2014 PLP (Trib (PTD)

These appeals have been filed at the instance of the Appellant/Taxpayer against the Order passed by the Commissioner Inland Revenue Appeals-II, vide Appeal No.440-413/2011 and 567/2011 for tax years 2011, dated 20-9-2011 and 15-11-2011 respectively, agitating upon the treatment of the learned Appellate Commissioner by filing the following grounds:-- (Space Com-USA) (1) That the order of the Commissioner Inland Revenue is bad on law and facts of the case. (2) That the Commissioner Inland Revenue had failed to appreciate the fact that any order passed by the Commissioner of Income Tax which enhance the liability of a taxpayer is covered under section 127 of the Ordinance, 2001 so he is not justified in dismiss the appeal as out of jurisdiction. (3) That the Commissioner of Inland Revenue had wrongly treated the payments being "Royalties" under Article VIII instead of Industrial/Commercial profits as per Article III of the Double Taxation Treaty between Islamic Republic of Pakistan and United States of America. (4) That the Commissioner had erred while passing the original order by assuming that taxpayer will use the equipment hardware, software, infrastructure and network as royalty instead of business income of the Non Resident. (5) That the Commissioner erred / misled himself in interpreting the Para D of the contract in his original order. (6) That the Commissioner erred in original order passed under section 152 that the transponder is installed in the satellite i.e. out-side of the territorial jurisdiction of the Pakistan so the same is not Pakistan Source of Income. (7) That the Commissioner of Inland Revenue erred in original order by treating the payment made to non-resident is a business income instead of royalty. (8) That the commissioner erred in original order while treating the taxpayer liable for the payment of tax on tax and withholding of tax. (9) The appellant craves the permission to amend, add, alter any or all the grounds before or at the time of hearing of appeal. (World Skies-Netherland) (1) That the order of the Commissioner Inland Revenue is bad on law and facts of the case. (2) That the Commissioner Inland Revenue had wrongly treated the payments being "Royalties" under Article 12 instead of "business profits" as per Article 07 of the Double taxation Treaty between Islamic Republic of Pakistan and Netherlands. (3) That the Commissioner had erred by assuming that taxpayer will use the equipment hardware, software, infrastructure and network as royalty instead of business income of the Non Resident. (4) That the Commissioner erred / misled himself in interpreting the Para D of the contract in his original order. (5) That the Commissioner erred in while passing order under section 152 that the transponder is installed in the satellite i.e. out-side of the territorial jurisdiction of the Pakistan so the same is not Pakistan Source of Income. (6) That the Commissioner of Inland Revenue erred by treating the payments be made to non-resident royalty instead of business income. (7) That the commissioner erred in order while treating the taxpayer liable for the payment of tax on tax and withholding of tax. (World Skies-Netherland-U/S 221) (1) That the order of the Commissioner Inland Revenue is bad on law and facts of the case. (2) That the Commissioner Inland Revenue had failed to appreciate the fact that the order passed by the Commissioner of Income Tax was under section 152 read with 221 of the Income Tax Ordinance 2001 which is covered under section 127 of the Ordinance 2001. (3) That the Commissioner of Inland Revenue had wrongly treated the payments being "Royalties" under Article 12 instead of business profits as per Article 7 of the Double Taxation Treaty between Islamic Republic of Pakistan and Netherlands which itself is mistake floating on record. (4) That the Commissioner had erred while passing the original order by assuming that taxpayer will use the equipment hardware, software, infrastructure and network as royalty instead of business income of the Non Resident. (5) That the Commissioner erred / misled himself in interpreting the Para D of the contract in his original order. (6) That the Commissioner erred in original order passed under section 152 that the transponder is installed in the satellite i.e. out-side of the territorial jurisdiction of the Pakistan so the same is not Pakistan Source of Income. (7) That the Commissioner of Inland Revenue erred in original order by treating the payment made to non-resident is a business income instead of royalty. (8) That the commissioner erred in original order while treating the taxpayer liable for the payment of tax on tax and withholding of tax.

2. Brief facts of the case are that the taxpayer is a public limited company and required to pay to the non-resident company of Messrs Space Com of United States of America. The Commissioner Inland Revenue, RTU, Islamabad passed order under section 152 of the Income Tax Ordinance and treated the payments of taxpayer as "Royalties" instead of claimed "Industrial/Commercial profits". The Commissioner of Inland Revenue (Appeals) had dismissed the appeal on ground that same is out of his jurisdiction.

