1998 PLP (Trib (PTD)

"The legal question as to how far the principle of res judicata is applicable to proceedings before the income tax authorities need not detain us. This question directly arose for decision in view of the question framed under section 66 of the Income Tax Act in the case of Commissioner of Income Tax v Wahiduzzaman (supra). It was held that the principle of res judtcata cannot be applied with the same strictness to decisions of the Income Tax Authorities, as it is applicable to cases decided by Courts or judicial tribunals. The bar of res judicata was postulated to be applicable within the limits as observed in the following dictum: ' Under the circumstances the ends of justice will be served by confining the bar of res judicata in relation to decision of Income Tax Authorities to cases where the decision is not clearly open to some objection. It should be a decision which is reached after proper enquiry, which is such as could reasonably have been reached on the material before the authority and which does not suffer from such a defect as would render it liable to be set aside under section 100, C.P.C. in second appeal if it was a decision of a Civil Court. Also a matter can always be reopened on the ground that fresh evidence having a material bearing on the point decided is available.' It is not necessary, therefore, to go to the decisions cited by the learned counsel for the appellant on this point. It may be reiterated that a previous decision of an income tax authority will not be a bar in the following cases:-- (i) where the earlier decision is clearly open to some objection; (ii) if it is a decision which is not reached after proper enquiry; (iii) if it is a decision as could not reasonably have been reached on the material before the authority; (iv) if it is a decision which suffers from such a defect which falls within the purview of the grounds mentioned in section

100. C.P.C. and liable to correction there under in second appeal, if it were a decision of a Civil Court; and (v) if fresh evidence having a material bearing on the point decided in the previous decision is available. "

13. The assessee/appellant had challenged the impugned order on the following grounds: "

2. The learned Commissioner of Income Tax (Appeals) has erred in rejecting your appellant's plea that your appellant's entire income is assessable under the head 'Income from business or profession' under section 22 of the Income Tax Ordinance, 1979, after allowance of all deductions claimed by your appellant under section 23 of the Ordinance. 2.1 The learned CIT(A) has erred in not referring to, considering and commenting do certain arguments relied upon by your appellant for which a Miscellaneous Application and affidavit has been submitted to the learned CIT(A). 2.2 Without prejudice to above, the learned CIT(A) has grossly erred in rejecting your appellant's plea that the Assessing Officer cannot alter the basis of assessment in the absence of any change in the facts and circumstances of the case i.e. assessing your appellant's income under section 80-AA of the Ordinance instead of assessing the same under section 22 of the Ordinance after allowance of all deductions claimed by your appellant tinder section 23 of the Ordinance i.e. 'income from business or profession' in line with the past history of the case. . 2.3 The learned CIT(A) has erred in inferring, that your appellant's assessments .in respect of prior assessment years were either 'wrong or erroneous', without placing any material on record in this respect.

3. Your appellant prays that the order of the learned CIT(A) and that of the Assessing Officer are both cancelled in toto and the returned income of your appellant is accepted. "

14. The Authorised Representatives contended that the two departmental authorities had not correctly appreciated the nature of the business activities of the assessee company. That the company performed actual physical work on the oil drilling site and the work was performed with the help of its own personnel and equipment. That it did not provide any managerial, technical or consultancy services to its client which could fall in the definition of 'technical services'. That the remunerations for the services provided by the assessee-company had the character of income from business or profession and, as such, continued to be subject to section 22 unaffected by the insertion of section 80-AA of the Ordinance. Thai, in order to determine the nature of income, the predominant activity of the assessee-company had to be kept in view which would have determined the character of its income. 15 The learned A.R. vociferously contested the action of the Assessing Officer in deviating from the history of the case by taxing the income under section 80-AA read with section 30 instead of sections 22, 23 and 24 of the Ordinance as was done in earlier years. In this connection, reliance was again placed on the decision of Karachi High Court in the case of S.M. Abdullah v. CIT (1966) 14 Tax 161 in which the Court observed that the I.T.O. cannot reopen the basis or footing of an assessment simply on the ground that the former decision was erroneous and the succeeding officer does not agree with the previous officer as it would be against the principle of natural justice. According to the learned A.R., the principle of res judicata was applicable in the circumstances of the case.

