1988 PLP rib (PTD)

"We are unable to understand as to why the convention should first exclude from the ambit of industrial and commercial profits the remuneration derived from personal services and then grant it exemption also. Had the intention been to exempt remuneration earned by an individual from Pakistan tax an omission of the expression from article-11(i) would have served the purpose. Thus, as the provisions of the Convention stand we think that the remuneration derived from personal services rendered by an artificial or legal person like a company, is not exempt from Pakistan Tax as it is not included within the fold of "Industrial or commercial profits" although the income derived by an individual has been specifically granted exemption under Article XI of the Convention under certain conditions. Now we come to next question; what is meant by expression 'personal Service' as used in Article II(i) of the Convention? The answer appears to be quite simple. A company, or to be more precise a legal person is not made of bones, blood and flesh. It, therefore, cannot render any service itself. It has to act through natural persons, namely, persons made of blood, bones and flesh. Thus, if we look to the services rendered by the respondent as reproduced above and the qualifications and skill of the natural persons who have to discharge such services for and on behalf of the respondent it becomes abundantly clear that the personal services by the respondent are nothing but professional services. As such we have to hold as a logical necessity, that expression 'personal services' means and implies professional services. Let us also mention here that in Article XI the expression 'personal (including professional) service' has been used deliberately because personal services rendered by an individual must not necessarily be professional. In our judgment the words 'including professional' have been specifically used to widen its scope in contradistinction to provision of Article II(i) where the expression 'personal service' means professional service only. We also feel inclined to agree with learned counsel for the department that the income derived by the respondent cannot be called income derived from business. It is, indeed derived from professional services. We should keep in mind that in Pakistan law the income from business is treated separately than income from profession. We are also very much fortified in our view by authors of book entitled "Model Double Taxation Convention on Income and on Capital" published by Organisation for Economic Co-operation and Development based at Paris (1977 Edition). Before referring to relevant paragraphs we would like to observe by way of introduction that the Organisation for Economic Co-operation and Development, hereinafter referred to as "OECD" was set up under a Convention signed in parts on 14th December, 1960, which provides that it shall promote policies 'designed, inter alia to avoid ways and means and instance of double taxation in the signatory countries. The ORCD, therefore, framed Model Double Taxation Convention for the facility of contracting States, which consist of 20 developed countries including USA. Article 14 thereof is reproduced as under:

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9. Now if keeping aforesaid observation in mind we refer to the agreement entered into between the parties we find that the respondents Assessee offered their services as professionals of high skill. They have been described even as consultants. Moreover, from perusal of the contract it also appears that it was entered into with the respondent on their representation that they were possessed of necessary skills, knowledge and experience and capability and qualified personnel required for executing and performing the work as specified in the contract and required to be performed by the consultant. (Please see page 2, paragraph 2 of the Agreement). However, this finding does not cut the matter short. The learned CIT(A) has talked of nexus which he did not find existing between the income derived and the territory of Pakistan. We would, therefore, examine this appeal from this angle also. However, before entering into merits of this submission let us observe that there is no estoppel in law as contended by Mr. E.U. Khawaja. We also agree with him that if the law was applicable it was the duty of the ITO to apply it even if the respondent agreed that it should not be applied in its case. As such we are of the view that the learned CIT (A) rightly examined this issue.

10. Now entering into the merits we find that a/s 11 (1) (b) the provisions of the Ordinance apply regarding total income of a non-resident and of income derived by it from whatever source is to be included if it:-- (1) is received or is deemed to be received in Pakistan in the income year by or on behalf of such person, or (2) accrues or arises, or is deemed to accrue or arise to him in Pakistan during such year. Now what is deemed income or what income accrues or arises in Pakistan a/s 11 (1) of the Income Tax Ordinance has been dealt with by subsection (5) of section 12 of the Income-tax Ordinance which reads as under: "(5) Any income by way of fees 'for technical services payable by-- (a) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside Pakistan or for the purposes of making or earning any income from any source outside Pakistan; or (b) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in Pakistan or for the purposes of making or earning any income from any source in Pakistan, shall be deemed to accrue or arise in Pakistan."

