These appeals have been filed by the assessee as well as by the department. The assessee is a public limited company deriving income from providing telephone services to its subscribers.
Return for assessm ent year 2001-2002 was filed declaring total income of Rs,18,864,579,186. For the reasons recorded in assessm ent order under: Income declared = 18,658,283,186 Addbacks
(1) Borrowing cost on machinery = 94,511,846
(2) Bad debts written off = 4,180,874,040
(3) Provisions Added back
(i) Provision for doubtful debts = 1,744,882,000
(ii) Provisions for doubtful advances: = 11,392,000
(iii) Provision for diminution in value of investments= 15,282,000 Total = 1,870,556,000
(4) Depreciation of building 5% depreciation allowed on fifteen percent of the buildings not being factories, workshops or labour quarters)
Addition. = 42,351,841
(5) Depreciation on plant and machinery due to reduction in W.D.V.
Addition. = 1,519,915,688
(6) Addition under section 24(c) on salaries:= 311,464,102
(7) Addition under section 24(i) on account of excess perquisites:= 501,071,033
(8) Addition under section 24(b) on satellite charges:= 685,356,938 Income assessed under section 22 from business:= 27,864,384,674 Add dividend income under section 30:= 206,296,000 Total income = 28;070,680,674
2. The assessee filed appeal against this assessment and learned CIT(A) vide order dated 19-9- 2000 disposed of the issues in dispute. The assessee filed second appeal on the following grounds:-
(i) That order dated 19th September, 2002 passed by the learned Commissioner of Income Tax, Appeals Zone I, Islamabad (the CITA) is bad in law and against the facts of the case.
(ii) That the CITA was not justified in upholding disallowance of interest amounting to Rs,94,511,846 claimed by the appellant under section 23(I)(vii) of the Income Tax Ordinance, 1979 (the Ordinance).
(iii) That the CITA was not justified in upholding disallowance of bad debts amounting to Rs,4,180,874,040 for assessm ent year 2001-2002.
(iv) That the CITA was not justified in upholding disallowance of Rs,311,464,102 under section 24(c) of the Ordinance being 20% of basic salary of staff for alleged non-deduction of tax from salaries of employees.
(v) That the CITA was not justified in upholding addition of Rs,501,071,033 under section 24(i) of the Ordinance for alleged provision of excess perquisites to employees.
(vi) That the CITA was not justified in upholding addition of Rs,75,163,550 out of an addition of Rs,685,356,938 under section 24(b) of the Ordinance on account of non-deduction of tax under section 50(3A) of the Ordinance from payments to Asia Satellite Telecom Co. Ltd., Hong Kong a non-resident satellite company and not giving any finding about additions amounting to Rs,166,526,372 under the above said clause.
3. The department has also filed second appeal for assessment year 2001-2002 on the following grounds:--
(1) That the order of the learned CIT(A), Islamabad is had in law and contrary to the facts of the case.
(2) That the learned CIT(A) was not justified to delete the addition made under section 24(b) for default of section 50(3A) on, payment made to Intelsat UK Ltd.
(3) That the learned CIT(A) was not justified to hold that Intelsat was a USA Company as during assessm ent proceedings the assessee provided agreement copy and also admitted that the payments was made to INTELSAT UK Ltd.
(4) That the fiscal domicile of the signing company would apply and not the parent company and as the recipient company was UK based hence the Pakistan-UK Taxation Treaty was rightly applied by treating the payments as royalty as per clause 12 of the treaty.
(5) The CIT(A) has erred in treating the INTELSAT Organization and the INTELSAT UK Ltd., and INTELSAT USA Ltd., as same entity for taxation purposes.
(6) The International Telecommunication Satellite Organization created by Resolution of the United Nations General Assembly may have its income/assets exempt in Pakistan. But Intelsat UK Ltd., cannot avail exemption as it is a separate entity from the International Satellite organization as this fact is clearly established from the definition given in the agreement. The agreement states that Intelsat Ltd., is company registered by the laws of Bermuda. The Intelsat UK Ltd. Is registered under the laws of UK.
(7) That the Learned CIT(A) was not justified to hold that the income of Intelsat UK Ltd. (or even Intelsat USA Ltd.) were exempt in Pakistan.
