MOUNTAIN STATES MINERAL ENTERPRISES INC., through duly constituted attorney, Karachi VS COMMISSIONER OF INCOME TAX, (APPEALS) ZONE-3, KARACHI, 2008 PTD-KARACHI-HIGH-COURT-SINDH 1087 (2007)

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

----S.136(1)---Advisory jurisdiction of High Court---Scope---High Court in exercise of its advisory jurisdiction can only give opinion on the questions of law, arising from order of Income Tax Appellate. Tribunal and those questions of law which were proposed in the application under S.136 (1) of Income Tax Ordinance, 1979, filed in the Tribunal for referring the same for opinion of High Court.

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

----S. 12(5)(a)---Avoidance of Double Taxation Agreement between Government of Pakistan and Government of USA, Art.III(1)---Income deemed to accrue in Pakistan---Exemption---Applicant was a non-resident company, which had provided service of updating the pre-investment feasibility to its client in Pakistan---Applicant claimed exemption under Art.III(1) of Avoidance of Double Taxation Agreement between Government of Pakistan and Government of USA, to its income received for providing service in Pakistan---Validity---Amount received by applicant fell within the definition of Industrial and Commercial Profits---Applicant having no permanent establishment in Pakistan, therefore, its income was exempted under the provisions of Avoidance of Double Taxation Agreement between Government of Pakistan and Government of USA---Income generated by applicant was not taxable in Pakistan---Appeal was allowed accordingly.

Commissioner Income Tax v. Messrs Unilever PLC UK. 2002 PTD 44 fol.

Abdul Ghaffar for Applicant.

Nasrullah Awan for Respondent.

ORDER

MUHAMMAD ATHER SAEED, J.---This Reference Application has been filed under section 136(2) of the Income Tax Ordinance 1979, for seeking the opinion of this Court on the following proposed question said to be arising out of the order of Income Tax Tribunal dated 14-12-1987, passed in LT.A. No. 1592-KB of 1984-85:--

(1) Whether on the facts and circumstances of the case the Income-tax Appellate Tribunal was justified in maintaining the assessment order of the Income Tax Officer having regard to the provisions of section 11 and subsection (5) of section 12 of the Income Tax Ordinance. 1979 and the provisions of the agreement entered into between the Resource Development Corporation Limited and the letter from Resource Development Corporation Limited No. COM/MSME/AGR dated 5th January. 1983?

(2) Whether on the facts and circumstances of the case the Tribunal was justified in confirming that the Income of the Appellant does not constitute "Industrial or Commercial Profit" within the meaning of Article III of the Avoidance for Double Taxation Agreement between the Government of Pakistan and the United States of America?

(3) Whether on the facts and circumstances of the case the work done by the Assessee fell outside the definition of Industrial of Commercial Profits as defined under the Treaty?

(4) Whether on the facts and circumstance of the case where the entire work was done in the office the assessee in United States and no part of the work was done in Pakistan the mere visit by two of the engineers of the assessee for a period of 15 days created nexus between the assessee and the territory of Pakistan?

(5) Whether on the facts and circumstances of the case the Tribunal was justified in holding that the profit of the Appellant is not exempt from tax in Pakistan under Article III of the Agreement for the Avoidance of Double Taxation between Pakistan and U.S.A.?

(6) Whether the Tribunal could have refused in law to give a finding on the legality of the direct and indirect expenses disallowed by the ITO and the 10% surcharge on income tax imposed by him, when this question was not decided in appeal by the Commissioner?

2. The brief facts of the case are that the applicant a non-resident company had entered into a contract dated 1-9-1979 with Messrs Resource Development Corporation Limited (RDCL) of Pakistan to update the pre-investment feasibility of (RDCL) and other incidental works to be done outside Pakistan. The applicant filed its return of income declaring taxable income at nil for the assessment year in. question and declaring exempt income of Rs.19,86,208 claiming exemption of income from contract by treating it as Industrial and Commercial Profit, exempted under Article III(1) of the Avoidance of Double Taxation Agreement, executed between Pakistan and USA. The Income Tax Officer did not accept the contention of the applicant and after holding that the amount has been received by the applicant on account of fees and the fees are not included in "Industrial or Commercial Profits" as defined in sub-clause (I) of Article-II of convention between Pakistan and USA for Avoidance of Double Taxation, taxed the above income.

3. Being aggrieved by the above order the applicant filed an appeal before the Commissioner of Income Tax (Appeals), who vide his Order No.813/CITA/Z-3/82-83/NOC dated 8-12-1984 allowed the appeal and held that the income of the applicant was not liable to tax in Pakistan.

4. Being aggrieved by the above order the department filed and appeal before the Income Tax Appellate Tribunal, who vide their order, referred to above, accused the appeal and annulled the order of the CIT (Appeals) and restored the order of the ITO by holding that the fees received by the applicant did not fall within the definition of Industrial or Commercial Profit and also that since two Engineers of the applicant's company had come to Pakistan for study of the working conditions and collecting the samples for testing, therefore, the perquisites of sub-section (5-A) of section 12 were not fulfilled. The applicant filed reference application before the Income Tax Appellate Tribunal for referring three questions for opinion of this Court by order in R.A. No.36/KB of 1987-88 dated 14-11-1989, which was refused, as according to the learned Tribunal the finding given by the Tribunal was purely based on facts and no legal issue was involved. Hence this reference application.

