COMMISSIONER OF INCOME-TAX VS MESSRS UNILEVER P.L.C. U.K.
2002 P T D 44
[Karachi High Court]
Before Dr. Ghous Muhammad and Mushir Alam, JJ
COMMISSIONER OF INCOME-TAX
Versus
Messrs UNILEVER P.L.C. U.K.
Income-tax Appeals Nos. 412 to 415 of 1997, decided on /01/.
th
November, 1999. (a) Agreement for Avoidance of Double "Taxation between Pakistan and the United Kingdom---
----Arts. II (I) (I) & III (I)---" Permanent establishment"-----Connotation-- Term "permanent establishment" denotes a branch, management, factory or other fixed place of business but does not include an agency unless the agent has and habitually exercises a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of goods or merchandize from which lie regularly meets his order---Definition of "permanent establishment" hardly covers the visits of the expatriates--- "Permanent establishment" signifies soma permanence.
CIT v. Visakhapatnam Port Trust (1983) 144 I T R 146 and CIT v. Abbott Finance 1982 P T D 31 rel.
(b) Agreement for Avoidance of Double Taxation between Pakistan and the United Kingdom---
----Art. III(I) (I)---Permanent establishment---Visit of the expatriates of the assessee in Pakistan would not constitute a "permanent establishment" of the assessee in Pakistan.
(c) Income-tax---
----Reference---Appeal---Argument neither raised in the grounds of appeal nor arising out of the order of the Income Tax Appellate Tribunal, has no merit.
(d) Agreement for Avoidance of Double Taxation between Pakistan and the United Kingdom-
----Art. II(I)(k)---"Industrial and commercial profit"---Connotation-- Definition "industrial and commercial profits" confirms that not all types of fee have been excluded from tile ambit of "industrial and commercial profits" ---Exclusion is only in relation to a fee drawn by an enterprise from the management, control or supervision of the trade, business or other activity of other enterprises or concerns---Exclusion is in relation to a fee earned from the management, control or supervision of an enterprise in Pakistan---Consultancy fee by no stretch of imagination would arise or be payable as consideration for managing, controlling or supervising an enterprise.
Raleigh Investment Co. Ltd. v CIT 1983 PTD 126; Glaxo Group Ltd. v. CIT 1992 PTD 636; Glaxo Laboratories v. CIT 1991 PTD 195; Glaxo Operations UK Ltd. v. CIT C.A. 76-K of 1991 and 26-K of 1992; Glaxo Group Ltd. v. CIT I T R No. 529 of 1990 and Lars Costa Adhom v . CIT 1994 PTD 590 rel.
(e) Words and phrases---
----"Consultation"---Connotation and explanation.
Burewala Textile Mills Ltd. v. Punjab Government NLR 1979 Lah. Lah. 297, Electric Equipment Manufacturing Co. Ltd. v. Government of Punjab 1979 PLC 416; Rolls v. Minister (1984) 1 All ER 13; R. Pushpam v. The State of Madras AIR 1953 Mad 392; Fiether v. Minister of Town Planning (1947) 2 All ER 496; Al-Jehad Trust v. Federation of Pakistan PLD 1996 SG 324 and Al-Jehad Trust v. Federation of Pakistan PLD 1997 SC 84 rel.
(f) Income Tax Ordinance (XXXI of 1979)---
---S. 163---Avoidance of Double Taxation and Prevention of fiscal evasion--Agreement for Avoidance of Double Taxation between Pakistan and the United Kingdom---Consultancy fee---Taxability-- Exemption claimed by the assessee on consultancy fee was disallowed by the Assessing Officer and the same was confirmed by the Income Tax Appellate Tribunal---Validity---Admitted position was that the fee in question was towards consultancy and the term "consultancy" would denote tendering advice and counselling and surely not managing, controlling or supervising---Consultancy fee thus falls under the term "industrial and commercial profits" which was taxable in Pakistan.
Burewala Textile Mills Ltd. v. Punjab Government NLR 1979 Lab. Lah. 297, Electric Equipment Manufacturing Co. Ltd. v. Government of Punjab 1979 PLC 416; Rolls v. Minister (1984) 1 All ER 13; R. Pushpam v. The State of Madras AIR 1953 Mad 392; Fiether v. Minister of Town Planning (1947) 2 All ER 496; Al-Jehad Trust v. Federation of Pakistan PLD 1996 SC 324 and Al-Jehad Trust v. Federation of Pakistan PLD 1997 SC 84 rel.