4. For assessm ent year 2002-2003 the assessee filed return declaring income of Rs,24,841,538,414.
For the reasons recorded in assessment order under section 62 dated 18-4-2003 the declared version was rejected and net income was assessed as under:-- Income declared = 24,839,538,414 Addbacks (1)Borrowing cost on machinery = 3,273,269,309 (2)Bad debts written off against provisions for doubtful debts= 917,000 (3)Bad debts written off claimed as operating cost= 1,993,046,000 (4)Provisions added back = 569,737,534 (5)Additions under section 24(i) on account of excess perquisites:= 479,856,941 (6)Addition under section 14(b) on satellite charges:= 31,210,436,776 Income assessed under section 22 from business: = 31,210,436,776 Add dividend income under section 30: = 2,000,000 Total income assessed = 31,212,436,776
5. The assessee filed appeal on various points and learned CIT(A) vide his order dated 24-12-2003 decided the issues raised in appeal before him. Now, the assessee has filed second appeal on the following grounds:--
(i) That the learned CIT(A) was not justified in upholding disallowance of bad debts amounting to Rs,3,258,693,167 written off and claimed under section 23(1)(x) of the Income Tax Ordinance, 1979 (the Ordinance).
(ii) That the CIT(A) was not justified in upholding addition of Rs,569,737, 534 under section 24(i) of the Ordinance for alleged provision of excess perquisites to employees.
(iii) That the CIT(A) was not justified in upholding addition of Rs,479,856,941 under section 24(b) of the Ordinance on account of non-deduction of tax under section 50(3A) of the Ordinance from payments to non-resident satellite companies which sum was not chargeable under the provisions of the Ordinance.
5. Return for tax year 2003 was filed declaring income of Rs,37,321,776,492. This return was deemed to have been accepted under section 120. Subsequently, discrepancies in audited accounts were detected by the Assessing Officer who started proceedings for amendment of assessment. Finally, through order under section 122, dated 10-5-2004 the assessment was amended in the following manner:-- Income as per computation chart/return : Rs,37,323,676,492 Additions.
(1) Borrowing cost on machinery: 13,132,000
(2) Bad debts: 2,339,000
(3) Receivables 2,827,000
(4) Provisions for doubtful debts 1,169,826,000
(5) Provisions for doubtful advances; 14,924,000
(6) Bad debts written-off against provisions for doubtful debts:1,070,505,000
7. The assessee filed appeal contesting various additions and learned CIT(A) vide his order dated 15-7-2004 disposed of the issues raised in these grounds of appeals. The assessee filed second appeal against the aforesaid orders of learned CIT(A) on the following ground:-
(i) That order of 15th July 2004 passed by the learned Commissioner of Income Tax Appeals Zone-I, Islamabad (CIT(A)) is bad in law and against the facts of the case for the following and for such further reasons as may be raised at the time of hearing of appeal.
(ii) That the learned CIT(A) was not justified in upholding addition of Rs,538,324,000 under section 21(c) of the Income Tax Ordinance, 2001 (the Ordinance) on account of non-deduction of a tax under section 152 of the Ordinance from payments to nonresident satellite companies although such sums were not chargeable to tax under the provisions of the Ordinance.
8. The assessee filed miscellaneous applications for assessment year 2002-2003 and tax year 2003 raising following additional grounds:--
(1) "That the learned Commissioner of Income Tax (Appeals) Zone-I, Islamabad (CIT) was not justified in remanding back disallowance of interest amounting to Rs,54071578 for assessment year 2002-2003 allowable under section 28(1)(a) of the Income Tax Ordinance and Rs,13,132,000 for tax year 2003.
(2) That for tax year 2003 the learned CIT(A) was not justified in setting aside disallowance of bad debts written off directly in profit and loss account, bad debts written off against provision for doubtful debts and receivables written off amounting to Rs,2,359,000, Rs,1,070,505,000 and Rs,2,827,000."
9. Additional grounds.---Learned AR stated 'that no fresh fact finding is involved in the matter of additional grounds because the points raised therein were either set aside or confirmed. No jeopardy is caused to the department through these additional grounds. These additional grounds initially escaped the attention of AR who has raised the same in order to avoid the fresh drill of reassessm ent. Learned AR stated that the additional grounds raised by the taxpayer relate to the core issues and merit to be admitted for adjudication. Learned DR initially opposed the admissibility of these additional grounds. Attention of learned DR was invited to the question of limitation relating to completion of reassessment. After this potation learned DR did not oppose the admissibility of these additional grounds. The same was accordingly admitted for adjudication.
