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A.P. MOLLER through AGENT VS TAXATION OFFICER OF INCOME TAX, 2011 PTD-KARACHI-HIGH-COURT-SINDH 1460 (2011)

Jan. 27, 2011 KARACHI HIGH COURT SINDH 2011 PTD 1460

2011 PTD-KARACHI-HIGH-COURT-SINDH 1460

A.P. MOLLER through AGENT VS TAXATION OFFICER OF INCOME TAX

2011 P T D 1460

[Karachi High Court]

Before Muhammad Athar Saeed and Munib Akhtar, JJ

A.P. MOLLERthrough AGENT

Versus

TAXATION OFFICER OF INCOME TAX and another

Income Tax Reference Applications Nos.205 of 2007 and 882 to 942 of 2008, decided on 27/01/2011.

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss. 7, 11, 107 & 143--- Cargo embarked outside Pakistan carried to Pakistan on ships operated by non-resident shipping companies/ charterers---Sale of such cargo to Pakistani buyers by foreign seller on FOB basis---Payment of freight charges to carriers in Pakistan by resident buyers---Liability of carriers to pay income tax on suchfreight---Scope---Provision of S. 7 of Income Tax Ordinance, 2001 would apply to freight charges for cargo embarked in Pakistan, whether received or receivable in or outside Pakistan and freight charges for cargo embarked outside Pakistan, if received or receivable in Pakistan---Cargo embarked outside Pakistan should be headed for Pakistan as per terms of S. 143 of Income Tax Ordinance, 2001 for imposing tax thereon under S. 7(1)(b) thereof---Freight charges paid by Pakistani buyers would remain liable to tax under S. 4(1) of the Ordinance,rather than S. 7 thereof---Buyers (here Pakistani importers) in FOB contracts would be regarded as party to Bill of Lading creating relationship between buyer and carrier---Carrier would have a lien on goods shipped for payment of freight charges and would be entitled to hold same till such payment---Release of cargo, in the present case to Pakistani buyers on payment of freight charges had established that freight charges were received by carriers in Pakistan within meaning of S. 7(1)(b) of the Ordinance---According to avoidance of double taxation agreements (DTAs) by Pakistan with France and Denmark, "source State" was that in which payment was made and such State was regarded as entitled to tax such payments---Payment, in the present case, was made in Pakistan, which was a "source State"---Payments received by carriers would be considered as profit derived from sources within Pakistan, thus, were liable to be taxed in Pakistan---Nothing in such avoidance of double taxation agreementsthat would bar application of S. 7(1)(b) of the Ordinance,to freightchargesreceivedorreceivableinPakistan---Profitsearnedby such carriers from international shipping business would come within meaning of"industrial or commercial profits" used in the agreements---Suchcarrierswereliabletopaytaxintermsas provided in S.7(1)(b) read with S.143 of the Ordinance---Principles.

Mahabir Commercial Company Ltd. v. CIT (1972) 86 ITR 417 (Ind. SC); Ishikawajma Harima Heavy Industries v. Director of Income Tax, Mumbai (2007) 288 ITR 408 (Ind. SC); General Bank of Netherlands and others v. CIT (1991) 63 Tax 149; 1991 PTD 687; CIT v. Toshoku Ltd. (1980) 125 ITR 525; Macneil and Barry Ltd. v. CIT (1970) 22 Tax 8 (SC); Jardine Henderson v. CIT PLD 1960 SC 371 and Octavious Steel and Company Ltd. v CIT 1960 PTD 1 ref.

Carriage of Goods by Sea by John F. Wilson (5th ed., 2004);The Danish DTA's case PTCL 1988 St. 181; PTCL 2002 St. 316(sic); The French DTA's case 1997 PTD (Statute) 33; 74 Tax 343; The Japanese's case DTA 1959 PTD 126; Mountain States Mineral Enterprise Inc. v. CIT (Appeals) 2008 PTD 1087; CIT v. Unilever PLC 2002 PTD 44; Raleigh Investment Co. Ltd. v. CIT 1983 PTD 126 Ostime v. Australian Mutual Provident Society (1960) AC 459; (1960) 39 ITR 210; Arabian Express Line Ltd. v. Union of India 212 ITR 31; 1997 PTD 833 and CIT v. Visakapatnam Port Trust (1983) 144 ITR 146 rel.

(b) Interpretation of statutes---

----Fiscal statute---Charging provision---Exemption from taxation---Two or more reasonable interpretations of such provision and exemption from taxation---Effect---Interpretation of charging provision favouring taxpayer would be preferred---Interpretation, which would rob provision of all meaning and make same of any substantive content, could not be regarded as reasonable---Onus would lie on taxpayer to show that he was exempt from taxation---Exemption from taxation would be strictly construed, but where two reasonable interpretations thereof were possible, then one favouring revenue would be adopted.

(c) Income Tax Ordinance (XLIX of 2001)---

----Ss. 7 & 101---Phrase "subject to this Ordinance" as used in S. 7 of Income Tax Ordinance, 2001---Scope---Such phrase would not mean that other provision of Income Tax Ordinance, 2001 would be read or incorporated into S. 7 thereof---Such phrase would mean that in case of conflict between anything else contained in Income Tax Ordinance, 2001 on one hand and S. 7 thereof on other hand, latter must give way and other provision would prevail---When no such conflict existed, then such phrase would do nothing---No conflict existed between Ss. 101 and 7 of the Ordinance---Principles.

C&J Clark Ltd. v. Inland Revenue Commissioners (1973) 2 All ER 513; Harding v. Coburn (1976) 2 NLR 577; Newcrest Mining (WA) Ltd. v. Commonwealth (1997) HCA 38; (1997) 190 CLR 513 and The South India Corporation (P.) Ltd. v. The Secretary, Board of Revenue Trivandrum and another AIR 1964 SC 207 rel.

(d) Interpretation of statutes---

----Fiscal statute---Interpretation increasing substantially tax burden of taxpayer cannot be preferred over one which brings him to tax, but for a much lesser amount.

(e) Bills of Lading Act (IX of 1856)---

----Ss. 1 & 2---Bill of lading to which S. 1 of Bills of Lading Act, 1856 appliesisalsoabillofladingtowhichS. 2 thereof is applicable.

Effort Shipping Company Limited v. Linden Management SA and others (1998) UKHL 1; (1998) 1 All ER 495; East West Corporation v. Dampskibsselskabet AF 1912; Aktieselskabet (2003) EWCA Civ 83; (2003) 2 All ER 700, Borealis AB v. Stargas Ltd. (The Berge Sisar) (2001) UKHL 17 and (2001) 2 All ER 193 rel.

(f) Federal Board of Revenue---

----Any interpretation of income tax law by Central Board of Revenue would not be binding on tax authorities.

(g) Avoidance of Double Taxation Agreement---

----Nature and object---Such agreement establishes an agreed framework for distribution of taxation revenue between contracting States---Principles.

OECD, Model Tax Convention on Income and on Capital, condensed version, July 2008; (Nabil Orow, Comparative Approaches To The Interpretation of Double Tax Conventions; (2005) 26 Adelaide Law Review, pp. 73-102; Lord Radcliffe put it in Ostime v. Australian Mutual Provident Society (1960) AC 459 and (1960) 39 ITR 210 ref.

(h) Interpretation of statutes---

----Fiscal statute ---Avoidance of double taxation agreement---Such agreement for being international agreement or treaty would be interpreted broadly and liberally, but not strictly as a fiscal statute -- In caseofpossibilityoftworeasonableinterpretationsofsuch agreementoranydoubtorambiguityinitsinterpretation,thensame would be resolvedinfavourofcountryhavingarightto tax.

Crown Forest Industries Ltd. v. Canada (1995) 2 SCR 802; McDermott Industries (Aust) Ply Ltd. v. Commissioner of Taxation (2005) FCAFC 67; Union of India and another v. Azadi Bachao Andolan and another (2003) 273 ITR 706; Thiel v Federal Commissioner of Taxation (1990) HCA 37; (1990) 171 CLR 338 and National Westminster Bank, PLC v. United States (2008) 512 F.3d 1347 rel.

Dr. Ikramul Haq for Applicant (in ITRA 205 of 2007 and connected Reference Applications (in relation to the Danish DTA)).

Makhdoom Ali Khan and Najeeb Jamali for the Applicant (in ITRA 882 of 2008 and connected Reference Applications (in relation to the French DTA)).

Aga Faquir Muhammad and Aga Zafar Muhammad for the Applicant (in ITRA 6 of 2008 and connected Reference Applications (in relation to the Japanese DTA).

Jawaid Farooqui for Respondent (in all the Reference Applications).

ORDER

MUNIB AKHTAR, J.---By this common judgment, we intend disposing of these 785 Reference Applications, the particulars of which are given in the Appendix, since the References raise common issues with regard to the interpretation of sections 7 and 107 (and other provisions) of the Income Tax Ordinance, 2001 ("2001 Ordinance") and certain double taxation avoidance agreements entered into by Pakistan. The double taxation agreements ("DTAs") are those with Denmark ("the Danish DTA"), France ("the French DTA") and Japan ("the Japanese DTA"). The following questions are said to be the questions of law which arise out of the impugned orders of the Tribunal which considered the Danish DTA:--

(1)Whether in the facts and circumstances of the case, the Tribunal was right to hold that freight charges on inward cargo, on FOB basis outside Pakistan, fall within the ambit of is "sources within the other Contracting State" as envisaged in Article 8(3) of the Pak-Danish Tax Treaty?

(2)Whether in the facts and circumstances of the case, the Tribunal was right to hold that Pakistan can tax freight charges for cargo embarked outside Pakistan under Article 8(3) of the Pak-Danish Tax Treaty?

(3)Whether in the facts and circumstances of the case, the ITAT was right to hold that provisions of section 7 of Income Tax Ordinance, 2001 and section 80 of repealed Income Tax Ordinance, 1979 are not pari materia, therefore, the benefit of C.B.R's Circular Letter No. C.2(4)IT.2/95 dated 1st August, 1995 is not available under section 239(10) of Income Tax Ordinance, 2001?

(4)Whether in the facts and circumstances of the case, the ITAT was right in law to maintain assessment order framed without issuance of show-cause notices for rejecting the claim of non-taxability of inward cargo receipts under Article 8(3) of the Pak-Danish Tax Treaty?

The following questions are said to be the questions of law which arise out of the impugned orders of the Tribunal which considered the French DTA (question No.1 having been modified with the consent of learned counsel by order of the Court dated 22-10-2008):--

(1)Whether on the facts and circumstances of the case, the learned Income Tax is Appellate Tribunal (ITAT) was justified in holding that the freight receipts in respect of the cargo/goods embarked outside Pakistan is taxable in Pakistan?

(2)Whether on the facts and circumstances of the case, the learned ITAT was justified in considering the issue that the assessment framed by the Taxation officer is beyond the limitation provided under the law?

(3)Whether on the facts and circumstances of the case, the learned ITAT was justified in applying the provisions of section 7(1)(b) of the Income Tax Ordinance, 2001 (the Ordinance) by totally ignoring the provisions of section 107 of the Ordinance and the Double Taxation Avoidance Agreement between Pakistan and France?

Although five questions of law were said to arise out of the impugned orders of the Tribunal which considered the Japanese DTA, learned counsel for the parties agreed that there was, in essence, only one question of law which required determination, which was framed in thefollowingtermsbytheCourtbymeansoftheorderdated16-9-2008:--

Whether income from the shipping transport business of the applicant is exempt from tax under the Convention between Japan and Pakistan, notified under S.R.O. 238(I)/59 dated 4th June, 1959?

