I.T.As. Nos. 186-IB, 187-IB and 188-IB of 2002 VS I.T.As. Nos. 186-IB, 187-IB and 188-IB of 2002, 2004 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 397 (2003)

(a) Income Tax Ordinance (XXXI of 1979)-----

----Ss. 52A/86, 50(4), 59-A,, 80-C & 143-B---C.B.R. Circular No.4 of 1964, dated 11-12-1964---C.B.R. Circular No. 8 of 1986, dated 9-2-1986---Recovery from the person from whom tax was not deducted or collected---Joint venture---Execution of construction of pipeline contract---Filing of statement under S.143-B of the Income Tax Ordinance, '1979 in respect of payments received as an association of persons---Assessment was finalized under S.59-A of the Income Tax Ordinance, 1979 and also issued refund---Assessing Officer having the jurisdiction over the assessee treated the assessee as sub-lettee of his partner non-resident company as assessee was not signatory of the contract and created liability against the assessee for non-deduction of tax on the payments made by the partner nonresident company to asses see-company---Validity---Fact that payments received were deposited in Bank account maintained jointly by both the partners of the joint venture and operated with the signatures of both the parties had not been controverted by the Department which proved that payments were received jointly by both the parties---Assessing Officer failed to specify the part of work awarded by the partner non-resident company under the alleged sub contract to assessee nor the amount of payments were quantified against the work done under sub contract---Undisputed facts and documents produced by the assessee supported the contention of the assessee that the contract work was executed as a joint venture-- Contract awarding, company accepted the execution of work by non resident company alongwith assessee as joint venture---Existence of joint venture in respect of agreement/contract was proved---Provisions of S.50(4) and consequently of S.52A of the Income Tax Ordinance, 1979 were not attracted---Order passed by the Assessing Officer to charge tax in respect of the same amount of the same transaction in the hands of assessee which had already been subjected to tax in the hands of association of persons without first taking cancellation proceedings completed assessment were not maintainable in law---Orders passed were not maintainable---Appeals were accepted and orders of both the Authorities below were vacated by the Appellate Tribunal.

1971 PTD 175 2000 PTD 2424 (Trib). rel.

(b) Income Tax Ordinance (XXXI of 1979)---

----S: 3(1)(e)---Income Tax Authorities---Deputy Commissioner of Income Tax---Order passed by Assessing Officer could not be declared illegal by another Assessing Officer unless it was cancelled or annulled by the Competent Authority as provided under the Income Tax Ordinance, 1979.

Kashif Aziz Jehangiri, ACA for Appellant.

Naushad Ali Khan, D.R. for Respondent.

Date of hearing: 23rd April, 2003.

ORDER

KHALID WAHEED AHMED (JUDICIAL MEMBER).---These three appeals, at the instance of the assessee-appellant, are directed against the combined order, dated 16-3-2002 pertaining to assessment years 1996-97, 1997-98 and 1999-2000 of CIT/WT(A), Zone-I, Islamabad.

2. The assessee, a private limited company, derives income from execution of contracts of different nature. Statements under section 143B of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) were filed by the assessee declaring gross receipts from different sources and tax deducted thereon. However, later on, proceedings under section 52A/36 of the Ordinance were initiated against the assessee for three years, under appeal by the DCIT, Circle-14, Corporate code, Islamabad for alleged non-deduction of tax on the payments made by Messrs Will Bros Middle. East Incorporation (Will Bros) to the Assessee company. As per assessment order, the Messrs Will Bros Inc (a non resident company) received a total amount of Rs.17,60,66,705, Rs.88,31,27,551 and Rs.2,76,61,059 from Messrs Pak Arab Refinery Ltd: (Parco) on account of execution of contracts during the assessment years 1996-97, 1997-98 and 1999-2000 respectively. According to the Assessing Officer, 40% shares of the contract was sub letter by Messrs Will Bros to Messrs Techno Engineering Services (Pvt.) Ltd. (Techno), therefore, Messrs Will Bros was under obligation to deduct tax from the payments made to Messrs Techno for the execution of sub contract. The explanation offered by the assessee did not find favour with the Assessing Officer who proceeded to create liability against the assessee for the three years under consideration in the following manner:

Assessment year 1996-97

A Tax Liability under section 52A

Total receipts during the year ;Rs.70,426,682

Tax @ 5%Rs.3.521335

Total Tax under section 52ARs.3,521,335

B. Additional Tax under section 86Rs.4,598,960

C. Total Tax liability (A + B)Rs.8120,295

Assessment year 1997-98

A Tax Liability under section 52A

Total receipts during the yearRs.70,426,682

Tax @ 5 %Rs 3 521.335

Total. Tax under section 52ARs.3,521,335

B. Additional Tax, under section 86Rs.4,598,960

C. Total Tax liability (A+ B)Rs.8120 295

Assessment year 1999-2000

A Tax Liability under section 52A

Total receipts during the yearRs.11,064,424

Tax @a 5 %Rs. 553 221

Total Tax under section 52ARs. 553,221

B. Additional Tax under section 86Rs. 324,203

C. Total Tax liability (A+ B)Rs. 877 424

3. The orders passed by the Assessing Officer under section 52A/86 of the Ordinance for all the thee years under consideration were challenged by the assessee through the appeals filed before the learned first appellate forum. The learned CIT(A) through the above referred combined order, dated 16-3-2002 confirmed the action of the Assessing Officer by holding that treating the asses see-company as sub contractors of Messrs Will Bros and framing of assessment under section 52A/86 for all the three years under consideration were in order. The confirmation by the learned CIT(A) of the treatment given by the Assessing Office whereby it was held to be a sub contractors of Messrs Will Bros Middle East Inc is contested to be unjustified through the common grounds of appeals for all the three years under consideration. The jurisdiction of the Assessing Officer to pass the impugned order and initiation of proceedings through issuance of notice under section 56 of the Ordinance by the Assessing Officer are also contested to be unjustified through the grounds of appeals for the three years under consideration. The order of the Assessing Officer under section 52A/86 are also challenged by the assessee on the ground that the provisions of section 52A are not retrospectively effective and thus not applicable to the years under consideration.

4. Mr. Kashif Aziz Jehangiri, ACA the learned AR appeared on behalf of the assessee-appellant and Mr. Naushad Ali Khan, the learned DR appeared on behalf of the Revenue: During the course of hearing of appeals at an occasion, Mr. M. Ishfaq Ahmed, the author of the order also appeared who though was not authorized to represent the Department however, he was allowed to explain certain things for the assistance of the Court.

5. The learned AR in his arguments, supported the contention of the assessee as per grounds of appeals. Stating the facts, the learned AR of the assessee submitted that Messrs Bros Middle East Inc, a non resident company, registered in Panama was allowed to open a branch in Pakistan by the Board of Investment vide its letter, dated 5-6-1997. The learned AR further informed that it was also got registered in the Income Tax Department and NTN was issued in the status of a non-resident foreign company. According to learned AR, the assessee-company Messrs Techno Engineering Services (Pvt.) Ltd., a resident private limited company carries on the business of execution of contracts of different nature. The learned AR stated that the assessee-company entered into an agreement for joint venture with Messrs Will Bros Middle East Inc for execution of contract for the construction of pipeline from Karachi to Mahmood Kot which was awarded by Messrs Pak Arab Refinery Ltd. According to learned AR the bid for the contract was filed on 25-4-1994 by Messrs Will Bros and the contract was executed vide agreement, dated 23-1-1995. The learned AR further stated that non resident company entered into an agreement of joint venture with the assessee-company as per terms of which the assessee-company was to carry on the 40% of the, work awarded by Parco's MFM pipeline extension project..