10. Borrowing cost on acquisition on machine.---The assessee claimed a sum of Rs,94511846 for assessm ent year 2001-2002 Rs,54071578 for assessment year 2002-2003 and Rs,13132000 for tax year 2003 as interest on borrowed capital. The Assessing Officer disallowed the claim of the assessee for the reason that it was in the nature of capital expenditure. Learned CIT(A) in his order dated 10-9-2000 for assessm ent year 2001-2002 observed that the treatment given by the Assessing Officer was legally right. He also observed that facts of the case reported as 1993 SCMR 1224 = 1993 PTD 758 are distinguishable from this case because in that case it was held that in the case of increase of business if additional machinery is acquired through a loan to increase the efficiency of existing productivity and not in the new production, then interest on such loan is allowable even if the machinery is yet to be commissioned whereas this assessee acquired a loan for installation of new telephone lines. The loan was thus put in use for new production. The disallowance of interest for assessm ent year 2001-2002 was confirmed by CIT(A). For assessment year 2002-2003 learned CIT(A) observed that facts of disallowance of the claim on 'his account are different than the facts relating to assessment year 2001-2002. For assessment year 2001-2002 the disallowance was confirmed by CIT(A) for the reason that it was a pre-production expenditure which was to be capitalized whereas for assessment year 2002-2003 a large portion of the borrowed capital was used for acquisition of machinery which was installed, commissioned and put to use for improving the efficiency as the old system of Analogue was converted to the Digital system. He, therefore, remanded the case back to the Assessing Officer with the directions to re- determine the inadmissible capital expenditure and admissible revenue expenditure. For tax year 2003 learned CIT(A) vide his impugned order dated 15-7-2004 again remanded the case back to the Assessing Officer because in his opinion the facts for tax year 2003 were not different than the facts for assessm ent year 2002-2003. Assessment on this point for tax year 2003 was also set aside with the directions for Assessing Officer to verify the facts and determine the quantum of expenditure of capital nature vis-a-vis, revenue nature and re-examine its admissibility on the similar lines as spelled out for assessment year 20022003.
11. Learned AR stated that the CIT(A) upheld the disallowance of borrowing cost incurred by the appellant during the period prior to the commissioning of the relevant plant by misinterpreting the judgment of the honourable Supreme Court of Pakistan reported as 1993 SCMR 1224 = 1993 PTD
758. It was held by the honourable apex court in para 11 of the judgment as follows:-- "(11) Secondly in the finding of ITO there is reference to preproduction stage which is not supported by the record for the reason that loan was not obtained for installation of machinery in order to go for new products but to add efficiency to the production already in existence, hence question of preproduction stage did not arise and in any case reference to preproduction stage was unnecessary as deduction of interest under section 10(2)(iii) is to be allowed in full regardless of the fact whether stage was pre-production or otherwise.... "
12. Learned AR stated that section 10(2)(iii) of the, repealed Income Tax Act 1922 reads as follows:--
(2) Subject to the provisions of this Act, such profits or gains shall be computed after making the following allowances, namely:-
(i) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid."
13. He further stated that parallel provisions to section 10(2)(iii) of the repealed Income Tax Act, 1922 are contained in section 23(1)(vii) of the repealed Income Tax Ordinance, 1979 which reads as follows:-- "23(1). In computing the income under the head "income from business or profession", the following allowances and deductions shall be made, namely:--
(i) to (vi)---
(vii) any interest paid in respect of capital borrowed for the purposes of the business or profession"
14. Learned AR emphasized that as held by the honourable apex court in the above referred judgment, deduction of interest paid in respect of capital borrowed is to be allowed regardless of the fact whether stage was pre-production or otherwise.
15. Learned DR stated that the CIT(A) was fully justified in upholding disallowance under section 23(1)(vii) of the Income Tax Ordinance, 1979 on account of interest. The company had claimed the amount in question as borrowing cost on acquisition of machinery and deducted the same straight from income under section 23(1)(vii) while computing the taxable income. When confronted, the company explained that these are financial charges duly capitalized during the year 20002001. During assessm ent proceedings the company admitted that the interest was capitalized in accordance with the accounting policy which provided that mark-up, interest and other charges on redeemable capital, long term loans and other borrowings are capitalized up to the date of commissioning of the respective asset, acquired out of the proceeds of such redeemable capital and long, term liabilities. All other mark-up, interest, profit and other charges are charged to income. Learned DR stated that it clearly establishes that the assets acquired out of borrowed funds on which interest and mark-up was claimed, had not been commissioned during the year. It is settled proposition of law that interest on assets not actually put to business use or commissioned is not admissible as revenue expenditure and is to be capitalized. The assessee has also not proved that the assets had actually been commissioned and that the amount was wrongly capitalized in books. Viewed in this context these expenses being in the nature of capital expenditure cannot be allowed as deduction from income chargeable to tax. Therefore the CIT(A) rightly observed that the expenditure on installation of new telephone lines was a capital expenditure which should be capitalized.