2.Although the References were earlier twice heard and judgment reserved by other Division Benches of the Court, they could not, on each occasion, be decided on account of certain intervening events beyond the control of the Court, and had therefore to be fixed for re-hearing. The References were finally re-heard on 24-12-2010 by this Bench, and judgment reserved.

3.The relevant facts needed to answer these Reference Applications can be stated shortly and without specific reference to any particular case. In all cases cargo was carried to Pakistan on ships operated by non-resident shipping companies or charterers (hereinafter referred to as the "carriers"). The cargo consisted of goods sold to Pakistani buyers by foreign sellers on FOB basis, and the freight (and other charges, if any) in respect of the carriage were paid in Pakistan by the resident buyers. The Taxation Officer took the position that the amounts received by the carriers were taxable under section 7(1)(b) of the 2001 Ordinance. The applicants contended that section 7(1)(b) did not apply in the facts and circumstances of the case, but that even if it did, the amounts paid were not taxable in Pakistan by reason of the relevant DTA. The amounts were nonetheless brought to tax, and the applicants appealed to the CIT (Appeals). Those appeals failed, and further appeals taken to the Tribunal met the same fate. The matter now comesbeforethisCourtbywayoftheaforesaidReference Applications.

4.Although the appeals out of which these Reference Applications arise were decided by different orders of the Tribunal, it is not necessary to refer to each such order separately since the reasoning and conclusions of the Tribunal were essentially the same in all cases. It is important however, to understand how the Tribunal came to dismiss the appeals, and in order to get a flavour of the Tribunal's reasoning and conclusions, reference can be made to three representative impugned orders, one in relation to each DTA. In relation to the Danish DTA, reference can be made to the Tribunal's order dated 27-1-2007 in Appeal No.1236/KB/2006(impugnedinITRA205of2007). TheTribunal, afterreferringtosection80oftheIncomeTaxOrdinance, 1979 ("1979Ordinance")andsection7ofthe2001Ordinance, held as under:

"8.... From the foregoing provisions of law, we have found a basic difference in both these provisions of law. Under the repealed Ordinance, the shipping company was required under section 80(2) to declare freight receipts from both outward and inward cargo etc. and the DCIT, after calling for the requisite particulars, accounts or documents, was empowered to determine the aggregate of the freight charges etc. for charging the tax thereon. Whereas, no such authority to determine aggregate amount has been conferred on the Taxation Officer in section 7 of the new Ordinance 2001 which lays down that "a tax shall be imposed" in respect of receipts from the cargo etc. embarked in Pakistan as provided in its clause (a) and from the cargoetc. embarkedoutsidePakistanasprovidedinits clause (b). Accordingly, we hold that section 80 of the repealed Income Tax Ordinance, 1979 and section 7 of the new Income Tax Ordinance, 2001 are not pari materia. Accordingly, we also hold that the C.B.R's. clarification dated 1-8-1995 is not protected by section 239(10) being inconsistent with section 7 of the Income Tax Ordinance, 2001 and not binding on the Taxation Officer with effect from Tax Year, 2003. Whereas, the C.B.R's. latest clarification dated 14-11-2001 in respect of section7isbindingontheDepartmentalOfficersunder section 214 of the Income Tax Ordinance, 2001 since Tax Year 2003.

(9)Now coming to the application of Pak-Danish Tax Treaty, we consider it necessary to reproduce Article 8 thereof as follows:--

Article 8

(1)Profits from the operation of aircraft in international shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

(2)With respect to profits derived by the air transport consortium ScandinavianAirlinesSystem(SAS)theprovisionsof paragraph (1) shall apply but only to such part of the profits as corresponds to the participation held in that consortium by Det Danske Luffartsselskab (DDI the Danish partner of Scandinavian Airlines System (SAS).

(3)Profits from the operation of ships in international traffic may be taxed in the Contracting State in which the effective management of the enterprise is situated. However, such profits derived from sources within the other Contracting State may also be taxed in that other State in accordance with its domestic law provided that for the past five years for which this Convention is effective the tax rate charged in that other State shall be reduced by 50 per cent and for the next five years it shall be reduced by 25 per cent.

(4)The provisions of the foregoing paragraphs of the Article shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

The paragraphs 1 and 3 of Article 8 ibid confer taxing right to the Contracting State in which the place of effective management of the enterprise is situated. In the instant case, the 'Contracting State' means Denmark since the appellant is a Danish resident. However, paragraph 3 of the Article 8 ibid also confers taxing right to the 'Other Contracting State'. In the instant case, the 'Other Contracting State' means Pakistan which has also been accepted by the learned AR of the appellant as already mentioned in paragraph 6 of this order. Now, the question arises whether or not the freight charges on inward cargo etc. fall in sources within Pakistan. We are of the considered opinion that the freight charges are received or deemed to be received in Pakistan only when the cargo coming into Pakistan is booked on FOB basis and are paid in Pakistan by the Pakistan consignees to the shipping company. In the case of imports on FOB basis, the title of ownership of cargo has passed on to the Pakistan consignees at the port of shipment and any expenses incurred in Pakistan thereafter by the Pakistani consignee fall in sources within Pakistan. Accordingly, we hold that the freight charges declared by the appellant on the inward freight fall within the Pakistan source and are taxable in Pakistan as provided in section 7(1)(b) and there is no provision, either in the Income Tax Ordinance, 2001 or the Pak-Danish Tax Treaty granting exemption from tax on such receipts.

(10)As far as issuance of notice for charging tax on the declared freight receipts that are claimed exempt is concerned, we have found that the Taxation Officer has accepted the declared receipts and has not made on his own any determination of such receipts. The exemption claimed by the appellant on such receipts is ab-intio void and of no legal effect since neither provided in the Income Tax Ordinance, 2001 nor in the Pak-Danish Tax Treaty. Notwithstanding the fact that the Taxation Officer issued a notice, he has only calculated the amount of tax payable at the rate provided in the Pak Danish Tax Treaty and issued notice for recovery of the short payment of tax by appellant. Any notice u/s 143 of the Ordinance even otherwise was not required to be issued since determination of such receipts was not made by the Taxation Officer.

(11)In view of the foregoing we hold that the action of the Taxation Officer is fully justified being lawful and is confirmed. As a result the learned CIT (A)'s order is also confirmed.

(12)Accordingly, the appeal filed by the assessee-company is dismissed being devoid of merit."

5.In relation to the French DTA, reference can be made to the Tribunal's combined order dated 20-2-2008 in Appeal No.1477/KB/2007 and connected appeals (impugned in ITRA 882 of 2008 and connected References).TheTribunalsimplyfolloweditsearlierorderdated 27-1-2007 in Appeal No. 1236/KB/2006 referred to above. This is not surprising since, as we shall see, the Danish DTA and the French DTA are virtually identical in all material respects.

6.In relation to the Japanese DTA, reference can be made to the Tribunal's combined order dated 31-10-2007 in Appeal No.570/KB/2007 and connected appeals (impugned in ITRA 06 of 2008 and connected References). The Tribunal referred to an earlier order dated 29-10-2007 (which itself relied on its order dated 27-1-2007 noted in para 4 supra) and dismissed the appeals in the following manner:--

"(6).We have heard the learned representatives of the two sides and have also perused the record. To proceed further it is necessary to mention that on similar facts and grounds appeals bearing Nos.575, 580 ...813/KB/2007 were heard and decided by this bench vide order dated 29-10-2007 M/s. James Finley Limited. The relevant portion of the order is reproduced hereinunder:--

`6. We have given serious consideration to the arguments of both the sides. As far as taxability of receipts receivable in Pakistan on account of inward cargo under section 7(1)(b) of the Income Tax Ordinance, 2001 is concerned, the Tribunal vide its order dated 27-1-2007 in ITA No.1236/KB/2006 has already decided the issue in favour of the Revenue in the following terms:--

(i)Section 80 of the repealed Income Tax Ordinance, 1979 and section 7 of the Income Tax Ordinance, 2001 are not pari materia;

(ii)TheC.B.R'sclarificationvide C. No.2(4)IT.2/95dated1-8-1995 is not protected by section 239(10) of the Income Tax Ordinance, 2001 and, hence, not binding on the Taxation Officer with effect from Tax Year 2003;

(iii)TheC.B.R'sclarificationC. No.2(4)Int. Taxes/95,dated14-11-2001 is binding the Departmental Officer's since Tax Year 2003;

(iv)Neither the Income Tax Ordinance, 2001 nor the Agreement for the Avoidance of Double Tax and Fiscal Evasion between Pakistan and Denmark (Tax Treaty) provides exemption to profits of shipping business received or deemed to be received in Pakistan for the cargo etc. embarked outside Pakistan.

(v)The claim of exemption on the receipts in respect of cargo etc. embarked outside Pakistan is ab-intio void and of no legal effect. The Taxation Officer was not required to issue any notice under section 143 since determination of such receipts was not made by the Taxation Officer who has charged tax only on the receipts declared by the appellant;

(vi)The profits of shipping business received or deemed to be received in Pakistan for the cargo etc. embarked outside Pakistan are from sources within Pakistan and taxable in Pakistan as provided in Article 8 of the Tax Treaty between Pakistan and Denmark.

(7)We have also gone through various Tax Treaties negotiated by Pakistan with various other countries and have found that there are two types of tax treaties i.e. the "comprehensive tax treaties" which cover all types of incomes including income from air and shipping transport business covered under specific article articles of the treaty and the "limited purpose tax treaties" which do not cover all types of incomes. We are of the considered opinion that the Pak-Japan Tax Treaty is a limited purpose tax treaty and it does not cover shipping transport business since shipping and air transport business are alike and only the air transport business is specifically covered in Article-V of the said Tax Treaty. We are also inclined to agree with the learned Taxation Officer that Article-III of the Pak-Japan Tax Treaty does not apply to shipping transport business more so when the appellant itself is voluntarily offering for tax the amounts received on account of outward cargo. We are of the considered opinion that Article-III of the said Tax Treaty cannot be invoked partially so as to apply to one half part and not to apply to the other half part of the same business. We are also of the considered opinion that the Pakistan Tax Authority has lawfully exercised its right of taxing the amounts received in Pakistan from shipping transport business on account of both inward and outward cargo being Pakistan source income. The Pak-Japan Tax Treaty does not grant exemption from tax to income from the shipping transport business and the appellant has also neither claimed nor established that its income has been doubly taxed relief from which is provided through invoking the "mutual agreement procedure" as provided in Articles-XVI and XVII of the Pak-Japan Tax Treaty.

(8)As far as case law cited by the learned AR is concerned, the case reported as 1983 PTD 126 deals with sale of shares of a company as a commercial activity which cannot be equated with shipping transport business. Therefore, the cited case-law is of no help to the appellant.

(9)In view of the foregoing, we find no merit in appellant's captioned appeals which are dismissed being devoid of merit. Accordingly, the orders passed by both the authorities below in all the subject cases are upheld and confirmed.

(10)All the captioned appeals fail.

(7)As we have already mentioned supra that the facts and grounds of present appeals are similar, therefore, keeping in view the ratio of order supra we are not inclined to agree with the arguments of learned A.Rs that income of the assessee is exempt. Therefore, we have reasons to confirm the orders of the officers below.

(8)Resultantly all the appeals filed by the assessee are without any merit and stand dismissed."