6. Mr. Ishfaq Ahmed, the author of assessment order supported his order on the same reason as mentioned by him in the body of assessment order. He explained that the provisions of section 52A were attracted in the case of the assessee for the following reasons:--

(i)The assessee Messrs Techno Engineering Services (Pvt.) Ltd. was not a party to the contract No. PAR/MFMC/S/031/85 which was awarded by Parco to Messrs Will Bros a non resident company and thus according to him it does not accrue any rights or incurred any liabilities out of the said agreement.

(ii)That the payments were made by the Parco to Messrs Will Bros on which tax was also withheld and no payments were made. to the assessee Messrs Techno nor any tax. was deducted therefrom

(iii)That the agreement entered into between Messrs Will Bros and Messrs Techno was though titled a "join venture agreement" but according to the nature of agreement it was actually an agreement for sub contracting of 40% work of the original contract by Messrs Will Bros to Messrs Techno.

(iv)That the contention of the assessee regarding the awarding of the contract by the Messrs Parco to the joint venture is also not acceptable for the reason that no permission was obtained from C.B.R. as required under C.B.R.'s Circular 4 of 1964, according to which in case of joint venture between a foreign enterprises and the local company the respective parties were required to pay tax separately on their own income according to rates applicable to them independent each other.

(v)That the facts of the case do not. suggest existence of any joint venture because contract was awarded by Messrs Parco to Messrs Will Bros which subsequently entered into a sub contract with Messrs Techno for execution of the same. That Messrs Will Bros committed default by not deducting tax on the payments made to Messrs Techno on account of 40% work done under the sub contract.

(vi)That the facts of the case do not suggest the existence of any joint venture between Messrs Will Bros and Messrs Techno. Mere mentioning of the words "joint venture" in the agreement between the Messrs Parco and Messrs Will Bros do not change the relationship as a sub constructor of the assessee-company with Messrs will Bros.

(vii)That the statements filed under section 143B in Company Zone-I, Lahore as joint venture and the assessments framed under section 59-A in the status of AOP being against the provision of law have no legal value and consequently do not have any impact on the proceedings invoked under section 52A/86 of the Ordinance against the assessee.

(viii)That Messrs Parco through its letter, dated 4-9-2001 written in response to notice issued by the Assessing Officer has not confirmed the awarding of any contractor making of any payment to Messrs Techno which prove that the assessee was awarded sub contract by Messrs Will Bros.

Mr. M. Ishfaq Ahmed, the author of the assessment order also leveled serious charges against the Assessing Officer as well as IAC and Commissioner of Company Zone-I, Lahore by stating that the national exchequer was deprived of a considerable amount through issuance of illegal refund by the above mentioned officers of the Department through their connivance with the assessee. However, Mr. Ishfaq was directed not to raise such issues before this forum and was reminded that he should have agitated the issue before the proper forum. At this stage he stated that he had agitated the issue before the concerned authorities and the officers concerned have already been charge-sheeted. However, author of the assessment order was not allowed to raise such allegations and Divas informed that he was only allowed to explain the reason to justify the invoking of the provision of sections 52A/86 of the Ordinance.

7. The learned AR of the assessee also based his arguments on the same contentions as taken by him before the two authorities below. According to learned AR, the impugned order as well as order of the Assessing Officer were not maintainable for the allowing reasons:---

(i)That the Assessing Officer has no jurisdiction to proceed under section 56 of the Ordinance since the case of the assessee was covered under presumptive tax regime. It was the contention of learned AR of the assessee that the proceedings in the instant case were initiated by issuing notice under section 56 of the Ordinance which were ab initio void. According to learned AR of the assessee, the order passed under section 52A/86 of the Ordinance in consequence of the proceedings initiated through issuance of notice under section 56 of the Ordinance merged to void in law. Learned AR contended that this fact i.e. passing of order on the basis of proceedings initiated under section 56 is proved from the show-cause notice issued under section 62 read with section 61 of the Ordinance through which the assessee was confronted on the issue under consideration. Learned AR of the assessee produced a copy of. the above mentioned notice issued by the Assessing Officer bearing No. 144, dated 4-9-2001 to substantiate his contention.