16. The learned A.R. further contended that the income was received by the assessee-company through its permanent establishment in Pakistan and hence was liable to tax in Pakistan under the provisions of section 11 (1)(b)(i) of the Ordinance. That, in the presence of such a specific provision, there was no justification for the Assessing Officer to invoke the deeming provision of section 80-AA of the Ordinance. The learned A.R. did not seriously press the ground of appeal at serial No. 2.1.

17. The learned Departmental Representative, besides wholeheartedly supporting the assessment as well as the impugned order, submitted that the wording of the Contract Agreement showed clearly that the job of the assessee-company was that of providing technical support services to the client oil-drilling company in the form of 'logs' i.e. graph charts accompanied by relevant subsurface data and the expert advice as how to proceed further in the oil drilling operation. That the physical activities carried out by the assessee-company were incidental to the rendering of technical services in the form of professional advice based on scientific data. That physical activities of the assessee-company were totally fruitless unless the results and the data derived from such activities were compiled, analysed and communicated to the client company in the form of expert advice. As such, physical activities were not the ultimate purpose of the assessee company. That the real purpose and specialization of the assessee-company was that it collected the relevant sub-surface data and then it was interpreted with the help of highly sophisticated equipment and skilled staff and appropriate advice was given to the client company as to how further drilling operation should be conducted by it. The contention of the learned D.R., in nutshell, was that the end-product' of the assessee-company was collection of scientific data and its interpretation and that physical activities were simply incidental to that end. He finally pleaded that the employment of highly skilled personnel, use of sophisticated equipment by the assessee-company for the purpose of collecting sub-surface data and giving of expert advice was nothing but a technical service and the fees received in this connection squarely fell in the definition of 'fee for technical services' in terms of the Explanation to section 12(5) of the Ordinance.

18. We have heard the representatives of both the parties and have carefully perused the contents of the assessment as well as impugned order. The assessment order contains detailed facts about the nature of activities of the assessee company. Such discussion was never made in any of the earlier assessment orders. It is the consensus of Judicial Authorities of the sub continent that the doctrine of res judicata or estoppel by record does not apply to the decisions of the Income Tax Authorities. They have also ruled that a previous finding or decision of a Tax Authority can be reopened and departed from in a subsequent year if the previous decision was not arrived at after due enquiry or if fresh facts come to light which, on investigation, would entitle the officer to come to a conclusion different from the one previously reached. The elaborate discussion in the assessment orders shows that the Assessing Officer had made diligent enquiry and had collected considerable fresh facts about the activities of the assessee-company. Such discussion was never made in any of the assessments for the prior years. The action of the Assessing Officer is also well within the bounds fixed by the Supreme Court of Pakistan in its decision reported as CIT v. Farrukh Chemical Industries 1992 PTD

523. An erroneous action cannot get a legal sanctity with the passage of time. Thus, in our opinion, the Assessing Officer had not violated any principle of law by changing the basis of assessment and taxing the receipts of the assessee-company under section 80-AA of the Ordinance.

19. In order to further appreciate the nature of activities of the assessee company, we perused the contents of the contract agreement and deem it appropriate to reproduce below its relevant extracts:-- ARTICLE II: OBJECT OF CONTRACT: "The main purpose of this Contract is to procure Logging, Production Logging, Perforation Logging and Allied Services, equipment and personnel required for twenty-seven (27) wells of Purchaser's field. 3.03. CONTRACTOR'S PERSONNEL (a) The Contractor shall have a logging engineer and crew on the exclusive service of Purchaser's field. (b) The Logging Engineer will be competent to operate the required tools with sufficient experience of working with Contractor and good knowledge of Logging Interpretation. (c) The Contractor shall provide Station Manager at Islamabad who should be qualified and experienced to give necessary guidance on all aspects of well logging service and trouble shooting. 3.07 BACK-UP SERVICES: (a) The Contractor will evaluate and recommend to purchaser to requirements of logging operations and perforation jobs. (b) The Contractor shall provide both well site service interpretation and computerized process Interpretation including Quicklook, Cyberdip, Cross Plot, Play Back, Global, Cluster, Geodip, Flow Analysis Log and Fracture Identification Log. . (c) Contractor shall train Purchaser Logging Personnel for interpretation without any additional cost to Purchaser. (d) The Contractor shall provide the Purchaser six copies of each log free of cost for Logging and Production Service performed. 5.02 The PURCHASER shall pay the CONTRACTOR in the manner and at the time hereunder set forth:-- Charges of Logging, Production Logging, Perforation Logging and Allied Services under Supplement-1 attached herewith and the rate provided in the Schlumberger letter No.nil, dated 30th October, 1989 addressed to Mr. Arif Kemal, Executive Director, Production regarding discount attached herewith. However, additional services performed will be charged according to the 'Price List L.81-M provided that such request for performing these services have been made by the Purchaser in writing. "