(g) Words and phrases---
----"Permanent establishment"---Connotation.
Javed Farooqi for Appellant. Fateh Vellani for Respondent.
Date of hearing: 1st June, 1999.
JUDGMENT
DR. GHOUS MUHAMMAD, J.---The present appeals have been filed by the Commissioner of Income Tax Companies-I, Karachi under section 136 of the Income Tax Ordinance (hereafter: " 1979 Ordinance") against a common order of the Income Tax Appellate Tribunal (hereinafter: "ITAT") for the assessment years 1983-84, 1984-85, 1985-86 and 1986-87. For all the four years in issue the questions of law as framed by the appellant are common, which are being reproduced as follows:----
(a) "Whether, on the facts and in the circumstances of this case the learned Income Tax Appellate Tribunal was justified in holding that permanent establishment requirement was there for `Fee for Technical Services' although the fees did not constitute Industrial and Commercial profits taxability of which only requires presence or permanent establishment under the Treaty and "Fee" earned in Pakistan were taxable in Pakistan?"
"Whether on the facts and in the circumstances of this case the learned Income Tax Appellate Tribunal was justified in holding that the assessee did not have permanent establishment when the company earned consultancy income through its expatriates whiz are present in Pakistan for number of years including subsequent period also?"
2. In all these appeals, the respondent is a non-resident company from the U.K. i.e. Unilever PLC, UK. For the years in question the respondent had declared the following as its sources of income which had accrued and arisen in Pakistan:---
| | 1983-84 | 1984-85 | 1985-86 | 1986-87 |
| Dividends | 24,888,255 | 17,872,107 | 21,003,730 | 28,316,230 |
| Consultancy | 59,634 | 480,115 | 124,250 | 405,834 |
| Royalty | 119,422 | 63,885 | 193,666 | NIL |
From the above sources of income, the respondent offered dividends to tax, while exemptions were claimed on the consultancy fee and royalty in view of the Avoidance of Double Taxation treaty between Pakistan and the U.K. duly notified under section 163 of the 1979 Ordinance. It appears that the Assessing Officer did not dispute the exemption in relation to royalty, however, with regard to the exemption claimed by the respondent on the consultancy fee the same was disallowed. Aggrieved against the treatment of the Assessing Officer, the respondent filed appeals for the four years before the Commissioner of Income Tax (Appeals). Interestingly, for three years i.e. 1983-84, 1984-85 and 1986-87, the respondent's appeals were allowed and its claim for exemption upheld by a common order, dated 26-3-1988. However, for the assessment year 1985-86 the Commissioner of Income Tax (Appeals) dismissed the respondent's appeal through order, dated 26-5-1987. The two orders, obviously in conflict with each other, were passed by different officers holding the appellate jurisdiction at different times. Both parties preferred appeals to the ITAT which were decided through a common order, dated 6-5-1997 whereby the appeals of the appellant were dismissed and the one appeal of the respondent was allowed. In other words, for all the four years in question the matter stood decided in favour of the respondent.
3. The appellant has questioned the order of the ITAT in the four appeals. Mr. Javed Farooqi, the learned counsel for the appellant contended that the consultancy fee was earned by the respondent through its expatriates/employees who had worked for a number of years in Pakistan. It was submitted by Mr. Farooqi that the presence of these expatriates in Pakistan constitutes a "permanent establishment: of the respondent in view whereof the respondent was not entitled to the exemption claimed under the Avoidance of Double Taxation Treaty.
4. On the other hand Mr. Fateh Vellani, the learned counsel for the respondent has submitted that firstly the expatriates have not maintained the presence of 180 days in Pakistan in any one year and secondly under the Avoidance of Double Taxation Treaty, the presence of expatriates does not constitute a "Permanent establishment" of a non-resident company in Pakistan.
5. We have heard Mr. Javed Farooqi, the learned counsel for the appellant, Mr. Fateh Vellani the learned counsel for the respondent, perused the record and the law on the point.
