I.T.As. Nos. 2027/KB of 2002 VS I.T.As. Nos. 2027/KB of 2002, 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 488 (2004)

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

---Ss. 52, 50(3), Proviso-II, & 12(2)---Finance Act (I of 1995), Preamble---Agreement for avoidance of double taxation---Liability of persons failing to deduct or pay tax---Assessee, a Bank had made payment to company, a non-resident company and payment was remitted directly to Regional Office of the said company at Singapore---Said company did not realize any receipt in Pakistan from the assessee---Assessing Officer observed that newly-added proviso to S.50(3) of the Income Tax Ordinance, 1979 was neither applicable nor attracted in the case of assessee and assessee-Bank was liable to make tax deduction under S. 50(3) of the Income Tax Ordinance, 1979---Assessing Officer charged the tax at the rate of 30% holding the assessee as "assessee-in default" under S.52 of the Income Tax Ordinance, 1979---Assessee contended that prior to 1995 withholding tax was required to be deducted under S.50(3) of the Income Tax Ordinance, 1979 even if a foreign company established a branch office in Pakistan---Company used to regularly obtain reduced withholding tax service and deducted tax in accordance with rates mentioned in the certificate---After addition of Proviso II to S.50(3) of the Income Tax Ordinance, 1979, through Finance Act, 1995 the assessee stopped deducting said tax---Validity---As a result of amendment in second proviso to subsection (3) of S.50 of the Income Tax Ordinance, 1979 the exemption from withholding tax under the said subsection in respect of branches of non-resident companies would be available in case payment was made to a branch in Pakistan of a non-resident company whereas in the present case the payments had been remitted at Singapore and not to a branch in Pakistan---Assessee failed to deduct tax while making payment to a non-resident outside Pakistan as required under S.50(3) of the Income Tax Ordinance, 1979---Order treating assesses in default, in circumstances, did not warrant interference.

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

---S. 50(3), proviso-II---Deduction of tax at source--Any person responsible for paying to non-resident any sum chargeable under the provisions of Income Tax Ordinance, 1979 shall, unless such person is himself liable to pay tax thereon. as an agent, deduct at the time of payment, tax at the rates specified in the First Schedule to the Ordinance---Any payment made to a non-resident outside Pakistan which was chargeable under the provisions of Income Tax Ordinance, 1979 was liable to withholding tax under S.50 (3) of the Income Tax Ordinance, 1979 at the rate of 30%.

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

----Second Sched., Part-I, Cls. (128) & (62)---Exemption---Export Processing Zone-'-Banking Company---Assessee claimed income from Export Processing Zone Branches as exempt---Such income was added to the income of the assessee on the ground that under Cl. (128) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979, exemption was allowable to an industrial undertaking only whereas the assessee was a banking company and not an industrial undertaking---First Appellate Authority allowed exemption to income from assessee branch located at Export Processing Zone---Validity---First Appellate Authority was not justified to give a different treatment in allowing exemption to assessee bank in respect of assessee's branch located at Export Processing Zone---Departmental appeal was allowed by the Appellate Tribunal.

I.T.A. No.487/KB of 1997-98, dated October 10, 1999 for the assessment year 1996 distinguished.

2004 PTD (Trib.) 1666 rel.

Khaliq-ur-Rehman, FCA for Appellant (in I.T.A. No.2027/KB of 2002).

Ali Hasnain, D.R. and Muhammad Farid, Legal Advisor for Respondent (in I.T.A. No.2027/KB of 2002).

Ali Hasnain, D.R. and Muhammad Farid, Legal Advisor for Appellant (in I.T.A. No.926/KB of 2003).

Khaliq-ur-Rehman, FCA for Respondent (in I.T.A. No.926/KB of 2003).

Date of hearing: 7th September, 2004.

ORDER

By this order, we would propose to decide appeals pertaining to assessment years 1997-98 and 2002-2003 preferred by the assessee and the Department respectively.

Assessment year 1997-98:

2. The assessee in the year under appeal has taken objection to the order confirming, National Bank of Pakistan as assessee in default under section 52 of the Income Tax Ordinance, 1979 and maintaining levy of tax of Rs.2,518,338 and additional tax of Rs.516,639.

3. Reuters Ltd. is a company incorporated in United Kingdom, which is' providing money market, and monitors services to various customers in Pakistan. It has established a branch office in Pakistan for this purpose since 1983. Accordingly the branch office constitutes Permanent Establishment as defined in the Double Tax Treaty between Pakistan and United Kingdom. Therefore, the entire income of the Pakistan operations are assessable to tax in Pakistan, and being assessed to tax in Pakistan by the Deputy Commissioner of Income Tax, Circle C-12', Cos. I, Karachi, vide NTN 14-12-3371760 since 1983 in respect of its income attributable to the Pakistan operations.

