' The appeal in this case has been filed b% the Commissioner Inland Revenue (legal) division against order of the learned CIR(A) Zone-II order number 34 dated 17-10-2009 on the following grounds:
(1) That the order of learned commissioner of Income Tax (Appeals) is bad in law and contrary on the facts of the case.
(2) That the learned Commissioner of Income Tax (Appeals) is not justified to delete the addition of Rs,151,356,693 made under section 21(c) of Income Tax Ordinance, 2001 as ITAT has decided the issue in favour of department in a case ITA 58/KB/2007 dated 12-11-2008 in the case of Messrs Pakistan Engineering Services (Pvt.) Limited for tax year 2005.
(3) That the learned Commissioner of Income Tax (Appeals) is not justified to delete the addition of Rs,1,370,026.
(4) That the appellant craves permission to add, alter, amend or substitute the ground(s) of appeal before or at the time of hearing of appeal.
2. Brief facts of the case are that the case of the respondent who are engaged in the business of freight forwarding agent and logistic services was selected for audit under section 177(4)(d) of the Ordinance and after conducting of audit proceedings the deemed order was amended under section 122(1) of Income Tax Ordinance by making add backs of Freight paid to Shipping companies and Airlines for non-deducting of tax under section 152 of the Ordinance and also made under section 111 of the Ordinance. The appellant aggrieved by the order under section-122(1) preferred appeal to the learned CIR(A) and the learned Commissioner vide his appellate order dated 17-10-2009 deleted both the additions. Aggrieved by the order of the learned CIR(A) department invoked the jurisdiction of this Tribunal.
3. On the date of hearing none attended from the department in spite of proper service of hearing notice while Mr. Muhammad Mehtab Khan and Mr. Muhammad Javed Alvi, Advocates represented the Respondents.
4. The case also earlier was heard and reserved for judgment as such sufficient material is available on record as such it is deemed fit to proceed ex parte and decide the appeal on merits.
5. The learned AR supported' the order of the learned CIR(A) on the ground that the provisions of sections 152(2), 152(5) and section 21(C) are not applicable in the case under appeal and referred to, the provisions of law, Circular, clarification S.R.O. 586(1)/91 and the case-law decided by the honourable Sindh High Court in the case reported as 2010 PTD 1159. The learned. AR argued that the respondent is associated to world-wide Scan well Group. The freight is collected from the importer concern at Hongkong and the freight to shipping is also made from the Hong Kong and that in view of the provisions of section 107 and the Government of Pakistan and the Government of China have agreements for avoidance of double taxation as such no tax is chargeable in Pakistan. The learned AR also referred to section 7 of the Ordinance which provides that every non-resident carrying on business of operating of ships or aircrafts has to pay tax before departure of ship or aircrafts if the income is not exempt from tax under the Ordinance and none of the ship or aircraft has ever been arrested by the department as such it confirm that the appellant is not liable to deduction of any tax. In respect of addition under section 111 the Learned AR argued that the addition is in violation of the provision of law as no notice was issue and the Tax payer has been deprived of being heard and in view of the case-law of the Hon. High Court of Sindh reported as 2010 PTD 704 the entire addition is not maintainable. Even otherwise the amount is explainable in the Balance sheet available on record that this represents commission payable to staff members.
6. The arguments have been heard and documentary already available on record perused. The learned Assessing Officer while disallowing the deduction has stated in the body of the assessment as under-- Tax payer earns services income on account of freight forwarding. Most of the receipts of taxpayer are from freight services in relation to exports. Taxpayer is associated to world-wide Scan-well Group. As a routine matter and in order to facilitate its client's taxpayer in some cases receives freight payment from Scan-well Hong Kong. In return Scan-well Network Company of importer's country, recovers the freight plus services charges from the importer which transfers charges of freight to Scan-well Hong Kong and retain its services charges share on account of handling and safe delivery of goods to destination. After safe delivery of consignment a certificate from importer is obtained which is returned to Scan-well Pakistan as evidence of accomplishment of job. Scan- well Network adjusts charges of these services (provided in various countries) from gross receipts of Scan-well Logistics Pakistan. This treatment of adjustment of service charges against receipts is tantamount to payment against services; and since this payment is made to nonresidents hence falls under section 152(2) where deduction of tax or obtaining of exemption certificate under section 152(5) is obligatory. In the present case the taxpayer has neither deducted tax under section 152(2) nor has obtained exemption certificate under section 152(5), therefore keeping in view the violation of section 152(2) addition under section 21(c) is made at Rs,151,356,693.
