were admitted by them and the respondents had also admitted that they had made those payments to Morton Air Services Ltd, and, therefore. it was not a case of any doubt as to who had received the payment but it was a case of clear cut liability and in such an event under section 42 of the Income Tax Act the choice had to be made by the Income Tax Officer to assess either the principal or the agent and once the ITO had exercised the option in taxing the principal for particular income then the same income could not be reassessed as against the agent as well.

Premnath Diesel Grainvaying Division v. Commissioner of Income Tax 1986 ITR 575 (Delhi)

`That it was open to the ITO to assess either the agent or the nonâ€‘resident at the initial stage. Once the nonâ€‘resident company was assessed, the representative assessee, the agent, could not be assessed. If the Department found that the agent was to be taxed as representative assessee, the Department had to call upon the agent to file the return and then only he can be taxed as a representative assessee. At the stage after the direct assessment was made on the nonâ€‘resident company, the only thing that could be done was to recover the amount of the tax payable by the nonâ€‘resident under section 167 from the assets, which had vested in the hands of the agent. In this case, no property of the nonâ€‘resident had so vested and no recovery could be made under section 167'.

In view of the above facts, the law and the findings of the Courts on the issue, appellants submitted that the order of the DCIT under section 78 being an order contrary to law and facts be deleted.

(16) Without prejudice to the foregoing submissions Nova having also derived income from Sui Southern Gas Company Limited in addition to that from the appellant, the DCIT erred in solely treating the appellant as an agent and recovering the tax from the appellant pertaining to Nova's income from Sui Southern Gas Company Limited.

In response to the above submissions A.R. of appellants submitted as follows:

(a) The taxes withheld at .source referred to above relate to deductions made by Sui Southern Gas Company Limited from payments made by them to NOVA and not SNGPL. Copies of the challans as evidence of the deductions having been made by SSGC have been placed on record.

(b) The deductions made by SNGPL were made on the basis of the certificates issued by the tax authorities stating that the tax had to be withheld at the 5% rate from payments made to NOVA under section 50(3) since the only payments made by the appellant to NOVA were in respect of this contract the certificate issued by the tax authorities was issued by them after due application of mind, after examination of the contract and approval by the CIT that the taxes were to be withheld under section 50(3) from payments under the contract. The appellants accordingly made the deductions as required by the Tax Authorities.

(c) The fact that the Department required the deductions to be made by the appellant under section 50(3) is also evident from the order of the DCIT under section 78 which itself states that `SNGPL failed to deduct tax under section 50(3)' as a ground for taking action under section 78.

On Court question, it was brought to the notice of this Tribunal that the assessments framed in the name of Nova Corporation International Ltd. were appealed by the A.R. of the NOVA and the appeals were dismissed in June, 2001 by CIT(A), Lahore.

The counsel for the Department has also produced accept of the agreement reached between Nova Corporation International and assessee and according to clause 5(i) subsection (vii) it says that deduct amounts from Nova Corporation's invoices appropriate to cover applicable taxes on revenues at a rate established by the Government of Pakistan. He further argued as under:

Under subâ€‘clause (a) (vii) of clause (5.1) of the contract (for rendering technical services), between SNGPL and NOVA Corporation, the SNGPL was to deduct amount from NOVA to rover applicable taxes on revenue at the rate established by the Government of Pakistan. It was, therefore, preâ€‘existing obligation on the part of the appellant under the contract/agreement to deduct the tax at source at the time of making payment to the NOVA and pay it to the public exchequer.

Under section 80(AA) read with section 50(3A) and item (DDDD) Partâ€‘1 of the 1st Schedule to the Income Tax Ordinance, 1979, SNGPL was to deduct the tax @ 15 % at source.

It was argued by the A.R. that SNGPL discharged its liability by making the payment @ 5% owing the assessment period 1995â€‘96 in accordance with the certificate issued by the Deputy Commissioner Income Tax under proviso to section 50 (3) and no payment was made for the remaining two assessment years 1997â€‘98 as the proviso to section 53 was deleted during the period.

The above arguments of the learned A.R. were repelled by the counsel for the respondent who submitted that the certificate issued by the Deputy Commissioner for payment at reduced rate of 5% for year 1995â€‘96 is not lawful as section 50(3) and the proviso is not applicable in the case as "Technical Services" were rendered by the nonâ€‘resident, which fall under section 50(3A) of the Act:

The very application, therefore, under the proviso, for certificate was misconceived as it failed to disclose the correct provision of the agreement as to tax liability and rendering of Technical Services.

The relevant section applicable for technical; services being section 50(3A) of the Income Tax Ordinance, 1979 is reproduced below:

"Any person responsible for payment to a nonâ€‘resident any sum by way of fee for technical services shall, unless such person is himself liable to pay tax thereon as an agent, deduct, at the time of payment, tax at the rate specified in the First Schedule."