16. We have considered arguments of both the sides in the light of relevant facts. We have noted that learned CIT(A) while upholding the addition for assessment year 2001-2002 properly took into account the relevant facts. He drew a distinction between the facts of this case and facts of the case cited by the assessee. Therefore, confirmation of this addition by him for assessment year 2001-2002 is quite justified specially when proper opportunity had been provided to the assessee to substantiate its claim but it failed and the Assessing Officer conclusively established that the amount in question is in the nature of capital expenditure which is inadmissible. Action of both the authorities below on this point, for assessment year 2001-2002 is confirmed and assessee's appeal fails. The Department is not in appeal before us against setting aside of assessment on this point for assessm ent year 2002-2003 and tax year 2003. Therefore, action of the CIT(A) on this point is confirmed and assessee's appeal is not accepted for assessment year 2002-2003 and tax year 2003.
17. Bad debts.--For assessm ent year 2001-2002 bad debts of Rs,4180874040 were disallowed for the reason that these were not written off during the year under consideration. This addition was confirmed by learned CIT(A) vide his impugned order dated 19-9-2002. For assessment year 2002- 2003 bad debts of Rs,3274186309 were disallowed because the Assessing Officer found that all measures for recovery were not exhausted to his satisfaction. Learned CIT(A) vide his impugned order dated 24-12-2003 for assessm ent year 2002-2003 observed that disallowance pertaining to exemption period was in order. However, disallowance out of the claim for current year was set aside for re-examination of evidence, material and relevant facts. For tax year 2003 the disallowance of bad debts written off and charged in ,P&L account, bad debts written off against provision for doubtful debts and receivables written off were set aside for re-verification of claim/contention of the assessee company. The assessee company has filed appeal contesting that confirmation of add-back on this account for assessment year 2001-2002 and its setting aside for assessm ent year 2002-2003 and tax year 2003 by CIT(A) was not justified because the assessee was entitled to straight relief on this account.
18. Learned AR stated that disallowance of bad debts written off has been upheld the learned CIT(A) for the reasons that the debts were not written off during the relevant income year; these debts related to period when income of appellant's predecessors who were not subject to income tax; and debts related to a period before the appellant came into existence. He stated that the CIT(A) incorrectly assumed that the debts were not written off during the relevant income year. The fact is that the debts were actually written off on 30-6-2001 which action was approved on 8-11- 2001 by appellant's Board of Directors subsequent to the years end while considering its accounts.
He claimed that the CIT(A) failed to conceive the very concept of bad debts when he held that debts related to the period when income of appellant's predecessors was not subject to income tax. The fact is that debts invariably become bad much later than the date of their creation. A debt which is considered as recoverable at the time of its creation becomes bad or irrecoverable in a subsequent period when an assessee loses all rays of hope of its recovery. Accordingly, deduction on account of a bad debt is allowable in the period when it becomes irrecoverable. The period when a debt is created thus becomes irrelevant for the allowance. He stated that recoverability or in-recoverability of the amount under consideration was not questioned by the Assessing Officer or the CIT(A).
19. Learned AR stated that the CIT(A) again misconceived the concept of bad debts when he confirmed the disallowance of bad debts for the reason that debts related to a period before the assessee came into existence. The fact is that certain debts were created by appellant's predecessors whose business was taken over by the appellant. Deduction for bad debts relates to a period when these became irrecoverable which is invariably subsequent to creation of the debts.
