2025 PLP (Trib (PTD)

M. NAEEM ASHRAF, MEMBER.

This appeal has been filed by Peter and Co. (Chartered Accountants) against the order dated 20.10.2017 passed by the Commissioner Inland Revenue (Appeals-II), Islamabad, whereby the order dated 24.11.2016 passed by the Assistant Commissioner Inland Revenue (Unit-V, Corporate Zone, RTO, Islamabad) under Section 172(3)(1)(f) of the Income Tax Ordinance, 2001 (the Ordinance, 2001), was remanded back to the assessing officer.

2. The facts of the case briefly stated are that: M/s. Sedco Forex International Inc., Islamabad, a non-resident company conducted business through a branch office in Pakistan. An income tax reference bearing I.T.A. No. 295/2000 was filed by the Commissioner Income Tax/Wealth Tax, Companies Zone, Islamabad. The Hon'ble Court directed the department to serve a hearing notice upon the respondent. However, the direction of the Hon'ble Court could not be implemented as the taxpayer had ceased operations in Pakistan, and their whereabouts remained unknown. Subsequently, upon examining the tax records of the non-resident company the Assistant Commissioner noted that the tax reference filed on 05.04.1997 by the Commissioner Income Tax against M/s. Sedco Forex International Inc., Islamabad, listed Peter and Co., as Tax Consultant. Consequently, a notice of hearing was served on the appellant on 23.11.2016, treating them as a representative under Section 172(3)(f) of the Ordinance, 2001. The appellant firm objected to being designated as a representative under Sections 172(3)(a) to 172(3)(f) of the Ordinance, 2001. Nonetheless, the Assistant Commissioner, declared the appellant as a statutory representative under section 172(3)(f) of the Ordinance, 2001. Aggrieved, the appellant filed an appeal before the learned Commissioner Inland Revenue (Appeals), who, vide his order dated 20.10.2017, remanded the case back to the assessing officer observing: "The perusal of the order reveals that the assessing officer issued the notice on 23-11-2016 and passed the order on 24-11-2016, which indicates that the appellant was not provided an adequate opportunity to defend the case. It is my considered opinion that the appellant should have been provided at least seven days to comply with the notice. By allowing only one day for compliance, the assessing officer has ignored the instructions contained in Circular No. 7(2)(d) (dated 01-02-1994) and various judgments of superior courts. In view of the facts and circumstances, I consider it appropriate to remand the case back to the assessing officer with directions to examine the details/documents. confront discrepancies, obtain a reply, and pass an order after providing the appellant with an opportunity for a hearing. The taxpayer is also directed to produce relevant documents for the proper ascertainment of facts."

3. Dissatisfied with the decision of the learned CIR(A), the appellant has filed the present appeal.

4. The case was heard on 28.04.2025. Mr. Oliver Peter Pervez, FCA, represented the appellant, while Mr. Attique Akbar, learned DR, represented the tax department.

5. The learned Authorized Representative (AR) contended that the learned CIR(A) erred in remanding rather than deciding the case on merits. He argued that upon identifying violations by the assessing officer, the learned CIR(A) should have annulled the order outright. The learned AR submitted documents including hearing notice dated 23.11.2016, power of attorney, and an order of the Hon'ble Lahore High Court, Rawalpindi Bench. Conversely, the learned DR strongly supported the stance of tax authorities.

6. After carefully considering the arguments of the learned representatives and the record submitted during the hearing, we find that the Assistant Commissioner's rational for declaring the appellant as statutory representative under Section 172(3) (f) of the Ordinance, 2001, is legally flawed. The Assistant Commissioner relied on the fact that the appellant had previously acted as the authorized representative in the tax reference filed by the Commissioner Income Tax on 05.04.1997 and continued in this capacity up to the appellate tribunal level. However, this reliance is misplaced, as the mere fact that the appellant served as an authorized representative in past does not inherently validate their appointment as a representative under Section 172(3)(f). The roles of an authorized representative under Section 223 of the Ordinance, 2001 differs fundamentally from a statutory representative under Section 172(3)(f), with the latter carrying specific fiduciary obligations and financial responsibilities, which fact, the Assistant Commissioner failed to comprehend. It is important to note that an authorized representative does not bear the same level of responsibility or vicarious liability as a representative. Therefore, the tax authorities cannot automatically appoint an authorized representative as a representative without establishing the required significant financial connection between the appellant and non-resident person, thus, such declaration lacks justification.

7. Additionally, the Assistant Commissioner based his decision on the pendeNcy of an Income Tax Reference bearing I.T.A. No. 265 of 2000 before the Islamabad High Court, where notice could not be served on the respondents as directed by the Hon'ble Court. It is relevant to note that the Hon'ble Islamabad High Court, disposed of the tax reference under discussion, as well as two other tax references, filed by the tax authorities against Sedco Forex International, bearing T. Ap. No. 314 of 2000, T.Ap. No.l295 of 2000 and T.Ap. No. 102 of 2000 vide order dated 3-5-2018 (available on the website of the Hon'ble Court), in the following terms: "In view of the above, the instant tax reference application as well as I.T.A. No.295 of 2000 are without merit and are accordingly dismissed." Therefore, the foundation on which the appellant was declared as statutory representative no longer holds, rendering the Assistant Commissioner's decision unsustainable and legally untenable.

