2001 PLP (Trib (PTD)
N/A
| Citation | 2001 PLP (Trib (PTD) |
| Forum / Court | Income-tax Appellate Tribunal Pakistan |
| Bench Members | Inam Ellahi Sheikh, Chairman and |
| Parties | N/A |
| Primary Law | (b) Income Tax Ordinance (XXXI of 1979), (c) Agreement for Avoidance of Double Taxation Between Pakistan and United States of America, (a) Agreement for Avoidance of Double Taxation Between Pakistan and United States of America |
Q1: What are the key laws and sections cited in 2001 PLP (Trib (PTD)?
This judgment primarily cites: (b) Income Tax Ordinance (XXXI of 1979), (c) Agreement for Avoidance of Double Taxation Between Pakistan and United States of America, (a) Agreement for Avoidance of Double Taxation Between Pakistan and United States of America as referenced in Pakistani case law index.
Q2: Which judicial bench decided the case 2001 PLP (Trib (PTD)?
The case was heard and decided by the Income-tax Appellate Tribunal Pakistan bench comprising: Inam Ellahi Sheikh, Chairman and.
Q3: What is the official citation format for this judgment on Pakistan Law Portal?
Cite this legal precedent as: 2001 PLP (Trib (PTD) (N/A). Read the full summary and cross-referenced laws free on Pakistan Law Portal.
Laws Cited
Representation
- Khalil Ahmed Waggan, A.C.A. and Irfan Sadat Khan for Appellant.
- Vishno Raja Qavi, D.R. for Respondent.
- Date of hearing: 4th January, 2001.
- 5. The appellant is now before us on the grounds as set forth in the memo. of appeals and are reproduced in the first para. of this order. Mr. Khalil A. Waggan, ACA alongwith Mr. Irfan Sadat Khan, Advocate stated that the appellant had entered into an agreement with Oracle Corporation USA, a non-resident company, whereby the appellant was granted a licence for sub-licensing the rights to use the specified Oracle Computer Software Program (Programs) in Pakistan for the consideration of fee equal to 50-55 per cent. of sub-licence fee received by the appellant. Mr. Khalil Waggan vehemently contended that Oracle Corporation USA had no PE in Pakistan, therefore, the learned DCIT had wrongly made income of Oracle Corporation USA subject to tax in Pakistan and had wrongly treated the appellant as its agent under section 78 of the Ordinance. It was argued that Article III of the Treaty provides that a US Enterprise shall not be subject to tax in Pakistan in respect of its income unless it is engaged in trade or business in Pakistan through a PE situated therein. Mr. Waggan referred to the definition assigned to the term "Permanent Establishment" in the Treaty and argued that the relationship between Oracle Corporation USA and the appellant which was of a creator and independent contractor would not constitute PE. Definition of 'Permanent Establishment' as provided in Article II(1)(m) of the Treaty is reproduced below:
Headnotes / Summary
Art.II(1)(m)
"Permanent Establishment"
Definition of permanent establishment as given in the Treaty enumerates the places which fall within the concept of "permanent establishment" and enlarge the scope of "permanent establishment" by including agents in its ambit
Definition of "permanent establishment" distinguishes between independent agent; or contractor and dependent agent or contractor
An agent is deemed to create a permanent establishment who has the authority to conclude contracts on behalf of a US enterprise or who actually exercises such authority; such are dependent agents
Agents of independent status acting in the ordinary course of their business are excluded from the scope of "permanent establishment- Mere agency for acting on behalf of US enterprises is not enough to constitute a permanent establishment and for such purpose the agent must fill orders from stock of goods or habitually exercise an authority to conclude contracts on behalf of or in the name of US enterprise
If the agent is independent and acting in the ordinary course of its business there is no permanent establishment of US enterprise in Pakistan.
