COMMISSIONER INLAND REVENUE (ZONE-II), LTU, ISLAMABAD VS GHAZI BAROTHA CONTRACTORS ISLAMABAD, 2017 PTD-ISLAMABAD 150 (2016)

Income Tax Ordinance (XXXI of 1979)---

----Ss. 11(1)(b), 52 & 86---Income Tax Ordinance (XLIX of 2001), S. 133 & 161(1)(b)---Convention between the Government of Republic of Italy and Islamic Republic of Pakistan, for avoidance of Double Taxation and the Prevention of fiscal evasion with respect to Taxes on Income, Art. 7---Reference---Foreign Banks---Repayment of loans---Dispute between the parties was with regard to charging of tax on interest paid by assessees to non-resident Banks who were not chargeable to tax in Pakistan---Authorities were aggrieved of order passed by Appellate Tribunal Inland Revenue---Validity---Non-resident Banks did not have any permanent establishment in Pakistan nor any tax demand against non-resident Banks was due under the provisions of Income Tax Ordinance, 1979---When assessing officer had no authority to charge income of non-resident Banks, collection of advanced tax for adjustment under S. 50(8)(b) of Income Tax Ordinance, 1979 did not arise---Assessing officer invoked provision of S. 78 of Income Tax Ordinance, 1979 and appointed two non-resident members of assessee company as agents of non-resident Banks but such action under S. 50(3) of Income Tax Ordinance, 1979 and S. 161 of Income Tax Ordinance, 2001 could not be initiated as if a person was himself liable as agent of non-resident person in terms of S.78 of Income Tax Ordinance, 1979 then he was not required to deduct any tax under S. 50(3) of Income Tax Ordinance, 1979---Question of deduction of tax did not arise as the payments made to non-residents were exempted from tax---High Court declined to interfere in the findings recorded by Appellate Tribunal Inland Revenue as the same were free from any legal infirmity---Reference was declined in circumstances.

Messrs American Express Bank Karachi v. Commissioner of Income Tax 2009 PTD 1791 and Mountains Estate Mineral Enterprises v. Commissioner of Income Tax 2008 PTD 1087 ref.

Dr. Farhat Zafar and Sheikh Anwar-ul-Haq for Petitioner.

Mian Ashiq Hussain for Respondent.

Date of hearing: 24th November, 2015.

JUDGMENT

SHAUKAT AZIZ SIDDIQUI, J.---By means of this single judgment, we intend to decide the instant Income Tax Reference along with following five ITRs as common questions of law have been referred to this court for determination:--

i.ITR No.12 of 2013, re: The Commissioner Inland Revenue (Zone-II), LTU, Islamabad v. Messrs Ghazi Barotha Contractors, Islamabad.

ii.ITR No.13 of 2013, re: The Commissioner Inland Revenue (Zone-II), LTU, Islamabad v. Messrs Ghazi Barotha Contractors, Islamabad.

iii.ITR No.14 of 2013, re: The Commissioner Inland Revenue (Zone-II), LTU, Islamabad v. Messrs Ghazi Barotha Contractors, Islamabad.

iv.ITR No.15 of 2013, re: The Commissioner Inland Revenue (Zone-II), LTU, Islamabad v. Messrs Ghazi Barotha Contractors, Islamabad.

v.ITR No.16 of 2013, re: The Commissioner Inland Revenue (Zone-II), LTU, Islamabad v. Messrs Ghazi Barotha Contractors, Islamabad.

2.The petitioners have raised the following questions from the orders passed by Appellate Tribunal Inland Revenue, Islamabad:--

i.Whether on facts and in the circumstances of the case, the learned ATIR was justified to hold that, in view of the provisions of section 239(4) of the Income Tax Ordinance, 2001, Order under sections 161/205 of the said Ordinance cannot be passed for taking cognizance of default of non-deduction/non-payment of tax under section 50 of the repealed Income Tax Ordinance, 1979?

ii.Whether on the facts and in the circumstances of the case, the learned ATIR was justified to cancel the order passed by the Assessing Officer by observing that, in view of section 239(4) of the Income Tax Ordinance, 2001, order should have been passed by the assessing officer under the repealed Ordinance which are meant for assessment proceedings whereas order under section 161 read with section 205 of the Ordinance was passed for recovery of tax due on account of non-deduction and deposit of tax from interest paid to non-resident banks?