(ii)That the provision of section 50(4) and consequently of section -52A of the Ordinance were not attracted in the case of the assessee-appellant. According to learned AR, the Assessing Officer failed to establish the relationship of assessed-company with Messrs Will Bros as that of a sub. contractor. According to learned AR, the assessee-company executed an agreement with Messrs Will Bros Middle East Inc. (WMEI) for entering into a joint venture for the purpose of carrying out the project of construction work to be awarded to the later by Messrs Parco. Learned AR produced a photo copy of agreement, dated 16-9-1994 executed between Messrs Will Bros Middle East Inc. and the assessee i.e. Messrs Techno Engineering Services (Pvt.) Ltd. According to him, this agreement was a Memorandum of Understanding between the two companies for execution as a joint venture of the project of construction work to be awarded by Parco to WMEI. Learned AR pointed out that as per terms and conditions of the above mentioned Memorandum of Understanding the execution of contract as a joint venture was subject to the approval of principal company i.e. Messrs Parco. He further submitted that it was also provided in the said agreement that in case the WMEI is the successful project. bidder but not able to secure the award of contract directly to joint venture then the Messrs Techno i.e. the assessee shall be deemed to be a sub contractor. Learned AR contended that Messrs WMEI succeeded in getting the contract in the name of joint venture which is evident from the agreement entered into with Messrs Parco for construction of MFM pipeline extension project. Learned AR produced a copy of said agreement, dated 23-1-1995 to parties to which are mentioned as Messrs Parco on the one ,hand and WMEI acting as a joint venture with Messrs Techno on the other side.

(iii)That the assessee Messrs Techno was not a sub contractor because as per clause 9-3 of the contract agreement dated 23-1-1995 no work could be assigned or sub-Jetted without the written consent of the principal company. It is the contention of learned AR that there was no evidence or material to prove that any work was sub-Jetted to Messrs Techno or any such approval for the purpose of subletting to Messrs Techno was obtained by Messrs Will Bros from Messrs Parco.

(iv)That the Parco in its letter dated 4-9-2001 referred by the Assessing Officer which was written in response to notices under section 144 issued by him has not denied the execution of contract as a joint venture. According to learned AR, in the said letter the Parco informed that they have not executed any contract with Messrs Techno but has not denied the execution of contract by the joint venture. Learned AR further submitted that the Assessing Officer has picked up the portion of letter which suited to him but has ignored the remaining part whereby it has been confirmed in the same letter that the contract Par/MFM C/S/031 was signed by the authorized representative of Parco and Messrs `Vill Bros Middle East Inc. and the parties to the contract were cited as Pak Arab Refinery Ltd. (Parco) and "WMEI acting in joint venture with Messrs Techno Engineering Services (Pvt.) Ltd.". It is the contention of learned AR that in presence of the confirmation by Messrs Parco as above mentioned there remained hardly any doubt that the contract was executed as a joint venture. A photocopy of the said letter dated 4-9-2001 was also produced by the learned AR of the assessee. Learned AR further submitted that a joint venture agreement was also executed between Messrs Will Bros Middle East Inc. and Techno Engineering Services (Pvt.) Ltd. for the execution of the part of MFM project comprising execution of construction work. Learned AR produced a photocopy of joint venture agreement dated 23-1-695 executed between Messrs Will Bros and Messrs Techno. According to learned AR, the parties to joint venture agreed to operate collectively under the name of Messrs Will Bros ,Middle East Inc. as per clause 2 of the agreement. It is the contention of learned AR. that the agreement' of contract executed between Messrs Parco and WMEI was signed by Messrs Will Bros on ,behalf of the joint venture and it was not necessary that it should have been signed by all the parties to joint venture. Learned AR further submitted that the objection of the Assessing Officer. that being not a signatory to the contract ,agreement the assessee was not liable to or responsible for any liabilities regarding the execution of contract were not maintainable being against the facts of the case. According to learned AR, it is proved from the facts of the case that the contract was awarded to Messrs Will Bros and Messrs Techno acting as joint venture. Learned AR further submitted that in presence of the agreement for Memorandum of Understanding dated 16-9-1994 and agreement of joint venture dated 23-1-1995 the assessee was entitled to and responsible for all the rights and liabilities in respect of the contract being a partner in the joint venture.