20. The assessee provided following additional services to its client company:

1. Resistivity services.

2. Radioactive services.

3. Sonic/seismic services.

4. Production services.

5. Perforation services.

6. Miscellaneous additional services.

7. Data processing services.

21. Careful perusal of the above extracts and the description of the actual operations of the company clearly shows that the assessee-company prepared different types of 'logs', which as per textbook definition, means ' a continuous record as a function of depth usually graphic and plotted to scale on a narrow paper strip, of observations made on the rocks and fluids of the geologic section exposed in a well bore'. This information is collected through highly sophisticated equipment list of which forms a separate Supplement to the Contract Agreement. Such information is then interpreted and expert advice and guidance is given by the personnel of the assessee company to the well-drilling company. The drilling company plans its operations strictly in accordance with the advice of the assessee's company. No oil drilling company can imagine to operate without the assistance, guidance and advice of a well logging company like the assessee. A well logging company, like other specialist supporting companies, provides support services to an oil drilling company. .

22. The contract documents further indicate that the assessee-company makes a separate charge for each operation/service provided by it to the oil drilling company according to the mutually agreed price list. The services are of highly technical and sophisticated nature and the assessee company is one of the few specialist companies of the world in this field. The contract documents term the operations/functions of the assessee-company as 'Services'. Perusal of contract documents makes it abundantly clear that assessee's contract is a 'Services Contract' and not a 'work contract' because fee is charged for each service separately at different rates. The subsidiary and auxiliary nature of a 'logging' contract is evident from the fact that it has no independent existence of its own and is always executed in pursuance and furtherance of an oil drilling contract. This is the most important, feature of a 'Services' contract. Hence the receipts of the assessee-company are more in the nature of 'fee for technical services' than commercial or industrial receipts.

23. The reliance of the Authorised Representative on the decisions of the Tribunal i.e. ITA No.3750/LB of 1986-87 dated 4-2-1991 and 1993 PTD (Trib.) 739 is rather misplaced because both the cases are 'distinguishable from the case of the appellant company. In the former case, the income of the Danish company was exempt from Pakistan tax under the relevant Agreement for Avoidance of Double Taxation. Moreover, section 80-AA of the Ordinance had not been introduced in the statute at the time. Hence the Tribunal did not consider the connotation of terms 'fee for technical services'. in that case. In the latter case, full implications of section 80-AA of the Ordinance could trot be considered by the Tribunal in view of the following special circumstances of that case:-- (a) The Swiss company was not maintaining any permanent establishment in Pakistan. (b) The services were predominantly performed in Switzerland. (c) Payments were received in foreign exchange in Switzerland. (d). The provisions of the Agreement for Avoidance of Double Taxation between two Governments provided an umbrella of exemption from Pakistan tax to the income of the Swiss company.

24. The term 'technical services' was considered and adjudicated upon by the Sindh High Court and this Tribunal in the following words and with the following results:--

1. Glaxo Grqup Ltd. v. CIT, Karachi 1992 PTD 636 (H.C. Kar): "In our view, both under sub-clause (d) as well as under clause (g), the services required to be rendered by. the assessee are in the nature of technical service. As noticed, under sub-clause (d), the service to be rendered by the assessee through its staff or staff of its associated companies is to advise the Pakistan company on the utilization of its machinery and equipments etc. and under sub clause (g) the advice to be given is about maintenance of high standard of qualify of the specialized products and this advice is rendered through regular inspections by the assessee. As observed, these types of advices or services can be aptly described as technical services. What the assessee does is that it makes available its expertise, technical and special knowledge and experience to ache Pakistan company The technical services rendered under the aforesaid sub-clause by the assessee to the Pakistan company are covered by the term 'personal services'. Being a company, the assessee has to render such services through its staff or staff of it s associated company. Nevertheless, such services remain technical service rendered by the assessee." 2. 1998 PTD (Trib.) 291 (Full Bench): "

