1999 PLP (Trib (PTD)

12. This brings us to another point raised by the learned A.R. which relates to the method of deduction of tax where no actual cash payment to a non-resident is made. He argues that since the assessee company did not pay any cash to the non-resident company, it was not possible for the assessee to deduct any tax as envisaged in section 50(3). On the other hand, the Legal Adviser of the department states that under the law, it was the assessee's responsibility to deduct tax while making payment, in whatever form, and the assessee company has to pay the tax which it had failed to so deduct. He further states that the assessee company has the financial means to pay the aforesaid tax. As we have already held that even when payment is made in kind which, in substance, is cash payment, tax, under section 50(3) is required to be deducted. Therefore, it means that here the paying person makes payment in the form of anything valuable, other than cash, in satisfaction of the gross amount payable, the value of the aforesaid thing has to be equal to the net amount after deduction of tax. The difference between the gross amount and the net amount represents the amount of tax which is to be deposited into Government account by the paying person. In the present case, the 'assessee company issued shares in lieu of the amount payable to the foreign company (HRPG). Had the HRPG not agreed to this mode of payment, the assessee company would have paid cash to discharge the liability. By issuance of shares in lieu of cash, it had retained the money and yet discharged the liability. The assessee company should have issued shares of the value of net amount after deduction of tax under section 50(3) from the gross amount payable. The amount of tax so deducted should have been deposited into Government account as per the prescribed procedure.

13. Mr. Pasha has raised another objection with regard to application of the provisions of section 50(3) to the entire amount representing the value of shares issued to the foreign company. He argues that the words "sum chargeable" as used in the said section, refer to income and not to total payment which may include some portion as income or profit of the non resident. In other words, he is of the view that the tax under section 50(3) can be deducted in. respect of only shat portion of the gross payment as represents income of the non-resident because only such income and not the gross receipts are chargeable to tax in the hands of the recipient. Referring to the impugned orders under section 52186, the learned A.R. states that the Assessing Officer has himself mentioned that the issuance of shares to HRPG at 10 % discount means that recipient had earned income to the extent of 10 % of total value of shares. He says that the Assessing Officer further observed that it is not established by the assessee that there is no element of profit in transfer of project development expenditure to the assessee by the HRPG. Therefore, the Assessing Officer should have first determined the income of the non-resident (HRPG) arising out of this transaction and then charged tax under section 52 from the assessee. The learned A.R. supports this view by referring to a case cited as Gulberg Textile Mills v. CIT 1978 PTD 126 (H. C. Kar.) and draws our attention to the following observations:

"Section 18(3B) is expressed in the widest possible terms. It covers all sums (other than "interest on securities") chargeable under the provisions of the Act and payable to a non-resident, which are in the nature of income, that is pure income, as opposed to payment of a sum which in the hands of the recipient is a trading receipt, e.g., price of goods sold paid to a non-resident seller. In the former case, payment of a sum which is pure income profit, the payer is bound to make deduction of tax at the time of payment to the non-resident and he is not concerned with the ultimate result of the assessment of the non-resident person to whom the payment is made, which is a matter between the non-resident and the Revenue." The learned A.R. thus states that tax under section 50(3) can be deducted only if the payment to the non-resident is in the nature of pure income or profit. The learned Legal Adviser of the Department, on the other hand, argues that total payment made to a non-resident is subject to deduction of tax under section 50(3). He argues that the words "sum chargeable" mean that the amount paid is of a nature which is taxable under the Income Tax Ordinance. He asserts that the expression "chargeable" is not synonymous to the word "payable". The latter expression, according to him, would apply in respect of income on which tax would be payable by the non-resident. He states that by using the expression "chargeable" the law makes the payment subject to deduction of tax and it needs no determination of the income on which tax is payable because the payability, is through the machinery provided under the Income Tax Ordinance. In this connection, he refers to a case in re: The Laxmi Insurance Company Ltd. v. CIT AIR 1931 Lah.

