1999 PLP (Trib (PTD)

"(1) The industrial or commercial profits of an enterprise of one of the territories shall not be subjected to tax in the other territory unless the enterprise carries on a trade of business in the other territory through a permanent establishment situated therein. If it caries on a trade or business in that other territory through a permanent establishment situated therein, tax may be imposed on those profits in the other territory but only on so much of them as is attributable to that permanent establishment. (2) The term 'industrial or commercial profits', as used in this Article, does not include income from the operation of ships or aircraft interest on bonds, securities or debentures or any other form of indebtness, dividends or moralities, fee or other remuneration derived from the management, control or supervision of the trade, business or other activities of an enterprise or remuneration for labour or personal (including professional) services, except any such income which, under the laws of any of the Contracting States and in accordance with this Article is attributable to a permanent establishment situated therein."

7. Mr. Siraj-ul-Haq, Advocate and Mr. Arshad Siraj, Advocate have been heard on behalf of the appellant/assessee together with Mr. Mumtaz Sheikh and Mr. Ashraf-ud-Din Bhatti, D.Rs. for the department. The learned counsel for the assessee vehemently argued the case at the bar and contends that three issues fall for decision before us. Firstly if fee for technical services was includable in "Industrial and commercial profits" under Article III of the Convention for Avoidance of Double Taxation between Pakistan and France and was, therefore, exempt if there was no permanent establishment. Secondly if the fee for technical services was included in industrial and commercial profits whether such income was chargeable under the head income from business or profession or under the head other sources? Lastly whether the reported judgment of the Karachi Bench of the Tribunal 1985 PTD (Trib.) 877 was correctly decided? In support of his submissions that the fees received by the appellant company were industrial and commercial, profits and, therefore, enjoyed exemption he relied upon the order recorded on 18-1-1996 by a Division Bench at Karachi, on the appeal of present appellant as I.T.A. No.2014/KB of 1986-87. Through that order it was found that income of the appellant fell within the definition of industrial and commercial profits and in the absence of permanent establishment in Pakistan it was not chargeable to tax in this country. He also referred to another order of the Tribunal dated 30-1-1996 in I.T.A. No.885/KB of 1988-89 (Assessment year 1986-87) where the same Division Bench decided for the assessee/appellant in the year 1986-87 for the reasons recorded in the earlier order, dated 18-1-1996 which pertains to the assessment year 1985-86. The learned counsel also placed his reliance upon the order of the Lahore Bench in I.T.A. No.3750/LB of 1986-87 and contended that the facts considered by the Tribunal has resemblance with the present case as compared to those considered by the Karachi Bench in the reported judgment 1985 PTD (Trib.)

877. In this regard he drew our attention to para. 6 of the order of the Lahore Bench and claims that firstly the view adopted by the Karachi Bench was not directly attracted to the facts and, therefore, the Division Bench at Lahore refused to follow the same in the facts before them which, as noted above were similar to the facts of the present case. He also placed reliance upon 1989 PTD 664 re: CIT v. General Tyres Limited in which Article III of the S.R.O. 79(I) 69 for avoidance of double taxation between Government of United States of America and Government of Pakistan was considered by the Karachi High Court. In that cast the non-resident company which derived its income as technical company was considered. The Assessing Officer refused to allow the exemption claimed but the Tribunal allowed the same. The Karachi High Court finally upheld the view adopted by the Tribunal. In the next case relied upon at the bar re: CIT v. Abbot Finance Co. Ltd. reported as 1991 PTD 915, -the -Karachi High Court considered Article III of the agreement of avoidance of double taxation between the Government of Pakistan and the Federal Republic of Switzerland. In that case also the Karachi High Court approved the view adopted by the Tribunal that technical amounts received as fees were exempted from levy of tax in accordance with Article III of the Convention. Reliance was also placed on 1993 PTD 739 (Trib.) wherein exemption clause (III) in convention for avoidance of double taxation between Pakistan and Switzerland were considered by a Division Bench of the Tribunal at Lahore. In that order, section 80(AA) of the Income Tax Ordinance was- also considered. The Division Bench in the course of that order observed: "Section 80(AA), Income Tax Ordinance, 1979 would come into operation only when fee for technical service is received or is deemed to be received by, or accrues or arises, or is deemed to accrue or arise, to a non-resident ' in Pakistan'. "

