1981 PLP (Trib (PTD)

MIAN ABDUL KHLAQ (MEMBER).‑-- .. 2 .. 3 .. 4 .. 5. .. 6. .. Foreign Agents Commission In the assessment year 1977‑78, the assessee's entire claimed foreign agents commission at Rs. 1,00,660 was disallowed by the I.-T. O. It was held that commission was paid to foreign agents who were non‑residents in Pakistan and no tax having been deducted under section 18 of the Repealed Income‑tax Act, the assessee's claim was inadmissible under section 10(4) (bb). The I.-T. O. arrived at this conclusion while following the decision in the case of Gulberg Textile Mills Limited v. Commissioner of Income‑tax, Karachi (1978 PTD 126). In appeal, the learned A. A. C. followed the Central Board of Revenue's Circular No. 14 I. T. P. of 1950. Amendment made in section 10(4) (bb) vide Finance Act, 1977, was also relied. (The amendment was made vide Finance Ordinance, 1978 but the A. A. C. erroneously assumed the same as of the Finance Act, 1977). The assessee's entire claim was allowed. The Department is in further appeal against that treatment. The Departmental Representative reiterated the plea taken by the I.‑T. O. regarding this claim. It was submitted that foreign agents commission was not admissible under section 10(4) (bb) as, no tax was deducted there from under section

18. Reliance was placed by the Departmental Representative on the reported case (supra). The assessee‑respondent's Authorised Repre sentative in his turn submitted that in the instant case, the agents rendered services as well as received commission outside Pakistan and as such provision of section 10(4) (bb) was not attracted. The assessee‑respondent's Authorised Representative further submitted that commission having been paid after approval of the State Bank of Pakistan, the same was allowable under various circulars issued on the subject by the Central Board of Revenue. Before decision of the issue involved, it is pertinent to dwell on the legal provision. Sub‑clause (bb) of section 10(4) was added to the Repealed Income‑tax Act for the first time by A. C. T.‑I of 1957. The provision as then made was as under:‑- "any allowance in respect of any payment by way of brokerage or commission made to a person not resident in taxable territories unless tax has been deducted there from, under section 18." By Act I of 1962, the words "taxable territories" was substituted by the word "Pakistan". Thereafter amendment was again made by Finance Ordinance, 1978 and amended provision of sub clause (bb) is as under :‑‑ "any allowance in respect of any payment by way of brokerage or commission chargeable under the provision of this Act made to a person not resident in Pakistan unless tax has been deducted there from under section 18." The issue of commission to non‑residents remained under active consideration of the Central Board of Revenue who have been issuing various circulars from time to time. It is essential to narrate the circulars of the Central Board of Revenue which are as under :‑ (i) Circular No. 14‑I. T. P. of 1950 which read as under :‑‑‑ "The commission or borkerage paid to the non‑resident in these circum stances is not liable to tax and there can be no charge under sub section (2b) or (3‑A) of section 18 of the Act. Accordingly the I.‑T. O. is directed to refrain from taking action to tax such payments. (ii) Circular No. 6 of 1959 dated 2‑3‑1959 read as under :‑‑ Some doubts appear to exist regarding true import of clause (bb) of subsection (4) of section 10 of the Income‑tax Act. This subsec tion reads :-- Nothing in clause (ix) or (xvi) of subsection (2) shall be deemed to authorise any allowance in respect of any payment by way of brokerage or commission made to a person not resident in the taxable territories unless tax has been deducted there from under section

18. The Board is of the view that the principle of law laid down by the West Pakistan High Court in C. I. T. v. Netherland Trading Society Civil Reference No. 167 of 1964 should govern the interpreta tion of this clause also. There the Court was considering clause (c) of this subsection which comes immediately after clause (bb). Agreeing with the view of the Income‑tax Appellate Tribunal, Constantine, J. remarked :-- The reasoning underlying the Tribunal's conclusion, therefore, is that since there will be no payments liable to tax, it is superfluous and unnecessary to make any arrangement to provide for payment of such tax, and that since the danger against which the prohibition guards does not exist, the prohibition does not apply. It follows that if the commission or the brokerage is of a nature that it attracts Pakistan Income‑tax in the hands of the non‑resident payee, deduction of tax under section 18 is imperative for its admissibility as a deduction in the assessment of the resident payer. However, if under the Income‑tax Act the commission or the brokerage is not liable to Pakistan tax in the hands of the recipient, it would be an admissible expense in the assessment of the payer irrespective of the deduction of tax under section 18 of the Income‑tax Act. (iii) Circular No. 3(60) T. L. 70 dated 28‑4‑1971 read as under : -- "The question of applicability of section 10(4) (bb) as well as the section 18 of the Income‑tax Act, 1922, in respect of commission/ brokerage paid to non‑resident agents was examined in the Board. In, this connection attention is invited to the Board's Circular No. 6 of 1959 [26(14) I. T. P. 56] dated 2nd March, 1959. Section 10(4) (bb) of the Income‑tax Act provides for disallowance of the commission/brokerage paid to non‑resident agents unless tax is deducted in respect of such payment under section