iii.Whether the learned ATIR was justified in conveniently ignoring express provision of law contained in clause (b) of subsection (1) of section 161 of the Income Tax Ordinance, 2001, which clearly provide that order under section 161 of the said Ordinance, shall be passed for default of non-deduction/non-payment of tax under section 50 of the repealed Income Tax Ordinance, 1979?

iv.Whether on facts and in the circumstances, of the case, the learned ATIR was justified in holding that action under section 161 was barred by time whereas the Hon'ble Supreme Court of Pakistan has clearly ruled out that in the Civil Appeals Nos.1091-1092/2009 dated 17.5.2009 that the courts cannot lay down time limit for action under section 161, if the same is not provided in the statute.

v.Whether the learned ATIR was justified to conveniently ignore a binding pronouncement of the Hon'ble Supreme Court of Pakistan on the issue that action under sections 161/205 does not get barred by time?

vi.Whether on facts and in the circumstances of the case the learned ATIR was justified to hold that interest payment on foreign loans utilized in Pakistan is not chargeable to tax in Pakistan under section 50(3) of repealed Income Tax Ordinance, 1979?

vii.Whether on facts and in the circumstances, of the case, the learned ATIR was justified in holding that the issue of chargeability of interest income of non-resident banks stands already settled in this case by the ATIR?

viii.Whether the learned ATIR was right in holding that adequate opportunity of hearing was not provided to the taxpayer appellant?

ix.Whether on facts and in the circumstances of the case, the learned ATIR was justified to hold that action under section 161 has been taken by the revenue in complete disregard of provision of section 50(3) of the repealed Income Tax Ordinance, 2001?

3.The necessary facts forth coming from the reference application filed under section 133 of the Income Tax Ordinance, 2001 are that the respondent Messrs Ghazi Barotha Contractor, Islamabad was an association of partner consisting of four members and WAPDA had engaged it for construction of Ghazi Barotha Hydropower project in 1995. That Messrs Ghazi Barotha Contractors (hereinafter to be referred as GBC) executed separate loan agreement with six non-resident banks and had obtained loans for acquisition of assets for use at project. That GBC made the repayment of loans to those banks and it also reported this fact in its financial assessment for the years under consideration, detail of which is provided in Para-No.2 of the application That as per provision of section 50(3) of Repealed Income Tax Ordinance, 1979, the amount of interest paid by GBC to non-resident/foreign banks was the income which accrued in Pakistan, therefore chargeable to tax under the Pakistan Tax Law. That at the time of repaying the interest on loan to foreign banks the GBC was under obligation to deduct the tax at source under section 50(3) of Income Tax Ordinance, 1979, however, it failed to deduct and deposit the tax. That the show-cause notice under section 161 (1A) read with section 205 of the Income Tax Ordinance was issued to the respondent and it sought adjournments which were granted by the assessing officer, however respondent did not show cause to the notice That subsequently order under sections 161/205 read with section 239 of Income Tax Ordinance, 2001 was passed and tax was charged on account of non-deduction of tax from interest payment made to the non-resident banks and the default surcharge under section 205 of the Income Tax Ordinance, 2001 was also charged as detailed in Para-3 of application. The respondent challenged the said order before the Commissioner Inland Revenue (Appeals) Islamabad who vide order dated 24.11.2011 dismissed the appeal. The respondent filed second appeal before the Appellate Tribunal Inland Revenue which was accepted vide order dated 8.1.2013, which constrained the petitioner to file these references.

4This court vide judgment dated 18.2.2014 dismissed the references and thereafter the Hon'ble Supreme Court remanded the references for decision afresh vide order dated 24.6.2014.

5.The material question of law referred to this court is question No.3 that whether the learned ATIR was justified in conveniently ignoring express provisions of law contained in clause (b) of subsection (1) of section 161 of the Income Tax Ordinance, 2001, which clearly provides that order under section 161 of the said Ordinance, shall be passed for default of non-deduction/non-payment of tax under section 50 of the repealed Income Tax Ordinance, 1979. Learned counsel for the petitioner has argued that GBC is a joint venture consisting of four members, two of them were foreigners/non-resident members i.e. one was Italian and the other was German. That the earlier round of proceedings were against the foreign members and the learned Appellant Tribunal Inland Revenue (hereinafter to be referred as ATIR) in its judgment dated 28.7.2007 held that the assessee company did not have any direct financial relationship with the non-resident banks and in fact the loan agreement was executed by GBC which is an association of person and a separate legal entity and that the DCIT should have treated the GBC as agent of non-resident bank instead of assessee company. It is further argued that the said order of learned ATIR has attained finality; therefore, the respondent cannot evade the liability to pay the demand. It is further argued that the Hon'ble Supreme Court in C.As. Nos.1091-1092/2009 held that there is no time limit for action under section 52 of Income Tax Ordinance, 1979, hence, the demand of tax from the respondent is within the mandate of law. Conversely, the learned counsel for the respondent has argued that jurisdiction of this Court under section 133 of the Income Tax Ordinance, 2001 is of advisory nature and this Hon'ble Court is not required to re-assess and re-evaluate the facts. It is further argued that learned ATIR rightly held that the proceedings under the Income Tax Ordinance, 1979 under sections 52/86 and 78 was pending at the commencement of the repealing Ordinance and were later on concluded on the dates specified in the appellate order dated 08.01.2013; therefore the initiation of alleged default proceedings under sections 161/205 of Income Tax Ordinance, 2001 on the same subject matter was without jurisdiction.

