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Petitioner: A.P. MOLLER through AGENT VS Respondent: TAXATION OFFICER OF INCOME TAX and another
Court Name: Sindh High Court Judge(s): Munib Akhtar, Muhammad Ather Saeed Title:A.P. MOLLER through AGENT vs TAXATION OFFICER OF INCOME TAX and
another Case No.: Income Tax Reference Applications Nos.205 of 2007 and 882 to 942 of 2008 Date of Judgment:2011-01-27 Reported As: 2011 PTD 1460 Result: Order accordingly Judgment ORDER ' MUNIB AKHTAR, J.---By this common judgment, we intend disposing of these 785 Reference Applications, the particulars of which are given in the Appendix, since the References raise common issues with regard to the interpretation of sections 7 and 107 (and other provisions) of the Income Tax Ordinance, 2001 ("2001 Ordinance") and certain double taxation avoidance agreements entered into by Pakistan. The double taxation agreements ("DTAs") are those with Denmark ("the Danish DTA"), France ("the French DTA") and Japan ("the Japanese DTA"). The following questions are said to be the questions of law which arise out of the impugned orders of the Tribunal which considered the Danish DTA:-- (1) Whether in the facts and circumstances of the case, the Tribunal was right to hold that freight charges on inward cargo, on FOB basis outside Pakistan, fall within the ambit of is "sources within the other Contracting State" as envisaged in Article 8(3) of the Pak-Danish Tax Treaty? (2) Whether in the facts and circumstances of the case, the Tribunal was right to hold that Pakistan can tax freight charges for cargo embarked outside Pakistan under Article 8(3) of the Pak-Danish Tax Treaty? (3) Whether in the facts and circumstances of the case, the ITAT was right to hold that provisions of section 7 of Income Tax Ordinance, 2001 and section 80 of repealed Income Tax Ordinance, 1979 are not pari materia, therefore, the benefit of C.B.R's Circular Letter No, C.2(4)IT.2/95 dated 1st August, 1995 is not available under section 239(10) of Income Tax Ordinance, 2001? (4) Whether in the facts and circumstances of the case, the ITAT was right in law to, maintain assessm ent order framed without issuance of show-cause notices for rejecting the claim of non-
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taxability of inward cargo receipts under Article 8(3) of the Pak- . Danish Tax Treaty? ' The following questions are ,said to be the questions of law which arise out of the impugned orders of the Tribunal which considered the French DTA (question No,1 having been modified with the consent of learned counsel by order of the Court dated 22-10-2008):- (1) Whether on the facts and circumstances of the case, the learned Income Tax is Appellate Tribunal (ITAT) was justified in holding that the freight receipts in respect of the cargo/goods embarked outside Pakistan is taxable in Pakistan? (2) Whether on the facts and circumstances of the case, the learned ITAT was justified in considering the issue that the assessment framed by the Taxation officer is beyond the limitation provided under the law? (3) Whether on the facts and circumstances of the case, the learned ITAT was justified in applying the provisions of section 7(1)(b) of the Income Tax Ordinance, 2001 (the Ordinance) by totally ignoring the provisions of section 107 of the Ordinance and the Double Taxation Avoidance Agreement between Pakistan and France? ' Although five questions of law were said to arise out of the impugned orders of the Tribunal which considered the Japanese DTA, learned counsel for the parties agreed that there was, in essence, only one question of law which required determination, which was framed in the following terms by the Court by means of the order dated 16-9-2008:- ' Whether income from the shipping transport business of the applicant is exempt from tax under the Convention between Japan and Pakistan, notified under S.R.O. 238(I)/59 dated 4th June, 1959? 2. Although the References were earlier twice heard and judgment reserved by other Division Benches of the Court, they could not, on each occasion, be decided on account of certain intervening events beyond the control of the Court, and had therefore to be fixed for re-hearing. The References were finally re-heard on 24-12-2010 by this Bench, and judgment reserved. 3. The relevant facts needed to answer these Reference Applications can be stated shortly and without specific reference to any particular case. In all cases cargo was carried to Pakistan on ships operated by non-resident shipping companies or charterers (hereinafter referred to as the "carriers"). The cargo consisted of goods sold to Pakistani buyers by foreign sellers on FOB basis, and the freight (and other charges, if any) in respect of the carriage were paid in Pakistan by the resident buyers. The Taxation Officer took the position that the amounts received by the carriers were taxable under section 7(1)(b) of the 2001 Ordinance. The applicants contended that section 7(1)(b) did not apply in the facts and circumstances of the case, but that even if it did, the amounts paid were not taxable in Pakistan by reason of the relevant DTA. The amounts were nonetheless brought to tax, and the applicants appealed to the CIT (Appeals). Those appeals failed, and further appeals taken to the Tribunal met the same fate. The matter now comes before this Court by way of the aforesaid Reference Applications. 