A.P. MOLLER through Maersk Pakistan (Pvt.) Ltd. VS COMMISSIONER OF INCOME TAX, ZONE-I, KARACHI, 2012 PTD-SUPREME-COURT 683 (2012)

(On appeal from the judgment dated 27-1-2011 of the High Court of Sindh, Karachi passed in ITRA No.205 of 2007).

Income Tax Ordinance (XLIX of 2001)---

----Ss. 7(1)(b), 101, 107(2) & 239(10)---Profits earned by non-resident shipping carrier on in-bound cargo on account of freight received in Pakistan---Taxability of such profits as earned from sources within Pakistan---Scope---Pak-Danish Double Taxation Agreement (DTA) did not contain express renunciation of taxing right by Pakistan in relation of profits earned there from ships operated in international traffic---In case of possibility of two reasonable interpretations of DTA or doubt or ambiguity in its interpretation especially in relation to expression "profits derived from sources within the Contracting State" as used therein, same would be resolved in favour of Pakistan having taxing right---"Sources State" would be regarded such State in which payment was made and would be entitled to tax such payments---Carrier would be entitled to freight charges only if cargo was actually carried to port of destination---Port of destination in the present case was a Port of Pakistan---Both terminus of event by which carrier earned income i.e. carriage of goods and actual payment, were within Pakistan---Payment in the present case was made by a Pakistan buyer, thus, same being profits derived by such carrier from sources within Pakistan could be reasonably regarded as within taxing right of Pakistan---Principles.

Dr. Ikram ul Haq, Advocate Supreme Court for Petitioner.

Nemo. for Respondents.

Date of hearing: 23rd January, 2012.

ORDER

EJAZ AFZAL KHAN, J.---This petition for leave to appeal has arisen out of the judgment dated 27-1-2011 of the High Court of Sindh whereby the learned Judge of the High Court in his chambers dismissed the Reference application filed by the petitioner.

2.The facts leading to the institution of the present petition as described in paragraph No.3 of the impugned judgment are reproduced herein below:--

"(3)The relevant facts needed to answer these Reference Applications can be started 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 comes before this Court by way of the aforesaid Reference Applications."

3.The questions which were raised by the petitioner in its Reference application are as follows:--

(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 envisages 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 facts and circumstances of the case, the ITAT was right to hold that provisions of section 7 of the 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?"

4.Learned counsel representing the petitioner contended that according to Circular Letter No.C.2(4)IT.2/95 dated 1-8-1995 when section 80 of the Income Tax Ordinance, 1979, which is in pari materia with section 7(1)(b) read with section 143 of the Income Tax Ordinance, 2001, did not apply to charges in respect of passengers, livestock, mail or goods embarked outside Pakistan, petitioner cannot be taxed simply because the provision under the latest enactment has been numbered and worded differently. The learned counsel next contended that passengers etc. thus carried could be taxed only if the amount is received by the carrier through a permanent establishment. When none of the carriers, the learned counsel submitted, had any permanent establishment in Pakistan, the provision contained in section 7(1)(b) of the Ordinance 2001wouldnotapply. Thelearnedcounselnextcontendedthatsection 101 of the Income Tax Ordinance, 2001 would also debar the respondents from taxing the profits thus earned by the carriers, therefore, the verdict of the High Court affirming that of the appellate Tribunal cannot be said to have been based on correct interpretation of the law and the Treaty. The learned counsel, then contended that where agreements have been entered into between two States to avoid double taxation and provisions have been made by notification for implementing that, they have to be given effect notwithstanding anything contained in any law for the time being in force, in so far as they provide for-

"(a)relief from the tax payable under this Ordinance;

(b)the determination of the Pakistan-source income of non-resident persons;

(c)where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within or outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan;

(d)the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and

(e)the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding laws in force in that other country."

The learned counsel by referring to Article 8(3) of the Treaty contended that where a DTA has been entered into between the two countries, it will have overriding effect on the taxing provisions of the Statute. The learned counsel by concluding his arguments submitted that when all the relevant provisions of the Statute were not considered in their proper perspective the impugned judgment cannot be maintained.

5.We have gone through the entire record carefully and considered the contentions of the learned counsel for the petitioner.