7.Learned counsel for the applicants raised a number of points to contend that the Reference Applications should be allowed. Each counsel attacked the impugned orders from a different perspective, while also adopting the submissions of the other counsel. Dr. Ikramul Haq (who was concerned mainly with the Danish DTA) submitted that section 80 of the 1979 Ordinance was in pari materia section 7 read with section 143 of the 2001 Ordinance. He contended that the Central (now Federal) Board of Revenue had itself, through its Circular Letter No.C.2(4)IT.2/95 dated 1-8-1995 ("the Circular Letter") concluded that section 80 did not apply to charges in respect of inbound cargo, i.e., cargo being carried to Pakistan from foreign ports. His case was that the Circular Letter was equally applicable to section 7(1)(b) read with section 143 and hence no tax was payable in respect of freight (and other charges, if any) in terms thereof (For convenience, all amounts charged by the carriers in relation to the carriage of goods are hereinafter referred to as the "freight charges".) He submitted further that the Tribunal had completely misunderstood section 7(1)(b) on its own terms. His case was that in the absence of any permanent establishment in Pakistan, the place of accrual of income for the carrier in relation to the carriage of goods was the place where the cargo was placed on board, which meant the foreign ports. He submitted that section 7 was expressly subject to the 2001 Ordinance. This meant that the freight charges would be "received" or "receivable" in Pakistan only if the amounts were received by the carrier itself (e.g., through a permanent establishment). None of the carriers had any permanent establishment in Pakistan. It was insufficient that the amount was being received, as was the case at hand, through an agent/representative in the country. Income arose when the recipient first obtained the money under his control, which in the case of the carriers was outside Pakistan. He placed reliance on section 101 in support of the foregoing submissions, and contended that that section applied to section 7 since the latter provision was expressly made subject to the other provisions of the Ordinance. He further submitted that even if section 7(1)(b) were applicable, the case of the applicants was covered by Article 8(3) of the Danish DTA, which provided that the profits from the operation of ships in international traffic were to be taxed in the State in which the effective management of the carrier was situated. This was admittedly outside Pakistan. While Article 8(3) permitted the other State (in this case, Pakistan) to tax such profits as were "derived from sources within" that other State, learned counsel submitted that this applied only in relation to outbound cargo (i.e., cargo carried from Pakistan to foreign ports). In other words, his case was that section 7 was subject to section 107 (since it was subject to the 2001 Ordinance) and the latter provision made the Danish DTA applicable to the facts and circumstances of the case. In terms of Article 8(3) thereof, Pakistan couldtaxthatcarriageofgoodswhichcamewithintheambitof section 7(1)(a), but not the carriage covered by section 7(1)(b). He pointed out that outbound cargo and inbound cargo were obverse cases, and to allow Pakistan to charge tax in respect of both would, in effect, rob Article 8(3) of all meaning. Since both the applicants and the Department accepted that tax could be charged in respect of outbound cargo (under section 7(1)(a)) that necessarily meant that it could not be charged under section 7(1)(b) (for inbound cargo). He therefore prayed that the References be answered in favour of the applicants.

8.Mr. Makhdoom Ali Khan (who was concerned mainly with the French DTA) adopted and reiterated Dr. Ikramul Haq's submissions with respect to section 7 and other statutory provisions, and also Article 8(3), since that provision is essentially identical in both the French and the Danish DTAs. He further submitted that the Tribunal had failed completely to appreciate that all carriage of goods by sea was under bills of lading in which the buyer (in this case, the Pakistani importer) was merely the consignee. His case was that the contract for the carriage of goods, even in the case of FOB contracts, was between the shipper (i.e., the foreign seller) and the carrier. Since the Pakistani buyer was not party to the bill of lading, there was no privity of contract between him and the carrier. Any amounts paid in Pakistan could not be said to have been "received" in this country within the meaning of section 7(1)(b). He pointed out that if the freight charges remained unpaid, the carrier could not hold the consignee (i.e., the Pakistani buyer) liable; its only recourse would be against the shipper (the foreign seller). He also placed reliance on section 2 of the Bills of Lading Act, 1856 in support of the foregoing submissions. Learned counsel further submitted that even though the freight charges were received in Pakistan by the carrier's agent, the latter had nothing to do with the contract of carriage. The functions performed by the carrier's "agent" did not amount to a true agency within the meaning of law. Any receipt of freight charges by the "agent" also did not establish any "business connection" in Pakistan of the applicant that would bring the amount to tax under the 2001 Ordinance. Learned counsel emphasized that even otherwise, there was no "business connection" in the facts and circumstances of the case. In this context, he also placed reliance on section 101.

9.Mr. Aga Faquir Muhammad adopted the submissions of the other learned counsel and stressed certain aspects with particular reference to the Japanese DTA (with which he was mainly concerned). As will be seen later, this DTA is different from the other two DTAs. Learned counsel submitted that in general, DTAs could be divided into two broad categories: comprehensive and of limited scope. He emphasized that the Japanese DTA fell in the former category, and that the Tribunal had erred materially in coming to the contrary conclusion. His case was that Article III of the Japanese DTA provided that "industrial or commercial profits" of an enterprise of one State (in this case, Japan) would be taxable in the other State (i.e., Pakistan) only if the enterprise carried on business in Pakistan through a permanent establishment. It was an admitted position that the applicants did not have any permanent establishment in this country. Article III (or any other provision of the DTA) did not make any exception in respect of profits earned through the shipping business. Learned counsel therefore contended that its terms were broad enough to cover all profits (i.e., income), including those from shipping business, and hence by virtue of section 107, section 7(1)(b) did not apply in the facts and circumstances of the case. In fact, his case was that the Japanese DTA was so comprehensive that even section 7(1)(a) did not apply to Japanese carriers. He therefore also prayed that the References be answered in favour of the applicants and against the Department.

10.All the learned counsel filed written synopses and relied on case law and other material, which will be referred to at the appropriate place in the paras hereinbelow.

11.Mr. Jawaid Farooqui, learned counsel for the Department, opposed all the Reference Applications. His case was that section 7 was a special provision, which was in the nature of a self-contained code in its own right. He submitted that the said section applied in its own terms, and inbound cargo clearly came within the ambit of section 7(1)(b) and hence the freight charges were liable to tax in terms thereof. He contended that any reference to section 101 in relation to section 7 was misconceived. He further contended that in any case, there was a clear "business connection" in the facts and circumstances of the case, and thus, the freight charges had rightly been brought to tax. In relation to the Danish and French DTAs, his case was that Article 8(3) permitted Pakistan to tax the freight charges. He submitted that in respect of profits from shipping business, the DTAs intended for the tax revenue to be shared between the Contracting States, which allowed Pakistan to tax the freight charges under section 7(1)(b). As regards the Japanese DTA, he submitted that there had to be an express exemption applicable in the case of shipping business. Since the DTA admittedly did not have any such exemption, reliance could not be placed on the general provisions of Article III thereof. He also contended that the Japanese carriers were admittedly paying tax under section 7(1)(a). Since the Japanese DTA had no equivalent to Article 8(3) of the Danish and French DTAs, that necessarily meant that section 7(1)(b) was equally applicable to the Japanese carriers. He submitted that the Tribunal had come to the correct conclusion both in law and on the facts and hence prayed that the References be dismissed. Like learned counsel for the applicants, he filed written synopses and relied on certain case-law, which will be referred to at the appropriate place in the paras hereinbelow.

12.We have heard learned counsel for the parties, examined the record with their assistance, and considered the case-law and other material relied upon by them. The issues raised before us can be divided into two broad questions. The first question is whether section 7(1)(b) of the 2001 Ordinance is applicable in the facts and circumstances of the case, i.e., in respect of goods sold by foreign sellers to Pakistani buyers on FOB basis, with the freight charges paid or payable in Pakistan at the conclusion of the carriage. If the answer to this question is in the affirmative, then the second question arises, namely, whether by reason of section 107 read with the relevant DTAs, such freight charges cannot be brought to tax in Pakistan. If at all the second question arises, it will have to be tackled in two parts, one in relation to the Danish and French DTAs and the other in relation to the Japanese DTA. We propose to address the issues before us in the foregoing order.

13.Section 7 of the 2001 Ordinance provides as follows:--

"(7)Tax on shipping and air transport income of a non-resident person.--

(1)Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division V of Part I of the First Schedule, on every non-resident person carrying on the business of operating ships or aircrafts as the owner or charterer thereof in respect of -

(a)the gross amount received or receivable (whether in or out of Pakistan) for the carriage of passengers, livestock, mail or goods embarked in Pakistan; and

(b)the gross amount received or receivable in Pakistan for the carriage of passengers, livestock, mail or goods embarked outside Pakistan.

(2)The tax imposed under subsection (1) on a non-resident person shall be computed by applying the relevant rate of tax to the gross amount referred to in subsection (1).

(3)This section shall not apply to any amounts exempt from tax under this Ordinance."

Section 7 is part of group of three sections (sections 5 to 7) in respect of which section 4 makes specific provision. Section 4 is the general charging section of the 2001 Ordinance, and brings to tax all taxableincomeofapersoninaccordancewiththeprovisionsof theOrdinance.Subsections(4)and(5)however,provideas follows:--

"(4)Certain classes of income (including the income of certain classes of persons) may be subject to --

(a)separate taxation as provided in sections 5, 6 and 7; or

(b)collection of tax under Division II of Part V of Chapter X or deduction of tax under Division III of Part V of Chapter X as a final tax on the income of the person.

(5)Income referred to in subsection (4) shall be subject to tax as provided for in sections 5, 6 or 7, or Part V of Chapter X, as the case may be, and shall not be included in the computation of taxable income in accordance with section 8 or 169, as the case may be."

14.Section 7, which is expressly made "subject to this Ordinance", applies to all non-resident carriers. On the face of it, the section applies to two situations. Firstly, it applies to freight charges for the carriage of cargo embarked in Pakistan, whether the charges are received or receivable in, or outside, Pakistan. This is subsection (1)(a). The second situation is freight charges for the carriage of cargo "embarked outside Pakistan". This applies only if the charges are received or receivable in Pakistan. This is of course subsection (1)(b), which lies at the heart of the present dispute.

15.The first point to note is that if learned counsel for the applicants are correct, and section 7(1)(b) does not apply to the fact-situation of the present case, then the question which arises is, what does it apply to? It is telling that although we expressly invited learned counsel to assist us on this question, there was no substantive answer forthcoming. It is of course well settled that if two or more reasonable interpretations of a charging provision are possible, then the one in favour of the taxpayer will be preferred. But an interpretation that effectivelyrobstheprovisionofallmeaning,andmakesitdevoid ofanysubstantivecontent, canhardlyberegardedasreasonable. Section 7(1)(b) must after all, apply to something, i.e., to some fact-situation. What is that fact-situation? We address this question by taking up and considering the various elements that must be found in any fact-situation to which section 7(1)(b) is applicable. The first element of the fact-situation must be that the cargo is "embarked outside Pakistan". There cannot be any doubt that this means that the cargo must be loaded onto the ship in a foreign port. Now cargo embarked on a ship must be destined for someplace, and this brings us to the second element of the fact-situation: where must this cargo be headed for? It is interesting to note that there is nothing in section 7(1)(b) itself which requires that the cargo should be headed for Pakistan. All that it requires is that the cargo be "embarked outside Pakistan". In order to address this point, reference must be made to section 143, which provides in material part as follows:

143. Non-resident ship owner or charterer.---(1) Before the departure of a ship owned or chartered by a non-resident person from any port in Pakistan, the master of the ship shall furnish to the Commissioner a return showing the gross amount specified in subsection (1) of section 7 in respect of the ship.

(2)Where the master of a ship has furnished a return under subsection (1), the Commissioner shall, after calling for such particulars, accounts or documents as he may require, determine the amount of tax due under section 7 in respect of the ship and, as soon as possible, notify the master, in writing, of the amount payable.