441. In that case, the assessee company started insurance business in 1924 and its first Actuarial Report was prepared in 1928 and the first assessment made was for assessment year 1928-29. Rule 25 of the Income-tax Rules governed the method of computation of income from insurance business on the basis of Actuarial Report. The Assessing Officer proceeded under section 34 to assess the income for the assessment year 1927-28. It was held that there being no machinery provided by the law during the year 1927-28 for ascertaining or assessing the income of the company in accordance with the provisions of rule 25, no income escaped assessment within the meaning of section 34 and hence the assessment for 1927-28 was illegal. The Legal Adviser, therefore, asserts that although the income in that case was chargeable to tax for assessment year 1927-28 but there being no machinery provided for that year, the tax was not payable, as it was not assessable.

14. We have examined the arguments of both sides on this point. Going through the .facts of Gulberg Textile Mills, we are not persuaded to interpret the observation, quoted in the preceding paragraph, in that case in the manner as desired by the learned A.R. of the assessee. In fact in that very case, their Lordships of the Karachi High Court have quoted a portion of a judgment of the Indian Supreme Court in re: Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal (1958) 33 ITR

245. In that case it was held that those persons who are bound under the Act to make deductions at the time of payment of any income, profits or gains are not concerned with the ultimate result of the assessment. Whether in the ultimate result the amount of tax deducted or any lesser or bigger amount would be payable as income-tax in accordance with the law in force would not affect the rights; liabilities and power of a person under section 18 or of the agent under sections 40(2) and 42(1). We would like to point out that in the case of Gulberg Textile Mills, it was further held that even though the commission paid to non-resident agents was not chargeable to tax in Pakistan, yet the amount paid was not allowable as deduction by virtue of section 10(4)(bb), as tax had not been deducted from the payments made. In this regard, we may also refer to a case cited as CIT v. Esso Pakistan Fertilizer Ltd. 1990 PTD

787. In that case, a reference has been made to a case of Indian jurisdiction in re: P.C. Ray & Co. v. A. C. Mukerjee AIR 1959 Cal. 131 wherein it was held that the word "chargeable" in section 18(3B) was not to be treated as equivalent of "assessable" to income-tax and connoted a sum liable in its nature to be brought into computation in an assessment, that is to say, as belonging to one or other of the heads of income as set out in section 6 of the Act. Their Lordships of the Karachi High Court held that section 18(313) of the Act is a code in itself and virtually covers all sums payable to non-resident, chargeable under that Act and such sums may or may not be of a determinate character. Absence of a provision in the statute leaves no machinery for the remitter to resort to, with a view to find out the proportionate amount chargeable and he, being not armed with the powers of an Assessing Authority, must, therefore withhold all or any sums as a whole, which have elements of chargeability or, on failure, become person liable tinder section 18(7) of the Act. It was further held that it is none of the functions of the person obliged to make disbursement under section 18(313) of the Act to sift and assess as to whether and what portion of the amount projected to be disbursed is taxable or none at all is so taxable. Having regard to the law as expounded in the said case, we are of the view that where a person is obliged to deduct tax under section 50(3), he must deduct tax from the whole of the amount to be paid. Even otherwise, the person making payment is not in a position to determine as to what is the proportion of the income/profit which the recipient has earned out of the payment received by him. The function of determining the income of non-resident recipient is to be performed by the Assessing Officer and not by the paying person. The proposition that the Assessing Officer should first determine the income of the non-resident and the tax payable thereon and then demand the tax from the paying person under section 52 is neither tenable nor practicable. The liability of the paying person to deduct tax under section 50(3) is quite distinct from the ultimate tax liability that may be determined on assessment of income of the non-resident. '

15. The learned A.R. also argued that it is the right of an assessee to conduct transactions in a manner which may result either in no tax or less tax. As the transaction in the present case was in the form of issuance of shares, tax under section 50(3) was not deductible. In this connection he referred to a case cited as Inland Revenue Commissioners v. Wesleyan General Assurance Society (1948) 16 ITR

