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Petitioner: COMMISSIONER OF INCOME-TAX, CENTRAL ZONE, ---B---, KARACHI VS Respondent: ESSO JUDGMENT
Court Name: Sindh High Court Judge(s): Wajihuddin Ahmed, Saleem Akhter Title:COMMISSIONER OF INCOME-TAX, CENTRAL ZONE, ---B---, KARACHI vs ESSO
JUDGMENT
Reported As: 1990 PTD 787 Result: Order accordingly Judgment JUDGMENT WAJIHUDDIN AHMAD, J.--The facts giving rise to this application under section 0fi(2) of the Income-tax Act, 1922, are rooted in an order of assessment dated 17-5-1976, passed by the Income-tax Officer, Companies Circle V, Karachi. Relevant to these proceedings the Income-tax Officer observes that the assessee Company, respondent herein, "had been remitting (payments for) technical and engineering services and other fees to its principals Messrs ESSO Eastern Chemicals Inc (EEC:) and its affiliates under the Engineering and Miscellaneous Charges Agreement dated 30-9-1968". During the account year under assessment (1973-74) the Company showed aggregate charges of $237,887.17, as payable to EEC for technical and engineering services rendered, Head Quarters services and charges for services utilised in purchase of material and supplies. It was claimed by the assessee that all such charges were billed on cost basis and no profit element was involved. As such no tax was deducted by the assessee Company on such payments. A copy of Auditors' report was brought on record stating that these charges were in accordance with the provisions of the agreement dated 30-9-1968 and, being at cost, were not liable to tax in Pakistan. It is observed by the Income Tax Officer that there never had been any commitment from the Government of Pakistan that such remittances would be exempted. Coming to hold the view that under subsection (3-B) of section 18 of the Income-tax Act, 1922, the Company was bound to deduct tax on any sum, chargeable under the Act, paid to a non-resident party, the former was served with a letter dated 6-5-1976 for action in terms of section 18(7) of the Income Tax Act, on failure to deduct tax under section 18(3-B) of such Act. Reply dated 7-5-1976 was submitted, the explanation being that service charges were billed to the Company at cost and
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there being no element of profit involved deduction under section 18(3-B) ibid was not required. The Income Tax Officer, on making reference to some case law, came to the conclusion that it is the gross revenue receipts which are -chargeable under section 19(3-B) of the Income Tax Act, and that such persons, as are bound to make deductions at the time of payment, are not concerned with the ultimate result of any income or otherwise to the payee. Through a separate order, the Assessing Officer charged additional tax as provided under section 18(7) on the total amounts disbursed for technical, engineering, Head Quarters and other services. 2. The respondent Company appealed but such appeal was disallowed by the Assistant Commissioner on 14,12-1976 through an elaborate order of that date. A further appeal was taken before the Income-tax Appellate Tribunal at Karachi and such appeal was allowed per order of the Tribunal dated 27-5-1977. Aggrieved by this order, the Commissioner of Income-tax, Central Zone `B', Karachi, sought a reference from the Tribunal under section 66(1) of the Income---tax Act to this Court but through order dated 3-3-1979 the Tribunal rejected the reference application and declined to state the case on the ground that no questions of law arose therefrom. In this background the present application under section 66(2) of the Income Tax Act, 1922, has been preferred and it is claimed that question of law do arise from the decision of the Tribunal, dated 27- -5-1977, and such questions have been included in the statement of the case. It is prayed that this Court be pleased to frame necessary questions and decide the same according to law. 3. In the statement of the case, submitted before the Tribunal, the following questions arc found to have been raised:-- (1) "Whether on the facts and in the circumstances of the case, the Income---tax Appellate Tribunal was justified in entertaining the appeal against the order of the Income-tax Officer passed under section 18(7) in view of section 30 of the Income-lax Act. (2) Without prejudice to the above question the Appellate Tribunal was justified in holding that no income was chargeable to tax in view of agreement between the assessee and non-resident company of September, 1908." 