"Provided that where on an application of an assessee the Deputy Commissioner gives a certificate in writing that the assessee is liable to pay tax under any treaty or convention for avoidance of double taxation, entered into between the Government of Pakistan and the country of residence of the assessee, at a rate which is lower than the rate specified in the First Schedule assessee shall, until such certificate is cancelled by the Deputy Commissioner, deduct tax at such lower rate."

In the circumstances, showâ€‘cause notice dated 3â€‘6â€‘1999 declaring and treating, the SNGPL under section 78 (ibid) was rightly issued acid the SNGPL was assessed as agent under the provision of the law discussed above and the demand correctly raised and recovered. The question raised by the Honourable Tribunal whether Ford Rohds & Company Chartered Accountant who represented the nonâ€‘resident till June 2000 (can be treated as agent of nonâ€‘resident), in an Indian Authority reported as 129 ITR 295, (SC), it was held that

"The professional can be treated as agent of the nonâ€‘resident"

Provided they have business connections.

In addition to the above authority the following authorities were also referred:

2001 PTD (Trib.) 888 relevant 891

It declared that fee for Technical Services is assessable under section 30(2) read with section 80 AA.

PLD 1995 (Lahore) 409/410(a)

It declared that unless any prejudice is caused to the party, the plea of no opportunity of defence, is not available, in the case of full opportunity having been given by the Deputy Commissioner by issuing showâ€‘cause notice, hearing the party before assessment and also full hearing in appeal to the appellant no prejudice was caused.

Asian Petroleum Ltd. v. Federation of Pakistan and others 1999 PTD 1313 (H. C. Kar) relied by A.R.

The above decision has fully been discussed in judgment dated 1â€‘4â€‘2000 in appeal by CIT and the other authorities relied in the case are not relevant.

After going through theâ€‘ rival arguments and the copy of the order in Suits Nos.736 of 1998 and 299 of 1999 of the Sindh High Court, the facts of which are totally akin to the. appeals in hand in which the suit has been decreed by the Honourable Judge on,3â€‘3â€‘2000. In the referred case, the facts were as under:

Both the above suits raise common issues of law and facts and hence I propose to dispose them of by this judgment.

Briefly stated the facts of the matter in Suit No.736 of 1998 are that the plaintiff Company entered into a contract dated 1â€‘1â€‘1995 with the defendant No.4 whereby the said defendant agreed to carry out for the plaintiff's Oil Pipe Line from Zulfiqarabad to Hub in Baluchistan. The grievance of the (plaintiff is that the defendant No.2 as per the impugned order dated 21â€‘5â€‘1998 has declared the plaintiff to be an agent of the defendant No.4 under section 78 of the Income Tax Ordinance, 1979 (hereinafter Ordinance) based upon clause 22.2.4 of the Agreement between the said parties and thus responsible for payment of tax on behalf of the defendant No.4 for the assessment year 1996â€‘97. The said order has been challenged on various grounds inter alia; that no hearing has been given to the plaintiff before passing of the impugned order; the defendant No.2 has no jurisdiction to issue the impugned order as he has not been officially assigned to assess the plaintiff; that clause 22.2.4. of the Agreement between the plaintiff and defendant No.4 nowhere mentions that the .plaintiff had agreed to become the agent of defendant No. 4 in terms of section 78 of the Ordinance; that as the agreement between the plaintiff and defendant No. 4 had come to an end on 26â€‘3â€‘1998, the defendant No.2 could not rely upon the same in passing the impugned order; that the entire exercise is mala fideâ€‘and colourable inas much as an attempt has been made to unlawfully recover the alleged tax from the plaintiff.

In suit No. 299 of 1999 the only factual difference is that the demand of tax raised by the Income Tax Department as far as defendant No.4 is concerned upon the plaintiff is for the assessment year 1997â€‘98.

The grounds taken in objection to such demand are the same as enumerated above.

In the written statement filed in Suit No. 736 of 1998 on behalf of defendant No.2 certain preliminary objections have been taken viz. that the suit is not maintainable under the law. That the jurisdiction of this Court is ousted under section 62 of the Ordinance and further that the Ordinance being a special statute which provides a special forum for adjudication of all disputes relating to the levy and payment of Income tax to that extent also no recourse can be made to this Court. It is further stated in the said written statement that there was some dispute between the department and the defendant No.4 regarding the rate of withholding tax, which had been decided by the Income Tax Appellate Tribunal vide order dated 2â€‘4â€‘1998 whereby the plaintiff was required to deduct such tax from payments, to defendant No.4 at the rate of 6% and such order had attained finality. It is further submitted in the written statement that on 10â€‘3â€‘1998 the plaintiff wrote a letter to the defendant No.2 informing him that this Court in Suit No. 101 of 1990 had ordered that all payments to the defendant No.4 by the plaintiff will be subject to withholding tax at the rate of 4% upon which the defendant No.2 wrote back on 20â€‘3â€‘1978 that in case the matter is decided in favour of the department by this Court in the said suit as well as by the Income Tax Appellate Tribunal then the responsibility for payment of the difference in tax shall lie with the plaintiff. Thereupon, the plaintiff repelled his contention vide letter dated 25â€‘3â€‘1998 informed the Department that they had already settled their outstanding payments with defendant No.4 on 20â€‘3â€‘1998 and, therefore, they could not agree that the plaintiff would be responsible for payment of the difference if any as regards the rate of withholding tax in case the matter is decided in favour of the Department: Finally it has been averred in the written statement that the impugned order has been passed after giving ample opportunity to the plaintiff for filing its objection it any to the same.