(3)The master of a ship shall be liable for the tax notified under subsection (2) and the provisions of this Ordinance shall apply to such tax as if it were tax due under an assessment order.

(6)This section shall not relieve the non-resident owner or charterer of the ship from liability to pay any tax due under this section that is not paid by the master of the ship.

It is clear from section 143 that the tax under section 7 is imposed on a ship-by-ship basis, and only in respect of those ships which visit Pakistani ports. In the normal course, the ship will be carrying cargo to Pakistan when it arrives (i.e., cargo embarked outside the country), and will carry cargo from Pakistan when it leaves (i.e., cargo embarked in the country). This section therefore explains, and properly limits, the second element of any fact-situation to which section 7(1)(b) is applicable: the cargo must be carried from the foreign port to a Pakistani port.

16.It will be seen that the first two elements, which must be found in every fact-situation to which section 7(1)(b) is applicable, are clearly to be found in the fact-situation presently under consideration. All the present References are concerned with cargo loaded in foreign ports ("embarked outside Pakistan", the first element) and carried to this country (the second element). We now come to the third (and most critical) element: the freight charges must be received or receivable in Pakistan. What does this entail? Obviously, it rules out cargo in respect of which freight charges have already been paid, e.g., goods shipped CIF or C&F. Learned counsel for the applicants submitted that on a true and proper interpretation, even the freight charges paid (or payable) in Pakistan were not "received" (or "receivable") in this country within the meaning of section 7(1)(b). We therefore need to consider the various submissions that were made in this regard.

17.Firstly, it was contended that the freight charges had to be received through either a permanent establishment or by reason of a business connection in Pakistan, and neither existed in the facts and circumstances of the present case. Learned counsel for the department on the other hand contended that a business connection clearly existed, and therefore the amount had been received in Pakistan. This was ofcourse quite apart from his basic submission that section 7 was a self-contained code to which such considerations were not applicable. As to this, learned counsel for the applicants emphasized that section 7 was expressly made subject to the other provisions of the Ordinance, and therefore, the requirement of receipt through a permanent establishment or by reason of a business connection in Pakistan was applicable. This requirement, according to them, applied by reason, and in terms, of section 101, which lays down the rules by which Pakistan-source income is to be determined. The opening words ("subject to this Ordinance") made these rules applicable to section 7, and it is this submission which must now be considered.

18.The legislative device of subjecting a provision to other provisions of the statute (or even the whole of the statute) is of course well established. Its proper interpretation was explained as follows in C&J Clark Ltd. v. Inland Revenue 71 Commissioners (1973) 2 All ER 513 by Megarry, J. (in the High Court):--

"In my judgment, the phrase 'subject to' is a simple provision which merely subjects the provisions of the subject subsections to the provisions of the master subsections. Where there is no clash, the phrase does nothing: if there is collision, the phrase shows what is to prevail. The phrase provides no warranty of universal collision." (p.520; emphasis supplied)

In Harding v. Coburn (1976) 2 NLR 577, the New Zealand Court of Appeal observed:--

"The qualification, 'subject to' is a standard way of making clear which provision is to govern in the event of conflict. It throws no light, however, on whether there would in truth be a conflict without it."(per Cooke, J., pg. 582; emphasis supplied)

In Newcrest Mining (WA) Ltd. v. Commonwealth (1997) HCA 38; (1997) 190 CLR 513, the High Court of Australia was concerned with the interpretation of sections 51 and 122 of the Australian Constitution. It was observed as follows (internal citations omitted):

"In interpreting S.122 and its relationship with S.51 of the Constitution, the most striking feature of the relationship is that the powers conferred by S.51 are conferred 'subject to this Constitution' while S.122 is unqualified by that expression.... The use of the expression 'subject to this Constitution' does not itself mean that there is always conflict between S.51 and S.122. But it does mean that, where conflict exists, S.122 must prevail. As Megarry J pointed out in C and J Clark Ltd. v IRC (1973) 2 All ER 513, 520 '[w]here there is no clash, the phrase does nothing: if there is collision, the phrase shows what is to prevail.' In S v Marwane 1982 (3) SA 717(A), 747-8, the Appellate Division of the Supreme Court of South Africa had to construe the words '[s]ubject to the provisions of this Constitution'. Miller JA, giving judgment for the majority, said:

'The purpose of the phrase 'subject to' in such a context is to establish what is dominant and what subordinate or subservient; that to which a provision is 'subject', is dominant - in case of conflict it prevails over that which is subject to it. Certainly, in the field of legislation, the phrase has this clear and accepted connotation. When the legislator wishes to convey that that which is now being enacted is not to prevail in circumstances where it conflicts, or is inconsistent or incompatible, with a specified other enactment, it very frequently, if not almost invariably, qualifies such enactment by the method of declaring it to be 'subject to' the other specified one." (emphasis supplied)

Finally, reference may be made to The South India Corporation (P) Ltd. v. The Secretary, Board of Revenue Trivandrum and another AIR 1964 SC 207, where the Indian Supreme Court observed:--

"The words 'subject to other provisions of the Constitution' mean that if there is an irreconcilable conflict between the pre-existing law and provision or provisions of the Constitution the latter shall prevail to the extent of that inconsistency." (para 23)

As these judicial observations indicate, the phrase "subject to" merely makes clear which provision is to prevail in case there is a conflict between two provisions. It does not however, in and of itself necessarily mean that there is or will be a clash or conflict between the dominant (or master) provisions on the one hand, and the subject provisions on the other. And it certainly does not mean that the provision being made "subject to" is to be applied as though every other provision of the statute is to be read into it. In our view, the use of this phrase in section 7 cannot therefore mean that its provisions are to be applied only by, and after, reference to the other provisions of the 2001 Ordinance. Nor does it mean that the other provisions of the 2001 Ordinance are to be read or incorporated into section 7. It is only if there is a conflict between anything else contained in the Ordinance and section 7 that the latter must give way, and the other provision prevail. It is therefore, in principle, wrong to incorporate section 101 into section 7 by placing reliance on the phrase "subject to", or to conclude that the latter section must, on account of these words, be read and construed only with reference to the former. The subjection of section 7 to "this Ordinance" would only apply if there were a conflict between section 101 on the one hand and section 7 on the other. If there is no conflict, then "the phrase does nothing".

19.In order to determine whether there is any conflict between section 101 and section 7, the proper scope and purpose of the former section has to be understood. In order to do so, we must briefly advert to the general scheme employed by the 2001 Ordinance to bring income to tax. This is, of course, well known. Depending on its nature or character, income is slotted into one of five "heads of income" specified in section 11. More than one head may be applicable to a taxpayer for the same tax year. Income under each head is computed according to the rules applicable to that head, and then added up to give the total income, on which income tax is payable under section 4(1). Now subsection (6) of section 11 states as follows:--

"The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income."

Pakistan sourceincomemeansincomedefinedassuchin section 101. That section lays down, in relation to each head, the rules to be applied for ascertaining whether the income in question is Pakistan-source. Subsection (16) provides that "an amount shall be foreign-source income to the extent to which it is not Pakistan-source income". Thus, the purpose of section 101 is clear: it is to identify and establish what is Pakistan-source income, so that such income can be included under the appropriate head of income, made a part of the total income, and brought to tax. Subsection (3) of this section deals with the Pakistan-source business income of a non-resident, and lays down the rules by which such income is to be determined. Those rules are stated in four clauses, which are clearly graduated, starting from the most definite and evident, i.e., incomeattributabletoapermanentestablishmentinPakistan (clause (a)) and ending at the most uncertain and nebulous, i.e., income attributable to a business connection in Pakistan (clause (d)). The objective behind the exercise is however, the same in all cases: determining Pakistan-source income, because it is only such income of the non-resident that is brought to tax.

20.The foregoing description applies to the general case in the ordinary course, i.e., to a determination of total income, which is brought to tax under subsection (1) of section 4. However, as already noted above, subsections (4) and (5) cater separately for the incomes specified in sections 5 to 7. The classes of income specified therein are "subject to separate taxation" (subsection (4)) and "subject to tax as provided therein" (subsection (5)). Subsection (5) further states that the incomes specified in sections 5 to 7 shall not be "included in the computationoftaxableincomeinaccordancewithsection 8 or section 169, as the case may be". Section 8(a) provides that when an amount is brought to tax under sections 5 to 7 "such amount shall not be chargeable to tax under any head of income in computing the taxable income of the person who derives it for any tax year"-which of course is the whole point of the exercise carried out under section 101. These provisions make clear that the incomes specified in sections 5 to 7 are liable to tax under the 2001 Ordinance in terms as stated only in those sections. It is pertinent to note that section 6 (which is also "subject to this Ordinance") taxes every non-resident person who "receives any Pakistan-source royalty or fee for technical services". Now what constitutes Pakistan- source royalty or fee for technical services is determinedintermsofsubsections(8)and(12) respectivelyof section 101. If learned counsel for the applicants were correct, and the phrase "subject to" automatically incorporated all other provisions of the Ordinance (including section 101) into the section, then there would have been no need to expressly specify in section 6 that the royalty or fee for technical services be Pakistan-source. In our view therefore, section 7 is to be applied as it stands. If there is any conflict between what is contained therein and any other provision of the 2001 Ordinance, the latter will prevail. But other than that, it would be incorrect to incorporate or read other provisions of the Ordinance into the section. There is no conflict between section 101 and section 7 as would bring the opening words of the latter section into operation. Of course, had there been no section 7, the principles of section 101(3) would have had to be applied to determine whether, and if so to what extent, the income of the applicants, whoarenon-resident,wouldbeliabletotaxunder section 4(1). However, for the reasons stated above, there is no need to carry out any such exercise in respect of the income referred to in section 7: such income is liable to tax under the 2001 Ordinance on its own terms and as it stands.

21.The matter can also be viewed from another perspective. If learned counsel for the applicants are correct, and section 101 is applicable to section 7, and by reason thereof, the facts and circumstancesofthepresentcasedonotcome within the ambit of section 7(1)(b), what would be the result? The amounts received by the applicants would not be their Pakistan-source business income by virtue of section 101(3). But equally, the other provisions of section 101 would be applicable. Now there is no dispute that the freight charges were paid by Pakistani buyers. Subsection (14) of section 101 provides as follows:-

"Any amount not mentioned in the preceding subsections shall be Pakistan- source income if it is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person."

This is a new provision: it had no equivalent in the 1979 Ordinance. It will be seen that it applies, inter alia, to any amount "paid by a resident person" regardless of where it is received by the recipient. Clearly, it would apply to the freight charges. Now subsection (14) is in the nature of a residual clause: it applies only if the other, specific subsections do not apply. Any income which comes within its ambit is also liable to be taxed under the 2001 Ordinance. Thus, the resultant position would be that the freight charges would remain liable to tax, only now under section 4(1) rather than under section 7. This may well result in a manifold increase in the tax liability.In our view, an interpretation that may substantially increase the tax burden of the taxpayer is hardly preferable over one that brings him to tax, but for a much lesser amount.