4. We propose to examine the second question first as such question touches the main controversy in these proceedings whereas the first such question is of a technical nature and has been brushed aside on the ground that the same was not raised before the Tribunal at all and, therefore, did not arise for making a reference. Even as regards the second question we cannot fail to see that the same besides, apparently, containing clerical or typographical errors is also not happily worded. However, being mindful that in such cases it is the essence of the controversy which has to come up for examination, the same being deducible from the record, which is available before the Court, and a proceeding, otherwise competent, should not be allowed to flinch merely because of an avoidable error, we have thought fit to examine the scope of the remedy at this level in the proceedings. Under Section 66(2) of the Income-tax Act, 1922, as it originally stood, there could be some scope for errors in drawing up questions for references to assume proportions, as it used to be on refused questions that this Court could call upon the Tribunal to "state the case and to refer it". This scope has considerably widened with the substitutions made of subsections (1), (2), (3) and (4-A) in section fib ibid through the Finance Act, 1974. Section (4)(2), as it read at the time of repeal of the Act of 1922, is as under:-- "66(2). If on an application made under subsection (1) the Appellate Tribunal refuses to state the case on the ground that, no question of law arises, the assessee or the Commissioner, as the case may be, may within ninety days from the date on which he is served with notice of the refusal, apply to the High Court and the High Court may if it is not satisfied with the correctness of the decision of the Appellate Tribunal frame a question of law and proceed to hear the case." 5. At the outset, on examining the facts and circumstances of the case, it is to be stated that the points in controversy before the Appellate Tribunal were, as to what payments or sums can be
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termed chargeable under Section 18(3-B) of the Income Tax Act, next, whether deduction from such payments is obligatory on the part of the person responsible to pay, and if so, whether the latter can bifurcate such sum(s) as regards chargeability and, finally, whether the agreement of September, 1968, operates as an exemption for the assessee to effect deduction under such section even though the payments of sums involved are otherwise liable for deduction. Before embarking upon a detailed examination of the case, it would be pertinent to observe that in the Income-tax Appellate Tribunal there was, to start with, a difference of opinion between Mr. Mazhar A.I, then Judicial Member and Mr. M. Karim, Accountant Member, in that the former was of the opinion that the officers below had lost sight of the real issue in the matter namely, whether the entire sums or any part thereof paid to EEC, the non--resident company, had the characteristics of being chargeable under the provisions of the Act, more particularly under the charging provision of section 4(1)(c) of the Act, the contention of the assessee having always been in the negative on that score but himself left that question open on the ground that, in the meantime; the assessee had been issued a notice under Section 43 of the Income Tax Act and had been treated as an agent of EEC; but the latter disagreed, being of the view that the responsibility to deduct begins and ends at the time of payment/deduction, the subsequent event of the remitter, having been saddled as agent, being of no relevance. The Accountant Member, further opined that liability of the remitter under sections 18(7) and 43 of the Income-tax Act was co-extensive, once default in making due deductions occurred. Being of such views he dismissed the appeal. Here, it would be advantageous also to mention that even the then Judicial Member, now an Honourable Judge of this Court, did not see eye to eye with the contention of the appellant before him that the payments, in question, were not liable to be taxed by virtue of Article III(c) of Agreement for the Avoidance of Tax between Pakistan and the U.S.A. And repelling that contention agreed with the findings of the Appellate Assistant Commissioner on the point. The appeal before the Division Bench of the Tribunal partially succeeded in so far as Mr. Mazhar A.I, the Judicial Member, was concerned but, as seen, totally failed with Mr. M. Karim, the Accountant Member. There was thus no difference of opinion between the members of the Bench, as originally constituted, on the question that the payments under reference, if otherwise chargeable, were liable to be taxed irrespective of the provisions in Article III(c) of the Agreement for the Avoidance of Tax between Pakistan and the U.S.A. Since under Section 5-A(7) of the Income Tax Act, corresponding to section 133(7) of the present statute viz. The Income Tax Ordinance, 1979, a reference to the President of the Tribunal could only be "on I the point or points" on which such members had differed, it is such "point or points" alone, which could be decided on the reference and none other or others These are the manifest meanings of section 5-A(7) and its current equivalent section 133(7) ibid. It would be useful to reproduce here the very words in which the reference was made by the differing members:-- "On account