1980 PLP (Trib (PTD)

MUHAMMAD MAZHAR ALI (MEMBER).‑In these four appeals, involving the assessment years 1969‑70, 1970‑71, 1971‑72 and 1972‑73, brought at the instance of the assessee, the common question that arises for decision relates to the taxability or otherwise of what is described as a "Manufacturing Royalty" by the assessee in all the four years, and the non‑allowance of credit for investment of Rs. 8,100 and Rs. 9,100 made on the purchases of Income Tax Bond in the charges years 1969‑70 and 1970‑71, respectively. There is an additional issue of non‑allowance of credit for the Cyclone Relief Surchage of Rs. 9,113 involved in the year 1970‑71.

2. The facts relevant fur the purposes of disposal of the first above noted common issue raised in these appeals, may be shortly stated as follows. The assessee is a Non‑resident U. K. Company (hereinafter called "Consultants"). It entered into an Agreement with G. L. (Pakistan) Limited (hereinafter called "the Pakistani Company") on 7th Dee‑ember, 1951, whereby the assessee was appointed to be the Consultants and Technical Advisor for a period of 20 years, in respect of "General Services" (which included (i) Medical Information, (ii) Competitive Information, (iii) Technical Staff. (iv) Consumer Relations, (v) Office Organization Methods, (vi) Training of Company's Higher Personal and (vii) Availability of Consultant's Personal and (vii) (Availability of Consultant's Personal), and (2) "Manufacturing Services" which comprised of (i) Manufacturing Information, (ii) Factory Administration, (iii) Training of Technical Staff, (iv) Availability of Consultant's (v) Patents, (iv) Storage and (vii) Inspections). The Consultant's was to be paid for the "General Services" an amount equal to 1 % of the Pakistani Company's not receipts from sales of the Specialized Products, and for the "Manufacturing Services" an amount equal to 3% of the Pakistan Company's not receipts from all the sales of Specialized Products manufactured by the Pakistani Company. Consultants offered for taxation the payments received under the head "General Services" on the basis of 80 % of the gross receipts and hence there is no dispute about these payments in these appeals. Moreover, the Consultants claimed exemption from tax in respect of the payments received under the second above‑noted head, viz., Manufacturing Services" or "Manu facturing Royalties, virtue of Article VIII of the Agreement for the Avoidance of Double Taxation between the U. K. and Pakistan (hereinafter for brevity's sake referred to as "the Tax Avoidance agreement"'. In its reply to the notices under section 23(3) served upon it in this behalf, the consultants, inter aria stated as under :‑

"G. Limited was incorporated in England and is assessed in Pakistan as non‑resident company. It entered into an agreement on 17th December 1951 with G. L. (Pakistan) Limited under which the England Company would render certain services to the Pakistan Company and under another agreement the above Company agreed to allow the Pakistan Company to use its trade marks in Pakistan. The former agreement provided for the payment of consultancy fees at the rate of 1% (known as consultancy fee) of the net value of sales and after commencement of manufacturing operations by the Pakistan Company a further sum at rate of 3% (known as manufacturing royalty) of the net value of sales of goods manufactured. The latter agreement provided for trade nark Royalties payable at the rate of 2% of the net value of sales of goods manufactured particulars of the nature of services to be rendered for each type of payment are given below: (Note.‑Details omitted as they are not relevant for our purpose).; (2) Manufacturing Royalties.‑For supply of technical `know how' in the areas of. (a) Manufacturing, production and technological Information of all kinds, in particular secret processes, flew sheets, etc. (b) Factory administration: (c) Training of technical staff.. (d) Availability of English Company's personal. (e) Patents ; (f) Technical and scientific information pertaining to storage and control, and (g) Inspection. (3) Trade Work Royalties.‑For use in Pakistan of all Trade Mark of which the English Company in the registered proprietor. We submit that in accordance with Article VIII of the Agreement for Avoidance of Double Taxation between U. K. and Pakistan, royalties payable to the assessee are not taxable in Pakistan, Paragraph 2 of Article VIII of `the Avoidance Agreement' defines Royalty "any royalty or other amount paid as consideration for the use of or for the privilege of` using any copy right, patent, design, ascert process or formula, trade mark or other like property but does not include any amount or royalty in respect of motion picture film or films for use in connection with television or any royalty or other amount paid in respect of the operation of a mine or quarry or of any other extraction of natural resources" which in our opinion covers the sum payable under item 2 above particularly in the case of items 2(a) and (e). In this connection we can but reiterate the orders of the Appellate Assistant Commissioner in his order K. Com.1193 dated 31 May 1960 deciding on the same issue in the year 1957‑58 which were later upheld by the income tax Appellate Tribunal."