22.In the context of whether the freight charges were "received" or "receivable" in Pakistan, Dr. Ikramul Haq placed reliance on Mahabir Commercial Company Ltd. v. CIT (1972) 86 ITR 417 (Ind. SC). That case did not however, involve a carrier at all. The assessee was an Indian company engaged in the jute trade both in India and Pakistan. It sold certain quantities of jute from Pakistan to Indian buyers, the jute to be delivered to the latter in India. The goods were shipped from Pakistan under bills of lading, and the question was whether the income in respect of such sale had accrued to the assessee in India or abroad (i.e., in Pakistan). As is obvious, this case is quite distinguishable from the case at hand. Learned counsel also relied on Ishikawajma Harima Heavy Industries v. Director of Income Tax, Mumbai (2007) 288 ITR 408 (Ind. SC) to contend that the receipt of the fright charges in Pakistan by the applicants' agents did not constitute receipt by the applicants. His case was that the amounts were received by the applicants only when they was remitted to them by the agents, which was admittedly outside Pakistan. Learned counsel also relied on General Bank of Netherlands and others v. CIT (1991) 63 Tax 149; 1991 PTD 687 (SC) to contend that the law was well settled that income is received on the first occasion when the recipient obtains the funds under his control which, in the applicants' case, occurred outside Pakistan. To take up the latter case first: the facts were that the assessee was a non-resident banking company carrying on banking business in Pakistan. To comply with the requirements of the Banking Companies Ordinance, 1962, it placed certain securities on deposit with the New York branch of the National Bank of Pakistan. On these securities, the assessee earned interest income. When the assessee's income from its banking operations in Pakistan was taxed, the income tax officer also brought the interest income to tax. The assessee contended that since the interest had accrued outside Pakistan, it was not liable to tax in this country. The Department's view was that the interest was taxable because it arose out of a business connection in Pakistan. We have already held that the issue of "business connection", relevant under section 101 for determining Pakistan-source business income of a non-resident, does not apply in relation to section 7, because section 101 is not engaged in respect of the income therein described. Even otherwise the decision relied upon does not apply, because the basis on which the Supreme Court decided the issue was as follows:--

"As mentioned earlier it is the admitted position in these cases that appellants earned income from the securities deposited outside Pakistan and further that the interest income from the securities accrued to the appellants as the owners of the securities in their own right. The interest income on securities also accrued outside Pakistan and was also received outside Pakistan. The fact that the securities themselves were required to be transferred to Pakistan by the appellants as capital assets have no bearing to the fact of accrual of interest income which took place outside Pakistan and was the income of the appellants which accrued to them outside Pakistan. The receipt of the "income" refers to the first occasion when the recipient obtains the money under his own control. Once an amount is received as "income" any remittance thereof to another place does not result in the receipt of "income" in his hand at another place. It is well-settled that the income, profits or gains having once been received by the assessee outside Pakistan would not be chargeable to tax by reason of the moneys having been brought into Pakistan because what is chargeable is the first receipt of the moneys, and not a subsequent dealing by this assessee with the said amount." (page 162; emphasis supplied)

Thus, what the Supreme Court held was that the income arose entirely outside Pakistan from a source or corpus (i.e., the securities deposited) also outside Pakistan. It was therefore not taxable in Pakistan, and the fact that the corpus or even the income itself was subsequently brought into Pakistan did not make it taxable. It is clear that the situation in the cited case was different from the facts and circumstances of the present case.

23.As regards the decision of the Indian Supreme Court, that case arose out of a request for an advance tax ruling. The facts of the case, as formulated for the advance ruling, are somewhat complicated, but for present purposes can be distilled in the following manner. The appellant was a non-resident, which carried on business in India through a permanent establishment. The question was whether certain income, in the earning of which the permanent establishment was not involved, could be taxed in India simply because of the existence of the said establishment. The Indian Supreme Court held that income which arose entirely outside India as a result of the head office's operations was not taxable in India and the mere existence of the permanent establishment did not establish a business connection in regard to this income. Again, the facts of this case are quite different. Learned counsel relied on that portion of the decision where the Indian Supreme Court, while examining, the relevant case-law, referred to its own earlier decision in CIT v. Toshoku Ltd. (1980) 125 ITR 525. In the latter case, the facts were that an Indian company, a dealer in tobacco, made exports to Japan where the tobacco was sold through the non-resident assessee. The latter remitted the entire sale proceeds to India, where the Indian company credited the assessee's account with it with the amount of the commission payable to it. Thereafter, the commission was remitted to the assessee in Japan. The Indian tax authorities sought to tax this amount in India. It was held by the Indian Supreme Court as follows (and this was the passage quoted in the Ishikawajma Harima case (supra) and relied on by learned counsel):--

"...It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance without more only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period." (para 11)

More importantly, the Indian Supreme Court also held in para.13:

"In the instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by Clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the nonresident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the Department."

As is clear, the facts of this case are also distinguishable from the facts and circumstances of the present case.

24.Mr. Jawaid Farooqui, learned counsel for the Department, relied on Macneil and Barry Ltd. v CIT (1970) 22 Tax 8 (SC), Jardine Henderson v. CIT PLD 1960 SC 371 and Octavious Steel and Company Ltd. v CIT 1960 PTD 1 (Dacca HC) in support of his submission that a business connection in Pakistan existed in the facts and circumstances of the case. Since we have already held that section 101 is not engaged and cannot be read into section 7, nor need the latter section be applied only by reference to the former, it is not necessary to consider these decisions in any detail.

25.Mr. MakhdoomAliKhanchallengedtheapplicabilityof section 7(1)(b) from a different perspective. His case was that there was no privity of contract between the Pakistani buyers and the carriers, since the contract of carriage was between the foreign sellers (the shippers) and the carriers. According to him, the Pakistani buyers were only the consignees of the bill of lading, and he placed reliance on section 2 of the Bills of Lading Act, 1856 ("the 1856 Act"). He submitted that it was only the shippers who were liable to the carriers for the freight charges. Thus, the payment of any amount in Pakistan did not amount to any receipt within the meaning of section 7(1)(b), which was accordingly not applicable.

26.We first consider the position under the 1856 Act. Now it is obvious that any bill of lading to which section 2 of the Act applies is also a bill of lading to which section 1 of the Act is applicable. The 1856 Act is based squarely on (indeed, is identical with) the UK Bills of Lading Act, 1855 (since repealed). The latter statute was considered by the House of Lords in Effort Shipping Company Limited v. Linden Management SA and others (1998) UKHL 1; (1998) 1 All ER 495. In his leading speech, Lord Lloyd of Berwick said as follows in relation to the UK statute:--

"...itisnecessarytosetoutverbatimthepreambleandsections 1 and 2 of the Bills of Lading Act 1855.

'Whereas by the custom of merchants a bill of lading of goods being transferable by endorsement the property in the goods may thereby pass to the endorsee, but nevertheless all rights in respect of the contract contained in the bill of lading continue in the original shipper or owner, and it is expedient that such rights should pass with the property.

(1)Every consignee of goods named in a bill of lading, and every endorsee of a bill of lading to whom the property in the goods therein mentioned shall pass, upon or by reason of such consignment or endorsement, shall have transferred to and vested in him all rights of suit, and be subject to the same liabilities in respect of such goods as if the contract contained in the bill of lading had been made with himself.

(2)Nothing herein contained shall prejudice or affect any right of stoppage in transitu, or any right to claim freight against the original shipper or owner, or any liability of the consignee or endorsee by reason or in consequence of his being such consignee or endorsee, or of his receipt of the goods by reason or in consequence of such consignment or endorsement.'

The mischief to which the Act of 1855 was directed appears clearly enough from the preamble. A bill of lading is both a document of title and evidence of the contract of carriage. Whereas property in the goods will pass by virtue of the consignment or endorsement of the bill of lading, rights under the contract of carriage could not be enforced by the receiver of the goods by reason of the peculiar rule of English law that prohibits jus quaesitum tertio. Cases in the early part of the 19th century illustrate the inconvenience of the rule and the efforts of the courts to get round it. In the end it proved necessary for Parliament to takea hand.

It will be noticed that whereas the preamble refers, as one would expect, to the passing of rights under the contract, it says nothing about the passing of liabilities. One finds the same contrast in section 1. It provides for all rights of suit to be 'transferred to and vested in' the holder of the bill of lading; it does not provide for the transfer of liabilities. Instead it provides for the holder of the bill of lading to be subject to the same liabilities as the shipper. It seems clear that this difference of language was intentional. Whereas a statutory assignment of rights under the bill of lading contract would represent but a modest step forward in pursuit of commercial convenience, a statutory novation, depriving the carriers of their rights against the shippers, and substituting rights against an unknown receiver, would have represented a much more radical change in the established course of business.

The legislative solution was ingenious. Whereas the rights under the contract of carriage were to be transferred, the liabilities were not. The shippers were to remain liable, but the holder of the bill of lading was to come under the same liability as the shippers. His liability was to be by way of addition, not substitution.

Mr. Johnson [counsel for the shippers] relied on the concluding words of the section 'as if the contract contained in the bill of lading had been made with himself.' He argued that by these words Parliament intended that the name of the shippers should be deleted as the shippers named in the bill of lading, and the name of the receivers substituted. I do not agree. In my opinion the words serve only to underline the legislative purpose, namely, to create an exception to the rule that only the parties can sue on a contract.

Much the strongest of Mr. Johnson's arguments depended on the language of section 2. Why, he asked, should Parliament expressly preserve the carrier's right to claim freight against the original shipper, if the shipper was to remain subject to all his original liabilities in any event? There is no very obvious answer to this question, other than that the words were inserted out of an abundance of caution. No doubt also the right to claim freight would be the right which would most readily spring to mind in the context of a shipper's liability." (emphasis supplied)

The reason for enacting the statute was that while the property in the goods represented by the bill of lading could be transferred, the rights and liabilities of the contract of carriage itself were not, and this caused great inconvenience in international trade. As Lord Lloyd explained, the legislature came up with an ingenious solution. Section 1 provided that all the rights in the bill of lading passed to the consignee (or final endorsee holding the bill). However, as regards the liabilities, the section put the consignee in the same position as the shipper, i.e., the shipper continued to remain liable, and in addition thereto, the consignee also became liable. Thus, the effect of section 1, insofar as is presently relevant, is that both the foreign shipper and the Pakistani buyer (the consignee) are liable on the contract of carriage. The carrier can hold eithertheshipperortheconsigneeliable for the freight charges. Section 1 directly establishes a nexus between the carrier and the consignee, and as noted by Lord Lloyd, creates "an exception to the rule that only the parties can sue on a contract". It may be that the carrier, for his own convenience, would usually sue the shipper for the freight charges if they remain unpaid. But that has nothing to do with the legal liability of the consignee to the carrier, which is clearly established by section 1. It is also interesting to note as regards section 2 that the learned Law Lord was himself somewhat at a loss to explain its need in view of section 1, and was content to observe merely that it must have been put in by way of abundant caution.

27.It must also, more generally, be kept in mind that we are here concerned with goods sold and shipped under FOB contracts. The relationship between the various parties to such a transaction is stated as follows in a standard treatise, Goode on Commercial Law, (4th Ed., 2010):--

The parties to a contract of carriage by sea are known respectively as the shipper and the carrier. The shipper is the person to whom the carrier undertakes the duty of transporting the goods. He may be the seller or buyer under a contract of sale, a freight forwarder or any other consignor.* His identity is prima facie established by the bill of lading, though it does not necessarily follow that the person named in the `shipper' box is the true contracting party, for it may be shown that he acted as agent, as where the seller acts as agent of the buyer under an extended f.o.b. contract or a freight forwarder as agent of the seller. (pg. 1149; emphasis supplied)

In a footnote to this passage (here marked with an asterisk), it is stated as follows: "The consignor and the shipper are not necessarily the same. For example, where a seller has goods shipped under a strict f.o.b. contract, the seller is the consignor while the buyer is the shipper". In East West Corporation v. Dampskibsselskabet AF, 1912, Aktieselskabet (2003) EWCA Civ 83, (2003) 2 All ER 700, Mance, L.T., (as he then was) referred to a dictum of Lord Hobhouse in Borealis AB v. Stargas Ltd. (The Berge Sisar) (2001) UKHL 17, (2001) 2 All ER 193, and observed:

"This was said in a context where the named consignees were FOB buyers.... In such a context, a shipper may readily, indeed normally, be regarded as acting as agent for a named consignee in making the relevant bill of lading contract: cf Albacruz v. Albazero (The Albazero) [1977] AC 774, 786A-B, per Brandon J. The goods will then have been from the outset bailed by the consignee (acting through the agency of the consignor) to the carrier." (para 34, emphasis supplied)

As these authorities show, in FOB contracts, it is invariably the buyer (here the Pakistani importer) who will be regarded as party to the bill of lading. Thus, on any view, there is a relationship or nexus (even extending to direct privity) between the buyer and the carrier, and the contrary view urged by learned counsel cannot, with respect, be accepted.