6. Section 163 of the 1979 Ordinance empowers the Federal Government to enter into an agreement with the Government of any other country for the purposes of according relief in relation to avoidance of double taxation; once such agreement is notified by the Government in the official Gazette, the same takes effect notwithstanding anything else contained in any law in force. For the sake of convenience the said section 163 is reproduced, which reads as follows:----
Section 163. Avoidance of double taxation and prevention of fiscal evasion.---(1) The Federal Government may enter into an agreement with the Government of any country for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income leviable under this Ordinance and under the corresponding law in force in that country, and may, by notification in the official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where any agreements is made in accordance with sub section (1), the agreement and the provisions made by notification for the implementing the said agreement shall, notwithstanding anything contained in any law for the time being in force, have effect insofar as they provide for--
(a) relief from the tax payable under this Ordinance; or
(b) determining the income accruing or arising, or deemed to accrue or arise, to non-residents from sources within Pakistan; or
(c) where all the operations of business or profession are not carried on within Pakistan, determining the income attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of such persons, including their agents, branches or establishments in Pakistan; or
(d)determining the income to be attributed to any person resident in Pakistan having any special relationship with a non-resident; or
(e)exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding law in force in that other country.
(3)The provision of the Seventh Schedule shall have effect where an agreement provides that the tax payable under the laws of the country concerned shall be allowed as a credit against the tax payable in Pakistan.
(4)Notwithstanding anything contained in subsections (1), (2) and (3) any such agreement may include provisions for relief from tax for any period before the commencement of this Ordinance or before the making of the agreement."
In the present case Government of Pakistan had entered into an Agreement for the Avoidance of Double Taxation with respect to taxes on income with the Government of U.K. (hereafter: "the Agreement"). This Agreement has been notified in the official Gazette through SRO 56(K)162, dated 9-1-1962. The admitted position is that this agreement subsists even today.
7. Article III (1) of the Agreement provides that the "industrial or commercial profits" of a U.K. enterprise shall not be subject to tax in Pakistan unless the enterprise is engaged in trade or business in Pakistan through a "permanent establishment" situated therein; even if the U.K. enterprise is so engaged, tax may be imposed on those profits in Pakistan which are attributable to the said "permanent establishment". For convenience, .the said Article III (I) is reproduced as follows:---
ARTICLE III
(1)The industrial or commercial profits of a United- Kingdom enterprise shall not be subject to Pakistan tax unless the enterprise is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by Pakistan, but only on so much of them as is attributable in that permanent establishment.
(2)The industrial or commercial profits of Pakistan enterprise shall not be subject to United Kingdom tax unless the enterprise is engaged in trade or business in the United Kingdom through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by the United Kingdom but only on so much of them as is attributable to that permanent establishment.
(3)Where an enterprise of one of the territories is engaged in trade or business in the other territory through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to drive in that other territory if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which is a permanent establishment.
(4)In determining the industrial or commercial profits of a permanent establishment, there shall be allowed 'as deductions all expenses which would be deductible if the permanent establishment were an independent enterprise insofar as they are reasonably allowable to the permanent establishment, including executive and general administrative expenses so deductible and allowable, whether incurred in the territory in which the permanent establishment is situated or elsewhere."
8. The respondent has stated that for none of the years the expatriates maintained a cumulative presence of more than 180 days in Pakistan. This agreement has been adduced on the strength of section 2(40) of 1979 Ordinance wherein a "resident", for the purposes of the Ordinance, has been defined to be a person who stays in Pakistan for more than 180 days. The factual aspect that the expatriates did not maintain a presence of more than 180 days in Pakistan in any given year is finding of fact entered by the ITAT. The same is neither challenged nor disputed here. However, the fact that the expatriates may or may not have maintained presence of more than 180 days or more may be relevant to determine as to whether the said expatriate as individuals have become residents in Pakistan for the purposes of the 1979 Ordinance, section 2(40) (a) itself confirms that the enquiry, in relation to the presence of 180 days or more is only meant for individuals. For the purposes of a company the test is the control and management of affairs in Pakistan as prescribed in section 2(40)(c). In other words, a company would be classified as a resident of Pakistan, i.e. for tax purposes, if its control and management and affairs are situated in Pakistan. There is no dispute that the control, management and affairs of the respondent are not situated in Pakistan and thus it is a non-resident for tax purposes. Accordingly, the fact that the respondent s expatriates may not have maintained a presence of 180 days in Pakistani in a year would not be relevant here so as to determine whether the respondent is entitled to exemption under the Agreement.