S.78
Agreement for Avoidance of Double Taxation Between Pakistan and USA
Liability of agents representing assessee
Permanent establishment
Assessee was treated as an agent of non-resident principal under S.78 of the Income Tax Ordinance, 1979, and tax was charged on the income that had accrued to the non-resident principal in Pakistan in the hands of assessee on the ground that assessee had entered into the distribution agreement with non-resident principal whereby the assessee was responsible for payment of taxes which arose as a result of payment of sub-licence fee to the said non-resident principal
Assessee contended that income of non resident principal was not chargeable to tax in Pakistan since it had no permanent establishment in Pakistan
Agreement between the assessee and the non-resident principal provided that the right to sub-licence the programmes was non-exclusive and the principal had the rights to distribute programmes directly in Pakistan and to appoint another agent in Pakistan
Only rights to use the intellectual property had been granted to assessee which could not be treated as goods or articles as had been referred to in the definition of "permanent establishment" in the Treaty
Subsequent sub-licensing the rights to use the programmes was not executed on behalf of non-resident principal, but the assessee in the capacity of licensor for its clients sub-licensed the rights to use the programmes
Assessee was acting independently in the ordinary course of its business and did not represent "permanent establishment of non-resident principal in Pakistan
Non-resident principal having no "permanent establishment in Pakistan, in circumstances, its income would not be subjected to tax in Pakistan
Order of the First Appellate Authority as well as that of the Assessing Officer was vacated by the Tribunal. CIT v. R.D. Aggarwal & Co., (1965) 56 ITR 20 (SC Ind.); B.P. Ray v. ITO, (1981) 129 ITR 295 (SC Ind.) and 1989 PTD 271 ref.
Art.II(1)(m)
Income Tax Ordinance (XXXI of 1979), S.78--=Permanent Establishment
Principle
Technological progress in the field of communication has considerably changed the manner of doing business and affected the basic concepts of fiscal policies relating to cross-border transactions
Old concepts of geographical boundaries have been demolished and now a borderless world Internet business, known as E-business is rapidly progressing
Need of the persons to a transaction, or the middleman, to be present physically has been eliminated
Basic rule of the "permanent establishment" i.e. the fixed place of business and the agency rule of permanent establishment were crumbling
E-business was, therefore, heading towards the resident base taxation
E-business could deal in digital goods (technological goods) and not in merchandise, articles or services-- "Permanent establishment" was very much relevant to the cross-border transactions relating to the latter
Income arising from cross-border transfer of technological goods and services could not be taxed on the basis of traditional concepts of permanent establishment under the present provisions of the Income Tax Ordinance, 1979.
Judgment & Decree
Within three (3) days of the last day of each month, FATAKIA shall provide ORACLE with a report detailing for that month; (a) Programs sub-licensed, including details of which programs and number of copies akeach program sub-licensed; (b) A list of all sub7licences, including names, addresses, and relevant CPU type; (c) A detailed amount of all sub-licence fees, technical support fees and other fees due to or to be paid to ORACLE under this Agreement; and (d) Forecasted sub-licenses for the following month presented in format to be designated by ORACLE. In addition, FATAKIA shall maintain copies of all agreements with its sub-licenses. Upon reasonable request from ORACLE, FATAKIA agrees to make these a4reements available for inspection to ORACLE. 4.2. Records; Inspection: FATAKIA shall maintain books and records in connection with activity under this agreement for the term of this agreement and for at least one year from the date this agreement terminates or expires. The records that FATAKIA shall Maintain shall include, but are not limited to, the information required to be reported in Paragraph 4.1 above. ORACLE; or its representative tray audit the relevant books and records of FATAKIA to ensure compliance with the terms of this Agreement. Any such audit shall be conducted during the regular business hours at FATAKIA's offices and shall not interfere unreasonably with FATAKIA's business activities. Audits shall be made no more than once annually. If an audit reveals that FATAKIA has underpaid fees to ORACLE in excess of five per cent. (5 %); then FATAKIA shall pay ORACLE's reasonable costs of conducting the audit in addition to the underpaid amount. ORACLE may inspect sub-licence lists upon reasonable notice to FATAKIA. 5.2b. Cessation of Support Services: ORACLE may discontinue Technical Support to FATAKIA for any programs or for any portions thereof, provided that ORACLE generally discontinues Technical Support for such Programs or portions thereof. Should ORACLE elect to discontinue Technical Support while this Agreement is in effect, FATAKIA shall receive a copy of the source code that is relevant to the unsupported program or portion thereof. The source code shall be used by FATAKIA solely for the purpose of continuing technical support for sub licences outstanding and shall be subject to the terms of this Agreement. FATAKIA shall not provide the source code to any third party. Other than as provided for in this paragraph FATAKIA shall not have access to the source code for the programs. 6.2A. Right to reproduce ORACLE hereby grants to FATAKIA the right to reproduce Documentation and promotional material and to use such material to further FATAKIA's marketing efforts on behalf of the programs, subject to the obligations set forth in this Agreement. 6.213. Right to translate: ORACLE hereby grants to FATAKIA subject to the obligations set forth in Paragraph 6.2C below, the right to translate promotional material and Documentation relating to the programs and to see such material to further FATAKIA's marketing efforts on behalf of the programs.