28.There is yet another aspect of the matter. Learned counsel for the applicants emphasized the nature of freight charges, and to the well established principle that a carrier was entitled to payment thereof on the carriage of the goods. It suffices to refer, to the following passage from Carriage of Goods by Sea by John F. Wilson (5th ed., 2004), relied on by Mr. Aga Faquir Mohammad:--

"In the absence of agreement to the contrary, the common law presumes that freight is payable only on delivery of goods to the consignee at the port of discharge. Payment of freight and delivery of goods are said to be concurrent conditions, in other words the carrier cannot demand payment of freight unless he is willing, and able to deliver the goods at the place agreed."

It is also well established that the carrier has a lien on the goods shipped forfreight charges, and is entitled to hold them till he is paid. Now it is nobody's case in the present proceedings that the goods are not handed over to the Pakistani buyer on his paying the freight charges to the carrier's agent or representative. It is not the situation that despite such payment, the delivery of the goods is postponed till after remittance of the amount by the agent/representative to the carrier and receipt by the latter of the amount abroad. In the normal course, the goods are released as soon as the payment is made in Pakistan. In our view, this clearly and decisively establishes that the freight charges have been received by the carriers. Had that not been the situation, the goods would not be released to the Pakistani buyers. Mr. Makhdoom Ali Khan referred to a number of cases to establish that the carrier's "agent"/ representative was not an agent in law, and hence receipt by him meant nothing. We must, with respect, disagree. It is not necessary to consider those cases in detail. Even if, as learned counsel contended, the carrier's agent/representative had nothing to do with the contract of carriage itself, that does not mean that he was not (or could not be) the carrier's agent insofar as receipt of the freight charges is concerned. It will be recalled that section 182 of the Contract Act, 1872 defines an agent, inter alia, simply as "a person employed to do any act for another" and section 185 provides that consideration is not necessary to create an agency. In any case, what section 7(1)(b) is concerned with is an amount (i.e., the freight charges) "received or receivable in Pakistan". When the amount is so received or receivable must take colour from the context in which the receipt occurs, which in the present case is the international carriage of goods by sea, in which the carrier in the normal course would hand over the goods only on receipt of the freight charges. The release of the goods to the Pakistani buyers on payment of the freight charges by the latter to the carriers' agents/representatives clearly establishes that the freight charges were received in Pakistan within the meaning of section 7(1)(b) (or were receivable here, in the occasional case in which the goods may have been released but payment of the freight charges deferred).

29.Accordingly, by reason of the foregoing analysis, we are firmly of the view that section 7(1)(b) is applicable in the facts and circumstances of the present case, and to the freight charges received by the carriers. It necessarily follows that in our view, the position taken by C.B.R. in its Circular Letter referred to supra cannot apply in relation to section 7(1)(b). Whether it even applied to section 80 of the 1979 Ordinance, with reference to which the Circular Letter was issued, is not something which we need to address in these References, although we must note that we have strong doubts even with regard thereto. In any case, it is well settled that any interpretation of income tax law by C.B.R. is not binding even on the tax authorities (which is the most that the Circular Letter could amount to), and we therefore do not need to spend any more time on this issue.

30.Since section 7(1)(b) is applicable, we must now turn to consider the second main question raised in these References, namely the carriers' contention that they are in any case not liable to tax in Pakistan by reason of the double taxation agreements. As already noted, this question will have to be addressed in two parts, one in relation to the Danish and French DTAs, and the other in relation to the Japanese DTA. However, before examining the relevant provisions of the DTAs in detail, it is important to consider, in general, the nature of such agreements, and the principles involved in interpreting and applying them.

31.Double taxation has been authoritatively described as follows:--

"International juridical double taxation can be generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods. Its harmful effects on the exchange of goods and services and movements of capital, technology and persons are so well known that it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries." (OECD, Model Tax Convention on Income and on Capital, condensed version, July 2008)

It is in order to avoid double taxation and its harmful effects that states enter into double taxation agreements (DTAs). The nature of such agreements has been explained thus:--

"Double tax conventions are international agreements that give rise to international obligations between sovereign states. The interpretation and application of such conventions is governed by the general rules of international public law (whether customary or as codified in the Vienna Convention) in the same way as any other political or economic treaty. However, double tax treaties differ from other economic or political treaties in that they are intended to operate within the domestic legal systems of the contractingstates.Inthissense,adoubletaxconvention hasadualcharacterasaninternationalagreementthat bindstwonationstatesandasdomesticlawthatbinds subjects within its scope." (Nabil Orow, Comparative Approaches To The Interpretation Of Double Tax Conventions, (2005) 26 Adelaide Law Review, pp. 73-102, available at: <http://www.austlii.edu.au/au/journals/AdelLawRw/2005/4.pdf>)

Thus, the first and foremost point to keep in mind regarding DTAs is that they 'are international agreements or treaties and are to be interpreted in the same manner as any other treaty. What is the correct approach to take in this regard? The question is of particular importance in the Pakistani context, where the well-settled rules of interpretation applicable to fiscal statutes require the courts (especially in relation to charging provisions) to take a strict approach, applying the words of the statute literally, and without taking into consideration the intent behind the legislation. This may be regarded as the basic rule. It is of course well settled that if two reasonable views are possible, the one favouring the taxpayer will be adopted, but this rule is itself an outcome of the basic rule. Exemption from taxation is also strictly construed in the sense that the onus lies on the taxpayer to show that he is exempt, and if two reasonable interpretations are possible, the one favouring the Revenue will be adopted. As will be seen, these are not however, the principles which apply in relation to an international treaty like a DTA. It would therefore, in principle, be wrong to interpret a DTA as though it were simply a fiscal statute.

32.International judicial consensus is clear that DTAs are to be construed broadly and liberally. Before citing some of the relevant authorities, it would be appropriate to set them in the proper context, for which purpose the following extracts from Nabil Orow, op. cit., can be usefully kept in mind:--

"Although double tax conventions are incorporated into domestic law, their interpretation must be cognisant of their essentially international character and their contractual character. In this sense the process of treaty interpretation is not concerned with the search for meaning consistent with the objects and purposes of a particular sovereign/legislature, but rather with the search for meaning that is consistent with the mutual intent and expectations of the sovereign contracting parties. The relevant mutual intent and expectations, once identified, may then be imputed to the legislature whose statutory instrument is under consideration by its national courts.

In an attempt to reconcile diverse legal and taxation systems, differences in language and legal conceptions, the text of double tax conventions is often expressed in relatively general terms.... The generality of the language used to express the intent of the treaty parties permits greater flexibility in the operation of double tax conventions, and leaves scope for discretion to each party with respect to the specific steps necessary to implement their respective obligations.

General expressions of principles by their nature rely on judicial interpretation to define their content and focus their legal scope and practical application. In discharging that function, it is critical that the respective national courts adopt broad and flexible principles of interpretation unconstrained by technical or rigid domestic rules and precedents." (pp. 80-81; emphasis supplied)

33.In Crown Forest Industries Ltd. v. Canada (1995) 2 SCR 802, the Canadian Supreme Court cited with approval the following passage from a decision of the Federal Court of Canada:--

"Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated in so far as the particular item under consideration is concerned." (para.43; emphasis in original)

In McDermott Industries (Aust) Ply Ltd. v. Commissioner of Taxation (2005) FCAFC 67, the Federal Court of Australia held as follows:--

"37. Double tax treaties are bilateral treaties entered into between two states. As such they are to be interpreted in accordance with the requirements of the Vienna Convention on the Law of Treaties ... ('the Convention') and in particular Article 31 of the Convention.

38. The application of the Convention has been discussed by McHugh J in Applicant A v. Minister for Immigration and Ethnic Affairs [1997] HCA 4; (1997) 190 CLR 225 and in Thiel v. Commissioner of Taxation (1990) HCA 37; (1990) 171CLR 338, the latter case being concerned with the interpretation of the double taxable agreement between Australia and Switzerland. The leading authority in this Court on interpretation of double taxation agreements is Lamesa [(1997) FCA 785). It isunnecessary here, to set out again what is there said. The following principles can be said to be applicable:--

Regard should be had to the 'four corners of the actual text'. The text must be given primacy in the interpretation process. The ordinary meaning of the words used are presumed to be 'the authentic representation of the parties' intentions': Applicant A at 252-3.

The courts must, however, in addition to having regard to the text, have regard as well to the context, object and purpose of the treaty provisions. The approach to interpretation involves a holistic approach.

International agreements should be interpreted 'liberally'.

Treaties often fail to demonstrate the precision of domestic legislation and should thus not be applied with 'taut logical precision'."

Finally, in Union of India and another v. Azadi Bachao Andolan and another (2003) 273 ITR 706, the Indian Supreme Court, while interpreting the provisions of the DTA between India and Mauritius, observed (in the section of the judgment titled `Interpretation of Treaties') as follows:--

"120. The principles adopted in interpretation of treaties are not the same as those in interpretation of statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes:

'With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for very good reason. To get agreement, politic uncertainty is called for.

...The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery CJ that the words are to be given their general meaning, general to lawyer and layman alike the meaning of the diplomat rather thanthelawyer.' (FrancisBennion, Statutory Interpretation, Pg. 461 (Butterworths, 1992 (2" Ed.))

121. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief Pg.4 (London Sweet and Maxwell, 1985), points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions."