Thus the period of creation of the debts becomes irrelevant for the said allowance. The matter of allowance of bad debts in the case of succession of business was dealt with by the honourable Madras High Court in the case of Mettur Sandalwood Oil Co. v. Commissioner of Income Tax, Madras reported as 47 ITR 781. It was held in the case that constitution of a partnership to continue and carry on the erstwhile joint family business as, result of partition brought about a succession by the firm of the preexisting business and that the assessee firm was entitled to claim the allowance of bad debts because the trade debts written off as bad and irrecoverable did not constitute capital assets in the hands of the assessee. In the appellant's case debts written off in assessm ent year 2001-2002 related to three different periods. The first is upto 14-12-1990 i,e,, when the assets later transferred to the appellant were under the control of the Telephone and Telegraph Department of the Federal Government. The second period runs from 15-12-1990 to 31-12-1995 during which the business was owned by Pakistan Telecommunication Corporation which was exempt from income tax. The third period is from. 1-1-1996 to 30-6-2000 during which period the appellant was exempt from income tax. Details of debts written off that related to each of these periods, presented in a region-wise format is as under:- Total upto 1990 439,824,099 Total 1991 to 1995 3,663,113,580 Grand Total upto 1995 4,302,937,679
20. Learned AR stated that bad debts can only be allowed if the conditions laid down in section 23(1)(x) of the Income Tax. Ordinance, 1979 (the repealed Ordinance) are fulfilled which require that
(a) the amount of bad debt must actually be written off; and (b) the amount claimed as a bad debt must be determined to be irrecoverable by the Assessing Officer. The appellant has fulfilled both these conditions for allowance of bad debts. The debts were actually written off during the relevant income year. The date of approval of the write off by appellant's Board of Directors in a subsequent period has no bearing on the action of writing off which undoubtedly was made in the relevant income year. No reservation was expressed by the Assessing Officer in his assessment order regarding the recoverability of the debts claimed to be bad. Since the appellant has fulfilled both the statutory conditions; the facts that these debts were created when the income of the appellant or its predecessors was exempt from income tax is simply irrelevant.
21. Learned DR stated that it is universally recognized principle of law that the revenue expenditure to be admissible must have relevance to the earning of income for the current year. Viewed in the back drop of this principle the allowance of bad debt pertaining to non-taxable income cannot be allowed against the taxable income. In the present case; (i) taxpayer at present enjoys status of a Public Ltd. Company; (ii) it was a government department namely Telegraph and Telephone department established in 1967 and remained so up to 1991; (iii) thereafter through Ordinance XVII 1990 promulgated on 15-12-1990, it became Pakistan Telecommunication Corporation and enjoyed the same status upto 31-12-1995. The income of Pakistan Telecommunication Corporation was also exempt under clause (140A) of Part-I of Second Schedule to the Income Tax Ordinance, 1979; (iv) later through Pakistan Telecommunication (Re-Organization) Act, 1996 it was converted into a Public Ltd., Company incorporated w,e,f,, 1-1-1996 and was granted exemption for three years from its incorporation under clause (140B) of Part-1 of Second Schedule to the Income Tax Ordinance, 1979; (v) admittedly the bad debts claimed by the taxpayer company relate to the period 1967 to 1995 when the income of the company was exempt. Moreover, although the company made huge profits from 1967 to 1995, the profit earned, from 1992 to 30-6-1999, alone were more than 110 billion, but these so called bad debts were not written off and the assessee waited for termination of exemption period and made the claim on this score only when its income become taxable. It was done intentionally to reduce the income and tax liability of taxable period.
22. Learned stated that bed debts in the case Messrs PTCL pertain to the years 1967 to 1995 when its income was exempt. However the entries of bed debts running into billions of rupees relating to 1967 to 1995 have been claimed by the taxpayer against the taxable income. It did not write off any of the bed debts although it earned huge income. Its income remained exempt even after 1995 till 31-12-1999. The argument of the AR of the taxpayer that surplus of income earned by the taxpayer during all this period has been capitalized has no bearing on its taxability. This capitalization has been done at the cost of tax revenue for which department is now being deprived of. Had the taxpayer written off these bed debts during the relevant period against the relevant income, the department could not have been made to suffer now. These bad debts I are mostly in the form of outstanding telephone bills. It does not appeal to reason that it took the taxpayer a long period of over 30 years to write them off. A decision which in the normal course should not have taken more than few months as is done under the efficient systems of the world. It is a settled law that when no time frame is provided, the time taken for any particular action has to be reasonable. It was at times argued by the AR of the petitioner company that many formalities have to be completed for purposes of recovery before the telephone bill is declared as non-recoverable. This argument is not palatable since all these formalities should have been completed within the reasonable time.
The decision of the taxpayer to write off the bed debts after long 33 years once the income became taxable neither deserve any favorable treatment nor it is so warranted by law.