7. For proper understanding the provisions of section 152(2)(5) are also reproduced hereunder:--
(2) Subject to subsection (3) every person paying amount to a nonresident person other than an amount to which subsection (1) or subsections (1A), (1AA) applies shall deduct tax from the gross amount paid at the rate specified in Division II of Part III of the First Schedule.
(3) Subsection (2) does not apply to an amount-
(a) ..................................
(b) ..................................
(c) ..................................
(d) where the non-resident person is not chargeable to tax in respect of the amount.
(5) Where a person intends to make a payment to a non-resident person without deduction of tax under this section other than payment liable to reduced rate under relevant agreement for avoidance of double taxation, the person shall, before making the payment furnish to the Commissioner a notice in writing---
8. The above provisions of law provide that section 152(2) is not applicable where the non-resident person is not chargeable to tax in respect of the amount. A list of carrier is available on record and the entire freight has been to those person who are not chargeable to tax in view of the double taxation treaty with China USA etc. As such the provisions of section 152(2) are not applicable. In the case reported as 2009 PTD 1791 a division bench of the Hon. High Court of Sindh has held that the "provisions of treaty prevail over provisions of the Income Tax Ordinance and it is settled law that provisions of special law prevail over general law. As such in view of the treaty the recipient is not chargeable to tax in Pakistan and that no tax was required to be deducted by the respondent.
The Hon High Court has already settled the issue in the ease-law reported as 2010 PTD 1159 and the relevant portion is reproduced hereunder:--
(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.
' As the condition of obtaining exemption certificate from the CIT as provided in section 152(5) the Hon. High Court in the above case in para. 18 has held that the provisions are not mandatory.
9. The F.B.R. In its Clarification No,4(67)ITP/2009 dated 25-2-2010 has also clarified that the Treaty has an overriding effect in so far as the matter of relief from tax payable under the Income Tax Ordinance for determination of Pakistan source of income of nonresident persons having no permanent establishment in Pakistan and determination of income attributable to operation carried on within or outside Pakistan is concerned. In such cases the provisions of section 152 are not applicable.
10. In the case of local payment of freight to Carrier also no tax is required to be deducted as provided in S.R.O. 586(1)/91 which reads as under:- ' S.R.O. 586(I)(91).---In exercise of the powers conferred by clause (ii) proviso to subsection (4) of section 50 of the Income Tax Ordinance,. 1979 (XXXI of 1979) hereafter referred to as the Ordinance, and in supersession of its Notification No,S.R.O. 659(I)(81) Dated 25th June, 1981 the Central Board of Revenue is pleased to specify the following to be the recipients or the classes of recipients, to whom the said subsection shall not apply namely:-- xi - shipping companies and air carriers receiving payments for the supply of passenger tickets and for the cargo charges of goods transported.
11. In view of above discussion, following binding decision of the Hon. High Courts and the departmental own circulars, S.R.O., clarification we hold that that the provisions of section 152 are not applicable and consequently the order of the learned CIR(A) is confirmed on this point.
12. As far as the addition under section 111 is concerned it is trite law that no addition can be made under section without confronting the aggrieved person and this issue has also been settled by the Hon. High Court in the case reported as 2010 PTD 704 where in it has been held that the assessee before making any addition must have been given an opportunity of being heard and since the mandatory requirements have been violated as such no addition can be made. By following the above dictum we confirm the order of the learned CIR(A) on this point also.
13. In result the appeal filed by the department has no merit and is hereby dismissed.