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Petitioner: Messrs EFU GENERAL INSURANCE LTD. through Joint Managing Director, Karachi VS Respondent: FEDERATION OF PAKISTAN through Ministry of Law and Parliamentary Affairs, Government of Pakistan, Islamabad and 3 others
Court Name: Sindh High Court Judge(s): Gulzar Ahmed, Irfan Saadat Khan Title:Messrs EFU GENERAL INSURANCE LTD. through Joint Managing Director,
Karachi vs FEDERATION OF PAKISTAN through Ministry of Law and Parliamentary Affairs, Government of Pakistan, Islamabad and 3 others Case No.:Constitutional Petitions Nos.D-1141 to 1149, 1177 and 2308 of 2009 I.T.A. No, 197 of 1997 Date of Judgment:2010-03-08 Reported As: 2010 PTD 1159 Result: Petitions disposed of Judgment ORDER ' IRFAN SAADAT KHAN, J.---These petitions are filed by the Companies engaged in the business of insurance. The petitioners have challenged that certain amendments have been made in Finance Act, 2008 (F.A. 2008) concerning the business carried out by the petitioners which according to them are being misinterpreted by the respondent. The petitioners have submitted that the action of the respondents is not only mala fide but is also contrary to the intention of the legislature and therefore through these petitions have prayed that the action of the respondents may be declared ultra vires. 2. Messrs Sirajul Haque Memon and Arshad Siraj Memon appeared on behalf of the petitioners and submitted that prior to the various amendments made through F.A 2008, the petitioners were sharing the risk with the foreign enterprises in the transaction of re-insurance and were not required to deduct any tax at source on such transactions with the non-resident enterprises as the Government of Pakistan (GOP) is having Agreements for Avoidance Of Double Taxation (AFAODT) with some countries and these enterprises belong to those countries which do not have any Permanent Establishment (P.E.) in Pakistan. As per the learned counsel the department is misinterpreting the provisions of the Ordinance wherein various amendments have been made vide F.A. 2008 and are now demanding that tax should be deducted at source in respect of the reinsurance payments made by the petitioners to the foreign enterprises with whom the GOP already have AFAODT. As per the counsel there in no dispute with regard to deduction of tax at
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source is concerned in respect of the foreign enterprises with whom GOP do not have AFAODT as in such cases the petitioner were and are deducting the applicable tax at source. According to the learned counsel the provisions of treaty have an overriding effect over the tax laws and even after the amendments made in the said F.A. 2008, the petitioners are not legally obliged to deduct the tax at source in respect of the payments made by them to their foreign enterprises in respect of the re-insurance amounts. They further submitted that the provisions of section 101 of the Income Tax Ordinance, 2001 (The Ordinance) are subservient to section 107 of the Ordinance hence the petitioners are not legally obliged to deduct any tax at source in respect of the payments made to foreign non-resident insurance companies, which are not having any P.E. In Pakistan. In support of their contention they have relied upon unreported decision given by the Hon'ble Supreme Court of Pakistan in Civil Petitions Nos.542, 543 and 544-K of 1999, dated 25-5-2000. 3. Mr. Javed Farooqui Advocate appeared on behalf of the respondents and submitted that prior to the amendments made in the F.A.2008 no deduction of tax at source was required in respect of payments of re-insurance premium made to the foreign countries with whom the GOP has AFAODT. However after the amendments made in F.A. 2008 it has now become incumbent upon the petitioners to deduct the tax at source in respect of the said re-insurance amounts paid to such non-resident companies. He further submitted that these amendments were aimed with the object that now the law-makers want to tax this amount which previously was not being taxed. He submitted that the reinsurance amounts would now be deemed as Pakistan source income and now the petitioners are legally obliged to deduct the tax at source on the amounts prior to remitting the same to the foreign enterprises. He further submitted that the present petitions are premature as the respondents have passed orders under the provisions of Section 161 of the Ordinance, and the respondents have the legal remedy available to them to file appeals, if aggrieved, with the Commissioner of Income Tax (Appeals). In his view these petitions are liable to be dismissed in limine as the petitioners have alternate remedy available to them; hence the recourse adopted by the petitioners in filing the present petitions under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973 is uncalled for. Mr. Ashiq Raza, DAG has adopted the arguments of Mr. Javed Farooqui, Advocate. 