4. Although the appeals out of which these Reference Applications arise were decided by different orders of the Tribunal, it is not necessary to refer to each such order separately since the reasoning and conclusions of the Tribunal were essentially the same in all cases. It is important however, to understand how the Tribunal came to dismiss the appeals, and in order to get a favour of the Tribunal's reasoning and conclusions, reference can be made to three representative impugned orders, one in relation to each DTA. In relation to the Danish DTA, reference can be made to the Tribunal's order dated 27-1-2007 in Appeal No,1236/KB/2006 (impugned in ITRA 205 of 2007). The Tribunal, after referring to section 80 of the Income Tax Ordinance, 1979 ("1979 Ordinance") and section 7 of the 2001 Ordinance, held as under: "8.... From the foregoing provisions of law, we have found a basic difference in both these provisions of law. Under the repealed Ordinance, the shipping company was required under section 80(2) to declare freight receipts from both outward and inward cargo etc. And the DCIT, after calling for the
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requisite particulars, accounts or documents, was empowered to determine the aggregate of the freight charges etc. For charging the tax thereon. Whereas, no such authority to determine aggregate amount has been conferred on the Taxation Officer in section 7 of the new Ordinance 2001 which lays down that "a tax shall be imposed" in respect of receipts from the cargo etc. Embarked in Pakistan as provided in its clause (a) and from the cargo etc. Embarked outside Pakistan as provided in its clause (b). Accordingly, we hold that section 80 of the repealed Income Tax, Ordinance, 1979 and section 7 of the new Income Tax Ordinance, 2001 are not pari materia. Accordingly, we also hold that the C.B.R's. Clarification dated 1-8-1995 is not protected by section 239(10) being inconsistent with section 7 of the Income Tax Ordinance, 2001 and not binding on the Taxation Officer with effect from Tax Year, 2003. Whereas, the C.B.R's. Latest clarification dated 14-11- 2001 in respect of section 7 is binding on the Departmental Officers under section 214 of the Income Tax Ordinance, 2001 since Tax Year 2003. (9) Now coming to the application of Pak-Danish Tax Treaty, we consider it necessary to reproduce Article 8 thereof as follows:-- Article 8 (1) Profits from the operation of aircraft in international shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. (2) With respect to profits derived by the air transport consortium Scandinavian Airlines System (SAS) the provisions of paragraph (1) shall apply but only to such part of the profits as corresponds to the participation held in that consortium by Det Danske Luffartsselskab (DDI the Danish partner of Scandinavian Airlines System (SAS). (3) Profits from the operation of ships in international traffic may be taxed in the Contracting State in which the effective management of the enterprise is situated. However, such profits derived- from sources within the other Contracting State may also be taxed in that other State in accordance with its domestic law provided that for the past five years for which this Convention is effective the tax rate charged in that other State shall be reduced by 50 per cent and for the next five years it shall be reduced by 25 per cent. (4) The provisions of the foregoing paragraphs of the Article shall also apply to profits from the participation in a pool, a joint business or an international operating agency. ' The paragraphs 1 and 3 of Article 8 ibid confer taxing right to the Contracting State in which the place of effective management of the enterprise is situated. In the instant case, the 'Contracting State' means Denmark since the appellant is a Danish resident. However, paragraph 3 of the Article 8 ibid also confers taxing right to the 'Other Contracting State'. In the instant case, the 'Other Contracting State' means Pakistan which has also been accepted by the learned AR of the appellant as already mentioned in paragraph 6 of this order. Now, the question arises whether or not the freight charges on inward cargo etc. Fall in sources within Pakistan. We are of the considered opinion that the freight charges are received or deemed to be received in Pakistan only when the cargo coming into Pakistan is booked on FOB basis and are paid in Pakistan by the Pakistan consignees to the shipping company. In the case of imports on FOB basis, the title of ownership of cargo has passed on to the Pakistan consignees at the port of shipment and any expenses incurred in Pakistan thereafter by the Pakistani consignee fall in sources within Pakistan. Accordingly, we hold that the freight charges declared by the appellant on the inward freight fall within the Pakistan source and are taxable in Pakistan as provided in section 7(1)(b) and there is no provision, either in the Income Tax Ordinance, 2001 or the Pak-Danish Tax Treaty granting exemption from tax on such receipts. (10) As far as issuance of notice for charging tax on the declared freight receipts that are claimed exempt is concerned, we have found that the Taxation Officer has accepted the declared receipts and has not made on his own any determination of such receipts. The exemption claimed by the