23. Learned DR stated that debts in question related to the period from 1967 to 1995 when income of the predecessors of the assessee i,e,, Pakistan Telecommunication Corporation and Telephone and Telegraph Department were not subject to tax. The philosophy behind inclusion of clause 23(1)(x) relating to allowance of bad debt is to provide relief in such cases when revenue has been offered for taxation in the earlier years on accrual basis and subsequently a part of this revenue which has already suffered taxation is not actually recovered despite all efforts. In such situation the law provides a concession to write off such amounts, which have become irrecoverable so that the assessee can recoup the tax paid on revenue, which has not been actually earned. In the instant case both accruals and receipts of income were not liable to tax during the period to which bad debt relate as income of the assessee company was exempt under clause (140B) of part-1 of the Second Schedule to the Income Tax Ordinance, 1979. The bad debts relating to exempt period cannot be allowed against the income of the taxable period as the exempt income cannot be termed as income chargeable to tax since it has been held by the honourable Supreme Court of Pakistan that the exempt income does not constitute assessable income. Reference in this regard is available in a judgment of the Tribunal reported as 2005 PTD (Trib.) 621. The debts in question were not written off during the year under consideration as decision to write off the debts was taken when the accounts for the relevant period were closed. These bad debts related to the period prior to the existence of PTCL. At the time of acquiring assets of the predecessor, due consideration must have been given for such bad debts in the quantum of equity contributed by the assessee company. Moreover, the assessee failed to furnish any evidence to the fact that the said bad debts had been written off after exhausting all the recovery measures as provided in the law. Reference in this regard may also be made to judgment of the honourable Peshawar High Court in a case reported as 2004 PTD 1940 wherein it has been held that the burden is on the assessee to show through evidence and cogent material that the debt has become bad debt and despite best efforts it cannot be recovered and it can never be recovered unless all these and other relevant conditions are fully satisfied it would be difficult to conclude that a debt claimed to be bad is actually so.
24. We have considered arguments of both the sides in the light of relevant record and we are of the opinion that assessee's explanation and evidence relating to this claim was properly thrashed out at assessm ent stage. The claim relating to exempt period is not admissible under the law. The amount relating to predecessor companies and amount allowable during previous years to the assessee and its predecessor companies and claims relating to previous years could not be allowed. This issue has been properly thrashed out at assessment as well as first appeal stage.
Learned CIT(A) rightly confirmed the addition relating to assessment year 2001-2002. The Department has not contested the setting aside of assessment on this point for assessment year 2002-2003 and tax year 2003. Therefore, we deem it appropriate to confirm the setting aside of assessm ent for these two years. Resultantly, assessee's appeal for all years fails on this point.
25. Excess perquisites added under section 24(i).---The Assessing Officer observed that certain perquisites were in excess of prescribed limit of 50% of basic or sustentative salary and were, therefore, liable for addition under section 24(i). He also found that certain allowances/perquisites were wrongly treated as "salary" by the assessee company and in this manner the amount of salary was artificially enhanced and at the same time the total percentage of inadmissible perquisites was correspondingly reduced in an artificial manner. He, therefore, confronted the assessee company on this point and conveyed his intention to treat orderly, allowance, special allowance for officers, drinking water allowance, stipend, honorarium, good conduct pay, and cash reward for meritorious services as perquisites. He found assessee's explanation as un-satisfactory and made addition on this score under section 24(i) for assessment years 2001-2002 and 2002- 2003. These additions were confirmed by both the CIT(Appeals) in their separate impugned orders.
The assessee has contested the confirmation of these additions in second appeal agitating that there was no justification with the CIT(A) to confirm the same.
26. Learned AR stated that the CIT(A) upheld the disallowance after holding that 'cash reward for meritorious servicescould not be equated with 'bonus'. The word 'bonuswas not defined in the repealed Ordinance. Its meaning in common parlance as per the new Lexicon Webster's Dictionary of the English Language is as follows:-- "Grant of money as a gratuity to workers, discharged soldiers etc.; .a special earned payment based e.g. On production; an extra dividend or gift of stock or shares from a company to its shareholders; a distribution of profits to certain insurance policy holders; anything welcome that one receives over and above what is expected or usual."
27. -Learned AR contended that it is not the case of the Department that payment of cash reward for meritorious services was not payable in accordance with terms of employment. The disagreement is on the use of the nomenclature of 'cash reward for meritorious servicesinstead of 'bonusas provided in explanation to section 24(i) of the repealed Ordinance. The above referred dictionary meanings of the word 'bonusin no way excludes a 'cash reward for meritorious servicesfrom its ambit. If the real character of the payment termed by the appellant as 'cash reward for meritorious servicesis taken into consideration and it is accordingly equated with 'bonusthe impugned addition under section 24(i) of the repealed Ordinance would not be maintainable.
28. Learned DR argued that the CIT(A) was fully justified in upholding addition under section 24(i) for provision of excess perquisites to employees. The company had included orderly allowance, special allowance for officers, drinking water allowance, stipend, honorarium, cash reward for meritorious services and good conduct pay in the salary. The Assessing Officer excluded the above payments from the salary, and made addition of the amount in question under section 24(i) being perquisites in excess of 50% of the salaries paid. The action of the Assessing Officer is in accordance with the provisions of Income Tax Ordinance, 1979 and has been rightly upheld by the CIT(A).