3. The Income‑tax Officer, for reasons recorded by him in the assessment order for 1969‑70 (and which were adopted in other years) repelled the assessor's contention and held that 5/7th of the payments received towards "Manufacturing Services" under the aforesaid Agreement dated 17‑11‑1951, which was described by the Company as "Manufacturing Royalties" was nothing but "Consultancy Fees" and it was liable to tax in. the same manner as the "Consultancy Fee" for "General Services" which had always been offered to tax by the Consultants" itself, Accordingly, he assessed to tax to the extent of 5/7th of the disclosed receipts under tile Caption "Manufacturing Royalties" in each year under appeal. Hence these direct appeals.

4. The learned authorised Representative of the appellant reitereted the role contention before us which had been pressed before the Assessing Officer. He submitted that it was, for the first time, in the assessment year 1957‑5R that "the Consultant's become entitled to the payment of "Manufacturing Royalties" under the Agreement. In the assessment for that year which was framed on 2601 October 1957, the Income‑tax Officer subjected to tax "Manufacturing Royalties" and "Trade Mark Royalties" amounting to Rs. 1,30,

715. The assessee went in appeal before the Appellate Assistant Commissioner of Income‑tax, `A' Range, Karachi, who by his order dated 31‑5‑1160 allowed the appeal and directed the Income‑tax Officer to exclude the aforesaid sum from the taxable income determined by him. The department did net take the matter in second appeal before the Tribunal and, as such, it accepted the finding of the Appellate Assistant Commissioner on this issue. It was ever since then that the "Manufacturing Royalties" were always exempted from the incidence of tax and that it was for the first time in the years under appeal that the Income‑tax officer has again subjected them to tax. The learned authorised Representative of the appellant also, drew our attention to certain unreported decisions of the various Benches of the Appellate Tribunal at Karachi passed in :‑.-- "(1) I. T. A. No. 388/67‑68 dated 18‑4‑1969 ; (2) I. T. A. No. 1530/71‑72 etc., dated 6‑6‑1972 ; (3) I. T. A. No. 1639/71‑72, dated 25‑10‑1972 ; and (4) I. T. A. No. 1264/KB/72‑73 dated 12‑10‑1973." To contend that payments of technical fee made to Non‑resident companies under Agreement bearing exactly similar terms of contract as are embodied in the Agreement in question dated 17th December 1951, executed by and between the "Consultants" and the "Pakistani Company" have been held to be `Royalties' under clause 2 of Article VIII of "Tax Avoidance Agree ment." In the alternative; exemption in respect of these payment was claimed under Article III of "The Tax Avoidance Agreement".

5. Before we proceed further to deal with the points raised for our consideration, we would like to reproduce Articles VIII and III of the Agreement for Avoidance of Double Taxation with respect to taxes on income between Pakistan and the United Kingdom :‑ (1) Any royalty derived from source within one of the territories by resident of the other territory, who is subject to tax in that other territory in respect thereof and is not engaged in trade or business in the first mentioned territory through a permanent establishment situated therein shall be exempt from tax in that first‑mentioned territory. (2) In this Article, the term "royalty" means any royalty or, other amount paid as consideration for the use of, or for the privilege of using, any copyright, patent, design, secret process or formula, trade mark or other like property, but does nor include any rent or royalty in respect of motion picture film or films for use in connection with television of any royalty or other amount paid in respect of the operation of a mine or quary or of any other extraction of natural resources. (3) Where any royalty exceeds a fair and reasonable consideration in respect of the right for which it is paid, the exemption provided by present Article shall apply only to so much of the royalty as represents such fair and reasonable consideration. (4) Any capital sum derived from sources within one of the territories from the sale of patent rights by a resident of the other territory, who is not engaged in a trade or business in the first mentioned territory through a permanent establishment situated therein, shall be exempt from tax in that first mentioned territory.

