VS, 2008 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 598 (2007)

Income Tax Ordinance (XXXI of 1979)---

----Ss.52, 86, 50(3) & Second Sched., Cl. (177-A)---Liability of persons failing to deduct or pay tax---Exemption---Interest payable to non-resident on account of loan utilized towards industrial investment was claimed as exempt from tax---Exemption was refused on the ground that assessee company had to file an application for issuance of exemption certificate in case the income was exempt from tax which was not filed at the relevant time---Determination of taxability and exemption was the exclusive prerogative of the Assessing Officer and assessee himself had not to become the Judge of his own cause---Assessee was treated assessee in default under S.52 of the Income Tax Ordinance, 1979 for not withholding tax under S.50(3) of the Income Tax Ordinance, 1979---Validity---Interest payable to a non-resident company in respect of foreign loan utilized for foreign industrial investment of Pakistan was exempt from the income tax under Cl.(77-A) of the Second Schedule of the Income Tax Ordinance, 1979---No provision for filing of application existed or was a condition precedent; it had not been specifically provided in Cl. (77-A) of the Second Schedule of the Income Tax Ordinance, 1979 that assessee will file an application to the Deputy Commissioner of Income Tax---Interest on foreign exchange loan was exempt from tax and assessee was not required to withhold any amount of income tax on the interest income.

1993 PTD 722 rel.

Mian Muhammad Faisal Banday, A.C.A. for Appellant.

Mohy-ud-Din Ismail, D.R. for Respondent.

ORDER

By the above titled appeal the assessee has assailed the appellate order dated 3-8-2002 recorded by the C.I.T.(Appeals). As per memo. of appeal as many as nine grounds have been taken however, gist of the same that the assessee is aggrieved by confirmation of tax default under sections 52/86 of the repealed Income Tax Ordinance, 1979.

2. Brief facts of the case are that the assessee is a public limited company deriving income from manufacturing and sale of cement. Assessing Panel vide letter dated 1-10-2001 specifically asked the appellant as to why appellant's company failed to deduct tax under section 50 (3) on the interest paid to Messrs Nichimen Corp. U.K. A portion of the said letter is as under:--

"You have paid interest charges etc, penal interest of Rs.40,53,18,039 on long term loan which obtained from Messrs. Nichimen Corp. U.K. in foreign currency of J.Y. two billion. The note No.5(c) has been perused wherein you have stated that the instalments of loan were not paid. The interest as stated above was recognized on mercantile basis in the accounts as evident from note No.9.2. The interest expense recognized on actual basis to the non-resident U.K. Company was an income to the UK company in the year of the recognition of the expense. The payment of interest by way of accrual is the interest `paid' to the non resident as per accounting policy adopted by you. This issue has been thoroughly discussed by the Tribunal in the case of Foreign bank reported as 1993 PTD 722"

In response to thereof assessee filed reply vide letter, dated 9-10-20.01 and the relevant para is reproduced hereunder:--

"(2) It is submitted that your honour has shown cause as to why not the company be kept in default for not withholding tax as the interest payable amounting to Rs.405,318,039 on long term loan obtained from Nichmen Corporation, U.K.

At the very outset we may point out that the interest figure, as pointed out by your honour, is an accumulated figure and the interest charged for the year comes to Rs.137,016,496.

Your honour has quoted a case-law cited as 1993 PTD 722 and extract of which has also been reproduced in your notice.

We have gone through the contents of the case-law cited to us. We may point out that issue before the I.T.A.T. in 'the above was deduction of interest expenses under clause 23(1)(vii) of the Income Tax Ordinance, 1979 and based on the various factors involved in the above judgment, the Hon'ble Tribunal reached the conclusion that interest expense in the above circumstances was not allowable deduction. We draw your attention towards last 4 lines of para 4 of the above judgment which is reproduced as under:--

`Relying on the decision of the Honourable Supreme Court in the case of Howrah Trading Company and the. High Court in Netherland Trading Society and for the reasons given by us we are of the opinion that interest amounts claimed for all these years as cost of funds had rightly been disallowed and calls for no interference.'