4. Learned counsel for the petitioners by giving their rebuttal vehemently opposed the objections raised by the counsel for the Department and submitted that no efficacious remedy is available to them. The matter is regarding fiscal rights based upon statutory instrument which could only be determined in writ jurisdiction. In support thereof they relied upon a number of decisions which have been elaborately discussed in the written synopsis filed by them. They therefore prayed that these petitions may be allowed with cost by holding that the action of the respondent is not only mala fide but also ultra vires. 5. We have heard all the learned counsel at length and have also considered the verbal as well as written arguments advanced by them. Before adverting to the legal controversies raised by the learned counsel we first would like to reproduce hereinbelow the amendments made through F.A. 2008: (a) "insertion of subsection (1AA) in section 152 stipulating that every person making payment of insurance premium or reinsurance premium to a non-resident person shall deduct tax from the gross amount paid at the rate (of 5%) specified in Division-II of Part-III of the First Schedule. (b) Corresponding amendment was made to treat such amount of tax deducted as a final tax on the income of the non-resident by insertion of subsection (1BB) in section 152. (c) Further corresponding amendment was also made in Rule 5 of Fourth Schedule by inserting sub-rule (4) to the effect that no deduction shall be allowed for any expenditure on account of insurance premium paid to an overseas insurance or re-insurance company or a local agent of an
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overseas insurance company until tax at the rate of 5% is withheld on the gross amount of insurance or re-insurance premium." 6. Briefly, stated the petitioners are Public Limited Companies and are engaged in the business of Insurance. The income of the insurance business is computed under section 99 of the Ordinance while the procedure of computing the income is given in the Fourth Schedule to the said Ordinance. The petitioners are carrying on business of insurance which is controlled and regulated through Insurance Ordinance, 2000. In this kind of business a contract of insurance is drawn for any property, life etc. And the Insurance Company assumes the risk thereto and for which purpose charges a stipulated sum of amount from the insured person commonly known as the premium. In order to share the risk for any heavy loss, which could be beyond the capacity of Insurance Company, transactions of re-insurance are undertaken wherein a foreign Insurance Company share such risk with the Pakistani Company and for which purpose charges re-insurance premium from the Pakistani Company, which the Pakistani Company eventually remits to them. The terms insurance and re-insurance have been defined in section 2 of the Insurance Ordinance 2000, which are reproduced herein below: "(xxvii) "insurance" means the business of entering into and carrying out policies or contracts, by whatever name called, whereby, in consideration of a premium received, a person promises to make payment to another person contingent upon the happening of an event, specified in the contract, on the happening of which the second-named person suffers loss, and includes reinsurance and retrocession: (Hi) "reinsurance" means a contract of insurance under which the event, specified in the contract, contingent upon the happening of which payment is promised to be made to the policy-holder thereunder; is payment by the policy-holder of a claim or claims made against the policy under another contract or contracts of insurance issued by that policy-holder." 7. The GOP entered into AFAODT with a number of countries and in most of these agreements it has been agreed bilaterally not to charge the tax subject to the condition that such foreign country should not have a P.E. In other country. Prior to the amendments made in F.A. 2008 the petitioners were not required to deduct the tax on such re-insurance remittances to non-resident enterprises which have the AFAODT with Pakistan and which do not have a P.E. In Pakistan. However after the amendments made in the F.A. 2008 the respondents are now demanding from the petitioners not only to deduct the tax on such re-insurance payments but also threatening them that penal action as provided under the law will be taken if no tax is deducted at source by the petitioners. 