101. In that case, it was held that a transaction, which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax. We find that this case is not relevant to the issue in hand because here we are not dealing with the question whether the payments received by the non-resident company (HRPG) constitute taxable receipts or not in the hands .of the said non resident company. However, we may mention that even in the said case it has been observed that name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. The question always is what is the real character of the payment, not what the parties call it. Precisely on this issue we have held that the transaction between the assessee and the non-resident company is, in substance, payment of money although in the form of issuance of shares.

16. Another point raised by the learned A.R. is that the assessee was even otherwise not required to deduct tax under section 50(3) for the reason that it is an agent of the non-resident company (HRPG). Elucidating this argument, he states that the definition of the term "agent" has been given in the Explanation to section 78, which deals with the provisions relating liability of an agent, and according to sub-clause (a)(iii) of clause (4) of the 'Explanation, any person in Pakistan from or through whom the non-resident is in receipt of any income, whether directly -or indirectly, is a statutory agent of the non-resident. He says that since the assessee company had made payment to the non-resident company, it automatically became an agent of the non-resident and consequently it was not required to deduct tax from payments made by it to the non-resident company. He further elaborates that it was not necessary for the Assessing Officer to declare the assessee as an agent because that condition, as stipulated in sub-clause (c) of clause (4) of the Explanation, is not applicable to the categories of persons listed in sub clause (a) of the said clause (4). The learned A.R. referred to a case cited as Noon Sugar Mills v. CIT, Rawalpindi PLD 1990 SC 1156 = 1990 PTD 768 = 1990 MLD 1977, wherein it was held that since the assessee company was liable to pay taxes as an agent of foreign suppliers, they were not obliged to deduct tax under section 18(313) of the Income-tax Act, 1922. On the other hand, the Legal Adviser of the Department asserts that the assessee was neither declared nor treated as an agent, nor it had at any time taken this plea before the Assessing Officer. The assessee had all along taken the stand that it had not made any payment in cash and the transaction was merely a reimbursement of expenditure incurred by the non-resident and hence tax under section 50(3) was not to be made, but now it has taken an altogether different plea. He states that the assessee never claimed to be an agent of the non-resident nor it paid tax on behalf of the non-resident.

17. We have thoroughly considered the arguments of both sides in the light of the relevant provisions of law on this point. For facility of reference, the relevant portion of section 78 is reproduced as under:

"78.

(1) Every agent shall, in respect of the income for which he is, or is declared to be, or is treated as, an agent, be deemed to be an assessee for the purposes of this Ordinance and be subject to the same obligations and liabilities as if he were the assessee, and shall be liable to assessment in his own name in respect of that income. (2) ........................... (3) .......................... Explanation.

For the purposes of this section and section 80, "agent" includes-- (1) ............................... (2)............................... (3)............................... (4) in respect of income of non-resident -- (a) any person in Pakistan -- (i) who is employed by, or on behalf of the non-resident; or (ii) who has any business connection with the non-resident; or (iii) from or through whom the non-resident is in receipt of any income, directly or indirectly; or (iv) who holds, or controls the receipt or disposal of, any money belonging to the non-resident; or (v) who is the trustee of the non-resident; or (b) any person, whether a resident or non-resident, who has acquired, .t00 by means of a transfer, a capital asset in Pakistan; or (c) any person who is declared or treated as an agent of the non resident:" Analyzing the provisions of section 78, we find that subsection (l)-of the said section contemplates two categories of persons as agents, namely:

(i) a person who is an agent; and (ii) a person who is declared or treated as an agent. Proceeding further we find that clause (4) of the Explanation to the' said section describes the persons as agents in respect of income of a non resident. Sub-clauses (a) and (b) of clause (4) specify the nature of connections with the non-resident on the basis of which a person qualifies to be an agent of the non-resident. Sub-clause (c) authorizes declaration or treatment of a person as an agent. According to Mr. Pasha, the learned A.R. of the assessee, persons mentioned in sub-clauses (a) and (b) are automatically agents of non-resident while under sub-clause (c) any other person can be declared or treated as an agent.