9. The taxable activity in the shape of consultancy fee is the payment made by Lever Brothers Pakistan Ltd. to the expatriates/employees of the respondent. Under the referred Article III(I) of the Agreement, a U.K. enterprise would not be taxable in Pakistan if it does not have a permanent establishment here. The key question which requires determination is whether the visits of the expatriates here in Pakistan would by themselves constitute a permanent establishment of the respondent. The term permanent establishment has been defined in the Agreement in Article II(I) as follows:
"ARTICLE II(I) (I)
(1)The term `permanent establishment' when used with respect to an enterprise of one of the territories means a, branch, management, factory, or other fixed place of business, but does not include an agency unless the agent has and habitually exercises, a general authority to negotiate and conclude contracts from which he regularly fills orders on its behalf. In this connection:---
(i)An enterprise of one of the territories shall not be deemed to have a permanent establishment in the other territory merely because it carried on business dealings in that other territory through a bona fide broker, general commission agent or other independent agent acting in the ordinary course of business as such or because it makes purchases of goods or merchandise direct from an independent exporter in that other territory in the normal course of international trade; and
(ii)The fact that a company which is a resident of one of the territories has a subsidiary company which is a resident of the other territories or which is engaged in trade or business in that other territory (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary company a permanent establishment of its parent company; and"
The above definition confirms that the term "permanent establishment" denotes a branch, management, factory or other fixed place of business but does not include an agency unless the agent has and habitually exercises a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of goods or merchandize from A which he regularly meets his order. This definition of "permanent establishment" hardly covers the visits of the expatriates/employees of the respondent. The term "permanent establishment" signifies some permanence. In CIT v. Fisakhapatnam Port Trust (1983) 144 ITR 146 the Andhra Pradesh High Court at page 162 has found a "permanent establishment" to connote, "projection of the foreign enterprise itself into the territory of the taxing state in a substantial and enduring form; (vide F.E. Koch's Book on the Double Taxation Conventions published by Stevens & Sons, London, 1947, Vol-1 at page 51, quoting Mitchell B. Caroll before the sub-Committee of the Committee of U.S. Senate Foreign Relations). The appellant has failed to bring any evidence or document on record to substantiate its claim that the respondent has maintained a "permanent establishment" here in Pakistan. The ITAT's finding of fact that the respondent has not maintained a "permanent establishment" in Pakistan has gone unrebutted in view of the appellant's failure to bring forth any other evidence to the contrary (see CIT. v. Abbott Finance 1982 PTD 31). There is thus no reason to disturb this finding of fact.
10. In light of the above discussion we hold that the visits of the expatriates of the respondent in Pakistan would not constitute a"permanent establishment" of the respondent in Pakistan.