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appellant on such receipts is ab-intio void and of no legal effect since neither provided in the Income Tax Ordinance, 2001 not in the Pak-Danish Tax Treaty. Notwithstanding the fact that the Taxation Officer issued a notice, he has only calculated the amount of tax payable at the rate provided in the Pak Danish Tax Treaty and issued notice for recovery of the short payment of tax by appellant. Any notice u/s 143 of the Ordinance even otherwise was not required to be issued since determination of such receipts was not made by the Taxation Officer. (11) In view of the foregoing we hold that the action of the Taxation Officer is fully justified being lawful and is confirmed. As a result the learned CIT (A)'s order is also confirmed. (12) Accordingly, the appeal filed by the assessee-company is dismissed being devoid of merit." 5. In relation to the French DTA, reference can be made to the Tribunal's combined order dated 20- 2-2008 in Appeal No,1477/KB/2007 and connected appeals (impugned in ITRA 882 of 2008 and connected References). The Tribunal simply followed its earlier order dated 27-1-2007 in Appeal No, 1236/KB/2006 referred to above. This is not surprising since, as we shall see, the Danish DTA and the French DTA are virtually identical in all material respects. 6. In relation to the Japanese DTA, reference can be made to the Tribunal's combined order dated 31-10-2007 in Appeal No,570/KB/2007 and connected appeals (impugned in ITRA 06 of 2008 and connected References). The Tribunal referred to an earlier order dated 29-10-2007 (which itself relied on its order dated 27-1-2007 noted in para 4 supra) and dismissed the appeals in the following manner:- "(6). We have heard the learned representatives of the two sides and have also perused the record. To proceed further it is necessary to mention that on similar facts and grounds appeals bearing Nos.575, 580 ...813/KB/2007 were heard and decided by this bench vide order dated 29-10-2007 M/s. James Finley Limited. The relevant portion of the order is reproduced here in under:-- '6. We have given serious consideration to the arguments of both the sides. As far as taxability of receipts receivable in Pakistan on account of inward cargo under section 7(1)(b) of the Income Tax Ordinance, 2001 is concerned, the Tribunal vide its order dated 27-1-2007 in ITA No,1236/KB/2006 has already decided the issue in favour of the Revenue in the 'following terms:-- (i) Section 80 of the repealed Income Tax Ordinance, 1979 and section 7 of the Income Tax Ordinance, 2001 are not pari materia; (ii) The C.B.R's clarification vide C. No, 2(4) IT.2/95 dated 1-8-1995 is not protected by section 239(10) of the Income Tax Ordinance, 2001 and, hence, not binding on the Taxation Officer with effect from Tax Year 2003; (iii) The C.B.R's clarification C. No,2(4) Int. Taxes/95, dated 14-11-2001 is binding the Departmental Officer's since Tax Year 2003; (iv) Neither the Income Tax Ordinance, 2001 nor the Agreement for the Avoidance of Double Tax and Fiscal Evasion between Pakistan and Denmark (Tax Treaty) provides exemption to profits of shipping business received or deemed to be received in Pakistan for the cargo etc. Embarked outside Pakistan. (v) The claim of exemption on the receipts in respect of cargo etc. Embarked outside Pakistan is ab-intio void and of no legal effect. The Taxation Officer was not required to issue any notice under section 143 since determination of such receipts was not made by the Taxation Officer who has charged tax only on the receipts declared by the appellant; (vi) The profits of shipping business received or deemed to be received in Pakistan for the cargo etc. Embarked outside Pakistan are from sources within Pakistan and taxable in Pakistan as provided in Article 8 of the Tax Treaty between Pakistan and Denmark. (7) We have also gone through various Tax Treaties negotiated by Pakistan with various other countries and have found that there are two types of tax treaties i,e, the "comprehensive tax treaties" which cover all types of incomes including income from air and shipping transport
