1990 PLP (Trib (PTD)

"In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere." Agreement with Belgium Article 7, paragraph 3: "In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere:" The contention of the assessee that allowance of such an expenses is inherent in the use of word "Profit" is also not valid as such expenses are admissible under section 23(1) of the Income Tax ordinance, 1979. In fact, the Head Office expenses allowed to a non‑resident are governed by section 24(e) of the Income Tax Ordinance which clearly states that any expenditure in excess of such limits as are prescribed under Rules 20 of Income‑tax Rules, 1982 shall not be allowed. The assessee's case is also that expenses incurred outside on account of Head Office Expenditure are admissible and were claimed as such all along under section 24(e) of the Income Tax Ordinance. The assessee's A.R. however, stated that Rule 20 prescribing the limit of admissible expenditure under section 24(e) is not applicable as it is in contravention with the provisions of Treaty for Avoidance of Double Taxation between Pakistan and USA. The law being O absolutely clear that any expenditure to be allowed under section 24(e) of the Income Tax Ordinance can only be allowed subject to the limits prescribed in Rule 20 of Income‑tax Rules, 1982, the contention of the assessee is, therefore, rejected being devoid of any merit." With the above observations the IAC in his order under section 66‑A made additions of Rs.6,53,560 and Rs.9,82,450 for the assessment years 1982‑83 and 1983‑

84. As regards the assessment years 1984‑85 and. 1985‑86 the assessee had claimed head office expenses of Rs. 27,08,456 and Rs. 30,18,471 for the two years respectively. On the basis of Rule 20 of the Income‑tax Rules the ITO calculated the admissible expenditure at Rs. 19,12,749 and Rs. 18,90,115 for the two years respectively and in this way added back Rs. 7,95,716 and Rs. 11,28,356 to the assessee's income. The learned CIT (Appeals) Zone‑1, Lahore subsequently upheld the add‑backs made by the ITO. In his order for the assessment year 1985‑86 the CIT (Appeals) observed that it was true that according to the Avoidance of Double Taxation Agreement between Pakistan and U.S.A. the assessee had to be treated as an independent enterprise carrying on business dealings at arm's length with its foreign Head Office but it was not possible to sec how the non‑resident character of the assessee was affected by this. The CIT (Appeals) observed that the assessee continued to be a non‑resident company which was governed by Rule 20 of the Income‑tax Rules and that there appeared to be nothing in section 163 which indicated that section 24(e) and Rule 20 were not applicable in the assessee's case. The learned C:IT (Appeals) further observed that paragraph (3) of Article III of the Avoidance of Double Taxation Agreement relied upon by the assessee only provided that where there was no evidence of manipulation in the matter of business dealings between a permanent establishment in one country and its Head Office in the other country, dealings between the two entities would be treated as having been made at arm's length principle which matter was also clarified in paragraph (c) of Article IV of the treaty. The learned CIT (Appeals) further observed that it was provided in Article XVI of the Treaty that for the purpose of carrying out the provisions of its Articles III and IV, the taxation authorities of the two contracting States could hold mutual consultations. The learned CIT (Appeals) wrote that in case the assessee disputed the provisions of section 24(e) of the Income Tax Ordinance the proper remedy would be for the two countries to hold mutual consultations in the matter. The CIT(Appeals) also did not attach much importance to a C.B.R. Circular of 1956 which had been cited by the assessee because as he pointed out there was no legal provision corresponding to section 24(e) of the Ordinance in the repealed Income‑tax Act, 1922. With these observations the learned CIT(Appeals) upheld that ITO's action in the assessment year 1984‑85 and on the same principle also for the assessment year 1985‑86.

