1985 PLP (Trib (PTD)

FARHAT ALI KHAN (MEMBER). The respondent, a company in corporated in United States of America, filed its return for assessment years 1976‑77, 1977‑78, 1978‑79 and 1979‑80 as non‑resident A. O. P. showing "nil" income. The respondent had entered into two separate contracts with Messrs P ...R .L . (hereinafter referred to as PARCO) and Sui Gas Transmission Company Limited (hereinafter referred to as SGTC) in connection with laying of separate pipelines for oil and gas. From perusal of the record it appeared that it was agreed between respondent and PARCO that the respondent would be paid professional fee with reference to the cost of project alongwith reimbursement of expenses incurred by it. Similarly, it was agreed that SGTC would pay a fixed monthly fee for Technical know how would also reimburse the expenses which were incurred by the respondent. The respondent in its returns for the relevant assessment years declared its income earned outside and inside P ., the total of which when converted in P ..currency, amounted to Rs. 22,75,733, Rs. 2,21,83,078, Rs. 62,58,196 and Rs. 38,26,756 during assessment years 1976‑77, 1977‑78, 1978‑79 and 1979‑80, respectively. However, relying upon Article III(i) of the Convention for the Avoidance of Double Taxation entered into between Pakistan and U. S. A. (herein after referred to as the Convention) the respondent claimed that its income being industrial and commercial profits was not subject to tax hence 'nil' return in all the relevant assessment years. The I. T. O. however, was not persuaded by the argument of the respondent. According to him, the nature of services rendered by the respondent to PARCO and S G T C amounted to management, control or supervision of the trade or business of both PARCO and SG TC hence was not falling within the ambit of the definition of "industrial or commercial profits". Arriving at his conclusion the Income‑tax Officer made, in all the relevant assessment orders, the following observation : "It is thus abundantly clear that as per the definition of industrial and Commercial profit given above, the assessee s case does not fall therein being the professional receipts for the control and supervision of the trades. Therefore, the assessee's claim for exemption is found ingenuine and incorrect." 'Thus, he subjected the income of the respondent to tax in all the four relevant assessment years. Moreover, in assessment years 1977‑78, 1978‑79 and 1979‑80 he also imposed additional tax for delayed payment and penal interest for failure to pay advance tax as prescribed under the relevant provisions the repealed Income‑tax Act, and the Income‑tax Ordinance, 1979, hereinafter referred to as "the Act" and "the Ordinance". In assessment years 1978‑79 and 1979‑80 he also levied surcharge.

2. The respondent having been dissatisfied and aggrieved went up in appeal. It was contended before the learned Commissioner of Income‑tax (A) that the fee paid by PARCO and SGTC to respondent was for its expertise and developed know how and as such amounted to "industrial or commercial profits" within the meaning of Articles III (i) of the Convention. It was further canvassed before the learned Commissioner of Income‑tax (A) that as both the projects of PARCO and SGTC were owned, super vised, controlled and managed by the Government, therefore there was no room for supervision and control of the respondent. Alternatively, it was also submitted that in any cast, the tax should have been imposed in accordance with the provisions of section 42 of the Act, and section 78 of the Ordinance. The aforesaid submission found favour with the learned Commissioner of Income‑tax (A). Repelling the observation of Income‑tax Officer which was reiterated before the learned Commissioner of Income‑tax (A) by the Legal Adviser of the Department, she observed :‑ "However, while making the above observation, the legal adviser did not take note of the tact that the trade of Messrs PARCO and Sui gas Transmission Company was the supply of gas and oil through the pipeline and the laying of the pipelines was not their trade, business or other activity as already stated in the earlier part of this order. This fact is quite clear from the agreement signed between Messrs W ..B ..Messrs SGTC and PARCO wherein it is clearly stated that Messrs W .B ..will lay pipelines and erect terminal through which the above liquid commodity will pass which would ultimately be refined by Messrs P ..and supplied by Messrs Suigas to various consumers/customers within country", (Please see page 24 of learned C.I.T. (Appeals) order). To lend further support to her conclusions the learned Commissioner of Income‑tax (A) at page 29 of her order also made the following obser vation :‑ ' "As both these projects are owned by the Government they are ‑automatically supervised controlled and managed by the Govern ment. On this point also the question of supervising, controlling or managing the affairs of PARCO and SGTC by Messrs W .....B...... does not arise and as those conditions do not exist which are necessary to bring the fees and payments received within the ambit of P tax as provided under the agreement for avoidance of double taxation. I can safely say and maintain that the regeneration and fees and other charges received by Messrs W B were not in any way related to the supervision, control and management of trade, business or other activity of Messrs SGTC and PARCO. Such remuneration, or fee was for the purpose of laying pipelines and erection terminals and as such falls within the ambit of and definition of industrial and commercial profits' and rank for exemption from P ..tax under the Avoidance of Double Taxation agreement between P ...... and the U.S.A. Dealing with the alternative argument of the respondent the learned Com missioner of Income‑tax (A) disposed it of in the following words : "The question of giving any opinion or considering the alternAte arguments advanced by the appellant for the assessment year 1976‑77 till 1979‑80; and the arguments of the legal Adviser dealing with taxability or otherwise of the receipts from Technical know how imparted from outside P need not to be considered‑ nor any finding given on this issue because in my opinion, as already slated above the appellant has rightfully claimed exemption from Pakistan tax under the provisions of Avoidance of Double Taxation Agreement between U. S. A. and Pakistan" Regarding additional tax, penal interest and levy of surcharge the learned Commissioner of Income‑tax (A) again did not record any finding because in her judgment it was not essential in view of her finding given regarding the non‑taxability of the industrial and commercial profits", of the respondent. Thus, she allowed all the appeals and annulled the assessment as framed by the Income‑tax Officer for assessment years 19;6‑77 till 1979‑