In the written statement filed on behalf of defendant No.2 in Suit No.299 of 1999 the pleas raised in the written statement of Suit No.736 of 1998 are more or less repeated and hence do not need any reproduction.

On the basis of the parties pleadings the following common consent issues in both suits were submitted by both the learned counsel which have been adopted.

(1) Whether the suit is maintainable?

(2) Whether the impugned order is void having been passed in violation of the principles of "natural justice"?

(3) Whether defendant No:2 had jurisdiction to initiate proceedings against the plaintiff under section 78 of the Income Tax Ordinance, 1979 not being the plaintiffs Assessing Officer?

(4) Whether the plaintiff could be made an agent of defendant No.4 after the defendant No.2 elected to tax defendant No.4 through the mechanism of section 50 of the Income Tax Ordinance, 1979?

(5) Whether the plaintiff could be made an agent under section 78 was not under its contemplation?

(6) What is the effect of the interim order passed by the High Court in Suit No. 1101 of 1998?

(7) Whether defendant No.2's letter dated 24â€‘3â€‘1998 could make the plaintiff an agent of defendant No.4 under section 78 of the Income Tax Ordinance, 1979 or give the plaintiff the apprehension that it would be assessed as an agent?

(8) Relief.

Both learned counsel have admitted each other's documents filed with the respective pleadings which have been marked as Exhibits: Both learned counsel did not choose to lead any evidence and have proceeded to argue the matter finally. I have heard both the learned counsel and my conclusions are as follows:

It was also observed as under:

"In my opinion this case is then adequate authority for the converse i.e. proposition that once the Revenue has elected to tax the nonâ€‘resident through the mechanism of section 18(3B) (which corresponds to section 50 of the 1979 Ordinance) then recourse cannot be taken to section 42, section 78 of the 1979 Ordinance) in order to treat the resident company as an agent of the nonâ€‘resident. In my view, therefore, as per settled law, right up to the Honourable Supreme Court, the defendant No. 2 erred in law while issuing the notice dated 21â€‘5â€‘1998. Issue No. 4 is thus answered in the negative.

However, as, held previously where upon receipt of notice under section 78, the proposed agent has already parted with his principal's funds this factum would be a complete defence available to him under section 78. It is only in this context that the provisions of section 78(4) can be rationalized as it would be quite unreasonable to put a person on notice under section 78 when he no longer possesses the funds of .his principal. Such an interpretation would not only be oppressive but would also be against the intention of the legislature which is to tax the principal although through the Agent.

The suit has been decreed in favour of the plaintiff in the following terms:

(a) It is declared that the orders dated 21â€‘5â€‘1998 and 13â€‘6â€‘1998 issued by the defendant No.2 upon the plaintiff under section 78 of the Income Tax Ordinance, 1979 for the, assessment years 1996â€‘97 and 1997â€‘98 are unlawful, void and inoperative.

(b) It is declared that in the circumstances of the case the plaintiff cannot be treated as an agent of the defendant No.4 for the assessment years in question viz. 1996â€‘97 and 1997-98.

(c) The defendants Nos.1, 2 and 3 are prohibited and restrained from acting upon or giving effect to the above mentioned orders or from recovering the tax liabilities of defendant No.4 through the plaintiff through section 74 of the Income Tax Ordinance, 1979 for the assessment years 1996â€‘97 and 1997â€‘98.

(d) Cost of the suits are also awarded."

In view ref the above, we agree with the arguments of the A.R. of the assessee and the ratio settled in Suits Nos.736 of 1998 and 299 of 1998 accept the appeals of the assessee and cancel orders of both the courts below passed under section 78 of the Income Tax Ordinance; 1979.

C.M.A./M.A.K./423/Tax(Trib.) Appeals accepted.

I.T.As. Nos.2600/LB to 2602/LB of 2000, decided on 29th September, 2001. VS I.T.As. Nos.2600/LB to 2602/LB of 2000, decided on 29th September, 2001., 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2906 (2001)

Requisition against illegal voters MTBA

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