8. The next case relied upon by the learned -counsel for the appellant reported as 1988 PTD (Trib.) 1022 is, however; not strictly relevant to the issue raised before us. In the case reported as 1983 PTD 126 re: Raleigh. Investment Co. Ltd. v. CIT, Karachi East, Karachi, the expression industrial and commercial profits as used in Article 2(1)(k) of the agreement for avoidance of double taxation between Pakistan and United Kingdom was considered. Again in the case reported as 1992 PTD 636 re: Glaxo Group Ltd. v. CIT General Zone-B, Karachi the Karachi High Court considered the phrase industrial and commercial profits and used in the said agreement and held that it should be interpreted with reference to its ordinary meanings. However, finally the Court held against the assessee on the ground that the services rendered by it under clauses (d) and (g) of clause (4) of the agreement were in nature of personal services and therefore, were not exempt from Income-tax as such services were specifically excluded from the definition of industrial and commercial profits in Article II(i)(k) of the treaty. The learned counsel has also relied upon an unreported judgment of the Supreme Court of Pakistan recorded in Civil Appeals Nos.76-K of 1991 and 26-K. of 1992 whereby .the judgment of the Karachi High Court in Glaxo Group Limited was reversed. In para. 5 of the judgment the Honourable Supreme Court quoted from Licensing Guide for developing countries published by World Intellectual Property Organization in 1977. It reads as follows: "The technical services may sometimes be a part of an integrated technology transfer transaction that includes an industrial property, licence or technical know how agreement and an agreement to render specialized design and engineering or consulting services through technical and professional experts concerning the purchase, installation, operation' and maintenance of machinery, equipment or other capital goods needed for construction of the industrial plant. "

9. The learned A.R. for the assessee also cited few other judgments, which are not attracted in the instant case, hence need not to be discussed for the sake of convenience. In the nutshell, the arguments of the learned A.R. for the assessee revolve around that business of the assessee was providing of technical assistance and know how which in broader term is trading in know how, so fee for technical services comes under the purview of definition of industrial and commercial profits so exempt from levy of tax.

10. In the case before us it has not been denied that the appellant is a consultant and the receipts disclosed to the department were from that source only. The Assessing Officer rightly refused its claim which was clearly not supported by the said Article III of the agreement for, avoidance. The definition of the term "industrial or commercial profits" clearly excludes' income from rendering professional services. The learned Counsel for the assessee has made a lot of stress of the fact that rendering of the kind of service is regular business of the appellant and, therefore, it clearly fell within the four corners of commerce or engagement in business. However, we are not inclined to agree in as much as the terms "industrial or commercial" are too well known to be mixed up or confused with professional services. In the unreported judgment the learned Division Bench at Lahore appears to have stretched itself to hold for the assessee. Also we have not been able to persuade ourselves to agree with the distinction it attempted to create between the. facts before them and those considered by the Karachi Bench in the reported judgment. We have also noted that in Para. 7 of that order the learned Division Bench based its opinion on the fact that no personnel were deployed in the field or on the site for day to day supervision of the implementation of the sketch design or design of the machinery. On the other hand the present appellant has failed to create any such kind of distinction or to say that it was not at all concerned with the on-going projects. The issue of permanent establishment is no more before us as the appellant has already been allowed relief in this regard. However, while considering that issue it was brought on record that a number of personnel of the appellant/assessee remained present in Pakistan for most part of the year. Therefore, in absence of an express denial that the personnel visiting Pakistan did not supervise the projects nor they participated in the progress of the work. We are of the view that the ratio emerging out of the order of the Lahore Bench is not otherwise attracted to the facts before us.

11. In 1985 PTD (Trib.) 877 the learned Division Bench at Karachi gave an elaborate break up of the term "industrial or commercial profits" as used in the convention between Pakistan and the U.S.A. That exemption clause is available in exactly the same form in the treaty before us. The learned A.R. has also pointed out that in the explanation clause of the treaty before us professional services were not included in "industrial and commercial profit". However, in convention between Pakistan and France the term industrial and commercial profits clearly and expressly excludes income from professional services. Therefore, even if there was any doubt with regard to that source in the convention between Pakistan and U.S.A. It is totally removed in the convention between Pakistan and France which is now under consideration before us. It is correct that in the clauses of income under section 15, income from business or profession has been mentioned together in sub-clause. (d). However, the mentioning of income from business and professional as one group does not mean that no distinction exists between the two. Similarly the words industry and commerce have their own peculiar meaning which can never be intermingled or mixed up with the word profession. The fact of the matter is that the word industry or commerce is many a times used to distinguish or in contradiction of a particular activity from a profession like Medical, Law, Architecture, etc.