11. Now if with reference to sections 11 and 12 we refer to the agreement entered into between the respondent and RDCL it appears that the respondent undertook to execute their job outside Pakistan, Article 2.1 deals with this aspect of the matter and it reads:- "2.1(a)Update outside Pakistan the pre-investment feasibility study of the owner; (b) execute outside Pakistan the general arrangement engineering of the project with a view to advance the engineering for each aspect of the project (Mining, Milling, Smelting, Roasting, Acid Manufacturing, Steel making and Infrastructure) from the current levels of 0 to 10% to 30%. (c) prepare outside Pakistan updated financial analysis and estimates of the capital and operating costs of the project to 10 to 15%. (d) combine the said engineering and updated financial analysis outside Pakistan into a bankable document whereby finances can be raised from International and Pakistan Financial Institutions; (e) prepare tender documents outside Pakistan for plant and machinery required for the project; and (f) prepare outside Pakistan preliminary and conceptual and general arrangement engineering drawings of the project." Moreover, Article 5.1 of the agreement deals with the payment schedule and it reads as under:- "5.1. Payment of fee due to the consultant under clause 4.1 will be work related as detailed in Appendix 'C' and will be made in the following manner: (i) Contract Date Month 1 $ 280,000 Half way 4 $ 280,000 Draft Review 7 $ 205,000 Acceptance $ 85,000 $ 850,000 Represents 10% with holding (ii) In all four invoices shall be raised by the consultant as follows: (a) First invoice: For work performed from the Effective Date to the Date of initial meeting between the parties as per Appendix "C" or as per overall programme for work established between the parties under Article 6 below; (b) Second invoice: For work performed from the date of initial meeting to the date of completion of the Consultant's reports of half way review meeting between the parties as per Appendix "C" or as per the said overall programme for the work; (c) Third invoice: For work performed from the date of half way review meeting to the date of submission of draft Consultant's document by the Consultant to the owner for the Onwer's review, as per Appendix "C" or the said overall programme for the Work, and (d) Fourth invoice: For work performed from the date of submission of the draft Consultant's documents as aforesaid to the date of acceptance of the Consultant's final documents. (iii) Balance due for payment of each invoice fees three invoices shall be paid by the owner within 30 days after receipt of the invoice by the owner in Karachi. (iv)(a) The owner shall pay to the Consultant the amount of final invoice on the expiry of the date after acceptance of the Consultant's final document. (b) The owner shall be required to communicate its non-acceptance of the final documents within 60 days of their delivery by the Consultant to the owner stating with specificity the requirements of the scope of work, which have not been satisfied, otherwise, the final documents shall be deemed to have been accepted. (c) Should the Consultant fail to correct the final documents within 60 days after receiving the Owner's communicating under paragraph (b) of this clause, the owner shall be entitled to forfeit the amount or retention withheld, and either party may proceed to arbitration for settlement of resulting dispute.

12. Very much relevant to aforesaid articles of the contract is the letter of RDCL dated 5th January, 1983 which is also reproduced hereinbelow : - "No: COM/MSME/AGR- 5 January 1983 Messrs Ford Rhodes. Robson, Morrow Chartered Accountants, Finaly House, I.I. Chundrigar Road, Karachi. Attr. Mr. Hanif Sheikh Re: Consultancy assignment to Mountain States Mineral Enterprises Inc. of USA (MSME) With reference to telephonic conversation of 4th January, 1983 we write to confirm that five internationally recognised consultants in the UK, USA and Canada were invited to bid for the preparation of feasibility study and bankable document of the Saindak Intedrated Mineral Project, MSME were selected by a Committee comprising Joint Secretary, Ministry of Finance (Investment Wing), Joint Secretary, Ministry of Petroleum & Natural Resources and representatives of Planning Division, PCSIR and this Corporation in September, 1979. The work was completed in May, 1980. During this period two of their engineers visited Pakistan for a period of 15 days to see the working conditions in the country and collect a sample for testing. However, the work in connection with the preparation of the feasibility study and bankable document was carried out by the Consultants in their office in USA. General Manager (Tech), Manager Engineering and Chief Geologist of the Corporation and a Metallurgist from the PCSIR, Lahore were deputed in the MSME office in USA for a period of 2/3 months for discussions and assistance in preparation of the above. The Chairman of the Corporation also visited MSME Office in USA at the time the study was being finalised there. No part of the work was carried out by MSME in Pakistan. Their representatives, however, did visit Pakistan at the time the bids were being examined by the Committee mentioned above and the contract was awarded to them. Thanking you, Yours faithfully Syed Ahmed Comptroller & Secretary P.S. A copy of the Contract with MSME and Certificate of payments and tax deducted thereon are enclosed."

13. Now if we read this letter with reference to the articles of the contract reproduced above it becomes abundantly clear that the contract was entered into between the respondent and RDCL for a job which was to be done in USA. From perusal of the letter it appears that only two of the engineers of the respondent came to Pakistan for 15 days to see the working conditions in the country and collected a sample for testing. It further appears that a representative of the respondent came to Pakistan to sign the contract. Apart from this no part of the work was carried out by the respondent in Pakistan. Nevertheless, if we keep into consideration aforesaid, two articles of the contract and this letter of RDCL we feel very much tempted to disagree with the observation of learned CIT (A) that "there existed no nexus either territorial or otherwise the appellant company, its earnings or its activities and the territories of Pakistan." It is true that the respondents were required to perform these functions outside Pakistan, which have been mentioned in various paragraphs of article 2.1. However, they had to come in any case to Pakistan for purposes of studying the working conditions and collecting soil samples. It is thus clear that unless they could have studied the working conditions and collected the samples for testing they would not have been in a position to prepare feasibility report, which might have been found bankable document by international or Pakistani financial institutions. We are, therefore, of the considered view that study of samples and local conditions was wholly and essentially necessary for the respondent. In other words, such study was SINE QUA NON of the contract and as such, in our judgment for the purposes of clause (a) of subsection (5) of section 12 such services should be wholly and essentially utilised outside Pakistan. In other words, we find territorial nexus between income earned by the respondent and Pakistan territory. We, therefore, with due respect to learned CIT (A) find force in the submission of Mr. Mohammad Farid, the learned DR. The submission of Mr. E.U. Khawaja the learned counsel for the respondent that the entire work under the contract was executed at the office of the respondent in USA. therefore does not appear to be correct. The payment, therefore, is deemed to accrue or arise in Pakistan hence the earnings of the respondent to our mind are taxable in Pakistan. Let us also mention here that under explanation appended to subsection (5) of section 12 of the Income Tax Ordinance the expression "fees for technical services" means and includes any fees paid for consultancy services also which admittedly the respondents have rendered.

14. We, therefore, allow this departmental appeal. The impugned order is hereby vacated and the order of the ITO is hereby restored. Since no other point was urged before us, the appeal, stands disposed of accordingly. M.B.A./459/T Appeal allowed.