18. In order-to understand the requirements of law for a person to bear the burden of tax in respect of income of another person who is non-resident, it is necessary to examine the purpose and scope of the provisions of sections 50(3) and 78 in some detail. It is quite obvious that both these sections are intended to ensure collection of tax on income of a non-resident accruing or arising in Pakistan, because ordinarily such non-resident is located outside Pakistan and it is otherwise impossible to enforce the collection of tax from him. One method, as stipulated in section 50(3), is to deduct tax at source from payments made to the non-resident and this responsibility has been assigned to the payer. The second method is to shift the burden of tax of non-resident on another person who is within the jurisdiction of tax authorities in Pakistan. This purpose is achieved by treating such person as agent of the non-resident in accordance with the provisions of section

78. Now, it is quite evident that not every person can be saddled with the tax liability of the non-resident. There has to be some business connection or monetary dealing of such person with the non-resident or he may have control over the money or assets of the non-resident. That is why sub-clauses (a) and (b) of clause (4) of the Explanation to section 78 prescribe the nature of connections which a person must have with the non resident before he can be burdened with the tax liability of the non-resident as his agent. Sub-clause (c) simply provides the authority to declare or treat a person as an agent and hence it has to be read with sub-clauses (a) and (b) and not independently. Therefore, in our view only such a person can be declared or treated as an agent who falls in any of the categories specified in sub-clauses (a) and (b). there are two reasons for this interpretation. Firstly, as stated earlier, not every person can be declared or treated as an agent of the non-resident and, therefore, sub-clause (c) can only be interpreted as an enabling provision authorizing the declaration or treatment of a person as an agent. Secondly, a person, before dealing with a non-resident or making a transaction with him, has to know, in certain and unambiguous terms, the situations or conditions under which he might be declared or treated as an agent. The law specifies these situations or conditions in sub-clauses (a) and (b). Here a question may arise that if this is the correct interpretation of law, then why is it necessary to specify two types of persons as agents in subsection (1) of section 78, namely: (i) who is an agent; (ii) who is declared and treated as an agent. The answer to that question is that in respect of income of a resident person, certain persons as mentioned in clauses (1), (2) and (3) of the Explanation, are agents of such resident person. Even in the case of a non-resident, a person may be an agent of such non-resident in his own right i.e. when he is appointed by the non-resident as is agent to pay tax on his behalf. Only such a person would automatically be an agent of the non-resident. In other situations, a person would be an agent of the non resident only if he is declared or treated by the Assessing Officer as an agent of the non-resident.

19. Having the above analysis of section 78 in view, we may revert to the facts of the present case. There is nothing on record to show that the assessee was appointed by the non-resident company as its agent for tax purposes, nor it was the claim of the assessee at any time. The Assessing Officer also did not declare or treat the assessee company as an agent of the non-resident (HRPG). Even the assessee company never considered itself as an agent as is evident from its conduct. It did not file returns of income for the relevant years, in respect of income of the non-resident company, nor paid tax thereon, in fulfilment of the obligations and liabilities as an assessee in place of the non-resident, as required under the provisions of section

78. In the case of Noon Sugar Mills Ltd., referred to by the learned A.R. the assessee company was declared as an agent under section 43 of the repealed Income-tax Act, 1922, by the Assessing Officer. This is not the position in the present case. Therefore, we are not persuaded to agree that the assessee company was an agent of the non-resident company (HRPG).

20. For the aforesaid reasons, it is held that the assessee company was rightly treated as an assessee in default under section 52 and the impugned orders under section 52/86 are upheld.

21. The assessee's appeals fail. C.M.A./23/Trib. Appeals dismissed.