12. In the immediate preceding year a Division Bench of this Tribunal found in favour of the present appellant by making a reference, to the said unreported judgment of the Lahore Bench but without dilating upon the ratio merging from the judgment of the Karachi Bench. As we have earlier observed that the judgment of the Lahore Bench was primarily based upon the fact that consultancy was the business of the appellant/assessee which they engaged in without the involvement of their personnel in the actual working of the project in any form. According to the learned Division Bench the non-presence or non-participation of the consultants of the Company at the site of the project was most important distinction which made their income as one from consultancy business and not from profession. This distinction to our mind was very strange. If doing paper work on desk is consultancy and therefore a business of the firm then some visits by its staff to the site of the project will not make it a less business or materially change the nature of its services provided to the clients. This is also doubtful if any consultant would keep itself away from execution of the project because in that case designing or other maping of a project would at best be a sale of charts and designs etc. and not consultancy which pre-supposes discussions and on the basis of the deliberations some changes during and is final outcome of the project. It is also worth noting that mere fact that the consultants of the company did not visit a project hardly derogates from their consultancy business if the term has to be adopted for the purpose. It will further be noted that the appellant before us has not provided a copy of their agreement with the Civil Aviation Authority for whom they are working. From the orders of the authorities below and the contentions made before us we have gathered that they are not only engaged in designing buts also supervising the on going projects. The services provided by them consequently falls within the ambit of professional services, which have expressly been excluded from the definition of the term "industrial and commercial profits" and used in the convention. Also that fact makes inapplicable to the case of the appellant the ratio of the Lahore Bench case.

13. The reliance of the learned counsel on the reported judgment of the Karachi High Court re: Raleigh Private Limited Company (supra) and Re: M/s. Abbot Finance Company Ltd. is misplaced. Both cases were duly considered by the Karachi Bench in the reported judgment. Since these were properly distinguished, therefore, we need not dilate them any further.

14. In the next cases re: M/s. Glaxo Ltd. and General Tyre Ltd. (supra) the issue before the Court related to the expression "personal service contract" as used in the convention for avoidance of double taxation between Pakistan and U.K. Also in re: CIT v. General Tyre International (supra) the amount in question was claimed exempt as royalty as contemplated in the conversion between Pakistan and the U.S.A. That case too, therefore, is distinguishable. Another reported judgment of the Lahore Bench reported as 1993 PTD (Trib.) 739 is based upon the same reasons which weighed with the Division Bench while recording order in the I.T.A. No.3750/LB of 1986-87. These reasons as we have noted earlier do not lead us to a conclusion acceptable at law. To say that the assessee company was a renowned specialist in the particular field and possessed required professional skill, personnel and technical resources as part of their normal business activity would not by itself make the amount received for services as profits from industry or from commerce. The use of word "profits" in Article III by itself indicates a surplus having accrued at the conclusion of a transaction or at the and of a specific period of business activity. The business could be of any kind starting from manufacturing to trading. In case of professionals, however, the concept of accrual of profits does not arise at all. A consultant, a lawyer a doctor, an architect or a designer does not earn profit out of his services. Its receipts are at best his fee. These situations will not change if a number of individuals join hands and act as consultants under a specific name or take the shape of a legal entity by getting themselves registered as a company. We are also of the view that the word profit in Article III was specially used for the purpose to distinguish it from receipts of other kind such as one before us. It will further be noted that the word profit has been used immediately after the words "industrial or commercial". This fact again gives strength to our view that it-is not only an income or receipt but only "profit" which is exempt from tax if it had accrued from an industrial or commercial enterprises. The words industrial or commercial have to be seen as understood in their normal meaning instead of those stretched or manipulated as desired by the learned counsel for the appellant.

15. In the light of the arguments advanced at the bar by the learned counsel for both the parties and case law cited, we have no hesitation in holding that fee for technical services does not come within the ambit of industrial and commercial profits and hence is not exempt. Resultantly the ratio decided in the reported case i.e. (1985) PTD 877 (Trib.) is hereby approved

16. Before parting with the case we must appreciate the valuable assistance provided to Bench by the learned counsel for both the parties which was really commendable.

17. As a result of above discussion appeal of the assessee fails, hence rejected. C.M.A./64/Tax(Trib.)?????????????????????????????????????????????????????????????????????????? Appeal dismissed ???????????