29. We have considered arguments of both the sides. We are constrained to disagree with learned AR's contention that "cash reward for meritorious services" was paid to all the employees and this payment was, therefore, in the nature of "bonus", which is part of salary. The company has managed to come out of this problem through renaming the payment on this account as "bonus" in the succeeding years. However, during assessment years 2001-2002 and 2002-2003 the payment was made to the employees on account of "cash reward for meritorious services". By no stretch of imagination the "cash reward" can be equated with "bonus". The nature of both these payments is totally different than each other. It is our considered opinion that "cash reward for meritorious services is a perquisites and not a part of salary. Its nature is different than bonus and the treatment, given to this item of payment was legally correct at the assessment as well as first appeal stage. We have not been able to find any reason to differ with the findings of learned CIT(A) which are hereby confirmed and assessee's appeal on this point being devoid of merit is not accepted.
30. Addition under section 24(c).---The Assessing Officer observed that the assessee company did not furnish complete details of payment of salaries. Sample audit was conducted by him from which, his viewpoint was confirmed. He specifically asked the assessee to provide necessary details. Since the assessee could not satisfy the Assessing Officer that proper withholding of tax at source was made from the salaries, therefore, he added 20% of the claim for assessment year 2001-2002 due non-deduction of withholding tax. This treatment was confirmed in appeal.
31. Learned AR stated that 20% of the basic pay of appellant's staff in pay scales 1 to 15 has been disallowed on the suspicion about non-deduction of tax from their salaries while completing assessm ent for assessm ent year 2001-2002. No such addition has been made in the subsequent years. The suspicion is entirely baseless as not a single case of non-deduction of withholding tax from salaries could be identified by the Assessing Officer during a monitoring of withholding taxes in April, 2002 and examination of statements relating to 7,500 employees during the audit proceedings. He stated that sample statements already submitted under section 139 of the repealed Ordinance to the relevant Assessing Officers having assessment jurisdiction over the cases of recipients of salary of 7,500 employees was considered by the Assessing Officer to be too small a sample to support appellant's claim that tax was being properly deducted from staff salaries. The Assessing Officer insisted on production of all the statements, non-production of which was held by the learned CIT(A) as a failure of the appellant to discharge its liability to prove that it has faithfully complied with the provisions of section 50 of the repealed Ordinance.
32. Learned DR stated that the CIT(A) was fully justified in upholding disallowance under section 24(c) being 20% of basic salary of staff for non-deduction of tax from salaries paid. The assessee company was provided with reasonable opportunity to furnish evidence to the effect that deduction as required under section 50(1) was made at the time of making payment to its employees. As the assessee failed to furnish any evidence in this respect an amount equal to 20% of the basic salary of staff, other than officers was added back. The CIT(A) upheld this treatment in the light of judgment of honourable Supreme Court of Pakistan reported as 2002 PTD 1 wherein it was settled that the withholding agent who maintains the record of payments liable to identify the payment liable to withholding tax and property withhold tax therefrom, under the law.
33. We have considered arguments of both the sides, in the light of relevant details and we are of the opinion that the Assessing Officer had no justification for making estimate at the rate of 20% for the purposes of making addition. He should have brought on record complete details and data to establish the default in deduction of tax at source. It is also pertinent to note that no addition on this score was made at assessm ent stage in the succeeding years. During assessment year 2001- 2002 only, the addition was made on estimatebasis. This addition on estimate basis cannot be legally maintained. In the light of facts and circumstances of the case we hereby vacate the orders of both the authorities below and delete the addition in question relating to 'assessment year 2001- 2002.