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business covered under specific article articles of the treaty and the "limited purpose tax treaties" which do not cover all types of incomes. We are of the considered opinion that the Pak-Japan Tax Treaty is a limited purpose tax treaty and it does not cover shipping transport business, since shipping and air transport business are alike and only the air transport business is specifically covered in Article-V of the said Tax Treaty. We are also inclined to agree with the learned Taxation Officer that Article-III of the Pak-Japan Tax Treaty does not apply to shipping transport business more so when the appellant itself is voluntarily offering for tax the amounts received on account of outward cargo. We are of the considered opinion that Article-III of the said Tax Treaty cannot be invoked partially so as to apply to one half part and not to apply to the other half part of the same business. We are also of the considered opinion that the Pakistan Tax Authority has lawfully exercised its right of taxing the amounts received in Pakistan from shipping transport business on account of both inward and outward cargo being Pakistan source income. The Pak-Japan Tax Treaty does not grant exemption from tax to income from the shipping transport business and the appellant has also neither claimed nor established that its income has been doubly taxed relief from which is provided through invoking the "mutual agreement procedure" as provided in Articles- XVI and XVII of the Pak-Japan Tax Treaty. (8) As far as case law cited by the learned AR is concerned, the case reported as 1983 PTD 126 deals with sale of shares of a company as a commercial activity which cannot be equated with shipping transport business. Therefore, the cited case-law is of no help to the appellant. (9) In view of the foregoing, we find no merit in appellant's captioned appeals which are dismissed being devoid of merit. Accordingly, the orders passed by both the authorities below in all the subject cases are upheld and confirmed. (10) All the captioned appeals fail. (7) As we have already mentioned supra that 'the facts and grounds of present appeals are similar, therefore, keeping in view the ratio of order supra we are not inclined to agree with the arguments of learned A.Rs that income of the assessee is exempt. Therefore, we have reasons to confirm the orders of the officers below. (8) Resultantly all the appeals filed by the assessee are without any merit and stand dismissed." 7. Learned counsel for the applicants raised a number of points to contend that the Reference Applications should be allowed. Each counsel attacked the impugned orders from a different perspective, while also adopting the submissions of the other counsel. Dr. Ikramul Haq (who was concerned mainly with the Danish DTA) submitted that section 80 of the 1979 Ordinance wds in pari materia section 7 read with section 143 of the 2001 Ordinance. He contended that the Central (now Federal) Board of Revenue had itself, through its Circular Letter No,C.2(4)IT.2/95 dated 1-8-1995 ("the Circular Letter") concluded that section 80 did not apply to charges in respect of inbound cargo, i,e,, cargo being carried to Pakistan from foreign ports. His case was that the Circular Letter was equally applicable to section 7(1)(b) read with section 143 and hence no tax was Payable in respect of freight (and other charges, if any) in terms thereof (For convenience, all amounts charged by the carriers in relation to the carriage of goods are hereinafter referred to as the "freight charges".) He submitted further that the Tribunal had completely misunderstood section 7(1)(b) on its own terms. His case was that in the absence of any permanent establishment in Pakistan, the place of accrual of income for the carrier in relation to the carriage of goods was the place where the cargo was placed on board, which meant the foreign ports. He submitted that section 7 was expressly subject to the 2001 Ordinance. This meant that the freight charges would be "received" or "receivable" in Pakistan only if the amounts were received by the carrier itself (e.g., through a permanent establishment). None of the carriers had any permanent establishment in Pakistan. It was insufficient that the amount was being received, as was the case at hand, through an agent/representative in the country. Income arose when the recipient first obtained the money
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under his control, which in the case of the carriers was outside Pakistan. He placed reliance on section 101 in support of the foregoing submissions, and contended that that section applied to section 7 since the latter provision was expressly made subject to the other provisions of the Ordinance. He further submitted that even if section 7(1)(b) were applicable, the case of the applicants was covered by Article 8(3) of the Danish DTA, which provided that the profits from the operation of ships in international traffic were to be taxed in the State in which the effective management of the carrier was situated. This was admittedly outside Pakistan. While Article 8(3) permitted the other State (in this case, Pakistan) to tax such profits as were "derived from sources within" that