(v)That the reliance of the Assessing Officer on C.B.R's., Circular No.4 of 1964 and Circular No.8 of 1986 dated 9-2-1986 is misconceived. According to learned AR, under the provision of said circulars the permission of the C.B.R. for entering into a joint venture by a resident with a non-resident company was required for the purpose of availing the concessional tax rates. It is the contention of the learned AR as per provision of the said circulars there was no bar on entering into a joint venture without the approval of C.B.R. According to. him, non-resident could enter into a joint venture agreement with a for the purpose of execution of a contract for the prior permission of C.B.R. was not

(vi)That the assessee-appellant was not confronted by the Assessing Officer with the quantum of amounts paid by Messrs Will Bros to the assessee-company which attracted the provisions of section 50(4)of the Ordinance.

(vii)That the Assessing Officer also failed to establish the fact of payments having been, made by Messrs Will Bros to` the assessee-company on account of execution of alleged sub contract. It is the contention of the learned AR of the assessee that in the absence of having been proved by the Assessing Officer that the payments liable to deduction of tax under section 50(4) were made by Messrs Will Bros to the assessee company the provisions of section 62-A were not attracted in the case of the assessee-appellant.

(viii)That the provisions of section 52-A though procedural but are substantive in nature because a charge is created as a result of their application. It was the contention of the learned AR that the order passed under section 52-A for the assessment year 1996-97 was not maintainable because section 52-A was inserted through Finance, Act, 1999 and was , not applicable retrospectively.

(ix)That the order passed under section 52-A/86 of the Ordinance for all the years under consideration was liable to beg cancelled because of the same amount transaction having peen subjected to tax, twice. Learned AR submitted that a statement under section 143-B of the Ordinance in respect of the payments received from Messrs Parco on account of execution of construction of pipeline contract as mentioned above was filed by the joint venture as an AOP. According to him, the tax deducted/payable on such payments was final discharge of liability under section 80-C of the Ordinance. It was the contention of learned A.R., that the statements filed by joint venture in the status of AOP for the years under consideration were consciously accepted by the Assessing Officer at Lahore. Learned AR also produced a copy of assessment order passed under section 59-A of the Ordinance for the assessment year 1997-98 by the DCIT/WT, Circle-17, Coys Zone-I, Lahore on 6-9-1999 whereby 'the assessee was assigned the status of AOP. Learned A.R. further submitted that the correspondence between the DCIT at Lahore and the principal company Messrs Parco as well as with the joint venture on the subject of rate of withholding tax prove that the statements filed under section 143-B in the status of AOP by the joint venture had been consciously, accepted. To support his contention learned AR of the assessee produced a photocopy of letter dated 7-5-1996 written to General Manager Finance Parco by the DCIT/WT, Circle-11, Coys Zone-1, Lahore and letter of Parco dated 22-8-1996 written to its tax consultant on the subject of withholding tax. Learned AR of the assessee contended that after the acceptance of. statements under section 143-B filed by the assessee as an AOP and as a result of assessments finalized in Circle-17, Lahore the refund was issued to the AOP. Learned AR of the assessee contended that the allegation of the Assessing Officer regarding illegal issuance of refund were baseless. According to him, the refund was issued by the Assessing Officer and IAC in consultation with the then CIT and RCIT who at present are posted as RCIT Lahore and Member C.B.R. respectively.

(x)That the order passed .by the Assessing Officer at Islamabad whereby the. same amount already having been charged to tax at Lahore was again subjected to tax by him without first having got cancelled the earlier orders were not maintainable in law. In this context, learned AR of the assessee cited the following case law in support of his contention that the same amount of a transaction could not be subjected to tax twice in two different heads:--

1971 PTD 175 (SC of Pak.) and

2000 PTD 2424 (Trib).

Learned AR contended that according to principle of lave laid down through the above mentioned decisions the income which had already been charged to tax and no step taken for annulment of the assessment framed in respect thereof the same income could not be taxed again.