8. A careful analysis of section 172 of the Income Tax Ordinance, 2001, reveals that a representative appointed under section 172(3)(f) must establish a fiduciary relationship with the non-resident person they represent. Subsection (f) of section 172(3) must be interpreted in conjunction with subsections (a) to (g) of the same section to ensure a harmonious understanding. Without this interpretation, the tax authorities would be armed with unbridled powers, enabling them to appoint any individual as a representative, regardless of the necessary relationship with the non-resident person. This relationship is essential to ensure that the representative can effectively fulfill their legal obligations, including the payment of tax liabilities. As observed in 1984 PTD 87, a representative must bear vicarious liability for the taxes owed by the non-resident company, which inherently requires a significant business connection between the representative and the non-resident company. Furthermore, Section 172(3)(f) should be read in conjunction with Section 173, which outlines the liabilities and obligations of representatives. As per subsection (1) of Section 173, every representative is responsible for performing duties and obligations imposed under the Ordinance, 2001, including the payment of tax. In the absence of any fiduciary relationship with the non-resident company, appointing a representative under Section 172(3)(f) could result in the individual being held vicariously liable for tax responsibilities without any actual involvement or relationship with the non-resident company, as clearly intended by subsections (a) to (g) of Section 172(3). In this regard we seek wisdom from the judgment reported as 1981 PTD 192 wherein following has been observed: ".... It is not the respondent's case that the petitioner was employed by or on behalf of the non-resident Company within the meaning of clause (a) likewise the respondent does not contend that the non-resident West Germany Company is in receipt of any income through the petitioner. The respondent seeks to saddle the petitioner with the liability to be treated and assessed as an agent of the non-resident for the sole reason that the petitioner admitted before the learned Additional District Judge that he was an associate of the non-resident company. Relying upon certain dictionary meaning the respondent came to the conclusion that his position was that of a partner. The arguments conveniently overlook a part of the statement of the petitioner before the learned Civil Judge where he expressly repudiated the suggestion that he was a partner or a share-holder of the company. The respondent did not even make a positive assertion as to the existence of business connection but stated that the "possibility of business relation between Abdul Rehman Mian and M/s. Ingenieurburo Oskar Von Miller GinbH cannot be ruled out."

7. I regret my inability to agree with the learned counsel for the respondent that the liability as an agent could be founded only on the mere possibility of existence of business relation between the petitioner to non-resident Company without there being any evidence upon which it could be open to the Income-tax Officer to reasonably draw the conclusion that the non-resident Company had in point of fact business connection with the petitioner.

8. The respondent appears to have chosen to declare the petitioner is an agent of Messrs Ingenieurburo Oskar Von Miller GmbH West Germany in an attempt to assess and recover the income-tax liability of the Company from the petitioner. I have no doubt that before the respondent could do so he was obliged to show that the petitioner falls in any of the three categories of persons against whom proceedings could be taken under section 43 of the Act. I am equally clear that section 43 which operates to impose a burden shall have to be strictly construed and even if two interpretations were possible, the interpretation favourable to the subject shall have to be adopted. 9... There being nothing on record to show that the fiduciary relationship or business connection between the petitioner and the aforesaid West Germany Company ever existed, the action of the respondent treating the petitioner as agent was arbitrary and wholly without any material basis.... [Emphasis Supplied)

9. Another significant aspect of this matter is that the order passed by the Assistant Commissioner, declaring the appellant as the representative, when read in conjunction with the Notice of Hearing dated 23.11.2016, appoints the appellant as the representative for all current and future tax years. However, Section 172(3) of the Income Tax Ordinance, 2001, specifically provides for the declaration of a representative for a single tax year only. This principle was reaffirmed in the case of 1971 PTD 1000, where the Court emphasized that a representative's liability is tied to a particular tax year. In said case, it was held that, "The liability imposed upon a person by his appointment as a statutory agent under Section 43 of the Act is only in respect of the liability for the assessment year for which the appointment is made." Therefore, based on this principle alone, the order passed by the Assistant Commissioner was illegal and unsustainable in law.

10. It is important to note that the legislature, under Section 172(5) of the Ordinance, 2001, has provided that the declaration of a representative under Section 172(3) is subject to subsections (4) and (5). For the purposes of the present controversy, only subsection (5) will be discussed, which mandates that an opportunity for a hearing must be provided to the person being declared as a representative. A person who has been afforded this opportunity must demonstrate to the Commissioner that they have not been in any fiduciary or business relationship with the non-resident person for whom they have been appointed as a representative. The grounds available to such a person are outlined in Section 172(3)(a) to (e), which allow them to show that they have no business or fiduciary relationship with the non-resident person. However, when subsection (3)(f) is read in isolation, the plain reading of the provision may leave the person without any grounds to present during the hearing. This would render the opportunity for a hearing redundant, which cannot have been the intention of the legislature. Therefore, it is essential that some reasoning be provided to a person appointed as a representative under Section 172(3)(f) to ensure that the hearing serves a meaningful purpose. Thus, the reasoning available to such a person should align with that enumerated in subsections (a) to (e), allowing them to present to the Commissioner during the hearing that they have no business relationship with the non-resident person, or that the information available to the Commissioner is inaccurate or irrelevant. In this manner, the true intent of subsection (5), which provides an opportunity for a hearing, will be fully realized.

11. In light of the above discussion, it is evident that the appellant's claim for being an authorized representative under Section 157 of the Income Tax Ordinance, 1979, is valid for the purposes of representing Sedco Forex International in relation to the tax years 1988-89 and 1990-91. However, this status does not automatically qualify them for appointment as a representative under Section 172(3)(f) of the Income Tax Ordinance, 2001, as the latter requires a distinct fiduciary relationship and financial connection with the non-resident company. Additionally, the failure of the assessing officer to specify a time frame for the appointment of the representative renders the order illegal. The order is also inconsistent with the statutory framework, which requires a specific tax year to be designated when appointing a representative.

12. Based on the foregoing, the appeal filed by the appellant is hereby allowed, and the orders passed by the tax authorities are annulled.

13. This order comprises eight (8) pages, with my signature placed on each page. MQ/23/Tax(Trib) Appeal allowed.