of difference of opinion between us with respect of the interpretation of the provisions of sections 18(3-B) and 43 of the Income---tax Act, and their application to the facts of this case, we would refer the case to the learned President for necessary action under Section 5(7) of the Act." 6. As it turned out, the President constituted another Bench following upon the reference, which included himself and quite another set of Judicial and Accountant Members to decide upon the difference referred. This under subsection (7) of Section 5-A, aforesaid, he could undoubtedly do and the outcome would rest on the opinion of the majority of the Bench so constituted together with the differing members, making the reference. However, such majority opinion would be restricted only to the point or points in the difference referred and not beyond. In so far, therefore, as the members of the newly-constituted Bench expressed themselves on Article III(c) of the Agreement between Pakistan and the U.S.A. That expression of opinion inasmuch as it travelled
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beyond the reference is invalid and the original opinion of the Bench initially constituted on that subject shall hold the field. Accordingly on the facts and circumstances of the case, we are unable to examine the terms of the agreement in question and the views of the originally constituted Bench should be conclusive. In relation to that matters and such views are clearly spelled out in the order of Mr. Mazhar A.I, aforesaid, with which, on the point, the other member did not disagree. Our examination of the case would, therefore, be limited only to such part of the controversy, as remained to be examined before the Tribunal on reference and, correspondingly, as raised in this Income-tax case. 7. In passing, per para 5 above, we have already adverted to some obvious legal controversies, which came up before the Appellate Tribunal. Such are germane to question No. 2 raised by the applicant before the Tribunal, for making a reference to this Court. It has been seen that question No. 2, as framed for the Tribunal to make reference, was unhappily worded but questions of law relevantly did arise. Similar infirmities also occur in relation to question No.1 posed by the applicant. On the language of Section 66(2) of the Act, which corresponds to Section 136(2) of the Income Tax Ordinance, 1979, we have the D necessary discretion to frame and answer appropriate questions. For the reasons which we have recorded in para 4 herein and coming to the conclusion that the decision of the Tribunal, opining that no question of law arose before it for making reference under Section 66(l) of the Income-tax Act, was too technical, we have thought 6t to reframe the questions as set out below:-- Question No. 1. "Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in entertaining the appeal against the order of the Income-tax Officer, passed under section 18(7) in view of the bar in Section 30 of the Income-tax Act?" Question No. 2. "Without prejudice to the above question, whether the Appellate Tribunal was justified in holding that no income was chargeable to tax under section 1838) of the Income-tax Act?" We have underlined the insertions which fairly arose and which we have made in the question proposed before the Tribunal and have also omitted the phrase pertaining to the Agreement of 1968 occurring in question No. 2 so as to bring the questions reframed by us in line with our observations recorded earlier on. 8. This then brings us directly to the controversy pertaining to the interpretation of Section 18(3-B) of the Income-tax Act, 1922, as covered by question No. 2 above, question No. 1 being left for consideration later on. At this stage, it would be in order to read Section 18(3-B) in the Act of 1922 as it stood at the relevant time:-- "(3-B) Any person responsible for paying to a person not resident in Pakistan any sum not, being `Interest on Securities' chargeable under the provisions of this Act shall, at the time of payment, unless he is himself liable to pay any income-tax and super-tax thereon as an agent, deduct (in the case of company) income-tax at the maximum rate and super-tax at the rate applicable to a company and, in other cases, tax in accordance with the provisions of subsection (1) of Section 17." Section 18(3-B), above reproduced, has been re-enacted as Section 50(3) in the Income Tax Ordinance, 1979. There are no significant changes in the re-enacted provision except that the proviso appended to Section 50(3) of the Ordinance of 1979, broadly, introduces a provision in the nature of section 18(3-C) of the then Indian Income-tax Act of 1922 but the effect of such section 18(3-C) will be examined, when relevant, herein below. 9. It is correct, as opined by the majority in the Tribunal that for an obligation to arise to make deduction under subsection (3-B) above, it is essential that the subject-matter of the deduction should be "chargeable under the provisions" of the Income-tax Act. It also admits of no controversy that in the context of chargeability in respect of subsection (3-B) ibid. Such chargeability relates