3. Similarly, in case of Messrs SES World Skies (an-other non- resident company) of Netherland, Commissioner passed under section 152 of the Income Tax Ordinance who treated the payments as "Royalties" instead of "business profits". The Commissioner Inland Revenue (Appeals) had dismissed the appeal on ground that same is out of jurisdiction. That on the same pitch, the Commissioner passed an order under section 152 read with the section 221 of the Income Tax Ordinance who treated the payments as "Royalties" instead of "business profits". The Commissioner of Inland Revenue had dismissed the appeal on ground that same is out of jurisdiction. So the primary dispute is in respect of status of payments to non-residents by the domestic company and its treatment for the purpose of taxation under the treaties.

4. Mr. Nadeem Yaseen of Messrs N Y Law Associates argued the case on behalf of the appellant and DR had opposed the arguments.

5. Mr. Yaseen argued that Commissioner Inland Revenue Appeal had wrongly dismissed the appeals on the ground of jurisdiction. According to him, any order which increases the liability of tax payer is appealable and the same is envisaged in the section 127(1) of the Income Tax Ordinance 2001; Further stated that the payments do not come into the ambit of royalty. The royalty is defined in Article VIII of the Double Taxation Treaty between Islamic Republic of Pakistan and United States of America. The relevant portion of the same is reproduced herewith for the sake of brevity:-- "(1) Any royalty (other than royalties or from motion pictures, films) paid as consideration for the use of or the use of privilege using any copy right, patent, design, secrete process or formula, trade mark other like properties and derived from sources in one of the contracting State by a resident of the other contracting State not having permanent establishment in the former state shall be exempt from taxing such former state. (2) Where any royalty exceeds a fair and reasonable consideration in respects of the rights for which it is paid, the exemption provided by the present Article shall apply only so much of the royalty as represent such fair and reasonable consideration."

6. He reiterated that there is no usage of intellectual property of any kind like use equipment as hardware, software, infrastructure and network as royalty rather a satellite receiver owned by the non-resident placed in the upper space and any one can buy the technical facility of the satellite who possesses compatible ground facility as local recipient. In this case services are rendered for voice call and internet services. AR also referred the case of Panamsat Corporation USA, decide by this Tribunal through Order No.2081/KB of 2001 dated 4-5-2002 and treated the payments as commercial profits. The relevant part i.e. Article III of the Treaty between Republic of Pakistan and USA reads as under:-- "Article III (1) A United States enterprise 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 is so engaged, Pakistan tax may be imposed upon the entire income of such enterprise from sources within Pakistan. (2) A Pakistan enterprise shall not be subject to United States tax in respect of its industrial or commercial profits unless it is engaged in trade or business in the United States through a permanent establishment situated therein. If it is so engaged, United States tax may be imposed upon the entire income of such enterprise from sources within the United States. (3) Where an enterprise of one of the contracting States is engaged in trade or business in the other contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive in such other contracting State if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment, and the profits so attributed shall be deemed to be income of that permanent establishment and shall be taxed accordingly."

7. AR was of the view that it is necessary for a withholding agent/payer to determine the nature of the payment and otherwise the intension of the legislature would be nullify by treating various sections of withholding in the Ordinance at par and payments in all the sections at equal parlance except salary fall under the ambit of business income in the hands of payee. The various payments are specifically defined in the Double Taxation Treaties and payer is required to fulfill the requirements of all the specific payments and the residue would fall under the ambit of income from Industrial/Commercial profits as per Article III of the Treaty. It would necessary to mention here that the Revenue himself had treated these payments as fee for technical services in case of Messrs Telecard Limited, ignoring the fact that nature of both the payments are same and only the payee are different. This Tribunal rejected the plea of the Revenue and treated the payments as commercial profits.

8. In case of payments made to SES World Skies a non resident company of Netherlands, the Commissioner had treated the payments as Royalty as per Article 12 of the Double Taxation Treaties between the Netherland and Republic of Pakistan. The relevant portion of the same is reproduced here below:-- "(1) Royalty arising in one of the States and paid to a resident of other state may be taxed in that other State. (2) However such royalties may also be taxed in the State in which they arise and according to the law's of that State. But if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: (a) 15 per cent of the gross amount of the payments referred to in paragraph 3(a): (b) 15 per cent of the gross amount of the payments referred to in paragraph 3(b): (c) 5 per cent of the gross amount of the payments referred to in paragraph 3(c): (3) The term "Royalties as used in this Articles means payments of any kind receipts as a consideration for the use of or the right to use: (a) A patent, trademark or trade name, secrete formula or process, design or model or information concerning industrial, commercial or scientific experience: (b) Industrial, commercial or scientific equipment, cinematograph and films and tapes or television and broadcastings: (c) A copy right of a literary, artistic or scientific work but excluding cinematograph films and tapes for television or broadcasting.