It is apparent from the above that this case is not at all fours in assessee's case.

It is further submitted that withholding tax under provisions of section 50(3) only becomes applicable once the payment is made to the non-resident. In case no payment is made to the non-resident, no default under section 50 (3) can be established.

However, without prejudice to our above argument, we would like to draw your attention towards section 50 (3) which is only applicable in those cases where the payment is being made in respect of sum which is chargeable to tax under the provisions of the Income Tax Ordinance, 1979. We reproduce below the extract of the relevant section 50 (3):--

"Any person responsible for paying to a non-resident any sum chargeable under the provisions of this Ordinance (other than income to which subsection (1) or subsection (2) or sub-section (2A) or subsection (3A) or subsection (4) or sub-section (4A) or subsection (6A) or subsection (7A) or sub-section (7(I)) applied 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."

We wish to submit that in accordance with the above provision only those payments are liable to withholding tax, which are chargeable under Income Tax Ordinance, 1979. We wish to draw your attention towards the fact that under Clause (77-A) of the Income Tax Ordinance, 1979, the interest payable to non-resident on account of loan utilized towards industrial investment is exempt from tax provided it is registered with the State Bank of Pakistan. Clause (77-A) of the Second Schedule of the Income Tax Ordinance, 1979 is reproduced as under:--

"Any interest payable to a non-resident being a foreign individual company, firm or association of persons in respect of a foreign loan as is utilized for industrial investment in Pakistan provided that the agreement for such loan is concluded on or after the First day of February, 1991 and is duly registered with the State Bank of Pakistan.'

It is submitted that the loan in the above case was utilized for purchase for machinery of Chakwal Cement Limited and was duly registered with State Bank of Pakistan. Proof of the registration is enclosed herewith for your reference and record.

Therefore, in light of the above since the interest expense payable was exempt from tax, therefore the provision of section 50(3) does not in any case apply to the assessee."

The assessing penal as well as learned C.I.T.(A) discarded the contention raised by the AR of the assessee with view point that for the purpose of exemption, assessee-company had to file an application for the issuance of exemption certificate in case the income was exempt from tax which was not filed at the relevant time. The determination of the taxability exemption is the exclusive prerogative of the Assessing Officer and assessee himself has not to become the Judge of his own cause. Since the assessee failed to demonstrate his behaviour by filing an application as required under the law. So he is not entitled to be granted his claim of exemption at this stage. Furthermore, the registration with the State Bank of Pakistan is in tact not for the purpose of exemption under Clause (77-A) of the First Schedule of the Income Tax Ordinance, 1979. This is for the purpose of regulation of foreign exchange and has nothing to do with the Clause (77-A) of the First Schedule of the Income Tax Ordinance1979. In view of the case law reported as 1993 PTD 722 withholding under section 50(3) would be applicable on the method of accounting adopted by the assessee which was on Mercantile basis. Therefore, default of withholding tax under section 50(3) stands c established by the assessee and he had been rightly treated as assessee in default under section 52 of the Income Tax Ordinance, 1979.

3. The learned AR of the assessee has narrated that in 1996 the company had obtained the loan denominated in foreign currency from Messrs Sojitz Europe PLC [`formerly Nichimen Corporation'] for plant and machinery of the company. Due to certain litigations with the Government as to the charge of duties on import of machinery, the plant could not be made operational and accordingly, the loan could not be repaid. However, as per the requirement of international accounting standards, the company continued to make accrual for the related interest expense in its book of account: The interest so recorded was added to the cost of plant and machinery and corresponding liability was reflected in the balance-sheet. He further stated that as the company has not commenced operations, it filed its tax returns showing Nil income for assessment years 1996-97 to Tax year 2006 and interest expense recorded in the books on the foreign currency loan was never claimed as deduction in the tax returns. The company was acquired by Orascom Construction Industries, Egypt in 2005 through Orascom's subsidiary, Pakistan Cement Holding Company Limited [PCHCL]. The outstanding foreign loan to Nichimen Corporation was paid off on behalf of the company by Orascom to the extent of its Principal amount only. The interest was waived off by the lender and it was never paid. The fact has been clearly stated in the audited financial statements of the company for the year ended 30th June, 2005, a copy of which is enclosed. He prayed that in the given facts that interest was never paid and merely accrued in the books and 'subsequently waived off by the lender as shown in the enclosed audited accounts, the question of withholding tax therefrom does not and would not arise in any case. Furthermore, the case-law 1993 PTD 722 was not on all fours on the assessee's case. He has further stressed upon the facts the tax was to be deducted in case the actual payment was made and not on accrual basis. He further argued on the point of exemption clause (77-A). Interest income of a non-resident lender on loan utilized in Pakistan is exempt from tax under clause (77-A) of Part-I of the Second Schedule to the 1979 Tax Ordinance that reads as under:--