4. Prior to year, 1995, the assessee used to regularly obtain withholding tax certificates and the customers were deducting the tax at the rate mentioned in the certificates. Situation changed due to an amendment made out through Finance Act, 1995 by adding a proviso to section 50(3), which reads as under:--

"Provided that nothing in this subsection shall apply to any payment made to a branch in Pakistan of a non-resident company."

5. In view of above proviso, withholding of tax under section 50(3) was no longer required for payment to a branch of foreign company in Pakistan. However, information was received that assessee made payment of Rs.83,94,460 to Messrs Reuters Ltd., a U.K. based non-resident company and payment was remitted directly to the Regional Office of Reuters Ltd., situated at Singapore. Since Messrs Reuters Ltd. A did not realize any receipts in Pakistan from the assessee, the Assessing Officer observed that the newly added proviso to section 50(3) of the Income Tax Ordinance, 1979 is not applicable and attracted in case of assessee, and, therefore, the assessee Bank is liable to make tax deduction under section 50(3).

6. Accordingly the assessee was confronted on the point above, vide office letter No.DCIT/C-4/Cos.I/97-98, dated 9-3-1998 requiring explanation. "as to why action may not be taken invoking section 52 of the Income Tax Ordinance, -1979". Since no compliance was made at the instance of bank, the Assessing Officer charged the tax at the rate of B 30% holding the National Bank of Pakistan as "assessee-in-default" under section 52 of the Income Tax Ordinance, 1979 whereby created a total tax demand of Rs.30,34,977. The learned CIT(A) maintained the order observing hereunder:--

"The above arguments of the learned A.R. of the appellant have been considered but I am not pursued to agree with the same firstly because before passing the impugned order a show-cause notice was duly issued to the appellant which was not responded to and the learned A.R. has no where claimed that the aforesaid show cause was not served on the appellant. Secondly, even on merit, I find that admittedly the appellant failed to deduct tax while making payment to a non-resident as required under section 50(3) of the Ordinance and hence was rightly treated as an assessee in default. The circumstances under which the payment was made as explained by the learned A.R. supra, are immaterial so far as the requirements of section 50(3) are concerned. Accordingly the impugned order is upheld in totality."

7. Heard the learned representatives of the two parties at length. The learned A.R. argued that the branch office of Reuters Limited is a permanent establishment as per double tax treaty between Pakistan and United Kingdom, the entire income of Pakistan operations is assessable to tax in Pakistan in accordance with the provisions of section 12(2) of the Income Tax Ordinance, 1979 read with Article-7 of the Double Tax Treaty between Pakistan and United Kingdom, and the Reuters Limited as being assessed to tax in Pakistan by the Deputy Commissioner of Income Tax, Circle C-12, Cos. I, Karachi vide NTN 14-12-3371760 since 1983 in respect of its income attributable to the Pakistan operations.

8. The counsel further urged that prior to 1995 withholding tax was required to be deducted under section 50(3) even if a foreign company established a branch office at Pakistan. Accordingly Reuters Limited used to regularly obtain reduced withholding tax services and deducted c tax in accordance with the rates mentioned in the certificate. However, following proviso added through Finance Act, 1995 inserted as Proviso II to section 50(3), the assessee stopped deducting alleged tax. The relevant Proviso II read as follows:

"Provided that nothing in this subsection shall apply to any payment made to a branch in Pakistan of a non-resident company."

9. It is' argued that with effect from 1995 (the addition of new proviso) withholding of tax under section 50(3) was no longer effective/ binding for payments made to a branch of foreign company in Pakistan, irrespective of the services rendered by Reuters to its customers. Since the Pakistan branch raised invoices and the entire revenue is reported at Pakistan and offered for tax from year to year and because Reuters has been assessed to tax in Pakistan, regularly makes payment of advance tax in accordance with the provisions of section 53, the added proviso is attracted in the present case.

10. Counsel further urged that in normal course under foreign exchange regulations a branch of foreign company remits its profit to the Head Office on annual basis .on the profit disclosed in its accounts. However, in the case of Reuters Limited the substantial part of the cost is incurred outside Pakistan as it is providing various services through Satellite Transmission. It is added that Reuters has obtained special permission from State Bank of Pakistan to enable customers to make payment directly to their Head Office instead of Making payment locally so that it could pay the cost in foreign currency:

11. We are however, of the considered view that the circumstances brought to the notice of the Tribunal under which payment has been made at Singapore are absolutely immaterial so far as the requirement of section 50(3) is concerned, which provides that any person responsible for paying to non-resident any sum chargeable under the provisions of this Ordinance shall, unless such person himself liable to pay tax thereon as an agent, deduct at the time of payment, tax at the rates specified in the First Schedule. In the circumstances any payment made to a non-resident outside Pakistan which is chargeable under the provisions of Income Tax Ordinance is liable to withholding tax under subsection (3) of section 50 at the rate of 30%.