other State, learned counsel submitted that this applied only in relation to outbound cargo (i e., cargo carried from Pakistan to foreign ports). In other words, his case was that section 7 was subject to section 107 (since it was subject to the 2001 Ordinance) and the latter provision made the Danish DTA applicable to the facts and circumstances of the case. In terms of Article 8(3) thereof, Pakistan could tax that carriage of goods which came within the ambit of section 7(1) (a), but not the carriage covered by section 7(1)(b). He pointed out that outbound cargo and inbound cargo were obverse cases, and to allow Pakistan to charge tax in respect of both would, in effect, rob Article 8(3) of all meaning. Since both the applicants and the Department accepted that tax could be charged in respect of outbound cargo (under section 7(1)(a)) that necessarily meant that it could not be charged under section 7(1)(b) (for inbound cargo). He therefore prayed that the References be answered in favour of the applicants. 8. Mr. Makhdoom All Khan (who was concerned mainly with the French DTA) adopted and reiterated Dr. Ikramul Haq's submissions with respect to section 7 and other statutory provisions, and also Article 8(3), since that provision is essentially identical in both the. French and the Danish DTAs. He further submitted that the Tribunal had failed completely to appreciate that all carriage of goods by sea was under bills of lading in which the buyer (in this case, the Pakistani importer) was merely the consignee. His case was that the contract for the carriage of goods, even in the case of FOB contracts, was between the shipper (i,e,, the foreign seller) and the carrier. Since the Pakistani buyer was not party to the bill of lading, there was no private of contract between him and the carrier. Any amounts paid in Pakistan could not be said to have been "received" in this country within the meaning of section 7(1)(b). He pointed out that if the freight charges remained unpaid, the carrier could not hold the consignee (i,e,, the Pakistani buyer) liable; its only recourse would be against the shipper (the foreign seller). He also placed reliance on section 2 of the Bills of Lading Act, 1856 in support of the foregoing submissions. Learned counsel further submitted that even though the freight charges were received in Pakistan by the carrier's agent, the latter had nothing to do with the contract of carriage. The functions performed by the carrier's "agent" did not amount to a true agency within the meaning of law. Any receipt of freight charges by the "agent" also did not establish any "business connection" in Pakistan of the applicant that would bring the amount to tax under the 2001 Ordinance. Learned counsel emphasized that even otherwise there was no "business connection" in the facts and circumstances of the case. In this context, he also placed reliance on section 101. 9. Mr. Aga Faquir Muhammad adopted the submissions of the other learned counsel and stressed certain aspects with particular reference to the Japanese DTA (with which he was mainly concerned). As will be seen later, this DTA is different from the other two DTAs. Learned counsel submitted that in general, DTAs could be divided into 'two broad categories: comprehensive and of limited scope. He emphasized that the Japanese DTA fell in the former category, and that the Tribunal had erred materially in coming to the contrary conclusion. His case was that Article III of the Japanese DTA provided that "industrial or commercial profits" of an enterprise of one State (in this case, Japan) would be taxable in the other State (i,e,, Pakistan) only if the enterprise carried on business in Pakistan through a permanent establishment. It was an admitted position that the
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applicants did not have any permanent establishment in this country. Article III (or any other provision of the DTA) did not make any exception in respect of profits earned through the shipping business. Learned counsel therefore contended that its terms were broad enough to cover all profits (i,e,, income), including those from shipping business, and hence by virtue of section 107, section 7(1)(b) did not apply in the facts and circumstances of the case. In fact, his case was that the Japanese DTA was so comprehensive that even section 7(1)(a) did not apply to Japanese carriers. He therefore also prayed that the References be answered in favour of the applicants and against the Department. 10. All the learned counsel filed written synopses and relied on case law and other material, which will be referred to at the appropriate place in the paras here in below. 11. Mr. Jawaid Farooqui, learned counsel for the Department, opposed all the Reference Applications. His case was that section 7 was a special provision, which was in the nature of a self- contained code in its own right. He submitted that the said section applied in its own terms, and inbound cargo…
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