56. The expression 'fees for technical services' has been defined in Explanation to section 12(5) of the Income Tax Ordinance, 1979 which means any consideration for rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). The nature of job performed by the non-resident company according to the description given by the assessee itself does not bring it in the purview of industrial or commercial activity. We will examine if the services rendered by them which is described in the invoices submitted by Red Adair Company dated 16-12-1991 as 'well control services' amounts to rendering of technical services including the provision of services of technical or other personnel. For this purpose, it is to be seen as to what is the connotation of term 'technical'. This term has not been defined in the Income Tax Ordinance, 1979 and, therefore, we will again seek assistance from the dictionaries as the meaning is to be taken in its ordinary sense. The word 'Technical' has been defined in Legal Thesaurus by William C. Burton, 1980 Edition as follows: Technical, Abstruse, difficult to understated highly specialized, highly specific, industrial, mechanical, occupational, professional, scientific, special, specialized, specific, trained, vocational."

57. In the new Shorter Oxford English Dictionary, 1993 Edition the term 'technical' includes the following meanings: "Technical: 1. of a person 'having knowledge of or expertise in a particular art, science or other subject,

2. Pertaining to, involving or characteristic of a particular art, science profession, or occupation, or the applied arts and sciences generally . . . . . . .

58. Applying the above meanings of word 'technical' to the nature of job performed by the non-resident company we find that the job performed is on all fours to the rendering of technical services. The definition "fees for technical services" is inclusive of the provision of services of technical or other personnel and the nature of job already explained above shows that the Assessing Officer has rightly held that the remuneration paid by the assessee-company to the non resident does not fall within the purview of industrial or commercial profits so as to attract the exemption provisions contained in the agreement for avoidance of double taxation between U.S.A. and Pakistan. . . . . . . .

25. In the case of Glaxo Group the expert advice by the foreign group through its staff to the Pakistani company on the utilization of its machinery and, equipment and with regard to the maintenance of high standard quality of its specialized' products was aptly described by the Honourable Court as 'technical services' because the foreign group made available its expertise, technical and special knowledge and experience to the Pakistani company. In the second case the provision of a fire extinguishing service on a wellhead by a specialist foreign company through scientific equipment and special technique was held to be 'a service of technical nature and the remuneration paid to the non-resident company was held to be a 'fee for technical services'. The word 'Technical', as elaborated by the Tribunal in the above noted case, is a very comprehensive term. Any activity involving or concerned with mechanical arts and applied sciences automatically falls in the purview of this term.

26. The plea of the A.R. that, in the presence -of the provisions of section 11(1)(b)(i) of the Ordinance, the Assessing Officer had no justification to invoke the deeming provision of section 80-AA of the Ordinance .appears to be misconceived because there is no dispute regarding the taxability of assessee's receipts under the tax laws of Pakistan as its receipts undoubtedly have the character of 'income'. The real dispute is whether the whole of such receipts or such receipts minus the expenses allowable under section 23 of the Ordinance will constitute its income. In such a situation, the applicability of section 80-AA is very much relevant and Assessing Officer's action cannot be considered as unjustified.

27. We have given our earnest consideration to all the aspects of the case and the respective contentions of both the parties. We have, no doubt, in our mind that the receipts of the assessee-company clearly fall in the purview of "fee for technical services" as defined in the Income Tax Ordinance. The Assessing Officer had, therefore, rightly taxed the same under section 80-AA of the Ordinance and the CIT(A) had rightly confirmed this action. Their actions find unequivocal support from the above-noted judgments of the High Court and the Tribunal. Hence, there is hardly any justification for our interference in the matter.

28. All the three appeals of the assessee/respondent are, therefore, dismissed. M.B.A. /469/Trib. Appeals dismissed.