18. On perusal of section 18, it will appear subsection (3) of that section is applicable to commission/brokerage paid to non‑residents. When section 18(3‑B) and section 10(4) (bb) are read together it will, appear that these two sections apply to any sum which is chargeable under the Income‑tax Act. The whole question, therefore, depends on whether the commission/brokerage paid to non‑residents by Pakistani residents is chargeable under the Income‑tax Act. This question is, in turn, mainly dependent on the question whether section 42(1) is attracted in respect of such payments. This very question of applicability of section 42(i) to the brokerage/commission paid to non‑resident agents was examined in detail in the Board and in the light of the decision instructions were issued in the Board's Circular No. 14/I. T. P. of 1950 35(1) I. T. P., 47 dated 1st September, 1950 and Circular letter No. 3(60) T. L./70 dated 23rd January, 1971. From the above circulars, it will appear that if the commission/brokerage is of a nature that it attract Pakistan tax in the hands of the non‑resident payee, deduction of tax under section 18 is imperative for its admissibility as deduction in the assessment of the resident payers. But if under the Income‑tax Act the commission/brokerage is not liable to tax in the hands of the recipient it would be an admissible expense in the hands of the resident payer irrespective of the deduction of tax under section 18 of the Income‑tax Act. . In view of the position explained above and the instructions contained in the aforementioned circulars the general practice reported to be followed in your charge regarding the treatment of brokerage/commission paid to non‑resident agents does not appear to be correct. The Board, therefore, desires that the question of taxability or otherwise of the brokerage/commission paid to non‑resident agents should he decided on the basis of the instructions contained in the Board's circulars/circulars letter referred to above". (iv) Circular No. 3(5) I. T.‑P./78 dated 8‑7‑1978 reads as under :‑ "In the case of Messrs Gulberg Textile Mills reported as (1978) 37 Taxation 125, the High Court of Sind has held that brokerage or com mission paid to a non‑resident without deduction of tax at source under section 18 (3‑B) is not admissible deduction as business expenditure from the profits of the assessee notwithstanding the fact that such non‑resident is not chargeable to tax under the Income‑tax Act in Pakistan. This decision is contrary to the practice followed by the department under the following instructions of the Board: (1) Circular No. 6 of 1959 dated 2-3-1959. (2) C. No. 3 (60) T. L. 70 dated 23‑1‑1971. (3) C. No. 3 (60) T. L.‑70 dated 28‑4‑1971. (4) C. No. 3 (22) T. T.‑I./74 dated 26‑3‑1971. An amendment has consequently been made in clause (bb) of sub section (4) of section 10 whereby the provisions of clause (bb) would be applicable only if the commission or brokerage paid is taxable in Pakistan. Since the amendment has not been made with retrospective effect, the Income‑tax Officer may tend to disallow expenditure in the pending casts. I have been directed to say that keeping in view the Board's earlier instructions on the subject no attempt should be made to disallow the said expenditure unless the commission or brokerage paid to a non‑resident is taxable in Pakistan and no tax has been deducted there from under section 13(3‑B)." A perusal of the aforementioned circulars clearly establishes that directions and instructions of the Central Board of Revenue were to allow commission or brokerage paid to non‑residents even if the same is not taxable in Pakistan Tax. As held by the Tribunal in its decision reported as (1981) 43 Taxation 83 (Trib.), the instructions or orders issued by the Central Board of Revenue are binding on ail officers and persons employed in the execution of Income‑tax Act by virtue of the provisions of section 5(8) of the Act. Taking up the two decided cases on this issue, it is pertinent to deal with them separately. In the case reported as (1966) 14 Taxation 96 (Trib.), the Tribunal while dealing with a case wherein no payment was involved held as under :‑ "Learned counsel for the appellant reads the word "Payment" occurring in clause (bb) and section 18 as meaning `actual payment' and we would not say that this reading is not correct. His contention that deduction of tax on commission or brokerage is possible only when such commission and brokerage is chargeable to tax under the Pakistan Income‑tax Act must also prevail. However, this analysis of the two provisions does not absolve him of his duty to get out of the mischief of the general prohibition created by clause (bb). The language of this clause is restrictive. If the recipient of the commis sion is a non‑resident and the payment is claimed under section 10(2) (xvi) then in the clear words of this clause the fact of deduction of tax thereon must be proved. In other words this clause completely prohibits the allowance of expenses claimed under section 10(2) (xvi) if the payment of those expenses is made to a person not resident in Pakistan unless tax is deductible and has been deducted on them under section