8. Before examining the contentions raised by the petitioner the action taken by the respondent is not only mala fide but also contrary to the intention of the legislature. We would like to deal with the issue that whether in the present circumstances the invoking of the constitutional jurisdiction under Article 199 of the Constitution of the Islamic Republic of Pakistan is warranted or not. The learned counsel for the petitioner in support thereof have invited our attention to a number of decisions given by the superior courts, wherein it has been held that "where the impugned order/action is without jurisdiction and mala fide or is contrary to law or misapplication of law or assumption of jurisdiction is based upon misreading of provisions of law then in such cases petitions are maintainable even though the machinery is provided for redressal". In the case of Usmania Glass Sheet Factory v. Sales Tax Officer (PLD 1970 SC 2005) it was held that: "The objection of the respondent that the appellant had alternative remedies by departmental means is also not of much substance. It has been held by this court that in a case where the dispute arises between the parties in respect of a fiscal right based upon a statutory instrument the same can be easily determined in writ jurisdiction." ' In another decision National Bank of Pakistan v. Wafaqi Mohtasib (Ombudsman), Karachi (PLD 1992 Karachi 339), it was held that:
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"When assumption of jurisdiction is clearly based upon misreading of the provisions of law, it is, and has always been a valid ground for interference in writ jurisdiction" ' In another decision reported as Pak Land Cement v. C.B.R. And others (2007 PTD 1524), it was held that "Nevertheless, it is equally well-settled that the alternate remedy must be equally efficacious and learned counsel for the petitioners seems to be correct in asserting that statutory remedies had become illusory on account of a clear expression of the opinion on the subject by the respondent No,2 to whom the appellate body was a subordinate". 9. In the instant petitions also the learned counsel for the petitioner has challenged the very authority of the Respondent No,4 in misinterpreting the provisions of the law which as per the learned counsel is not only mala fide but also contrary to law and is also a misapplication of the law. We, therefore in the light of the decisions noted supra have come to the conclusion that the matter does require an authoritative pronouncement in view of the allegations made by the learned counsel. At this junction we also would like to refer a decision given by a D.B. Of this court in Pirani Engineering v. Federal Board of Revenue (2000 PLD 809) wherein it was held that "a reviewing authority had already expressed his opinion in the form of an administrative order, therefore, filing of an appeal or revision/review before such authority was mere illusory in nature and was not efficacious remedy and it was held that the petition was maintainable." In the instant petitions also it was explained by the learned counsel for the petitioners that in certain petitions the CIT has already refused to issue nil withholding certificate to the petitioners and again going to the department for revision etc. Would be an exercise in futility and mere illusory in nature. We, therefore, overrule the objection raised by the learned counsel appearing for the respondent that these constitution petitions are not maintainable. 10. In order to appreciate the issue involved in the present petitions, we first have to examine the relevant provisions of the Ordinance in detail. The new subsection 13A has been introduced in section 101 through which any amount paid on account of insurance or re-insurance would be deemed as Pakistan source income. As per this section any business income of non-resident is to be treated as Pakistan source income which is directly or indirectly attributed to P.E. Of the nonresident person. Section 107 of the Ordinance deals with the Avoidance of Double Tax and Prevention of Fiscal Evasion and state about the determination of Pakistan source income of the non-resident person. Section 152 of the Ordinance states that every person making the payment to non-resident is legally obliged to deduct tax at source at the rate of 5% as specified in Division II of Part 3 of the First Schedule to the Ordinance. It was argued by the learned counsel for the petitioners that respondent No,2 vide Circular No,5 of 2008, issued explanatory note with regard to certain amendments made in F.A. 2008, whereby it was specifically mentioned that the taxpayer would not be required to obtain nil withholding certificate from the Commissioner where the payment of non-resident company falls under AFAODT. It is further clarified in the said circular that this is being done to reduce the hassle of taxpayers from getting exemption certificate for remittance of such amount without deduction of tax as per the provisions of treaty. The respondent No,2 thereafter issued a corrigendum dated 27-8-2008 clarifying that those taxpayers are not required to obtain exemption certificate from the Commissioner in cases where the payments made to non-resident companies are made on reduced rate as per AFAODT. The Respondent No,4 thereafter issued the impugned show-cause notices under the provisions of section 161 read with section 205 of the Ordinance asking the petitioners to explain as to why tax has not been deducted at source in respect of the payments made to the said nonresidents in respect of re-insurance amounts and further to explain as to why penal action as permissible under law may not be taken against them for not deducting the said tax. As per the learned counsel the provisions of section 107 of the Ordinance have an overriding effect over the other provisions of the Ordinance and any