80. This time it was the Department's turn to feel aggrieved and go up in appeal, and they are before us accordingly.

3. Mr. D . the learned counsel for the Department, supported the appeal vehemently argued that the income of the respondent did not fall under the category of "Industrial or commercial profits". Elaborating his arguments further the learned counsel pointed out that any income derived by a non‑resident enterprise from the management, control or supervision of the trade, business or other activity of another enterprise or concern, was not included within the definition of "industrial and commercial profits". According to the learned counsel, same was the position regarding income earned by way of remuneration for labour or personal services. However Mr. D .. conceded that the respondent had no permanent establishment in Pakistan. The learned counsel further conceded that the income of the respondent could be assessed under section 42 subject to production of necessary evidence, but the learned counsel added that the respondent carried out 95 per cent. of the contract inside Pakistan and only 5 per cent. was executed abroad. Concluding his arguments the learned counsel submitted that since the source of the income of the respondent was within the taxable territory of Pakistan, it was liable to tax. As for as the exemption claimed by the respondent was concerned, according to the learned counsel, the burden of proving it rested squarely on its shoulders which it failed to discharge, hence income of the respondent was subject to Pakistan tax.

4. On the contrary, Mr. E. U. K .adopting his arguments which prevailed upon the learned Commissioner of Income‑tax (A) submitted that the income of the appellant was not liable to Pakistan tax as it amounted to "industrial or commercial profits" and was exempt from Pakistan tax under Article III of the Convention. Alternatively, the learned counsel argued that the respondent being non‑resident its tax liability should be determined under the relevant provisions of the Act and the Ordinance. Referring to certain correspondence Mr. K pointed out that even the Central Board of Revenue had held that the income of respondent was exempt from Pakistan tax as claimed by it. Mr. K...... also cited at Bar the following authorities in support of his arguments :‑ C. I. T. v. Abbot Finance Company (1982 P T D 31), Raleigh Investment Company v. C. I. T. (1983 P T D 126).