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back to section 4(1)(c) of the Act of 1922 (more or less similar provision occurs in section 11(1)(b)(ii) in the Income Tax Ordinance, 1979). Here, we would prefer to reproduce verbatim such provision:-- "4(1). Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which--- (a) (b) (c) if such person is not resident in Pakistan during such year, accrue or arise or are deemed to accrue or arise to him in Pakistan during such year:" 10. Before embarking upon the construction of section 4(1)(c), above reproduced, in order to avoid a common error, it falls to be pointed out, that a non-resident is not entitled to the benefit of the second proviso to section 4(1), since such proviso applies only to person "not ordinarily resident in Pakistan" and income, profits and gain, which accrue or arise to such persons outside Pakistan are not to be included in their total income unless the same are derived from a business controlled in or a profession or vocation set up in Pakistan or unless they are brought into or received in Pakistan during the year of relevance. A non---resident, obviously cannot be equated with "a person not ordinarily resident in Pakistan". This aspect was necessary to be dilated upon as the benefit from and scope of such provision lies in a small compass and should not be confused tot extend to non-residents. 11. Reverting, directly, now to section 4(1)(c) above, the first question to be addressed is as to what is signified by the expression "Income, profits and gains from whatever source derived which------ accrue or arise----" to a non-resident in Pakistan, employed in the provision under consideration. The words underlined (by us) have been interpreted to denote ideas, more or less similar, though, perhaps, not identical; and the difference lies in that one may be more appropriate than the other, when applied to particular situations. On such basis, the rule seems to be that income or profits and gains "accrue" within the meanings of section 4(1)(c), when they first, come into existence or the right to receive them emerges but, correspondingly, such may be said to "arise" i.e. Spring up, appear, come into activity) when the method of accounting crystallises them in the shape of income, profits or gains. Thus, income may accrue at a point of time prior to its quantification or computation, which is not a condition precedent to accrual. Next, it arises to due accounting or computation. Such words (accrue or arise) singly or together, besides, are used in contradistinction to the word "receive" and indicate a right to receive and, accordingly, both represent a stage anterior to the point of time when the income becomes receivable. In addition, and this is crucial, income may accrue or arise in one place and be received in another. On this reasoning, irrespective of the place where a business is carried on or a profession or vocation is practised in the context of a non-resident, for the purposes of chargeability under Section 4(1)(c), the minimum requirement to be satisfied is the accrual of income, profits or gains in Pakistan in the year of relevance. If such minimum is satisfied it is altogether irrelevant whether the income, profits or gains have also arisen or been received, either actually or notionally. Mr. A.I Athar, in the context of chargeability, has referred us to the decision of the Bombay High Court in Commissioner Income- tax v. Cooper Engineering Ltd. (1968) 68 I.T.R. 457) where Kotwal, C.J. Recorded the following broad proposition:-- "By virtue of section 4(1) the Act can only apply to income, profits or gains which are received or deemed to be received in the taxable territories." With respect, we differ and cannot subscribe to such a proposition for interpreting section 4(l)(c) of the Income-tax Act, 1922. As seen, such provision does not go as far as to contemplate receipt or income, profits or gains and on the contrary, for good reason, employs the phraseology of income, profits and gains accruing or arising or even deemed to be accruing or arising in Pakistan. Manifestly, as shown, the concept covered by the phrase "accrue or arise" contemplates a stage