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entity or enterprise having no P.E. In Pakistan could not be taxed in respect of its business profit earned in Pakistan. For the sake of ease of reference the said section is reproduced here in below: 107. Agreements for the avoidance of double taxation and prevention of fiscal evasion.---(1) The Federal Government may enter into an agreement with the government of a foreign country for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income imposed under this Ordinance and under the corresponding laws in force in that country, and may by notification in the official Gazette make such provisions as may be necessary for implementing the agreement. (2) Where any agreement is made in accordance with subsection (1), the agreement and the provisions made by notification for implementing the agreement shall, notwithstanding anything contained in any law for the time being in force, have effect insofar as they provide for- (a) relief from the tax payable under this Ordinance; (b) the determination of the Pakistan-source income of nonresident persons; (c) where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan; (d) the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and (e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding laws in force in that other country. (3) Notwithstanding anything in subsection (1) or (2), any agreement referred to in subsection (1) may include provisions for the relief from tax for any period before the commencement of this Ordinance or before the making of the agreement. 11. In support of their contention the learned counsel have relied upon a decision given by this Court in I.T.A. No, 297 of 1997, which subsequently was approved by the honourable Supreme Court in 542-544-K of 1999. The honourable High Court vide its decision observed as under: "A plain reading of section 163 of the Income Tax Ordinance is sufficient to hold that existence of a duly executed treaty between the Government of Pakistan and any country would oust the application of the Income Tax Ordinance and provide overriding effect to the treaty in respect of the matters enumerated in clauses (a) to (e) of subsection (2) of section 163 of the Income Tax Ordinance and avoidance of Rule 20 of the Income Tax Rules, 1986 would be covered by clause (a) of section 163 (2) of the Income Tax Ordinance. The presence of specific clause in the treaty for ousting the application of the Income Tax Ordinance and the rules made thereunder is not a condition or requirement for giving overriding effect to the provisions of the treaty and ousting the application of the Income Tax Ordinance." ' It would not be out of place to mention that the provision of section 163 of the repealed Ordinance is in para materia with section 107 of the Ordinance, 2001 12. In an another case Messrs American Express Bank Karachi v. Commissioner of Income Tax (2009 PTD 1791) it was held by a Division Bench of this Court that "provisions of the treaty prevail over provisions of the Income Tax Ordinance and it is a settled law that special laws prevail over general laws". In an another case Mountains Estate Mineral Enterprises v. Commissioner of Income Tax (2008 PTD 1087) it was held that "where the applicant have no P.E. In Pakistan, their income is exempt under the provisions of AFAODT and the incomes generated in this regard are not taxable in Pakistan". It is trite law that the question of deduction of tax does not arise where the payments made to the nonresidents are exempt from tax. However prior to remitting the amount by a Pakistani Company to the non-resident company the said Pakistani Company has to first obtain a
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nil withholding certificate from the concerned Commissioner who after satisfaction grants the same to the concerned Pakistani Company. The onus in this regard definitely lies on the Pakistani Company to satisfy the concerned Commissioner that the amount which is being remitted does not require any deduction of tax at source. There is also no denying of the fact that the petitioners have business connection with the non-resident companies and it is for the petitioners to satisfy that the amount being remitted by them could not be considered to be the incomes accruing arising in Pakistan or these payments could not be considered as Pakistan source income. It is for the petitioner to prove that the non-resident companies have no business connection in Pakistan and the provisions of Ordinance are not attracted, in the cases where in their opinion the provisions of AFAODT are attracted. It is also a settled law that in the case of an enterprise of contracting State with which Pakistan has a treaty the provisions of the treaty will determine the rights and obligations of the said non-resident company. 