(1) The industrial or commercial profits of a, United Kingdom enterprise shall not be subject to Pakistan tax unless the enterprise is an aged in trade or business in Pakistan through a permanent "establishment situated therein. If it is not engaged, tax may be imposed on these profits by Pakistan, but only on so much of them as in attributable to that permanent establishment. (2) The industrial or commercial profits of a Pakistan enterprise shall not be subject to United Kingdom tax unless the enterprise is engaged in 'trade or business in the United Kingdom through a permanent establishment situated therein. If it is so engaged, tax may be imposed on those profits by the United Kingdom, but only on so much of them as is attributable to that permanent establishment. (3) Where an enterprise of one of the territories is engaged in trade or business in the other territory through a permanent establishment situated therein, there shall be attributed to such permanent establish ment the industrial or commercial profits which it might be expected to derive in that other territory 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. (4) In determining the industrial or commercial profits or permanent establishment, there shall be allowed as deductions all expenses which would be deductible if the permanent establishment were an indepen dent enterprise in so far as they are reasonably allowable to the permanent establishment, including executive and general administrative expenses so deductible and allowable, whether incurred in the territory in which the permanent establishment is situated or elsewhere."

6. A bare perusal of Article VIII of the "Tax Avoidance Agreement" clearly indicates that its object is to exempt "Royalty" which in terms of sub‑clause (2) of that Article means "any Royalty or other amount paid as consideration for use of, or for the privilege of using, any copy right, patent, design, secret process or formula, trade mark or other like property." Now. therefore, it is to be ascertained whether the amount paid by `the Pakistani Company' to the `Consultants' for rendering services as stipulated for and mentioned in clause (o), (c), (d) and (g) above, under the caption "Manufacturing Royalties" is in consideration of the user of any right or property of the nature of copyright, patent, design, secret process or formula, trade mark etc. We repeatedly asked Mr. Alam to state positively if the 'Consultants' have any vested right or property in the 'Factory Administration' and 'Training of Staff' etc. as is possessed by the grantee or proprietor of a patent or by the registered user of trade mark, or other like property. But the learned counsel was unable to make this ascertain. He, however, laid much emphasis upon the fact that the Agreement in question describe the payments towards the said items to be "Manufacturing Royalties" and, as such, they are exempt from taxation by virtue of Article VIII of 'Tax Avoidance Agreement'. We do not find any substance in the contention of the learned counsel for the appellant. Unless the 'Consultants' possesses any right of the nature mentioned in sub‑clause (2) of Article VIII and is in law entitled to the payment for the use of or for the privilege of using the said right by the Grantee, it cannot be held to be entitled to claim exemption under the said Article VXII. Now so far as the word "Royalty" is concerned, it is defined in Black's Law Dictionary ? Revised Fourth Edition, at page 1496 to be : "A payment reserved by the grantor of a patent, lease of a mine, or similar right, and payable proportionately to the use made of the right by the grantee : A payment which is made to an author or composer by an assignee or a licensee in respect of each copy of his work which is sold, or to an inventor in respect of each article sold under the patent." We are thus clearly of the view that the payments made to the assessee for the services rendered or agreed to be rendered by it, save as mentioned in sub‑clauses (a) and (e) under the head "Services where the Company is Manufacturing", cannot legitimated be said to fill/within the ambit of the definition of "Royalty" as given in Article VIII the "Tax Avoidance Agreement".