10. The learned D.R. has argued that there was proprietary rights of the appellant in "Programs" and it also enjoyed rights of modification and translation. He has also referred to clause 2.5 wherein the appellant agreed on to provide marketing and technical support on behalf of programs which according to learned D.R. should have been treated as the proprietary rights of the appellant in Pakistan. According to him, the Programs of the USA based company were stock-of-merchandise and the appellant had regularly filled the orders on behalf of the US-based company. He has contended that in case of cessation of the contract all the Programs would be the property of the US-based company. Learned D.R. has submitted that the definition of word "INDEPENDENT AGENT" in OECD (Model of Double Taxation Convention, 1977) as referred by the learned A.R. was not relevant as the said model was issued in 1977, whereas, the Treaty was executed in 1960 and has not based on the referred Model.
11. We have heard the learned' Representatives of both the parties and have also perused the impugned order of the learned CIT(A), all the assessment orders for the years under consideration, the distributorship Agreement between Oracle Corporation USA and the appellant, the relevant provisions of the Treaty and other relevant documents which have been referred to by both the parties. The main controversy between the parties is whether the appellant can be treated as PE of Oracle Corporation USA. Other issues are offshoots of the basic issue of PE. The definition for PE as has been given in the Treaty firstly enumerates the places which fall within the concept of PE. It then enlarges the scope of PE by including agents in its ambit. The definition distinguishes between independent agent or contractor and dependent agent or contractor. An agent is deemed to create a PE who has the authority to conclude contracts on behalf of US Enterprise or who habitually exercises this authority. Such are dependent agents. Agents of independent status acting in the ordinary course of their business are excluded from the scope of PE. Mere agency for acting on behalf of US Enterprises is not enough to constitute a permanent establishment. For this purpose the agent must fill orders from stock of goods or habitually exercises an authority to conclude contracts on behalf of or in the name of US Enterprise. If the agent is independent and acting in the ordinary course of its business there is no PE of US Enterprise in Pakistan.
12. The appellant, under the Agreement, has been granted a licence for sub-licensing the specified Computer Software Programs within the territory of Pakistan. In view of clause 9.4 of the Agreement the relationship between the US Corporation and the appellant is licensor and independent contractor. We have observed that sub-licensing activity is an independent activity of the appellant and is being carried on in ordinary course of appellant's business however, the US Corporation in order to protect its title, copyrights and other proprietary rights in the Programs and for the determination of fee, since it is based on sub-licence fee received by the appellant provides certain parameters for sub-licensing the Programs in the Agreement. We have perused the standard form of sub-licence agreement which is being used by the appellant. The relevant clauses of the "sub-licence agreement" are reproduced hereunder: Ora-Tech Systems (Pvt.) Ltd. hereinafter known as "Ora-Tech" situated at 9-A, Block 6, P.E.C.H.S, Sharah-e-Faisal, Karachi and the client identified the signature page here agree that the following terms and conditions will apply to each and 'every program sub-licence ("Licence") granted' and to all allied services provided by Ora-Tech under this Agreement. 2.1. Rights ranted: (A) Ora-Tech hereby grants to client a non-exclusive licence to use the Programs. Client obtains pursuant to this Agreement, as follows. 5.1 Infringement indemnity: Ora-Tech will defend and indemnify client against a claim that Program furnished and used within the scope of this Agreement infringes a United States and/or Pakistan copyright or patent, provided that (a) client notifies ORA-TECH in writing within 10 (ten) days of the claim (b); ORA-TECH has sole control of the defence and all related settlement negotiations and (c) Client provides ORA-TECH with the assistance, information, and authority necessary to perform the above, reasonable out of pocket expenses incurred by the client in providing such assistance will be reimbursed by ORA-TECH. ORA-TECH shall have no liability for any claim of infringement, based on (a) use of a superseded or altered release of programs if such infringement could have been avoided by the use of a current unaltered release of the Programs that ORA-TECH provides that client; or (b) the combination, operation, or use of any Programs furnished under this Agreement with- programs or data not furnished by ORA-TECH if any infringement would have been avoided by the use of the Programs without such programs or data. In the event the Programs are held or are believed by ORA-TECH to infringe. ORA-TECH shall have the option, at its expense, to (a) modify the Programs to be non-infringing. (b) obtain for client., a licence to continue using the Programs or (c) terminate the licence for the infringing Programs and refund the licence fees paid for those Programs, prorated over a five-year term from the commencement. 5.3 Exclusive remedies/liability: For breach of the warranties contained in paragraph 5.2 above, client's exclusive remedy, and Ora-Tech's entire liability shall be: For tyro-grams: 'The. correction\of Program errors or replacement of Program media of Ora-Tech is unable to make the Program operate as warranted. Client shall be entitled to recover the applicable Licence fees paid to Ora-Tech prorated to one year in case of Supported licences and no other claims or damages whatsoever .... 5.4 Limitation of liability In no event shall Ora-Tech be liable for any indirect incidental, special or consequential damages, including loss of profits, revenue, data, or use, incurred by Client or any third party, whether in an action in contract or tort. The provisions of this Article allocates the risk under this agreement between Ora-Tech and Client. Ora-Tech's pricing reflects this allocation of risk and the limitation of liability specified herein. The above clauses of the sub-licence agreement clearly show that only the appellant and its client are party to the sub-licence agreement had none of the acts of the appellant would bind the US Corporation.