9. The AR further explained that in the context of sections 152(2) and 152(5) of the Income Tax Ordinance, 2001 the Hon'able High Court of Sindh in a Constitutional Petition No.D-1141 of 2009 had held that if payment is not chargeable to tax under Double Tax Treaty the same cannot be held liable to deduction in advance. The relevant portion of the order is reproduced here below:-- EFU General Insurance Ltd. v. Federation of Pakistan C.P. No-D: 1141 of 2009 Decided on 8-3-2010 CITATION: PTD (sic) HC 2091; 2010 PTD 1159 "Constitutional petition -- Payment to non-resident --Non-deduction of tax at source -- Avoidance of double taxation -Payment of re-insurance premiums to foreign non-resident insurance Companies

Demand of Tax by department on such remittance - Validity

Whether it is trite law that question of deduction of tax does not arise where payments made to non-residents are exempt from Tax -- Held yes -- Whether petitioners are not legally obliged to make any deduction of Tax at source due to reason that this type of Payment falls outside ambit and scope of Ordinance and by no stretch of imagination be taxed either as that of Pakistan source income or could be legally deemed to be income accruing or arising in Pakistan

Held, yes--Whether although provision of section 152(5) of Ordinance directs a taxpayer to seek approval from Commissioner for remitting payment to non-resident without deduction of tax, and merely on basis of use of word "shall" if could not be construed that it is mandatory provision - - Held yes - Whether if payment is not chargeable to tax under Double Tax Treaty, same cannot be held liable to deduction of tax for, Tax which is not ultimately payable cannot be collect in advance -- Held yes -"

10. However, the learned DR had opposed the arguments of the AR and stated that if the arguments of the AR be accepted there would be no payment came into the ambit of the royalty. He strongly supported the reasons incorporated by the OR who passed order under section 152.

11. We have considered the arguments of both the parties. We find that core issue of disagreement between the taxpayer and the department is on the nature of payments and applicability of relevant clauses of double taxation treaties. However, it is immaterial for the payer that the how the payee treats the receipts so is in this case.

12. Further we are of the opinion that CIR(A) was legally empowered to adjudicate the grievance of the taxpayer; Thus not terming it as out of his jurisdiction. Moreover, we also hold that initial opinion given under section 152(6) should not deprive the taxpayer of his fundamental legal privileges or ignore significant aspects subsequently revealed at the time of levy.

13. After careful study of the referred definitions of the royalty and perusing the complete agreements of avoidance of double taxation, it is clear that payments made by the taxpayer are quite distinguishable from royalty as the satellite in the upper space installed by anyone and its usage would not attract any usage of the intellectual property i.e. trademark, copyright or patents. The Commissioner had also not taken cognizance of frequency, intensity, duration and focus of activities accrued between the two contracting parties or alternate options available to the taxpayer i.e. presence of other parties in the open market.

14. The Hon'ble High Court had also elaborated the issue in detail and observed that there are no penal provision envisaged in the law for non compliance to section 152(2) and (5) and this dilute the importance of the word "shall" in the section, without establishing first that the payments are chargeable to tax in Pakistan. In the presence of the facts, we are fortified with view point of the Hon'ble High Court and agree with the argument of the AR that the payments in this case are not subject to tax in Pakistan so could not be stretched to the withholding tax regime, resultantly it is held that the payments are not subject to withholding tax under section152 of the Income Tax Ordinance, 2001 in both cases of Space Com of USA and SES World Skies of Netherland and question of tax on tax is also not arises.

15. The other fundamental aspect altogether ignored by the learned CIR is ownership of "mother antenna" installed in Pakistan to interact with satellite beam. Besides this, the business of taxpayer is unable to operate in case of any pause or intervention in the satellite connectivity or the taxpayer is able to choose another concern to continue his business sustainability. Thus the ownership of technical equipment and control over operational management is performed by the taxpayer in Pakistan despite the higher degree of interdependence; we hold the disbursement as normal business expense.

16. Since a standard form agreement was concluded between the contracting parties and the payments include payment of taxes (subject to verification) on the part of recipient, which would not sustain tax deduction on the basis of our findings mentioned supra. Thus in case of excessive payments to non-residents to meet out the tax liability of recipient, we order that a sum @ 17.64% of the payments to non-residents debited in the accounts of the taxpayer would be liable to be recouped under the relevant provisions of law.

17. The appeals succeed to the extent and manners mentioned above. JJK/182/Tax(Trib.) Appeal allowed.