7. Now we would, at this stage, like to refer to the various decisions of the Tribunal cited by the learned counsel in support of his contention. In I. T. A. of 1967‑68, the Tribunal has simply observed, on the basis of the 'Remand Report' obtained from the assessing officer and the order of the Appellate Assistant Commissioner that "the amount of fee in question in the nature of 'Royalty' as defined in clause (2) of Article VIII of the Agreement for the Avoidance of Double Taxation with respect to tax on income between Pakistan and United Kingdom; The learned Members of the Tribunal who heard that appeal do not seem to have thoroughly scrutinized and examined the terms of the Agreement in question. At any rate, no elaborate reasons for holding the payment in question to be 'Royalty' are given in this said order. Similarly I. T. A. No. 1830 of 1971‑72 etc., the Full Bench of the Tribunal, upon appreciation of the facts of these cases, reached the conclusion that for the various specific services provision had been made separately, in the various clauses for specific remunerations related to almost identical services. Having reached this conclusion, the Tribunal in the cases. "Therefore, what is ultimately left to be paid out to the appellant in the shape of services fee, at the rate of 2‑l/2 per cent. represents nothing but the payment on account of use of the appellant's patents, supply of information, plants and processes and other information. "In the instant case, it may be noted, it has neither been asserted nor proved on behalf of the assessee before us that for each and every kind of service to be rendered, separate provision for payment was made and that the payment in question was for nothing but the supply of design patents, and plants etc. In I. T. A. No. 1639 of 1971‑72, after recording the contentions of the parties, the Tribunal made an observation, without recording its reasons therefore, that the income in question was squarely covered by the term "Royalty" as defined in clause (2) of Article VIII". I. T. A. No. 1264/KB of 1923‑73 etc., the learned Members of Tribunal who heard these appeals, without applying their minds independently to the issue involved therein, decided to follow an earlier decision of the Tribunal in I. T. A. No. 1639 (supra), on this issue. Thus it is evidently clear that in none of the aforesaid cases the 'Tribunal appeared to have given earnest consideration to the exact nature of payments made to the concerned U. K. Company, for various services rendered by them which did not obviously fall within the preview of the term "Royalty" as defined by sub‑clause (2) of Article VIII of the "Tax Avoidance Agreement". It may further be added that even the Appellate Assistant Commissioner vide his order dated 31‑5‑1960, had not held the payments to be "Royalty" and allowed exemption under Article VIII of the "Tax Avoidence Agreement". He had treated it to be a `commercial profit' and allowed exemption under Article III of `Tax Avoidance Agreement'.

8. The alternative plea raised on behalf of the appellant as noted above, should not detain us long as the payment in question cannot be said to be the Industrial or commercial profits'. The learned Appellate Assistant Commissioner undoubtedly held the income from the above services in question to be commercial profits in his order passed in appeal arising from the assessment of the year 1967‑68 but, we find it difficult to persuade ourselves to agree with him. The term "Industrial or Commercial Profits has been defined in Article II(1) of the Convention between the Government of Pakistan and the Government of United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to tax on income'. It clearly excludes Royalties, or fees or other remuneration derived by enterprises from the Management, control or supervision of the trade, business or other activity of another enterprise or concern from the term "Industrial or Commercial Profits. Even otherwise, the payments made towards rendering services in respect of "Factory Administration", "Training of Technical Staff. Sending its own staff' to Pakistan to advise `the Pakistani' Company' on the utilization of its machinery and equipment and on processes, manufacture and production as well as "conducting regular inspection of the specialized products manufactured by U. K. Company cannot, by any stress of reasoning be described as "Industrial or Commercial Profits".

9. With regards to the ground No. 3 in the Memorandums of Appeal, for the charge years 1969‑70 and 1970‑71, namely; that the Income‑tax Officer erred in not allowing credit for the investment of Rs. 8,100 and Rs.9,100 respectively, in the purchases of Income‑tax Bonds', and the ground No. 3 in appeal for 1970‑71 only, pertaining to cyclons relief surcharge the learned authorised representative of the appellant stated that an application for rectification under section 35 has already been presented before the Income tax Officer but, no orders have so far been passed thereon. We hope that the Income‑tax Officer would dispose of the said application in accordance with the law and hence we do not propose to go into the merits of this claims of the assessee. In the result, all the appeals fail and are hereby dismissed. Appeals dismissed.