5. We have heard Mr. Abdul Ghaffar Khan learned counsel for the applicant and Mr. Nasrullah Awan learned counsel for the respondents.

6. The learned counsel for the applicant drew our attention towards the observation given by the Tribunal in para-7 of its order, which reads as under:---

We are afraid, we do not find any force in second submission of Mr. Muhammad Farid, the learned D.R. When we go through the contract we find that the respondents were not required to exercise any powers which may amount to management, control or supervision of the trade, business or other activity of another enterprise or concern. The preparation of feasibility report which could be used in international market for obtaining loan for the project could not be deemed to be a trade, business or other activity of RDCL. We therefore, reject his this submission."

7. He stated that the income Tax Appellate Tribunal then went on to hold that personal services also did not fall within the definition of Industrial or Commercial Profits and therefore the income of the applicant did not fall within definition of Industrial or Commercial Profits and hence, was not exempt under the provision of Avoidance of Double Taxation Agreement, executed between two countries. He further stated that the question whether the consideration for personal and professional services as defined in the Avoidance of Double Taxation Agreement, fell within the definition of Industrial and Commercial Profits between Pakistan and UK, has been finally settled by this Court in the case of Commission Income Tax v. Messrs Unilever PLC UK reported in 2002 PTD 44. He stated that the facts of that case were exactly identical to the facts of this case and that judgment was applicable to his case because the provisions of avoidance of Double Taxation Agreement between the Pakistan and UK is identical to the provisions of Avoidance of Double Taxation Agreement between the Pakistan and USA. He specifically referred to the following extract form the judgment quoted supra:

While referring to the above definition, Mr. Javed Farooqui 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 argument, through neither raised in the grounds of appeal nor arises out of the order of the ITAT, has no merit. The term "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 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 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 its personal 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 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 plaint 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 draw 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 and 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 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 consultees 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 in towards consultancy and the term consultancy (as confirmed by the above definitions) would denote 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.

8. Mr. Nasrullah Awan learned counsel for the respondent supported to the order of the Tribunal and stated that Tribunal had rightly held that the personal services did not fall within the definition of Industrial and Commercial Profits and therefore, the income of the applicant was not exempt under the provisions of Avoidance of Double Taxation Treaty. He further stated that the Tribunal has also correctly held that since certain portion of the assignment was performed in Pakistan and this portion was essential for completing the assignment, therefore, the income did not fall within the ambit of section 12 (5) (a). He also drew our attention to the order passed by the Tribunal on reference application under section 136(1) to point out that the question sought to be raised by the applicant for opinion of this Court is a question of fact, which cannot be adjudicated by this Court in its advisory jurisdiction. He was however unable to negate the contention of the learned counsel for applicant that the case falls within the four corners of the judgment quoted supra.

9. We have examined the proposed questions in the light of the argument of the learned counsel and perused the records of this case including the impugned order and the judgment relied by the learned counsel for the applicant.

10. We have observed that in his application under section 136(2) of the Income Tax Ordinance 1979, the learned counsel for the applicant has sought the opinion of this Court on as many as six questions whereas, before the Tribunal, the applicant had only referred three questions. It is settled law that this Court in exercise of the advisory jurisdiction can only give opinion on the questions of law, arising from the order of the Tribunal and only to those questions of law, which were proposed in the application under section 136(1) of the Income Tax Ordinance, 1979 filed in the Tribunal for referring the same for the opinion of this Court. We will therefore, restrict ourselves to examining the questions Nos. 1 & 2 only. After examining the questions we are of the opinion that the question No.2 is question of law as it seeks the opinion of this Court on interpretation of industrial and commercial profits as defined under Article II(1) of the Avoidance of Double Taxation Agreement, and does not require appraisal of facts to determine. "Whether the amount received under a particular head falls within the above definition or not?"

11. We have very carefully perused the order of this Court quoted supra and find that the facts of this case are completely identical to the facts of the case before this Court in which the above judgment was pronounced and this Court has deliberated on all the points on which the Tribunal has deliberated and given exhaustive interpretation which in our opinion completely negates the opinion of the Tribunal. On the basis of undisputed facts emerging from the orders of the ITO and the Appellate authorities that the fee has been received for professional services and does not fall under the exemption to Article 2(1)K of the Avoidance of Double Taxation Agreement. We are of the opinion that the amount received by the applicant fall within the definition of Industrial and Commercial Profits and since it is admitted, fact that the applicant had no permanent establishment in Pakistan, therefore, we hold that the Income of the applicant is exempt under the provision of Avoidance of Double Taxation Agreement between the Government of Pakistan and Government of USA and is not taxable in Pakistan and therefore. We will answer question No.2 in affirmative.

12. Since the above question has been answered in affirmative, question No.1 has been rendered of academic interest only and is not required to be answered.

13. The above are the reasons for our short order dated 22-2-2007 by which we had allowed this Income Tax Appeal after hearing the learned counsel.

14. A copy of this judgment under the signature of the Registrar and seal of this Court be sent to the Income Tax Appellate Tribunal for passing and order in consonance with the judgment of this Court.

M.H./M-25/KAppeal allowed.