13. The learned D.R. has contended that the appellant is an exclusive agent of Oracle Corporation USA in Pakistan. We have perused the agreement and find that the observation is not correct. Clause 2.6 of the Agreement clearly provides that the rights to sub-licence the Programs is E non-exclusive and Oracle Corporation USA has the rights to distribute Programs directly in Pakistan and to appoint another agent in Pakistan. For the facility of reference clause 2.6 of Agreement is reproduced hereunder:-- 2.6. Marketing rights in the territory: FATAKIA acknowledges that its right to market and sub-licence the programs is non-exclusive. FATAKIA acknowledges that ORACLE has the right to distribute directly in the territory, and to appoint OEMS and VARs in the Territory. FATAKIA will not negotiate or enter into any OEM, VAR or other distribution agreements without ORACLES prior written consent"
14. The learned D.R. has also contended that the appellant has maintained stock of merchandise wherefrom he regularly fills order on behalf of Oracle Corporation USA. Under the Agreement only the rights to use the intellectual property (Programs) have been granted to the appellant which cannot be treated as goods or articles as have been referred to in the definition of PE in the Treaty. Further, the subsequent sub-licensing the rights to use the Programs is not executed on behalf of Oracle Corporation USA, but the appellant in capacity of licensor for its clients sub-licence the rights to use the Programs.
15. In view of the above-discussed facts and the provisions of the law, we are of the view that the appellant is acting independently in the ordinary course of its business and do not represent PE of Oracle Corporation USA in Pakistan. Since the learned DCIT has not catered any other situations which may establish PE of Oracle Corporation USA in Pakistan, therefore, in the present set off circumstances Oracle Corporation USA has no PE in Pakistan , hence its income would not be subjected to tax in Pakistan during the subject assessment years 1992-93 to 1998-99 in view of the provisions of the Treaty which Pakistan has with the USA. Accordingly, the impugned order of the learned CIT(A) for the assessment years 1992-93 to 1998-99 wherein the treatment of the DCIT was confirmed who treated the appellant as PE and an agent of Oracle Corporation USA under section 78 of the Ordinance is vacated and all the seven appeals filed by the appellant are allowed.
16. As we have allowed all the seven appeals on the issue of PE, we, therefore, need not to adjudicate the other consequential issues.
17. Before parting the order we would like to emphasize that technological progress in the field of communications has considerably changed the manner of doing business. It affects the basic concepts of fiscal policies relating to cross-border transactions. Old concepts of geographical boundaries have been demolished. It is now a borderless world. Internet business, known as E-Business is rapidly progressing. The need of the persons to a transaction, or the middleman, present physically has been eliminated. The basic rule of the PE i.e., the fixed places of business and the agency-rule PE are crumbling. E-business is, therefore, heading towards the residents base taxation. In that context, the PE concept appears irrelevant. E-business could deal in digital goods (technological goods) and not in merchandise, articles or services. PE is very much relevant to the cross-border transactions relating to the latter. The above situation has provided the law makers plenty of foods for careful thought since income arising from cross-border transfer of technological goods and services may not be taxed on the basis of traditional concept of PE under the present provisions of the Income Tax Ordinance, 1979.
18. All the seven appeals are allowed in the manner as indicated above. C.M.A./M.A.K./116/Tax(Trib.) Appeals allowed.