34.In our view, the foregoing extracts lay down the relevant principles and the correct approach to be taken while interpreting and applying a double taxation agreement. Two more points need to be made. Firstly, the Organization for Economic Cooperation and Development (OECD) has, since 1963, developed a model double taxation treaty or conviction ("the OECD Model"), which has been regularly updated and suitable redrafted since since its first publication. Since 1980, the United Nations has also published a model double taxation treaty ("the UN Model"), which is designed specifically with developing countries in mind. The UN Model is based largely on the OECD Model. Along with the OECD Model, the OECD also publishes (and regularly updates) a commentary ("the OECD Commentary"), which is regarded as an authoritative guide to the model (the extract quoted in para 31 supra is taken from the Commentary). The United Nations has also published a commentary on the UN Model ("the UN Commentary") which relies heavily on the OECD Commentary. In at least some jurisdictions, the courts have specifically held that the OECD Commentary may be referred to while interpreting DTAs which are based on the OECD Model. (See Nabil Orow, op. cit., pp. 94-95, and especially Thiel v Federal Commissioner of Taxation (1990) HCA 37; (1990) 171 CLR 338, referred to therein. See also, e.g., National Westminster Bank, PLC v. United States (2008) 512 F.3d 1347 (US Court of Appeals, Federal Circuit), where an earlier version of the Commentary was considered and relied on.) Obviously, this also applies in the case of those DTAs which are based on the UN Model. Almost all modern treaties follow these models, and this is true of the Danish DTA and the French DTA. In interpreting and applying these DTAs therefore, reference can usefully be made to the OECD and UN Models and the commentaries on these models. (The UN Commentary can be found at:http://unpan1.un.org/intradoc/groups/public/documents/un/unpan002084. pdf )

35.Secondly, it must also be noted that while the problem of double taxation can be resolved in different ways, two methods are used in particular. One method is for one of the Contracting States to agree in relation to a particular type or class of income (or the income of a particular type or class of person) that it will not tax it at all, and that it is the other Contracting State which will have the sole or exclusive taxing power. Thus, the former State derogates from its sovereign right of taxation. The other method is that of tax sharing. The DTA establishes "an agreed framework for the distribution of taxation revenue between the contracting parties" (Nabil Orow, op. cit., pg 89). As Lord Radcliffe put it in Ostime v. Australian Mutual Provident Society (1960) AC 459; (1960) 39 ITR 210:

"The aim is to provide by treaty for the tax claims of two governments both legitimately interested in taxing a particular source of income either by resigning to one of the two the whole claim or else by prescribing the basis on which the tax claim is to be shared between them." (pg 219 of ITR)

In our view, when interpreting and applying a DTA it is necessary and important to keep in mind which method has been adopted in relation to the income under consideration. Section 107 of the 2001 Ordinance provides the statutory gateway through which a DTA is given effect in the municipal law. Subsection (2) provides that a duly notified DTA has overriding effect insofar as its terms deal with or provide for any of the matters enumerated in clauses (a) to (e) thereof. Now it is normally said that in case there is a conflict between a provision of a DTA and a section of the 2001 Ordinance, it is the former that will prevail. In our view, this formulation is not perhaps fully reflective of how a DTA operates. The matter is not so much of resolving a conflict between two clashing provisions, but of a harmonization of tax treatment. Income is (or is potentially) taxable in two different jurisdictions. The DTA seeks to remove this disharmony by either removing the income altogether from one of the tax jurisdictions, or by recognizing that the tax is to be shared between the two jurisdictions, and making suitable provision for tax allowances or credits. The answer to the question whether, in the face of a DTA, the relevant section of the 2001 Ordinance ceases to apply entirely, or should apply in a limited manner and/or have a narrower scope, will therefore depend, at least in part, on what method is used in the DTA to deal with the problem of double taxation.

36.With the foregoing principles and analysis in mind, we now turn to consider the specific provisions of the DTAs. The Danish DTA (reported at PTCL 1988 St. 181) was notified in 1987. It was subsequently modified by a Protocol (duly notified in 2002 and reported at PTCL 2002 St. 316) by which certain provisions, including Article 8, were substituted/amended. The French DTA (reported at1997 PTD (Statute) 33; 74 Tax 343) was notified in 1996. The Japanese DTA (reported at 1959 PTD 126 (Statues)) was notified in 1959. Although it was subsequently modified by a Protocol notified in 1961, the latter is not relevant for present purposes.

37.For reasons already stated, we first take up the Danish and French DTAs together. The first point to note is that these DTAs are clearly and obviously based on the OECD Model. Article 8, which is reliedonbytheApplicants, comprisesoffourparagraphs, of which only paragraphs 1 and 3 are presently relevant. These provide as follows:--

(1)Profits from the operation of aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

(3)Profits from the operation of ships in international traffic may be taxed in the Contracting State in which the effective management of the enterprise is situated. However, such profits derived from sources within the other Contracting State may also be taxed in that other State in accordance with its domestic law, provided that the tax so charged in the other State shall be reduced by 50 per cent.

The only difference between the Danish and French DTAs is that the French DTA does not have the proviso contained in the second sentence of paragraph 3. The term "international traffic" is defined as follows in Article 3(1)(g):--

"The term 'international traffic' means any transport by a ship or aircraft operated by an enterprise that has its place of effective management in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State."

The OECD and the UN Models define international traffic in precisely the same terms. Article 8 of the OECD Model provides in paragraph 1 as follows:--

"Profits from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated."

Article 8 in the UN Model has two alternatives. Alternative A is the same as the OECD Model. Alternative B is somewhat different and reference may be made to paragraphs 1 and 2:--

"(1)Profits from the operation of aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

(2)Profits from the operation of ships in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated unless the shipping activities arising from such operation in the other Contracting State are more than casual. If such activities are more than casual, such profits may be taxed in that other State. The profits to be taxed in that other State shall be determined on the basis of an appropriate allocation of the over-all net profits derived by the enterprise from its shipping operations. The tax computed in accordance with such allocation shall then be reduced by -- per cent. (The percentage is to be established through bilateral negotiations)."

38.Since all the relevant provisions are concerned with profits obtained from the operation of aircraft and ships "in international traffic", it will be appropriate to start by considering the meaning of this expression. It is clear that the expression is defined in broad and wide terms. Any transport is international traffic if carried out by an enterprise which has its place of effective management in a Contracting State. The only exception is if "the ship or aircraft is operated solely between places in the other Contracting State". This limited exception would clearly apply only in restricted circumstances. This understanding is reflected in the OECD Commentary and the UN Commentary. The latter, relying on the former, states as follows:--

"As also noted in the OECD Commentary, the definition of the term 'international traffic' is 'broader than the term normally signifies [in order] to preserve for the State of the place of effective management the right to tax purely domestic traffic as well as international traffic between third States, and to allow the other Contracting State to tax traffic solely within its borders'." (pg. 55)

39.Article 8 of the OECD Model leaves no doubt that in terms thereof, profits from operating ships and aircraft in international traffic are taxable only by and in the Contracting State in which the enterprise has its place of effective management. It is to be noted that the Article uses strong mandatory language ("shall" and "only"). Thus, the other Contracting State has totally renounced its right to tax such profits. It is to be noted that this renunciation means that even if the Contracting State in which the enterprise has its place of effective management chooses not to tax the enterprise's profits at all, the other Contracting State can do nothing. The renunciation is absolute and not conditional or contingent. This is not necessarily as one-sided as it may seem, at least in relation to aircraft. To take an example from the French DTA, if Pakistan has totally given up its right to tax the profits earned by Air France from international traffic, France has equally totally given up its right to tax the profitsearnedbyPakistanInternationalAirlinesfromsuch traffic.

40.Both the Danish DTA and the French DTA (as also Alternative B of the UN Model) employ the foregoing language in relation to aircraft. In respect of profits earned by enterprises operating aircraft in international traffic, and having their effective place of management in Denmark or France, there can therefore be no doubt that Pakistan has absolutely renounced its right of taxation (this may be subject to a limited exception in the case of the Danish DTA, but that is not presently relevant). The position in relation to ships is however, markedly different. The OECD Model of course, places aircraft and ships in precisely the same position. Not so the Danish and the French DTAs. There is a difference in the language used. The question therefore is, what is the position in relation to profits obtained from operating ships in internationaltraffic?What,inotherwords, isintendedbythe languageusedinArticle8(3)?Itistobenotedthat the Contracting States could have used alternative language. An example of such language is, in fact, to be found in the DTAs entered into by India with Denmark and France ("the Indian DTAs"). Article 8 of the Indian DTAs deals with aircraft and uses the same mandatory language to be found in the OECD Model, and followed in the Danish and French DTAs. Article 9 deals with ships, and provides in material part as follows:--

"Article 9: Shipping.---1. Profits derived from the operation of ships in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

(2)Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State from which they are derived provided the tax so charged shall not exceed:

(a)during the first five fiscal years after the entry into force of this Convention, 50 per cent, and

(b)during the subsequent five fiscal years, 25 per cent, of the tax otherwise imposed by the internal law of that Contracting State. Subsequently, only the provisions of paragraph 1 shall be applicable." (Emphasis supplied)

(The Indian DTAs can be found at: <http://www.caalley.com/ acts_dtaa.html>)

Two points may be noted about the Indian version. Firstly, paragraph 1 of Article 9 uses the same mandatory language in relation to ships as used in relation to aircraft. Although paragraph 2 deploys a non obstante clause, it is clear that the intention is only to create a limited exception in this paragraph to the basic rule laid down in paragraph 1. Secondly, this exception is limited even as to time: after 10 years, only paragraph 1 is to apply.

41.Does the language used in Article 8(3) of the Danish and French DTAs essentially have the same meaning as that used, e.g., in the Indian DTAs or Alternative B of the UN Model? In other words, is the intention for Pakistan to renounce taxing rights in relation also to profits obtained from ships operating in international traffic, leaving only a limited exception in respect of "profits derived from sources within" Pakistan? Or is Article 8(3) intended to have a somewhat different meaning? The principles applicable to the interpretation of DTAs as international treaties have been stated in the paras supra. Keeping those principles in mind, we are of the view that the intention is indeed, somewhat different. Had it been the intent to, essentially, apply the same rule as applies in relation to aircraft, the Danish and French DTAs could have used language similar to the Indian DTAs, or even Alternative B of the UN Model. The language used is however, rather different, and can only be described as milder and softer, eschewing both "shall" and "only" and using the word "may" in relation to both the Contracting States. The word "may" is generally recognized to be directory or permissive in nature. The difference can perhaps be best brought out in the shape of the following propositions:--

(i)If it is clear from the DTA that there has been a renunciation of the taxing right, then the bar created by the treaty is absolute. This is of course, the situation in a DTA using the language of Article 8 of the OECD Model. In this situation, no matter how widely worded may be the relevant provision in the tax law of the State renouncing the taxing right, the income cannot be brought to tax in the latter jurisdiction.

(ii)The DTA may use language as aforesaid, but create a limited exception in favour of the State renouncing the taxing right. This would be the situation in a DTA using the language of Alternative B of the UN Model, or language similar to that employed in Article 9 of the Indian DTAs. In such a situation, if two reasonable interpretations of the DTA are possible, or there is any ambiguity, doubt or obscurity in the exception or its interpretation, the matter is to be resolved against the State renouncing the taxing right. The relevant provision in its tax law would therefore be regarded as inapplicable to the income in question.

(iii)The DTA may use language similar to that in Article 8(3) of the Danish and French DTAs, i.e., use directory (and not mandatory) words, there being no express renunciation of the taxing right. In such a situation, if two reasonable interpretations of the DTA are possible, or there is any ambiguity, doubt or obscurity in the relevant article of the treaty or its interpretation, the matter is to be resolved in favour of both the States having the taxing right, and the relevant provisions in their respective tax laws are to be applied accordingly.