11. Mr. Javed Farooqi, the learned counsel for the appellant has alternatively tried to argue that the exemption contained in Article III(1) of the Agreement could only be attracted if two conjunctive conditions are met: firstly, the activity should not be through a "permanent establishment" and secondly, the subject-matter of the exemption claimed should be "industrial or commercial profits". The learned counsel vehemently argued that in case one of the two above conditions are not met the exemption under the Agreement would not be' available: According to the learned counsel even if it were found that the visits of the expatriates did not constitute a "permanent establishment" of the respondent in Pakistan, the consultancy fee in question could not be termed as "industrial or commercial profits" as required by Article III(I) of the Agreement. In this respect Mr. Javed Farooqi has invited our attention to clause II(I)(k) of the Agreement which has defined the term "industrial or commercial profits" as follows:---
"ARTICLE II (I) (K)
(k) The terms `industrial or commercial profits' includes rents or royalties in respect of motion picture films and films for use in connection with television but dries not include income in the form of dividends, interest, or royalties, or a fee 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 or aircraft; "
While referring to the above definition, Mr. Javed Farooqi has stated that all kinds of fee have been excluded from the definition of "industrial and commercial profits" and this exclusion would squarely cover consultancy fee. The agreement, though neither raised in the grounds of appeal nor arises out of the order of the ITAT; has no merit. The term C "industrial and commercial profits" cannot be given any pedantic connotation; this term cannot be understood in a manner not so intended or expressed. The inclusions have to be given their common sense, ordinary and grammatical meaning. A Division Bench of this Court in Raleigh Investment Co. Ltd. v. CIT 1983 PTD 126 has even found gains from the disposal of shares to be included in the term "industrial and commercial profits". In Glaxo Group Ltd. v. CIT 1992 PTD 636 it was held that when foreign consultants tender technical advice to local companies, the same constitutes "personal services" and cannot be included in the term "industrial and commercial profits". In the latter case the Court had followed its earlier judgment in Glaxo Laboratories v. CIT 1991 PTD 195. In both the cases exemptions claimed by the non- resident assessees were partly declined. The Supreme Court, however, overturned the demand of exemption in both these judgments in appeal in Glaxo Operations UK Ltd. v. CIT being C.A. 76-K of 1991 and 26-K of 1992, dated 28-11-1993 (unreported), wherein it was held that a company, or a corporate body would "obviously" act through human agencies such as employees, and thus the use of the foreign company of its personnel for the purposes of consultancy agreement would not be fatal to the claim of exemption, thus implying that such consultative service would not make it a "personal service" excluding it from the ambit of "industrial or commercial profits". The Supreme Court's judgment has been followed in Glaxo Group Ltd. v. CIT ITR No. 529 of 1990 dated 3-9-1998 (unreported), decided by a Division Bench of this Court. In Lars Costa Adhom v. CIT 1994 PTD 590, a Division Bench of the Lahore High Court found the supervision in relation to erection of machinery by non-resident the Swedish nationals to be an act performed by the said persons on behalf of the Swedish Company. The proceeds from such supervision were found to qualify for exemption under the Avoidance of Double Taxation Treaty between Pakistan and Sweden. A plain reading of the definition of "industrial and commercial profits" cited above confirms that not all types of fee have been excluded from the ambit of "industrial or commercial profits". The exclusion is only in relation to a fee drawn by an enterprise from the management, control or supervision of the trade, business or other activity of other enterprise or concern. In other words, the exclusion is in relation to a fee earned from the management, control or supervision of an enterprise in Pakistan. A consultancy fee by no stretch of imagination would arise or be payable as a consideration for managing, controlling or supervising an enterprise. The term "consultation" has been the subject-matter of discussion by our Courts. In Burewala Textile Mills Ltd. v. Punjab Government NLR 1979 Lab. Lah 297, it was observed that "consultation" presupposes that one who has to consult has a problem or a proposition; it can be between a layman and an expert or between two experts. The Lahore High Court in Electric Equipment Manufacturing Co. Ltd. v. Government of Punjab 1979 PLC 416 (Labour) considered a number of reference including "Words and Phrases", Permanent Edn., Vol. IX, p.3; Rolls v. Minister (1984) 1 All ER 13; R. Pushpam v. The State of Madras AIR 1953 Mad. 392 and Fiether v. Minister of Town Planning (1947) 2 All E ER 496, to hold that the word "consult" implies conference of two or more minds respecting a topic in order to enable them to evolve a correct or satisfactory solution. In the context of judicial appointments our Supreme Court in the celebrated Judges' case i.e. Al-Jehad Trust v., Federation of Pakistan PLD 1996 SC 324 has also dilated upon the term "consultation" to carry a "consultative process" between the consulters and the "consulters". The latter was subsequently followed in Al-Jehad Trust v. Federation of Pakistan PLD 1997 SC 84. It is an admitted position that the fee in question is towards consultancy and the term "consultancy" (as confirmed by the above definitions) would denote F tendering advice and counselling and surely not managing, controlling or supervising. Consultancy fee thus falls under the term "industrial and commercial profits". The contention of the learned counsel of the appellant on this score also fails.
12. The upshot of the above discussion is that the four appeals in question are dismissed, the order of the ITAT maintained and the questions of law framed above are answered in the affirmative, however, there shall be no order as to costs.
C.M.A./M.A.K./C-32/KOrder accordingly.