3. The assessee's common contentions before us for all the four years are essentially the same as were taken before the authorities below. Main reliance of the learned counsel was on the provisions of paragraph 3 of Article III of the Pakistan and USA tax treaty which paragraph has already been reproduced above. It was contended that the word "profits" appearing in the said paragraph had a definite meaning and that it meant the net income after deducting all expenses incidental to the business from the gross income. In this connection some quotations from the publication "Words and Phrases", Volume 34 St. Paul, Minn, West Publishing Co. were also given, e.g. "The word "profits" has a fixed and definite meaning, and imports the net amount made after deducting any expenses incident to a business. It is said that the correct meaning of the word "profits" is the excess of receipts over expenditure. Lepore v. Twin Cities Nat. Building & Loan Ass'n, 5 Pa. Super. Gt. 276,280." The learned counsel for the assessee also furnished a copy of CBR Circular No. 12‑IT/1956 the last para. of which reads as under: "In the case of assessees whose profits have to be determined in accordance with Article III of the Double Taxation Agreement with the United Kingdom the profits attributed to the assessee's permanent establishment in Pakistan are to be computed as if it were an independent enterprise. In paragraph 5 of Circular No. 16 of 1955, dated the 15th December, 1955 (see section 49‑AA) it is stated that the present practice would continue of taxing the full profit without excluding any part of the profit attributable to the operations in the United Kingdom. It follows that no attempt should be made to exclude any part of the expenditure attributable to such operations. Moreover, if the permanent establishment in Pakistan were an independent enterprise dealing at arm's length with the United Kingdom enterprise it might be expected that the Head Office Expenses would be debited against the Pakistan enterprise and in that case, so far as they constituted revenue expenditure, would have to be allowed". (Circular No. 12‑ITP/1956.) The contentions of the learned counsel with regard to the meaning of the word "profits" and in the context of the CBR Circular of 1956 do not, however, appear to us to be quite to the point. The actual position is that despite the fact that paragraph (3) of Article III of the Tax Convention between Pakistan and USA does not make any specific reference to the deductibility of Head Office Expenses (which specific reference is found in some other conventions as noted by the IAC), the authorities below have not in principle doubted the admissibility of a reasonable amount of head office expenses as a deduction from the income of the assessee's permanent establishment in Pakistan. This acceptance in principle seems to be in line with the CBR Circular of 1956 issued in the context of the tax convention with the United Kingdom notified in July, 1955 and to which a reference has been made above. In this first United Kingdom convention (which was replaced by a new convention in January, 1962 and again m February, 1988) there was also no specific reference to the deductibility of Head Office 1‑'Tenses as is the case with the U S Convention. The admissibility of the Head Office Expenses having been accepted by the tax authorities concerned, the only question which is to be decided is whether in the context of the Pakistan U S Tax Convention, there is any bar on the Pakistan tax authorities to apply the provisions of rule 20 of the Income‑tax Rules read with section 24(e) of the Income Tax Ordinance, which provisions were introduced much after the convention was notified. While deciding this issue we would first of all observe that it not uncommon for the tax laws of various countries to contain special provisions m the context of taxation of non‑residents and it cannot be said that such provisions may necessarily be considered to violate the principles of the tax treaties entered into by those countries. The fact that rule 20 was introduced much after the Notification of the convention with USA is also not quite material because there is nothing in the Convention to suggest that the tax laws of the two countries would be deemed to have been frozen as on the date of the cooing into force of the Convention. In fact the Pakistan U S Tax Convention contains a very clear protection for the tax laws of Pakistan regarding the taxation of non residents. Its Article XVII which basically contains provisions relating to non discrimination between the nationals of the two States contains the following clarification in its paragraph (3): "(3) (a) as obliging either of the contracting States to grant to persons not resident in its territory those personal allowances, reliefs and reductions for tax purposes which are by law available only to persons who are so resident; or (b) as affecting any provisions of the laws of Pakistan regarding the imposition of tax on a non‑resided or the grant of rebate of tax to companies fulfilling specified requirements regarding the declaration and payment dividends, unless those requirements are fulfilled It is obvious from the above that the laws of Pakistan relating to the taxation of non‑residents are given specific protection in the Convention. As we have already noted such a protection is by no means unusual in tax treaties, for instance the identical Article 7(3) in Pakistan's comparatively recent tax Conventions with Sweden, Norway and Denmark reads as under:‑‑ "(3) (a) In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including only those executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, which are allowed under the provisions of the domestic law of the Contracting State in which the permanent establishment is situated." In the light of the above discussion we are of the considered view that the application of the provisions of rule 20 of the Income‑tax Rules to the assessee's case does not violate either the specific provisions of the Pakistan U S Tax Convention or its spirit. In fact the convention contains provisions which specifically protect Pakistan's tax laws such as those reflected in rule 20 read with section 24(e) of the Income‑tax Ordinance.

4. In the light of the foregoing we find no merit in the four appeals which, therefore, stand rejected. M.B.A./878/T Appeals rejected.