5. We have heard both the learned counsel for the appellant and the respondent at length and have also perused elaborately and diligently written impugned order as well as the assessment orders. Before we go to the merits of the submissions, it would be advantageous to reproduce the relevant provisions of Article II(i) and Article T11(i) of the Conven tion. Article III(i) reads as follows :‑ "A U ..S .E .shall not be subject to Pakistan tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Pakistan through a permanent establishment situated therein. If it so engaged, Pakistan tax may be imposed upon the entire income of such enterprise from sources within Pakistan." Article II(i) defines industrial or commercial profits as under :‑ "The term `industrial or commercial profits' does not include rents or royalties in respect of motion picture films or of oil wells, mines and quaries, or income in the form of dividends, interest, rents, or royalties or fee or other remuneration derived by an enterprise from the mangement, control or supervision of the trade, business or other activities of another enterprise or concerned or remunera tion for labour or personal services, or income from operation of ships." From perusal of aforesaid provision of law it appears that if income ofU .S ..E falls under any of the categories laid down hereinbelow, it would not be industrial or commercial profits, hence subject to Pakistan tax. The categories as follows : (1) Income derived from trade or business in Pakistan through permanent establishment situated therein. (2) Rent or royalties of motion picture films or of oil wells, mines and quaries. (3) Income earned in the form of dividends, interest or rents. (4) Income derived from other type of royalties than those mentioned above. (5) Income derived by way of fee or other remuneration from the management, control or supervision of the trade, business or other activity of another enterprise or concern. (6) Income derived as remuneration for labour or personal services and . (7) Income derived from operation of ships. As far as category No. 1 is concerned, the learned counsel for the Depart ment has fairly conceded that since respondent had no permanent establishment in Pakistan, therefore, its income .was not subject to the Pakistan tax. However, the learned counsel has very strenuously argue' that since the income of the respondent feel within the ambit of category 5 and 6 it was not, therefore, income exempt from Pakistan tax begin industrial 'or commercial profits. Starting with his first submission it appears that the expression "or other activity" has not been properly appreciated. This expression follows the words "the trade business". We would not discuss what the later expression means because we ascribe the same connotation to it which it carries in common parlance. Sine the expression" trade"/" business" means and implies simply and, merely trade or business, the expression "other activity" would naturally mean and imply any activity which is other than "trade" or "business" activity. The question then is what this other activity can be ? In our judgment, such activity, in any case, should be connected with or related to the trade or business of an enterprise we are of this view because the expres sion "of other activity" has been preceded by expression "Trade or business". It would, therefore, not mean and imply an activity which is not related to or connected with business or trade. For example, we cannot say that the expression "other activity", means and implies political, social or religious activity. Moreover, we are of the view that the expression "other activity" includes all activities which are necessary, to carry on business or trade of an enterprise. Whether such activity, should be prior to the establishment of a business or a trade ; or whether it is regarding expansion or modernisation of a business or a trade, area wholly extraneous considerations. Since expression used is. "other activity". It may mean any type of activity whether it is carried on prior to the establishment of a business or trad0 #or whether it is required for the purposes of expansion or modernisation of such business or trade. The learned Commissioner of Income‑tax (A) appears to have laid emphasis on the management, control or supervision of the trade and business of PARCO and SGTC. She held that as the Government was in the management, control or supervision of PARCO and SGTC, there fore, the respondent could not be said to be in control, management or supervision of these two enterprises. However, apparently, the argument of Mr. D... does not appear to be that the respondent was in manage ment, control or supervision of the trade of business of PARCO or SGTC. He rather emphasised on the management, control or supervision, of the trade or business of PARCO or SGTC. He rather emphasised on the management, control or supervision of "other activity" both enterprises. Again, the learned Commissioner of Income‑tax (A) held that since the function of PARCO and SGTC was to refine oil and distribute gas, therefore, it could not be said that laying down of pipelines was their trade or business. But with due respect to her, we think that it is their "other activity" which is related to or connected with their business or trade. Nevertheless, the question remains as to whether tire respondent were in management, control or supervision of the "other activity namely laying down of pipeline ? To answer this question, we will have to refer to the terms and conditions of the contract. Article II of the Contract entered into between the respondent and PARCO deals with they service agreed to be rendered by the respondent. They are as under : (a) To arrange and supervise borings, surveys and other field work necessary to connection with the Project (b) To prepare and submit to Owner for its approval a preliminary design of the Project : (c) To direct the site investigation work and review field data : (d) To prepare a final Engineer's cost estimate of the Project : (e) To prepare final design, drawings and documents for the solicita tion of international bids for the Project : (f ) To prepare bid documents for the construction of the Project : (g) To assist Owner in obtaining quotations for all materials, require ments, analyse same and make recommendations place purchase orders on directions of Owner and expedite supply thereof : (h) To analyse bids and make recommendations or award of contracts for the Project, and assist Owner in negotiations for finalising con tracts." : Similarly, Appendix‑B of the contract entered into between SGTC and the respondent lays down the functions of‑ the respondent. They are as under :‑ (a) A review of the pipeline design engineering and material specifica tions prepared by SuiGas Transmission Company Limited (SGTC) with comments and suggested modifications wherever appropriate, in line with latest gas pipeline technology. (b) An evaluation of the organization of the construction staff and advisement on the mobilisation of the staff for optimum utility. (c) Advisement of the deployment of construction equipment for most efficient utilisation.' (d) Advisement on the application of the latest development in gas pipeline construction technology. (e) A review of the design and material specifications which will be prepared by SGTC for the impressed current cathodic protection system, with comments and suggested modifications. (f ) Advisement and assistance in the design preparation of. material specifications and tender documents for the installation and com missioning on a turn key basis of telecommunications and telemutry systems for the project with special attention to integration into the existing pipeline system and the prospect of the future application of a telecontrol system. (g) Assistance in the technical evaluation of bids for telecommunica tions equipment, and in the awarding of contract. (h) Supervision of the construction, testing and commissioning of the pipeline. (ii) Consultant's personnel shall not exercise any executive powers but at every stage will perform the Services under the active collaboration and liaison with SGTC and in particular its Project and Construction Departments.