42.In the present case, it is Denmark and France who have the taxing right in terms of the first sentence of Article 8(3), and Pakistan which has the taxing right in terms of the second sentence. There is no express renunciation of the taxing right by Pakistan in relation to profits earned from ships operated in international traffic. If Article 8(3) must be regarded as open to only one interpretation, then it would be a differentmatter. However, iftworeasonableinterpretationsof Article 8(3) are possible, or if there is any doubt or ambiguity in its interpretation (especially in relation to the expression "profits derived from sources within the other Contracting State") that should be resolved in favour of Pakistan having the right to tax. The question therefore is, can the freight charges received or receivable by the carriers from Pakistani buyers under FOB contracts for inbound cargo be regarded as resulting in profits "from sources within" Pakistan? Is the interpretation of Article 8(3) so clear and unambiguous that the only answer to this question must be in the negative? Or are two interpretations reasonably possible? In our view, Article 8(3), on its proper analysis, must be regarded as at least reasonably open to the interpretation that profits earned by carriers on inbound cargo on account of freight charges received in Pakistan arise "from sources within" this country. It is a recognized interpretation that the "source State" is the State in which payment is made, and generally such State is regarded as entitled to tax such payments. Pakistan is clearly the "source State" in the facts and circumstances of the present case since payments are made here by the Pakistani buyers. Thus, the amounts received or receivable in Pakistan by the carriers are "profits derived from sources within" Pakistan and hence can be reasonably regarded as within the taxing right of this country as contemplated by Article 8(3). It will be recalled that a carrier is entitled to the freight charges only if the cargo is actually carried to the port of destination. That port, in the present context, must always be a Pakistani port. Thus, both the terminus of the event by which a carrier earns income (the carriage of goods) and the actual payment which constitutes the (gross) income are within Pakistan. In our view, the profits of the carrier can, in such a situation, be regarded as "derived from sources within" Pakistan. Furthermore, any doubt or ambiguity in the interpretation of Article 8(3) must also be resolved in Pakistan's favourforreasonsasaforesaid. Itfollows that there is nothing in Article 8(3) that would bar the application of section 7(1)(b) of the 2001 Ordinance to freight charges received or receivable by carriers in Pakistan. (We may also note that we need to interpret and apply the expression "profits derived from sources within the other Contracting State" only to the extent required for purposes of the present proceedings, and we do not regard the foregoing observations as necessarily exhaustive of the meaning of this expression.)

43.Both learned counsel for the Applicants, and learned counsel for the Department, also referred to Article 3(2) of the Danish and French DTAs. Paragraph 1 of Article 3 contains specific definitions of various words and expressions used in the DTAs. Paragraph 2 provides as follows:--

"As regards the application of the Convention by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has under the law of that State for the purposes of the taxes to which the Convention applies."

Learned counsel for the Applicants, in particular, submitted that by reason of this paragraph, the expression "profits derived from sources within" Pakistan should have the same meaning as "Pakistan-source income" as used in the 2001 Ordinance. Their submission was that when so interpreted and applied, the expression used in the DTAs could mean only the Pakistan-source business income of a non-resident and thus unless any of the clauses of subsection (3) of section 101 were found to apply, there could be no "profits derived from sources within Pakistan". In the facts and circumstances of the present case there was neither a permanent establishment nor a business connection, and hence no "profits derived from sources within Pakistan".

44.Article 3(2) applies only if the context does not otherwise require. If the expression "profits derived from sources within" Pakistan used in Article 8(3) is to be equated with "Pakistan-source income" as used in section 101 of the 2001 Ordinance, the result would be that the existence of a permanent establishment would be crucial for the application of Article 8(3). The reason for this is that three of the four clauses of section 101(3) are premised on the existence of such an establishment. But insofar as the DTAs are concerned, profits earned through a permanent establishment are dealt with separately in Article 7 (under the rubric "Business Profits"). Paragraph 7 of this Article specifically provides as follows:--

"Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article."

Article 7(7) corresponds to the same-numbered provision in the OECD Model, and Article 7(6) of the UN Model. The UN Commentary, relying on the OECD Commentary, states as follows on this paragraph:-

"It has seemed desirable, however, to lay down a rule of interpretation in order to clarify the field of application of the present Article in relation to the other Articles dealing with a specific category of income. In conformity with the practice generallyadheredtoinexistingbilateralconventions, paragraph 7 gives first preference to the special Articles on dividends, interest etc. It follows from the rule that this article will be applicable to industrial and commercial income which does not belong tocategories of income covered by the special articles...." (pg. 126; emphasis supplied)

In our view, if the submissions of learned counsel for the Applicantsareaccepted, thentheresultwould, ineffect, be that Article 7 would become applicable to Article 8(3) which is clearly contrary to the proper meaning and interpretation of the DTA. Insofar as the fourth clause of section 101(3), relating to business connection, is concerned, that also must be regarded as inapplicable. The reason is that either the expression "profits derived from sources within" Pakistan is to be equated with section 101 or it is not. Since the substantial part of section 101(3) cannot be applied, the remaining clause must be regarded as equally inapplicable. Finally, it is to be noted that if at all the expression "profits derived from sources within" Pakistan is to be equated with a term defined in the 2001 Ordinance, that must be "Pakistan-source income" taken as a whole, i.e., with section 101 as a whole, and not any particular subsection thereof As already noted above, subsection (14) of section 101 applies to any amount paid by a resident person and makes it a Pakistan- source income. In other words, such payment is as much Pakistan-source income as any amount coming within the scope of subsection (3), and hence would be equally part of "profits derived from sources within" Pakistan. On any view of the matter therefore, the amounts received by the carriers in Pakistan in the present context, would be regarded as coming within the meaning of the second sentence of Article 8(3).

45.Accordingly, in light of the foregoing discussion, we are of the view that there is nothing in Article 8(3) of the Danish or French DTAs which bars the application of section 7(1)(b) to the facts and circumstances of those Applicants who claim under either of these DTAs. It follows that those carriers who claim under the aforesaid DTAs are liable to pay tax in terms as provided in section 7(1)(b) read with section 143 of the 2001 Ordinance.

46.We now turn to consider the Japanese DTA. Paragraph (1) of Article IIIprovides as follows:--

"The industrial or commercial profits of an enterprise of one of the contracting States shall not be subject to the tax in the other contracting State unless the enterprise has a permanent establishment situated in that other contracting State. If it has such permanent establishment, the tax may be imposed by that other contracting State upon the entire income of that enterprise from sources within that other contracting State."

Article 2(1)(1) is as follows:

"The term "industrial or commercial profits" includes manufacturing, mercantile, fishing, mining financial and insurance profits, but does not include income in the form of dividends, interest, rents or royalties, or remuneration for personal services."

Article 2(1)(m) contains a definition of "permanent establishment".

47.Keeping in mind the principles applicable to the interpretation of DTAs as international treaties, it is clear that the intent of the contracting States is that each has renounced the right to tax the "industrial or commercial profits" of the enterprises of the other State. It is to be noted that the renunciation is cast in mandatory terms ("shall"). The renunciation is not however absolute. If the enterprise of a contracting State has a permanent establishment in the other (taxing) State, then the latter may tax the "industrial or commercial profits" of the enterprise to the extent that the said profits are obtained from "sources within" the taxing State. In our view, the proper application of a DTA provision such as Article III(1) would be that if two reasonable interpretations of the DTA are possible, or there is any ambiguity or doubt as to whether the enterprise has a permanent establishment in the taxing State, or whether the income in question is obtained from "sources within" the taxing State, the matter is to be resolved against the taxing State. The reason is that both the contracting States have essentially renounced taxing rights in respect of the enterprises of the other State, and the right to tax the enterprise on account of its "permanent establishment" is an exception to this general rule. Insofar as the term "industrial or commercial profits" is concerned, we are of the view that this must be construed broadly and not narrowly. This is because firstly, both the contracting States have renounced the taxing right in respect of such profits, and giving this term a narrow meaning would be contrary to, and may well defeat, the express intent of the States. Secondly, the definition uses the word "includes", and that is also a clear indication that the definition is not intended to be exhaustive or narrow. Thirdly, the definition expressly includes "mercantile" profits. In our view, this term is to be construed broadly, and clearly includes profits from commercial activities. Profits earned from international shipping business would come within the scope of this term. Thus, the profits earned by carriers in the facts and circumstances of the present case would come within the meaning of "industrial or commercial profits" and hence be within the scope of Article III(1).

48.Mr. Aga Faquir Muhammad relied on certain decisions of this Court, being Mountain States Mineral Enterprise Inc. v CIT (Appeals) 2008 PTD 1087, CIT v. Unilever, PLC 2002 PTD 44 and Raleigh Investment Co. Ltd. v. CIT 1983 PTD 126 in support of his contention that section 7(1)(b) was not applicable. He also relied on Ostime v. Australian Mutual Provident Society [1960] AC 459; (1960) 39 ITR 210, Arabian Express Line Ltd. v. Union of India 212 ITR 31; 1997 PTD 833 and CIT v. Visakapatnam Port Trust [1983] 144 ITR 146. In all these cases, the courts were concerned with DTAs which had provisions in pari materia the Japanese DTA. In the Mountain States case (supra), this Court observed as follows:--

"We are of the opinion that the amount received by the applicant falls 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...." (para 11, pg 1093)

The Court was referred to, and expressly applied, the earlier decision in the Unilever case (supra), where it was held as follows:--

"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." (para 11, pg. 52)

49.There is one point in the present context that needs clarification sinceitmayotherwisecausesomeconfusion. Asnotedabove, Article III(1) allows the taxing State to tax the profits or income if the enterprise of the other State has a permanent establishment in the taxing State. Were a carrier to have such an establishment in Pakistan, then the carrier would be liable in terms of section 7(1)(b). In the earlier part of this judgment on the other hand, we have held that section 7(1)(b) must be applied in its own terms, and not with reference to any permanent establishment or business connection. This apparent discrepancy might cause some confusion, but it is easily explained. In the earlier part of the judgment, the question of the permanent establishment was considered with reference to section 101(3), and we concluded that it did not arise because section 101 was not applicable. In relation to the Japanese DTA, the question of permanent establishment would arise from the DTA itself. Since section 7 is made subject to the Ordinance, and section 107 in any case contains a non obstante clause, it is the latter which must prevail, and it is for this reason that, in relation to a DTA like the Japanese DTA, section 7(1)(b) would apply to the freight charges receivedbyacarrierwhohasapermanentestablishmentin Pakistan. However, that is admittedly not the position in the cases at hand.

50.Accordingly, in light of the foregoing discussion, we are of the view that by reason of Article III(1) of the Japanese DTA, read with section 107, section 7(1)(b) does not apply to the facts and circumstances of those applicants who claim under this DTA. It follows that those carriers who claim under the Japanese DTA are not liable to pay tax in terms as provided in section 7(1)(b) read with section 143 of the 2001 Ordinance.

51.In our view, the issues raised by the present Reference Applications can be fully and properly brought out if the various questions referred to us are combined and reframed as follows:

(1)Whether,inthefactsandcircumstancesofthecase, section 7(1)(b) of the 2001 Ordinance applied to the freight charges received by the applicants in Pakistan in respect of goods carried from foreign ports to Pakistan, the said goods having been sold by foreign sellers to Pakistani buyers on FOB basis?

(2)Whether, in the facts and circumstances of the case, the amounts referred to in question (1) were not taxable in Pakistan on account of the Pakistan-Denmark double taxation treaty?

(3)Whether, in the facts and circumstances of the case, the amounts referred to in question (1) were not taxable in Pakistan on account of the Pakistan-France double taxation treaty?

(4)Whether, in the facts and circumstances of the case, the amounts referred to in question (1) were not taxable in Pakistan on account of the Pakistan-Japan double taxation treaty?

52.In view of the analysis and discussion in the paras supra, our answers to the reframed questions are as follows:--

(1)As to question (1), our answer is in the affirmative, in favour of the Department and against the applicants in all References.

(2)As to question (2), our answer is in the negative, in favour of the Department and against the applicants claiming under the Danish' DTA.

(3)As to question (3), our answer is in the negative, in favour of the Department and against the applicants claiming under the French DTA.

(4)As to question (4), our answer is in the affirmative, against the Department and in favour of the applicants claiming under the Japanese DTA.

Accordingly, the Reference Applications of those applicants who claim under the Danish DTA and the French DTA are dismissed. The Reference Applications of those applicants who claim under the Japanese DTA are allowed. In respect of those Reference Applications which have been allowed, the office is directed to send a copy of this judgment under the seal of the Court and the signature of the Registrar to the Appellate Tribunal which shall pass such orders as are necessary to dispose of the cases conformably with this judgment.

S.A.K./A-65/KOrder accordingly.

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