1996 PLP (Trib (PTD)

Abdul Mateen, C.A. for Respondent Date of hearing: 13th December, 1993. MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).-- The above appeals at the instance of department are directed against the order dated 25-2-1986 by the learned C.I.T. (A) Zone VI, Karachi.

2. The Assessee (hereinafter referred to as the respondent) is a foreign bank having branch in Pakistan and as such assessed in the status of non- resident. The first objection which is common in both the assessment years under consideration, raised on behalf of the department is that the learned C.I.T:(A) was not justified in deleting the addition in head office expenses relying on Article III(4) of Pakistan and Federal Republics of Germany, Tax Treaty.

3. Briefly stated the relevant facts are that the respondent in the assessment year 1983-84 claimed head office expenses at Rs.15,18,

257. The assessing officer restricted claim to Rs.11,42,255 by resort to rule 20 of the Income Tax. Rules, 1982. In the assessment year 1984-85 the respondent claimed head office expenses at Rs.11,42,255 and the assessing officer again restricted the claim at Rs.11,19,662 by recourse to Rule 20 of the Income Tax Rules. The respondent preferred first appeals contending that in view of agreement for avoidance of double taxation between the Islamic Republic of Pakistan and Federal Republic of Germany the recourse to Rule 20 of the Income Tax Rules was not justified Reliance was placed on Article III(4) of the 'convention between the Islamic Republic of Pakistan and Federal Republic of Germany. The contention was accepted by the learned C.I.T.(A) who held that the provision of tax treaty overrides provision of the demestic legislation. With these observations the additions under the head office expenses were deleted in both the years. Being aggrieved with the deletion of addition the department has preferred these appeals before us.

4. Heard Mr. Ali Nasir Bukhari, learned representative for the department and Mr. Abdul Mateen, learned representative for the respondent. Mr. Abdul Mateen has submitted that the point in issue already stands decided by a Division Bench of this Tribunal in I. T. A. No. 1598/KB to 1600/KB of 1985-86 vide order dated 22-2-1990. He has submitted that in the cited order the relevant provision contained In Pakistan United Kingdom Tax Treaty was considered and it was held that the Head Office expenses could not be restricted in accordance with the Rule 20 of the Income Tax Rules, in the presence of provisions contained in Article III(4) of the Pak. U.K. Treaty. Mr. Abdul Mateen has submitted that the provisions contained in Article III(4) of the Pak-U.K. Treaty and Pak-German Treaty are almost similar and, therefore, the same ratio will apply in the case of respondent as well. In order to appreciate the contention of Mr. Abdul Mateen the relevant provisions contained in the agreement for avoidance of double taxation with respect to taxes and income between the Pakistan and U.K. executed on 9th of January, 1962 and the Convention between the Islamic Republic of Pakistan and Federal Republic of Germany for the, avoidance of double taxation and the prevention of fiscal evasion with respect to taxes or income notified on 5th of October, 1960 are reproduced below: "III(3): In the determination of the profits of a permanent establishment, there shall be allowed as a deduction expenses which are reasonably allocable to the permanent establishment including executive an d general administration expenses so allocable, whether incurred in the State in, which the permanent establishment is situated or elsewhere. " "III(4): In determining industrial or commercial profits of a permanent establishment there shall be allowed as deductions all expenses reasonably allocable to the permanent establishment, including executive and general administration expenses so allocated. "

5. A comparison of the above provisions shows that both the Articles provided for allowing the expenses which are reasonably allocable to the permanent establishment including executive and general' administration expenses so allocable. However, there is one important difference in the contents of Treaty between Pakistan and U.K. and between the Pakistan and Federal Republic of Germany. In Pak-U.K. Treaty it is specifically provided that the expenses whether incurred in the State in which permanent establishment is situated or elsewhere shall be allowed if reasonably allocable to the permanent establishment while in Pakistan and Federal Republic of Germany Treaty the expression "whether incurred in the State in which the permanent establishment is situated or elsewhere" is missing. Thus, in the case of Pak-U.K. Treaty all the expenses reasonably allocable to the permanent establishment wherever incurred is to be allowed while in the case of Pak-Federal Republic Germany Treaty the expenses incurred elsewhere are not to be allowed. Only those expenses are to be allowed which are reasonably allocable to the permanent establishment including executive and general administration expenses. In any case in the presence of treaty for avoidance of double taxation the resort to Rule 20 of the Income Tax Rules is not justified. Under section 163 of the Income Tax Ordinance, 1979 the provisions contained in the agreement for avoidance of double taxation shall prevail over the provisions contained in the Income Tax Ordinance. It is, therefore, held that the learned C. I. T.(A) has rightly concluded that the resort to Rule 20 of the Income Tax Rules was not justified. However, the learned C.I.T.(A) was not justified in deleting the addition because the appropriate direction would have been to set aside the issue. As we have seen it is provided in the treaty for avoidance of double taxation that the expenses reasonably allocable to the permanent establishment including executive and general administration expenses are to be allowed. Thus, it is incumbent on the assessing officer to examine the details of the expenses to find out if they are reasonably allocable to the permanent establishment or not. We, therefore", set aside the assessment to the extent of finding relating to the head office expenses with the direction that the assessing officer should examine the details of expenses and allow those which are reasonably allocable to the permanent establishment including executive and general administration expenses. If the respondent has claimed any such expenses which are not reasonably allocable to the permanent establishment such expenses should be disallowed.

6. The next issue pertaining to the assessment year 1984-85 only is to the deletion of addition on account of penal interest. The contention of department is that the penal interest was disallowed in view of the decision of Income Tax Appellate Tribunal, reported as 1981 PTD(Trib.). 71 and, therefore, the learned C.I.T. (A) was not justified in deleting the same, However, in a recent judgment, dated 21st of March, 11994 (1994) PTD 1271 the Hon'ble Sindh High Court has held in the case of .M/s. Citibank v. C.I.T. that the penal interest is an admissible expenditure. Respectfully following recent judgment of Hon'ble Sindh High Court whereby the judgment of this Tribunal reported as 1981 PTD (Trib). 71 has been overruled, it is held that the learned C.I.T.(A) rightly deleted the addition to which no exception can be taken. 7 Both the appeals stand disposed of as above. M.B.A./147/T Order accordingly.