"(77-A). Any interest payable to a non-resident a foreign individual, company, firm or association of persons in respect of a foreign loan as is utilized for industrial investment in Pakistan provided that the agreement for such loan is concluded on or after the First day of February, 1991, and is duly registered with the State Bank of Pakistan."

From the foregoing, it will be appreciated that tax exemption has been provided by legislature on foreign loans provided the following conditions are met:

(i) The return of such loan must be with interest.

(ii) The `interest' is payable to a non-resident person. The loan is utilized for Industrial investment in Pakistan.

(iii) The loan agreement is concluded after the First day of February, 1991.

(iv) The loan agreement is registered with the State Bank of Pakistan (S.B.P.).

4. It is not a matter of dispute that the conditions mentioned in (i) to (v) above are fulfilled as also referred to by the Taxation Officer on the second last page of the Assessment Order. However, a view has been taken by the Assessing Officer that a separate registration is required with S.B.P. specifically for the purposes of Clause (77A) in addition to the registration under the Foreign Exchange Manual. This view is totally erroneous as neither the language of Clause (77A) nor any directive or circular of C.B.R. supports such contention. The S.B.P. is not the relevant authority to grant exemptions from income tax under any provision of the Ordinance and therefore, the question of any such approval from S.B.P. does not arise. From (v) above it is crystal clear that the only requirement in this context is that the loan agreement is registered with the State Bank of Pakistan. Which the Assessing Officer admits that this was done.

5. We have heard both sides and also gone through the relevant record available on file. The foremost question is as to whether the interest payable to a non-resident company in respect of foreign loan utilized for foreign industrial investment of Pakistan is exempt from the income tax under Clause (77-A). Undoubtedly it is so. Now the question arises as to whether the assessee had to apply for obtaining exemption certificate to the D.C.I.T. or not. No such provision for filling of application in prior, exists or is a condition precedent in Clause (77-A). Only the condition precedent is that loan agreement is concluded after the first day of February, 1991. In this case the loan agreement was concluded on 7th March, 1996. Second condition is the loan agreement be registered with the State Bank of Pakistan. This condition has also been fulfilled. Undoubtedly the loan has been utilized in industrial Investment in Pakistan i.e. for the purchase of plant and machinery. So in the Clause (77A) it has not been specifically provided that assessee will file an application to the D.C.I.T. for the grant of exemption certificate. This exemption is totally unconditional and requisite condition have already been fulfilled by the assessee. We feel no hesitation to conclude that said interest on the foreign exchange loan was exempt from the tax under Clause 77-A to the Second Schedule of the Income Tax Ordinance, 1979.

6. After the aforesaid discussion this question hardly arises as to whether it was payable on accrual basis or at the time of actual payment.

It has been disclosed that new management. "Pakistan Cement Company Limited" has revised the loan agreement and the interest has been waived of and only principal amount is payable. So in view of our expressed opinion on the applicability of the Clause (77-A), we do not want to go in detail of these aspects.

7. With these observations assessee's appeal is hereby accepted and it is held that assessee was not required to with hold any amount of the income tax on the interest income.

8. The assessee's appeal succeeds as above.

C.M.A./4/KAppeal accepted.

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