6. If we read these lists of functions of the respondent, it appears that they had to supervise several activities regarding the completion of the project of laying pipelines. To cut the matter short even in paragraph (a) of Article‑II of the contract of PARCO and paragraph (h) of Appendix‑B of the contract of SGTC the word "supervise" and "supervision" have been used. Thus, it is abundantly clear that the respondents if not in control and management of the entire project were definitely supervising some of the activities which were related to or connected with the "business or trade" of PARCO and SGTC. We, therefore, find the first submission of the learned counsel for the Department well‑founded.

7. Now turning to the other leg of the argument of the learned counsel for the Department we will have to examine whether the respondent derived income from remuneration for personal services. The word "personal services" has not been defined either in two contract or in the Convention. We will, therefore, have to find out as to what connotation is to be assigned to this expression. To begin with, firstly we would point out that expres sion "personal services" does not mean services rendered by an individual to another individual or a company. Had it been so Article XI of the Convention would not have provided for exemption of personal income of an individual under certain circumstances. Article XI is as under :‑ (i) " An individual who is a resident of the United States, shall be exempt from Pakistan tax on profits or remuneration in respect of personal including professional services performed in Pakistan in any financial year if.. . . . . .. . . . . .. . . . . . 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, a mere omission of the expression from Article II (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 artific 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 condition. Now we come to next questions what is meant by expression "personal services" 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) services" 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 services" means professional services 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 to mind that in Pakistan law the income from business is treated separately than income from profession.

8. 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 Paris 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 includ ing U. S, A. Article 14 thereof is reproduced as under "Article 14 INDEPENDENT PERSONAL SERVICES

1. Income derived by a resident of Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he has a fixed base regulary available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other State but only so much of it gas is attributable to that fixed base.

2. The term professional services' includes especially independent scientific literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. At its page 129, the commentary on Article 4 is contained. The relevant paragraphs are as under ; Commentary on Article 14 Concerning the Taxation of ' Independent Personal Services.

1. The Article is concerned with what are commonly known as profes sional services and with other activities of an independent character. This excludes industrial and commercial activities and also pro fessional services performed in employment e. g. a physician serving as a medical officer in a factory. It should, however, be observed that the Article does not concern independent activities of entertainers and athletes, these being covered by Article 17.

