VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 803 (2008)

Income Tax Ordinance (XXXI of 1979)---

----Ss.80AA, 50(3A) & 12(5)---Agreement of Avoidance of Double Taxation Between Pakistan and U.S.A., Art. XI---Tax on income of non-residents from fees for technical service---Assessee in default---Deduction of tax at source---Assessee in default---Payment was made by the assessee/company to non-residents and payments made to non-residents from outside Pakistan by the non-resident share-holders of the company---Assessing Officer considered such professional charges as fee for technical services and assessee/company was declared as assessee-in- default for non-deduction of tax---Validity---At the time of making assessment, Taxation Officer had not established that the claimed expenses were not related to income earned in Pakistan on the ground that the same were exclusively for the business carried out in Pakistan---Like-wise payments were made to non-residents having neither any fixed base in Pakistan for receiving such payments---Assessee was required to deduct tax under S.50(3) of the Income Tax Ordinance, 1979 only if the payment give rise to income which was liable to tax in Pakistan---Taxation Officer had assumed taxability without realizing the fact that the tax treaties empowered the Tax Department of Pakistan to charge tax only if such types of income were earned by maintaining fixed base in Pakistan---Taxation Officer had not conducted any enquiry to find out if there was any fixed basis of persons to whom the payments were made and had failed to establish taxability---In the subsequent years, similar treatment meted out by the Taxation Officer had not been approved by the Department itself and the contention of the assessee had been accepted by the A.D.R.C. which had been approved by the Federal Board of Revenue---No justification existed for treating the assessee/company as assessee in default---Order of First Appellate Authority was vacated and the orders passed by the Taxation Officer were annulled---Additional tax being consequential was also deleted by the Appellate Tribunal and appeal was allowed.

1985 PTD (Trib.) 877 ref.

Khaliq-ur-Rehman, F.C.A. for Applicant.

Rai Talat Maqbool, D.R. for Respondent.

ORDER

The appellant through these three appeals has agitated against the consolidated impugned order of the learned CIT(A) dated 6-7-2004 for the assessment years 1995-96 to 1997-98 on the following common grounds:---

"(1) That the order passed by the learned CIT (A) Multan Zone, Multan under section 132 of the Income Tax Ordinance, 1979 is bad in law and against the facts of the case.

(2) That the learned CIT(A) Multan erred to confirm the treatment of the learned DCIT in respect of payment of professional charges this regarding the provisions of double taxation treaties Pakistan has with connection of non-resident services providing ground of appeal No.2.

(3) Without prejudice to above the learned CIT(A) Multan also erred to confirm the interpretation of learned DCIT that Article 11 of US Treaty only covers services of individuals and not companies.

(4) That the learned CIT (A) erred to not to appreciate the non-deliberation of learned DCIT in respect of submission that payments were made by one non-resident to other non-resident for services rendered outside Pakistan.

(5) That the learned CIT(A) erred to confirm the order of DCIT despite the fact that the nature of services is evident on invoices of the service provider for production of copies of the agreement with the recipients of payment.

(6) That the learned CIT(A) erred to confirm the treatment of learned DCIT in respect of payment of Nicheman Corp. representing guarantee charges defined in the relevant law as "interest payment".

(7) That the learned CIT(A) also erred in confirming the order of the DCIT to charge the additional tax of Rs.3,938,960 without appreciating the absence of `mens rea'.

The learned counsel representing the appellant has at the very outset submitted that he is not pressing the above referred ground No.6 for all the three years. The appeals filed by the assessee are, therefore, dismissed to the extent of the above referred ground No.6 being not pressed.