18. If tax thereon cannot be deducted for the reasons that they are not paid and are not chargeable to tax then they go out of the exception created by the words `unless tax has been deducted there from under section 18' occurring in clause (bb). Mr. Rizvi, the Departmental Representative, went to argue that but for the exception referred to above there is a complete denial of the allowance should to a case falling under this section, and admittedly neither any payment has been made nor any tax has been deducted thereon, the assessee's claim is barred by the general prohibition created by clause (bb). Strangely enough when these is do payment how any allowance. In respect thereof can be admitted but this is yet another matter on which we need not dwell." The facts of this case are fairly distinguishable as issue involved therein was different. Therein commission was not paid to non‑resident and the issue cropped up only while deciding the case of managing agency agreement. Taking up the case decided by the High Court reported as (1978) 37 Taxation 125 there seems to be a basic difference in the facts of that case. Therein foreign agents commission was remitted from Pakistan and it was held as under :‑ "A close reading of clause (bb) of section 10(4) shows that the language is restrictive and worded in negative. It provides that any allowance in respect of any payment by way of brokerage or commission made to a non‑resident person shall not be deemed to be authorised as business expenditure under section 10(2) (xvi) unless tax has been deducted there from under section

18. In other words, the deduction of tax at the time of payment is made a condition to the allowance of the claim in respect of the payment of brokerage or commission. It is pertinent to observe that it is not a condition for the allowance of business expenditure of payment of every kind made to a non- resident person that it shall 'not be authorised unless tax has been deducted there from under-section 18, but only of payment of brokerage or commission which are specifically provided for ‑in clause (bb). As rightly observed by the Tribunal, the intention of the Legislature in enacting clause (bb) appears to be that the amount of brokerage or commission payable to a non‑resident should not altogether escape the incidence of taxation and the payer who is claiming the deduction of the amount from his profits as a business expenditure must deduct tax at the time of payment in accordance with the provisions of subsection (1) of section 17 of the Act, leaving it either to the non‑resident person to obtain a certificate in writing from the Income- tax Officer under the proviso to section 18(2‑B) specifying the rate at which the tax may be deducted, if any, or a payer to obtain an order to that effect." After taking into consideration all the circulars issued by the Central Board of Revenue as well as two reported decisions (supra), we are of the view that the Central Board of Revenue has been as a policy matter, through out directing the Assessing Officers to allow commission paid to the foreign agents. The amendment made in sub‑clause (bb) vide Finance Ordinance, 1978 was already being acted upon by the Central Board of Revenue. The question that falls for determination is the nature of amendment made by the Finance Ordinance, 1978. After perusal of the Central Board of Revenue' instructions, we are of the considered view that the amendment made b Finance Ordinance, 1978 was of rectificatory nature and shall haveretrospective application, irrespective of absence of any specific provision in that a regard. The amendment was purely curative and must be liberally construe in favour of the subject. There is nothing in the amending Ordinance to show that this amendment was prospective only. The amendment being of clarificatory nature is just incorporations of consistent directions of the Central Board of Revenue and as such it shall be deemed to be retospsctive. Provision of sub‑clause (bb) when read from its inception to the amendment in the light of consistent directions of the Central Board of Revenue in the forms of circulars seems to be of procedural nature. Any clarification or alteration in procedure shall have retrospective effect unless some good reason is assigned against that. Even otherwise, in the instant case, the facts were fairy distinguishable as commission was paid to Foreign Agents directly by the Foreign Bank who initially received the sale proceeds from the Customers. Agents rendered their services and received their dues outside Pakistan. The commission thus paid to the non‑residents was not taxable in the hands of recipients an Pakistan and as such there was no question of any tax deduction in 13akistan. The Tribunal has already allowed commission paid to foreign agents in similar circumstances vide its unreported decision in I. T. A. No. 1120‑1121 of 1967‑68 dated 19‑8‑1970. The original provision of section 10(4) (bb) as it existed in the year under review was not attracted. In view of the fact that the amendment made by the Finance Ordinance, 1978, has been held by us to be of rectificatory nature, it fully covered the assessee's case. In the decision of the Sind High Court, commission having been remitted from Pakistan, facts therein were distinguishable from the assessee's case. On that score that decision has no relevancy for this case. The I.‑T. O. erred in blindly following the High Court decision wherein facts were totally distinguishable. In this view of the matter, the order of the Appellate Assistant Com missioner on the issue involved , is maintained and the departmental appeal fails. Order accordingly.