2. The meaning of the term "professional services" is illustrated by some examples of typical liberal professions. The enumeration has an explanatory character only and is not exhaustive. Difficulties of interpretation which might arise in special cases may be solved by mutual agreement between the competent authorities of the Con tracting States concerned." From the above‑quoted extracts it is thus clear that the expression "personal services" means and implies professional services in such bilateral or~ multilateral Conventions for Avoidance of Incidence of Double Taxation., However, the question remains as to whether the respondents were rendering professional services to PARCO and SGTC. In this connection we would again revert back to two contracts. Referring to the first contract entered into with PARCO it appears that in Article II paragraph 2.01 the respondent has been described as "the Engineer." Again, in paragraph 2.03 skill and experience of the engineer has been mentioned. This paragraph reads : 2.03. The Engineer represents that it has examined the site of the pro ject and all data made available to it by Owner relating to the project and the Engineer has skill and experience in the design and supervi sion of construction of facilities of that kind and character and that it has an organisation capable of carrying out and providing for the work herein agreed to be performed." We have already quoted above the services, which are to be rendered by the respondent. Similarly, if we turn to the contract entered into with SGTC, we find that its Article I deals with the services to be performed by the respondent. Its section 1.01 is as follows ; "Section 1.01. Description of services.‑The work to be performed by the Consultant under this Contract is to review to design and engineer ing work prepared and carried out respectively by SGTC and advise on pipeline construction. The nature and scope of the services are setforth in detail in the Terms of Reference specified in Appendix `B' to this contract. Moreover, the Consultant will ensure that its advice on specifications and design shall be impartial in order to promote International competitive bidding. The Consultant agrees to limit its role to that of consulting engineer and will dis qualify itself and associates/affiliates for work in any other capacity on the Project (including bidding on any part of the project). In addition, he will ensure that the specifications proposed by him as consulting engineer will be impartial and can meet with compliance on a competitive basis."

8. Services of the respondent to be rendered to SGTC have already been reproduced. Thus, from perusal of all these extracts it appears that the respondent entered into contract with both PARCO and SGTC to render professional services of an engineer. On top of it, the following passage from the order of learned Commissioner of Income‑tax (Appeals) clinches the issue conclusively in favour of the learned counsel for the Department.) It reads :‑ "With reference to the above, the Authorised Representative has argued that the appellant is internationally engaged in providing engineering services on worldwide basis and their involvement under the two contracts has all along been confined to render professional services including specialised know-how and in no way they manage or con trol or supervise the activities of M/s. PARCO or Sui Gas Transmis sion Co., and the status of the two companies has always been remained that of Principal/Owner." Please see page 6 of the order).

9. We, therefore, can safely conclude that the respondent have earned their income, by rendering professional services. Since professional service fall within 6th category of income as discussed earlier, it cannot, be deemed to be industrial or commercial profits. We, therefore, with due respect to learned Commissioner of Income‑tax (Appeals), agree with the submissions of Mr. Dareshani that the income of the respondent not being industrial or commercial profits was subject to Pakistan Tax. However, matter does not end here. The learned Commissioner of Income‑tax (Appeals) recording the impugned order refrained herself from expressing her views on other points urged before her. We, therefore, are very much deprived of the benefit of her findings and observations on these issues. Under these circumstances, we are left with no alternative but to send the matter back to learned Commissioner of Income‑tax (Appeals) with the direction that she should record her finding on all other issues urged before‑her by both the parties.

10. Before parting with these appeals, we would like to mention that the learned Commissioner of Income‑tax (Appeals) has elaborately dealt with certain correspondence exchanges between the Commissioner of Income‑tax, Lahore and Central Board of Revenue on one hand and Com missioner of Income‑tax, Karachi and Central Board of Revenue on the other. With due respect the view expressed by the Central Board of, Revenue, or the learned Commissioners of Income‑tax is not binding on us. We, therefore, do not wish to dilate upon this point any more. At this juncture let us also mention that the rulings cited by learned counsel for the respondent hate no bearing on the issues involved before us. We have, therefore, refrained ourselves from discussing them details. Nevertheless, let us mention that in Abbott's. case (supra) the question involved was whether royalty for use of patent rights and fee for technical services rendered to Pakistani Company under an agreement by a Swiss Company was exempt from Pakistan‑tax being industrial and commercial profits as defined by provisions of agreement for avoidance of Double Taxation between Pakistan and Switzerland. Similarly, in Relaigh's case the question involved was as to whether the surplus arising out of sale of share was exempt from Pakistan‑tax under provisions of agreement for avoidance of Double Taxation between Pakistan and the United Kingdom. It was contended for the Department that such surplus was capital gain did not fall within the definition of industrial or commercial profits but the conten tion was repelled.

11. To conclude we hereby set aside the order of learned Commis sioner of Income‑tax (Appeals) and send the matter ‑back to her with the direction that she should record her finding on the other issues canvassed before her. M. B. A. Order accordingly.