Regarding the remaining grounds, the learned counsel has contended that the Taxation Officer has considered the professional charges as fee for technical services and has held that the appellant company as an assessee-in-default under section 80AA read with explanation of section 12(5) of the repealed Ordinance, 1979 which according to the learned counsel is factually incorrect, as the payment was made by the company to the non-residents and payments made to non-residents from outside Pakistan by the non-resident share-holders of the company. The learned counsel has contended that this was the second round of litigation before the learned CIT(A). Originally, the default under section 52 of the late Ordinance, 1979 was set aside by the learned IT(A) with directions to make re-assessment after making reference to treaties regarding double taxation executed between USA, Japan and U.K. It was pleaded by the appellant that as personal services have been rendered for which taxability does not arise under the local Tax Laws. According to the learned counsel during the re-assessment proceedings the Taxation Officer was provided information that the above referred treaties between U.S.A, Japan and U.K. were relevant as the non-resident recipients are residents of these countries. The payments were made to Engineers, Lawyers and Accounting Firms but the Taxation Officer has again established the alleged default under sections 52/132/86 of the repealed Ordinance, 1979 in re-assessment proceedings for the following two reasons:---

(a) that no agreements were produced with the services providers and only invoices were produced, hence in his opinion it cannot be ascertained whether or not personal services were rendered; and

(b) in USA treaty in Article XI tax exemption to personal services is available to individuals and not to firms and companies.

It has been contended that according to Taxation Officer the nature of services can be ascertained by the agreements but according to learned counsel the nature of services can be ascertained from the invoices also which are produced before the Taxation Officer and he has admitted this fact in the assessment year. He has contended that the nature of services can easily be ascertained from the professions the service providers are pursuing. The recipients are rendering professional services and are carrying on businesses in their respective fields such as Lawyers, Engineers and Accountants. He has explained that appellant has produced invoices which clearly establish the nature of services in an unambiguous manner. According to learned counsel the frivolous basis have been adopted in re-assessment proceedings to repeat the alleged default as there was no dispute between the appellant company and the department that the non-residents have rendered services. Like-wise there is also no dispute over the nature of payments.

According to the Taxation Officer it is the case of technical services falling within the ambit of explanation to section 12(5) read with sections 80AA/50(3A) of the repealed Ordinance, 1979 whereas, in fact, it is a case of personal services which have been rendered., therefore, agreements would not add anything to the "missing information" or "add any value". It has been contended that in the presence of specific source rule of personal services, the same will be applicable and relief from levy of tax was given under Article XI of treaty between Pakistan and the U.S.A. being putting the condition of presence of 180 days non-resident to stay in Pakistan. In the case under consideration, the non-residents did not visit Pakistan for a single day; hence their taxability is protected under treaties for avoidance of double taxation between Pakistan and the respective countries of the non-residents. According to the learned counsel the Taxation Officer has not established in his order that non-resident has ever visited Pakistan for a single day. According to him it is important to firstly establish as to what personal services mean, the services rendered by lawyers, accountants and engineers are professional services as has been stated in sub Article (2) of Article XIV of the double taxation treaty which states that "The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." The learned counsel has contended that each of the treaty also specifies what professional services comprises and what falls within the ambit of professional services in all the three treaties between Pakistan, U.S.A, Japan and U.K. The learned counsel has contended that anything other than what has specifically been provided in treaty will fall under residue covenants or under local tax laws. He is, therefore, of the view that in the present case the services are professional services being personal services and have the protection from taxability which puts the condition of presence of 180 days or more for non-residents to be present in Pakistan in a year.