12. The next contention of the learned A.R. that after the insertion of the second proviso in section 50(3) withholding of tax under section 50(3) was no longer required for payments made to a branch of a foreign company in Pakistan. has no basis. In fact second proviso before substitution read as follows:

"Provided that nothing contained in this subsection shall apply to any payment made by way of remittance of finance to a branch in Pakistan of, a non-resident banking company and after amendments inserted by Finance Act, 1998-99."

13. It is made clear that as a result of amendment is second proviso to subsection (3) of section 50 of the exemption from withholding tax under the said subsection in respect of branches of non-resident companies would now be available in case payment made to a branch in Pakistan of a non-resident company whereas the payments have been remitted at Singapore and not to a branch in Pakistan. In the circumstances, we find no merit in the arguments of the learned A.R. and see sufficient reasons to maintain the orders below.

14. As a result of above discussion, we find that assessee failed to deduct tax while making payment to a non-resident outside Pakistan as required under section 50(3) of. the Ordinance as such the order treating assessee in default also does not warrant interference.

Assessment Year 2002-2003:

15. The Department in the present appeal has taken objection to the order, dated 31-3-2003 allowing exemption to income from assessee branch located at Export Processing Zone. During the year under assessment, the assessee also claimed income from EPZ Branches to the tune of Rs.70,90,023 as exempt under clause (128) of Part-I of Second Schedule of the Income Tax Ordinance, 1979. The assessee was duly confronted vide notice under section 62, dated 18-12-2002 as to why the said amount should not be added to its income, as under clause (128) of Part-I of Second Schedule to the Income Tax Ordinance, 1979, exemption is allowable to an industrial undertaking only whereas the assessee is a banking company and not an industrial undertaking.

16. In reply thereof, it is alleged that matter has been decided in favour of the assessee bank by the Hon'ble Tribunal in all previous years. The assessee relied upon the latest decision referred as I.T.A. No.487/KB of 1997-98, dated October 10, 1999 for the assessment year 1996-97 which read as under:--

"(19) Having given our careful consideration to the foregoing facts and circumstances as well as the submissions made by the learned representatives of the two sides we find that the Bank Branch set-up by the appellant in the Export Processing Zone, Karachi, is an industrial undertaking as defined in Clause (e) of section 2 of the EPZ Authority Ordinance, 1980 within the meaning of the providing of such services as are specified in this behalf by the Federal Government under Rule 5 read with Rule 15 of the EPZA Rules, 1981 supra. We further find that the activities of the appellant's Branch are approved in this behalf by the Federal Govt. as numerated in sub-rules (4) and (5) of Rule 10 and sub-rule (1) of sub-rule (5) of Rule 11 and in view of the provisions of sub-rules (1)(b), (4) and (6) of Rule 10 as well as the provisions of Rule 11 supra, we are persuaded to agree with the learned A.R. of the appellant that one cannot escape the conclusion that the income accruing or arising to the Branch outside Pakistan for the purposes of Clause (128) of Part-I of the Second Schedule to the I.T. Ordinance, 1979, hence exempt from tax under I.T. Ordinance, 1979. In our view, there can be no insinuation of the intendment in the foregoing conclusion."

17. The learned DCIT however, disagreed with the case-law reported above and observed that assessee is a banking company, not an industrial undertaking, therefore, its income from its branch located in Export Processing Zone is taxable being not falling within the ambit of clause (128) or (126) of Second Schedule to the Income Tax Ordinance, 1979 whereby added an amount of Rs.7,090,032 to the income of the assessee being its normal business income as a banking company. In fact it is a decided issue at the level of the Income Tax Appellate Tribunal. The matter was referred to the Full Bench specially constituted to determine the present controversy which in its decision reported as 2004 PTD (Trib.) 1666, dated 31-12-2003 held as under:

"Accordingly we hold that no exemption from its income is available to the Offshore Branch of Habib Bank Limited established in Karachi Export Processing Zone under clauses (126) and (128) of 2nd Schedule of Income Tax Ordinance, 1979. Both the appeals are therefore, dismissed on this issue for the reasons recorded by -us in the aforegoing paragraphs."

18. In the circumstances, we find that the learned CIT(A) was not justified to give a different treatment in allowing exemption to the assessee bank in respect of assessee's branch located at Export G Processing Zone. As a result thereof the departmental appeal stands allowed.

C.M.A./442/Tax (Trib.)Order accordingly.