6.Before we discuss the arguments addressed at the bar it is worthwhile to refer to the provision relevant for the purpose of this case:--

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

7.The other relevant provision is section 101 which reads as under:--

"101. Geographical source of income.---

(1) Salary shall be Pakistan-source income to the extent to which the salary-

(a)is received from any employment exercised in Pakistan, wherever paid; or

(b)is paid by, or on behalf of, the Federal Government, a Provincial government, is a Local Government in Pakistan, wherever the employment is exercised.

(2)Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan.

(3)Business income of a non-resident person shall be Pakistan-source income to the extent to which it is directly or indirectly attributable to--

(a)a permanent establishment of the non-resident person in Pakistan;

(b)sales in Pakistan of goods or merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan;

(c)other business activities carried on in Pakistan of the same or similar kind as those effected by the non resident through a permanent establishment in Pakistan

(d)any business connection in Pakistan.

(4)Where the business of a non-resident person comprises the revering of independent services (including professional services and the services of entertainers and sports persons), the Pakistan-sources business income of the person shall include [in addition to any amounts treated as Pakistan-source income under subsection (3)] any remuneration derived by the person where the remuneration is paid by a resident person or borne by a permanent establishment in Pakistan of a non--resident person.

(5)Any gain from the disposal of any asset or property used in deriving any business income referred to in subsections (2), (3) or (4) shall be Pakistan-source income.

(6)A dividend shall be Pakistan-source if it is paid by a resident company.

(7)Profit on debt shall be Pakistan-source income if it is-

(a)paid by a resident person, except where the profit is payable in respect of any debt used for the purpose of a business carried on by the resident outside Pakistan though a permanent establishment; or

(b)borne by a permanent establishment in Pakistan of a non resident person.

(8)A royalty, shall be Pakistan-source income of it is:--

(a)paid by a resident person, exceptwhere the royalty is payable in respect of any right, property, or information used, or services utilized for the purpose of a business carried on by the resident outside Pakistan through a permanent establishment; or

(b)borne by a permanent establishment in Pakistan of a non-resident person.

(9)Rental income shall be Pakistan-source income if it is derived from the lease of immovable property in Pakistan whether improved or not, or from any other interest in or over immovable property, including a right to explore for, or exploit, natural resources in Pakistan.

(10)Any gain from the alienation of any property or right referred to in subsection (9) or from the alienation of any share in a company the assets of which consist wholly or principally, directly or indirectly, of property or rights referred to in subsection (9) shall be Pakistan-source income.

(11)A pension or annuity shall be Pakistan source income if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person.

(12)A technical fee shall be Pakistan-source income if its is--

(a)paid by a resident person, except where the fee is payable in respect of services utilized in a business carried on by the resident outside Pakistan through a permanent establishment; or

(b)borne by a permanent establishment in Pakistan of a non-resident person.

(13)Any gain arising on the disposal of shares in a resident company shall be Pakistan-source income.

[(13A) Any amount paid on account of insurance or re-issuance premium by an insurance company to an overseas insurance or re-insurance company shall be deemed to be Pakistan source income.]

(14)Any amount not mentioned in the preceding subsection 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.

(15)Where an amount may be dealt with under subsection (3) and under another subsection (other than subsection (14)), this section shall apply--

(a)by first determining whether the amount is Pakistan-source income under that other subsection; and

(b)if the amount is not Pakistan-source income, under that subsection, then determining whether it is Pakistan source income under subsection (3).

(16)An amount shall be foreign-source income to the extent to which it is not Pakistan-source income."

8.Yet another relevant provision is section 107 which reads as under:--

"107. Agreements for the avoidance of double taxation and prevention of fiscal evasion.---(1) The Federal Government may enter into an agreement with the government of a foreign country for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income imposed under this Ordinance and under the corresponding laws in force in that country, and may, by notification in the official Gazette make such provisions as may be necessary for implementing the agreement.

(2)Where any agreement is made in accordance with subsection (1), the agreement and the provisions made by notification for implementing the agreement shall, notwithstanding anything contained in any law for the time being in force, have effect in so far as they provide for--

(a)relief from the tax payable under this Ordinance;

(b)the determination of the Pakistan-source income of non-resident persons;

(c)where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within the outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan;

(d)the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and

(e)the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding laws in force in that other country.

(3)Notwithstanding anything in subsection (1) or (2), any agreement referred to in subsection (1) may include provisions for the relief from tax for any period before the commencement of this Ordinance or before the making of the agreement."