According to the learned counsel the treaty between U.S.A and Pakistan extends tax exemption/benefit to individuals and not to firms/companies and in the present case no company had rendered any services. Firms of lawyers, engineers and accountants have rendered services; therefore, it is not correct on the part of the Taxation Officer to disregard the treaty provision on this score. It has been contended that firms are nothing but composition of individual professionals. A firm is not a legal entity. It always renders services to clients either through partners or its staff. Professional firms are forbidden to make limited companies or the partnership firms. The learned counsel in this respect has given an, example of his own firm. Explaining the position he has contended that my firm has been appointed as tax consultant by the appellant but it is not the firm which is travelling or representing the appellant before this Tribunal but the individual is rendering professional services through his partner who has travelled from Karachi to Lahore to represent the appellant while rendering his service. Similarly, according to the learned counsel in the case of non-resident firm individual persons were assigned contracts who rendered services to the appellant company. The learned counsel has further contended that the firm cannot sue nor it can be sued. It is the partner who can sue and can be sued, therefore, firm is not a legal person. He has in this respect placed reliance on the decision reported as 1985 PTD 877 (Trib.) wherein service rendered by company was also held as personal service referring to Article XI of Convention for avoidance of double taxation entered into between U.S.A and Pakistan. He has, therefore, contended that the view taken by the officers below that the firms are not under the treaty provisions is not correct. The learned counsel in this regard has referred the relevant provision of treaty which is Article XI of the treaty between U.S.A and Pakistan, Article X of the treaty between Japan and Pakistan and Article XV between U.K. and Pakistan. The learned counsel has contended that no taxability arises of non-residents in Pakistan due to article related to business profits which requires existence of permanent establishment in Pakistan. He has contended that, the Federal Board of Revenue in this respect has also given findings through alternative Disputes Resolutions Committee on the subject with respect to the appellant for the assessment years 2001-02 and 2002-03. Similar defaults were established by the Taxation Officer for the subsequent years. The Alternate Dispute Resolution Committee of the F.B.R. accepted the contentions of the appellant company on facts that non-residents did not come to Pakistan and are protected under personal services Article of recipient's treaties and no tax was deductible under the treaties and addition made by the Taxation Officer were deducted in both the above referred years.

Regarding the additional tax the learned counsel has contended that it is consequential to the above referred addition and may please be deleted with the deletion of the default.

On the other hand the learned DR is supporting the treatment meted out by the officers below.

We have heard the learned Representatives from both the sides and have also perused the consolidated impugned order of the learned CIT(A), the assessment order, the order of the learned CIT(A) dated 26-5-2001 during the first round of litigation, the provisions of the treaties between Pakistan, U.K., U.S.A. and Japan regarding the avoidance of double taxation and other relevant documents produced before us by the learned counsel for the assessee.

After examining the case of the assessee in the light of the facts as discussed above and the relevant provisions of repealed Income Tax Ordinance, 1979 as well as Treaties for avoidance of double taxation executed with the Governments of U.K., Japan, U.S.A, we have found that the contentions of the appellant's counsel with regard to non-deduction of tax on payments made to non-resident persons has enough force on facts and law. We have noted that at the time of making assessment the Taxation Officer has not established that the claims of expenses are not related to income earned in Pakistan on the ground that the same were exclusively for the business carried out in Pakistan. Like-wise the payments were made to the non-residents having neither any fixed base in Pakistan for receiving these payments. We find force in the contention made by the learned counsel for the assessee that the assessee is required to deduct tax under section 50(3) of the repealed Ordinance, 1979 only if the payment gives rise to income which is liable to tax in Pakistan. In the present case the Taxation Officer has assumed taxability without realizing the fact that the tax treaties empowered the tax department of Pakistan to charge tax only if these types of income are earned by maintaining fixed base in Pakistan. The Taxation Officer has not conducted any enquiry to find out if there was any fixed basis of the persons to whom the payments were made; therefore, he has failed to establish taxability in this regard. We have further noted that in the subsequent year 2001-02 and 2002-03 the similar treatment meted out by the Taxation Officer has not been approved by department itself as the contention of the present appellant has been accepted by the A.D.R.C. which has been approved by the Federal Board of Revenue. We are, therefore, of the view that there is no justification for treating the appellant company as an assessee-in-default for the years under review. The impugned orders of the learned CIT (A) in this respect for all the years in this respect is, therefore, vacated and the orders passed by the Taxation Officer for all the three years in this respect are annulled.

The additional tax for all the three years being consequential is, also deleted.

All the three appeals filed by the assessee are allowed to the extent and in the manner referred above.

C.M.A./17/Tax(Trib.)Appeal allowed.