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prior to or even corresponding with the actual receipt of such income, profits or gains but the charge comes into operation with mere accrual or arising of the income, profits or gains, as the case may be, and is completely divested from their actual or notional receipt. 12. With this we move on to the other concept in Section 4(1)(c) of the Income-tax Act, 1922, and that pertains to "income, profits and gains from whatever source derived which---if such person is not resident in Pakistan---are deemed to accrue or arise to him in Pakistan----". In such context the clear intendment of the legislature is to bring within the mischief of the provision cases where, in actuality, income does not accrue or arise in Pakistan but, by fiction of law, that which in reality is not income, not having accrued or arisen in Pakistan, is deemed to be so. Thus, salaries taxable under section 7 of the Act are deemed to accrue in Pakistan, wherever paid, if the same are earned in Pakistan. Similarly, as regards profits from business, taxable under section 10, such are deemed to accrue in Pakistan in the case of any business connection in Pakistan. Thus, in appropriate cases, even where income, profits or gains have not actually accrued or arisen in Pakistan the same may still be taxable under the Act of 1922, if such are deemed to have accrued or arisen in Pakistan. Co-extensive to this, it would be the obligation of the person liable to make payment of such deemed income to a non-resident, to also make necessary deductions under section, 18(3-B) in such behalf. 13. Reverting now to section 18(3-B) of the Act, that provision casts an obligation on "any person responsible for paying to a person not resident in Pakistan any sum---chargeable under the provisions of this Act----at the time of payment, unless he is himself liable to pay---as an agent" to deduct relevant tax "in accordance with the provisions of subsection (1) of Section 17". The liability to deduct seems to be absolute except for two conditions namely, the sum payable should be chargeable under the provisions of the Income-tax Act and further the person responsible for paying should not himself be liable as an agent of the non--resident. As to agency, we shall deal with that question when we come to it. But as regards the first condition, for the obligation to arise the question of chargeability is covered by section 4(1)(c) of the Act already discussed above. As seen, which obligation would emerge on income or gains accruing or arising or deemed to be so accruing or arising to a non-resident in Pakistan and for that purpose neither actual receipt of the same is relevant nor the place where such payment is, in effect, received. It is on record that the three disputed sums pertained to EEC, for technical and engineering services rendered, for Head Quarters' services, and for charges against services rendered in purchase of material and supplies. The case of the respondents is and has been that, as per certificate submitted, there is no ingredient of profit involved in such payments and that these became due and were disbursed on costs basis alone. 14. In the foregoing legal and factual background, as projected, several mutually exclusive and alternative situations, can come into view for consideration. This, however, would be on the assumption that the agreement of 1968 remains inapplicable. In the first place, controversy would arise and the respondents would have been obliged to deduct from the whole amount if, on admitted facts, the entire remittances consisted purely of income, profits or gains due to the non- resident. Secondly, in case the amount or amounts in question were of a composite nature then, according-to the respondents, they would he obliged to deduct due taxes only on the profit ingredient and remit the balance whereas according to the department, taxes would be deductible on the whole composite dues payable to the non-resident. Here, significantly the respondents do not elaborate as to how such profit ingredient would be determined before deduction. Thirdly, if in reality no income or profits whatever were involved and that were an admitted position, nothing need have been retained by the respondents according to the stand taken by them but for the department even on such total dues deduction should have been enforced, leaving the matter for the Revenue to determine, at the time appropriate.
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15. The dispute thus is limited to the second and third points, as isolated in the proceeding paragraph. The departmental stand, in the words of Mr. Shaikh Haider, is that the respondents have no attribute of an assessing authority under the Act and it is not for them to determine as to what amount constitutes income, profits or gains of the non-resident. All that they have to do is to perform their duty and to discharge their obligation in making deductions, as required under section 18(3-B) of the Act and whether the whole or part of the sum(s) so deducted is not chargeable under the Act lies within the exclusive functions of the assessing and taxing authorities, to whom the non-resident must revert on due deductions having been made and, depending on its duly showing partial or complete non-amenability to tax, can get due refund. The respondents' counter--argument, through Mr. A.I Athar, is that such a course would result not only in harassment and unnecessary controversies where none in fact arise but even to absurd results. This contention, in turn, is based on a plea that the payments under consideration do not apply…
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