9.A perusal of section 7(1)(b) would show that the legislature in its wisdom included the gross amount received or receivable in Pakistan for the carriage of passengers, livestock, mail or goods embarked outside Pakistan for the purpose of being taxed. A reference to Section 101 would not be of any relevance in so far as it does not override the provision contained in section 7 of the Ordinance. Section 107(2), no doubt, makes a reference to DTA but we don't agree that there is anything in the relevant clauses of the DTA which tends to override the taxing provision of the Statute. It was in this back ground that the learned Division Bench of the High Court while dealing with the case of the petitioner in Paragraph No.42 of the impugned judgment held as under:--

"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 of 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 different mater. However, if two reasonable interpretations of 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 Contacting State") that should be resolved in favour of Pakistan having the right of tax. The question therefore is, can the freight charges received or receivable by the carriers from Pakistani buyers under FOB contract 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 reasonable possible? In our view, Article 8(3), on its proper analysis, must regarded as at least reasonable open to the interpretation that profits earned by carriers on inbound cargo on account of freight charges received I Pakistan arise "from sources within" this country. It is a recognized interpretation that the "sources 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 amount received or receivable in Pakistan by the carriers are "profits" derives from sources within Pakistan and hence can be reasonably regarded as within the taxing right of this country as contemplates 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 favour for reasons as aforesaid. It follows 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.)"

10.A perusal of the above quoted paragraph would reveal that learned Judge of the High Court in his chambers dealt with all the legal and factual aspects of the case. We, therefore, don't agree with the learned counsel for the petitioner that thelearned Judge of the High Court did not consider all the provisions of the Ordinance in their proper perspective. Much stress was laid on Article 8(3) of the DTA. How far it serves the purpose of the petitioner is a question requiring indepthexamination. Before we proceed to discuss it, it is worthwhile to refer to Article 8(3) of the DTA which reads as under :-

"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 Scandinavian Airlines System (SAS) the provisions of para-graph (1) shall apply but only to such part of the profits as corresponds to the particulars held in that consortium by Det Danske Luffartsselskab (DDI) the Danish Partner of Scandinvian 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 derives from sources within the other contracting State may also be taxed in the 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 25 per cent.

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

11.A look at clause 3 of the Article, reproduced above shows that profits from the operation of ships in International traffic could be taxed in the contracting State in which the effective management of the enterprise is situated. It also shows that the profits derived from the sources within the other contracting State may also be taxed in the other State in accordance with its domestic law provided that for the past five years for which this convention is effected the tax rate charges in that other State shall be reduced by 50% and for the next five years it shall be reduced to 25%. In this view of the matter we don't agree with the learned counsel for the petitioner that freight charges on in bound cargo cannot be taxed. When faced with this situation, the learned counsel by referring to the observation made in para 42 of the impugned judgment contended that when the learned judge authoring the judgment himself observed that clause of the Treaty is susceptible to two interpretations, then the one which is favourable to the assessee is to be preferred. We are afraid, we don't feel inclined either to agree with the argument of learned counsel for the petitioner or with the observation made in the judgment. The relevant provision of the Treaty when read carefully does not appear to be susceptible to two interpretations. It, indeed, has two parts, which deal with two distinct situations. Part one deals with the taxability of the profits earned from the operation of ships in the contracting State in which the effective management of the enterprise is situated. Part two deals with the taxability of the profits derived from the sources within the other contracting State in accordance with the domestic law. Profits in both the cases of the contracting and the second contracting States are taxable with the only difference that in the latter case the tax rates charged shall be liable to reduction according to the schedule and the percentage stipulated in the Treaty. We, therefore, hold that even a reference to Article 8 of the Treaty cannot come to the rescue of the petitioner.

12.The argument that when according to the circular letter No.C.2(4)IT.2/95, section 80 of the Income Tax Ordinance, 1979, which is in pari materia with section 7(1)(b) read with section 143 of theIncome Tax Ordinance 2001 did not apply to the charges in respect of the passengers etc. petitioner cannot be taxed has left us unmoved as the interpretation made in the circular is not in conformity with the provisions discussed above.

13.The sum total of the above discussion is that the treatment given by the High Court to the questions raised in the Reference Application appears to be correct and thus merits no interference.

14.For the reasons discussed above, this petition being without merit is dismissed.

S.A.K./A-7/SCPetition dismissed.