I.T.A. No.713/IB of 2004, decided on 21st May, 2005. VS I.T.A. No.713/IB of 2004, decided on 21st May, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1962 (2005)

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

----Ss.24(i) & 163(2)---Agreement for Avoidance of Double Taxation between Pakistan and Poland---Department pleaded that provisions of Income Tax Ordinance, 1979 were applicable even on non-resident companies and there was no exception provided in the Avoidance of Double Taxation Treaty of Pakistan with Poland with regard to non- application of S.24(i) of the Income Tax Ordinance, 1979---Validity---Languages used was very wide and reading the same through S.163(2) of the Income Tax Ordinance, 1979 clearly gave the impression that only such expenses which were incurred for the purposes of permanent establishment were allowable---There was an exception to the rule however, that such exception was not with regard to S.24(i) of the Income Tax Ordinance, 1979.

I.T.A. No.463/LB of 2003 and R.A. No.140/IB of 2004 rel.

(b) 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 Poland--Since the Convention was notwithstanding the provisions of Income Tax Ordinance, 1979. hence was governed under its own Articles.

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

--Ss.24(i) & 163---Agreement for Avoidance of Double Taxation between Pakistan and Poland, Art.3(7)---Under Article 3(7) of the Convention deduction of expenses, which were incurred for the purpose of permanent establishment, were to be allowed as a whole.

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

----Ss.163 & 24(i)---Avoidance of Double Taxation and Prevention of Fiscal Evasion---Agreement for Avoidance of Double Taxation between Pakistan and Poland---Interpretation and explanation---Provisions of the Income Tax Ordinance, 1979 shall not apply with regard to the determination of expenses under the said Convention---Such conventions were drawn under the delegated power through S.163 of the Income Tax Ordinance, 1979 and it was as good a law as Income Tax Ordinance, 1979 itself---Rules of interpretation applicable on interpretation of statutes were fully applicable for interpreting the Articles of the Convention and in this regard the principle of not to exceed beyond intendments applies on all fours---Section 163 of the Income Tax Ordinance, 1979 was a non-obstante clause and supersedes every thing contained in Income Tax Ordinance, 1979---Once all the provisions were substituted by a separate Convention it could not be said that provisions of Income Tax Ordinance, 1979 were still applicable.

Manzoor Ahmed, D.R. for Appellant.

Ms. Rubica Jafri, I.T.P. for Respondent.

ORDER

KHAWAJA FAROO,Q SAEED, CHAIRPERSON.---The departmental appeal speaks as follows:

"The learned C.I.T.(A) was not justified in directing to follow the directions of learned ITAT for the preceding year in respect of addition made on account of excess perquisites and head office expenses."

The DR says that the provisions of Income Tax Ordinance, 1979 are applicable even on non-resident companies and there is no exception provided in the avoidance of double taxation treaty of Pakistan with Poland with regard to non-application of section 24(i). He said that in this regard the decision of the Tribunal has been challenged before the Hon'ble High Court, hence department would like to register its arguments at this stage of the proceeding.

On the other hand, the learned AR insisted that there is already a finding by the Hon'ble Tribunal in assessee own case for an earlier year which should be followed in letter and spirit.

This Tribunal has discussed in detail the relevant provisions of Income Tax Ordinance, 1979 and avoidance of double taxation treaty of Pakistan with Poland. The Tribunal in its order vide I.T.A. No.463/LB of 2003 for the assessment year 1999,-2000 has discussed the same. The ultimate finding of the Tribunal remained as follows:---

"Now the issue of disallowance, on account of excess perquisites under section 24(i) in the Salaries Account, remained the only issue to be seen in the context of application of the Double Taxation treaty or otherwise. The stance of the learned AR of the assessee was that applicability of local laws was specifically given in the tax treaties with the countries like that of Bangladesh, China and Denmark etc. as per list submitted but no such express provisions were laid down in the tax treaties with the countries like Poland(presently under question), Belgium and Canada etc. and as such the disallowance on the basis of excess perquisites under section 24(i) could not be made and applied to this case. Keeping in view the above stands as taken on behalf of both the sides and also the various treaties as referred by the learned AR of the assessee which have not been disputed by the learned DR in the context of relevant provisions executed there under, we are of the considered opinion the local laws of Pakistan have not been made applicable to the case of the assessee under the Treaty."

From the above para it is obvious that the Tribunal has come out with a very clear and un-equivocal finding. It has further been re-affirmed while refusing reference application filed by the department vide R.A. No.140/IB of 2004 in the case of this assessee. However, another argument which needs to be added through this judgment is that there was no reason for exclusion of any section of the Income Tax Ordinance, 1979. The Articles of all convention between Islamic Republic of Pakistan and in this case Polish People's Republic Poland for avoidance of double taxation of income are governed by Clause 49AA of the Income Tax Act, 1922 (XI of 1922) which is pari materia to section 163 of the Income Tax Ordinance, 1979. In this regard relevant provision is section 163(2) which speaks as follows:---

" (2) Where any agreement is made in accordance with sub-section (1), the agreement and the provisions made by notification for implementing the said agreement shall notwithstanding anything contained in any law for the time being in force, have effect in so far 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) ------------------------------------------

(d) ------------------------------------------ ??

As is evident from above provision, the Conventions are made in suppression to the normal provisions and to provide relief from the taxable income under this Ordinance or from the method for determination of the income that may accrue or arise to the said non-residents in Pakistan. Since the Convention is notwithstanding the provisions of Income Tax Ordinance; hence is governed under its own Articles. Under Article 3(7) of the said Convention deduction of expenses which are incurred for the purpose of permanent establishment, are to be allowed as a whole, it says that such expenses may have been incurred in the state of permanent establishment or elsewhere in respect of said permanent establishment. The language used is very wide and reading the same through section 163(2) above clearly gives the impression that only such expenses which are incurred for the purposes of permanent establishment are allowable. There is an exception to the rule. However, said exception is not with regard to the section 24(i). It has also not been mentioned anywhere that the provisions of the Income Tax Ordinance shall apply with regard to the determination of expenses under the said Convention. Such Convention as already mentioned are drawn under the delegated power through the above section i.e, section 163. It is as good a law as income Tax Ordinance itself is. The rules of interpretation applicable on interpretation of statutes are fully applicable for interpreting the Articles of the Convention. In this regards the golden principle of not to exceed beyond intendments applies on all fours. Section 163 is a non obtaint clause. It supercedes everything contained in I.T. Ordinance, 1979. Once all the provisions are substituted by a separate convention it cannot be said that provisions of Income Tax of Pakistan are still applicable. The C.I.T.(A) has rightly followed the earlier order of the ITAT.

This obviously means rejection of departmental appeal in the manner and to the extent mentioned hereinabove.

C.M.A./510/Tax(Trib.)???????????????????????????????????????????????????????????? Appeal rejected