6.Having considered the respective oral contentions as well as written submissions of the learned counsel for the parties vis-a-vis the statutory and the case-law, it is observed that the first obligation of the assessing officer was to establish that whether the amounts of the interest paid by the respondent to the non-resident banks were or were not chargeable to tax in Pakistan before initiating any action of default within the domain of section 50(3) of Income Tax Ordinance, 1979. The learned ATIR in its judgment referred to the show-cause notices observed that what to speak of establishing the chargeability of amounts in question under the charging provisions of Income Tax Ordinance, 1979; when chargeability was not alleged. It is observed that it was sine qua non for the assessing officer first to establish the chargeability of interest paid to the non-resident banks under the provisions of Income Tax Ordinance, 1979. It is pertinent to note that the operation of section 11(1)(b) of the Ordinance is excluded by Article 7 of the Tax treaty between the Republic of Italy and Islamic Republic of Pakistan as it is specifically provided that the provisions of Tax treaty would over ride the provision of Income Tax Ordinance, 1979. It is not the case of the petitioner that the non-resident banks had any permanent establishment in Pakistan nor any tax demand against the non-resident banks is due under the provision of Income Tax Ordinance, 1979, therefore, when the assessing officer has no authority to charge the income of non-resident banks, therefore, the collection of advance tax for adjustment under section 50(8)(b) of the Income Tax Ordinance, 1979 does not arise. It is apparent that the assessing officer has invoked the provision of section 78 of the Income Tax Ordinance, 1979 and appointed two non-resident members of GBC as the agents of non-resident banks but such action under section 50(3) of Income Tax Ordinance, 1979 and section 161 of Income Tax Ordinance, 2001 cannot be initiated as if a person is himself liable as agent of non-resident person in terms of section 78 of Income Tax Ordinance, 1979 then he is not required to deduct any tax under section 50(3) of Income Tax Ordinance, 1979.

7.It is argued on behalf of petitioner with full force that in the earlier round of litigation, the learned ATIR in its judgment dated 28.3.2007 had held that in fact the loan agreements were executed by GBC which is separate entity, therefore, the assessing officer should have been treated as agent of non-resident banks, therefore, the GBC being the agent of non-resident banks was required to deduct and deposit the tax on the amounts of the interest which it paid to the non-resident banks. It is already observed that the Government of Pakistan having Agreement For Avoidance of Double Taxation (AFAODT) with the republic of Italy and admittedly the non-resident banks have no permanent establishment in Pakistan, therefore, any payments made to the said non-resident banks are not chargeable to tax in Pakistan and an action under section 161 of the Income Tax Ordinance can only be taken as a tax payer if it is established that the payments made to non-resident banks is chargeable to tax in Pakistan. It is also settled law that the provision of a special law prevails over the general law and in a reported judgment Messrs American Express Bank Karachi v. Commissioner of Income Tax (2009 PTD 1791) a division bench of Hon'ble Sindh High Court observed that the provisions of a treaty prevails over the provisions of Income Tax Ordinance. It was further held in the case of Mountains Estate Mineral Enterprises v. Commissioner of Income Tax (2008 PTD 1087) where an assessee has no permanent establishment in Pakistan, its income is exempt under the provision of AFAODT and the incomes generated in this regard are not taxable in Pakistan. It is trite law that the question of the deduction of tax does not arise where the payments made to non-residents are exempt from tax.

8.In view of the above discussion, it is held that the findings recorded by the learned ATIR on question No.3 and all the remaining questions are free from any legal infirmity. This reference along with the club references are answered in negative and all the petitions under section 133 of Income Tax Ordinance are dismissed. Let the copy of order be sent to the appellant tribunal for information.

MH/15/Isl References declined.