13. As per the learned counsel of the petitioner amounts of reinsurance payments made to a foreign enterprises have been deemed to be the Pakistan source income but in view of the explicit definition of the term P.E. As given in AFAODT the term "except in regard to reinsurance" has been specifically excluded from the term P.E., meaning thereby that the designers of the international treaties do not want this payment to be taxed in the State from where these payments are being made to the other contracting State. The perusal of the various treaties would show that in these treaties while defining the term P.E. The insurance enterprise of contracting State shall be deemed to have P.E. In the other contracting State if it collects premium in respect of that other State except "re-insurance premium". It would not be out of place to mention that this clause is unamended even today. In the instant petitions also petitioners are not legally obliged to Make any deduction of tax at source due to the reason that this type of payment falls outside the ambit and scope of the Ordinance and by no stretch of imagination be taxed either as that of Pakistan source income or could be legally deemed to be the income accruing or arising in Pakistan. 14. The upshot of the above discussion is that the claim of the petitioner is two fold their first submission is that as the provisions of the treaty have an overriding effect over the tax laws hence the amounts of the re-insurance premium could not be taxed either as Pakistan source income or could be legally deemed to be the payments accruing/arising in Pakistan. The next claim of the petitioner is that since the payment which they are making to the non-resident foreign enterprises is not liable to tax in Pakistan, hence they are not legally bound to deduct any tax at source in respect of the payments being made to the foreign enterprises. 15. However in our opinion the re-insurance premiums paid to the foreign enterprises where AFAODT is available would fall outside the scope of the Tax because of the fact that the provisions of section 107 of the Ordinance, which has remained unamended even today, have an overriding effect and prevail over the ordinary tax laws, as specifically discussed in the decisions referred supra. It would not be out of place to mention that the amendments made in sections 101 and 152 of the Ordinance vide F.A.2008 do not start with the non obscene clause "notwithstanding anything contained in this .Ordinance or any other law for the time being in force" makes, in our view, these provisions still subservient to those provisions of the law which have an overriding effect over the sections. 16. Now coming to the second limb of the argument of the petitioner that the respondents are misinterpreting the provisions of F.A. 2008 in demanding that prior remitting these amounts to the foreign enterprises the petitioner are under the legal obligation to obtain a nil withholding certificate from the Commissioner as per the provision of section 152 (5) of the Ordinance. In our view the issue can also be judged from another angle. We find that although the provision of section 152(5) of the Ordinance directs a taxpayer to seek approval from the Commissioner for remitting the payment to the non-resident without deduction of tax, however, they do not specify
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as to the penal consequences in the event the approval is not obtained. We also note that the legislature has used the word "shall" requiring the person to furnish to the Commissioner the relevant information should he choose to obtain the approval under section 152(5) of the Ordinance, and states as under- "the person shall, before making the payment, furnish to the Commissioner a notice in writing setting out- (a) the name and address of the non-resident person; and (b) the nature and amount of the payment." 17. A view is taken by the counsel of the department that by using the word "shall", the legislature has made the above provision mandatory in nature and defiance whereof must result in action against the taxpayer. However, we are not impressed with this argument for the reason that section 152 of the Ordinance as a whole does not specify the consequences of not following the requirement of informing the Commissioner if the person chooses to make the payment without deduction of tax. We are of the view that merely on the basis of the use of the word "shall" it could not be construed that it is a mandatory provision of law but is a directory provision and for not following a directory provision, a taxpayer cannot be penalized. We are guided in this…
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