8. It is the contention of learned AR of the assessee that the orders passed by the DCIT/WT, Coys Zone, Circle-14,. Islamabad for the assessment years 1996-97, 1997-98 and 1999-2000 are illegal and void thus not maintainable.

9. Learned DR, in his arguments, repeated the same grounds as taken by the Assessing Officer in the body of assessment order. According to him, since the assessee was not a signatory to the main contract agreement he could not be considered as a party to the said contract. It is the contention of the learned DR that the status of the assessee was that of a sub contractor and the Assessing Officer was justified in treating the assessee as a sub contractor. Learned DR further submitted that even the contract awarding company Messrs Parco has not confirmed of any payments having been made by him to Messrs Techno, therefore, his claim of execution of contract as a joint venture was rightly discarded by the Assessing Officer.

10. Arguments of learned representatives of both the parties have been heard. The orders of the Authorities below as well as the documents submitted by the parties have also been examined and the case-law perused. In our opinion, the Assessing Officer has failed to establish the relationship of a sub contractor of the assessee with Messrs Will Bros. Under the provisions of section 50(4) of the Ordinance the tax is liable to be withheld at the time of making the payments. There is no material brought on record by the Assessing Officer to prove that any payments were made by Messrs Will Bros to Messrs Techno which were liable to deduction of tax under section 50(4) of the Ordinance. The fact that the payments received from Messrs Parco were deposited in the bank -account maintained jointly by both the partners of the joint venture and operated with the signatures of both the parties had not been controverted by learned DR which goes to prove that the payments were received jointly by both the parties. From the adoption of the value of sub contract as 40% of the total amount of contract it is established that the Assessing Officer failed to specify the part of work awarded by Messrs Will Bros under the alleged sub contract to Messrs Techno nor the amount of payments were quantified in against the work done under it i.e. sub contract by the assessee. In our opinion, the Assessing Officer has miserably failed to establish the relationship as a sub contractor of the assessee with Messrs Will Bros. The undisputed facts and the documents produced by learned AR of the assessee also support the contention of the assessee that the contract work was executed as a joint venture by the assessee-company and Messrs Will Bros. From the acceptance by Messrs Parco the contract awarding company for the execution of work by Messrs Will Bros alongwith Messrs Techno as a joint venture the existence of a joint venture in respect of the said agreement/contract is proved. Under the circumstances when the Assessing Officer failed to specify the work done by the assessee company as a sub contractor and also failed to establish the facts of any; payment having been made by Messrs Will Bros to the assessee-company, it is held that the provision of section 50(4) and consequently of section 52-A were not attracted in the instant case. As such the orders passed bye the DCIT, Circle-14, Corporate Zone, Islamabad under section 52-A/86 of the Ordinance are held as not maintainable. Even otherwise the order passed by the DCIT at Islamabad to charge tax in respect of same amount of same transaction in the hands of asses see-company which had already been subjected to tax in the hands of AOP (joint venture) at Lahore without first cancellation of the proceedings completed at, Lahore are not maintainable in law. The contention of the Assessing] Officer that the orders passed by the DCIT at Lahore were illegal, therefore, he could pass the order at Islamabad without their cancellation first is devoid of any force. An order, passed by an Assessing Officer could not be declared illegal by another Assessing Officer unless it is cancelled or annulled by the Competent Authority as provided under the Ordinance. Thus in our opinion, the order passed by the Assessing Officer for the years under consideration are also not maintainable on this score.

11. Since the appeals of the assessee have been accepted on the above grounds we do not feel any need to adjudicate upon the remaining grounds.

12. As a result, the appeals of the assessee are hereby accepted and the orders of both the authorities below are hereby vacated.

C.M.A./952/Tax (Trib.)Appeal accepted.