34. Non-deduction of tax from payment of non-residents. ---The Assessing Officer obtained copies of agreements with the satellite companies for verification of assessee's claim of expenses in the shape of payments to the non-resident persons. The Assessing Officer specifically confronted- the assessee company by conveying his viewpoint through a specific notice that any payment for use of satellitehas to be treated as royalty. Moreover tax was deductible from these payments under section 50(3). The assessee contended that these payments were not in the nature of royalty. It was rather in the nature of fee for technical services or disbursement of commercial profit. The nonresident companies did not have any permanent establishment (PE) in Pakistan. Therefore, any payment made to them on account of fee for technical services or commercial profit was not liable to deduction of tax at source under section 50(3). The Assessing. Officer did not accept this contention and he treated the payments made to Telecommunication Satellite Companies as royalty. Due to default in deduction of tax at source under section 50(3) the expenditure in the shape of payments to non-resident companies was, disallowed under section 24(b) of the Income Tax Ordinance, 1979 for assessm ent years 2001-2002 and 2002-2003 and under section 21(c) of the Income Tax Ordinance, 2001 for tax year 2003. The assessee contested this addition on this account which was adjudicated by CIT(A) in his order dated 19-9-2002 for assessment year 2001-2002 in the following manner:- "The AR of the appellant objected to disallowance of payment made to Asia sat, Hong Kong and stated that in case of Hong Kong there is no double taxation treaty hence the domestic law would be applicable and definition given in the domestic law regarding royalty does not cover the amount paid to Asia sat, Hong Kong. It is true that the Assessing Officer has classified the payment as royalty and the definition of royalty in the Income Tax Ordinance, 1979 does not cover the payment. However, misclassification of the payment by Assessing Officer does not absolve the appellant from the liability placed on it for deducting tax under section 50. Thus liability was not discharged. In an identical case the learned ITAT vide ITAs Nos.194 to 199/IB/1997-98 dated 18-7- 2000 has held that payments made to Asia sat, Hong Kong are fees for technical services and are thus liable to be taxed in Pakistan under section 50(3A) of the Income Tax Ordinance, 1979. Similar is the situation in the instant case. Thus following the above quoted decision of the learned ITAT the disallowance of the amount in respect of Asia sat is upheld.
Intelsat, Washington DC, USA.---The DCIT has disallowed payment made to Intelsat, Washington, DC, USA, as according to him it has been paid to a UK company and tax should have been deducted under Pakistan U.K. Tax treaty wherein incomes from use of industrial communicational and scientific equipment's has been termed as royalty income.
The AR stated that payments up to 18th July, 2001 were made to "International Telecommunications Satellite Organization" (INTELSAT) and thereafter to a U.K. Based company Intelsat U.K. Limited. Thus according to him no disallowance can be made under Pak-U.K. Tax Treaty as the same is inapplicable. The assertion of AR is correct. Pak-U.K. Tax Treaty cannot be applicable to International Telecommunication Satellite Organization. This organization came into being in 1973 pursuant to Resolution, 1721 (XVI) of the General Assembly of the United Nations. Its Headquarter is in Washington. It is an inter---governmental organization. Pakistan is one of its members. ARTICLE XV of Agreement creating the Organization gives exemption for income tax to income of the Organization. The said Article is reproduced as under:- "(INTELSAT Headquarters, Privileges, Exemptions, Immunities). (a) The headquarters of INTELSAT shall be in Washington. (b) Within the scope of activities authorized by this Agreement, INTELSAT and his property shall be exempt in all States Party to this Agreement from all national income and direct national property taxation and from customs duties on communications satellites and transponders and parts for such satellites to be launched for use in the global system. Each Party undertakes to use its best endeavors to bring about, in accordance with the applicable domestic procedure, such further exemption of INTELSAT and its property from income and direct property taxation, and customs duties, as is desirable, bearing in mind the particular nature of INTELSAT."
Pakistan is a signatory to the Agreement. Therefore, income of INTELSAT is exempt from tax in Pakistan. Thus there is no liability to withhold tax on payments made to INTELSAT, Washington D.C., USA. The disallowance is, therefore, not justified and is deleted."
35. Similar pattern of treatment was followed in the succeeding years. The assessee filed appeal against the disallowance confirmed by CIT for all the assessment years whereas the department filed appeal for assessm ent year 2001-2002 in respect of allowance admitted by the CIT(A).
36. Learned AR stated that the CIT(A) upheld disallowance of amount paid to Asia-sat for non- deduction of withholding tax by relying on an unreported case in I.T.A. No,194 to 199/IB/1997-98 dated 18-7-2000. In the said case the honourable Tribunal held the payment to be in the nature of fee for technical services. The Assessing Officer had treated the payment as royalty in the assessm ent order but the learned CIT(A) held that the treatment was a misclassification and the definition of royalty in law did not cover the payment. In a subsequent reported case in ITA No,2081/KB/2001 dated 4-5-2002 reported as 2002 PTD (Trib.) 2679 the aforesaid unreported case was not followed by the Tribunal when it was held that amount paid to a satellite company did not fall within the meaning of fee for technical services. The contention of the appellant in that case that the income of the recipient satellite company fell within the ambit of industrial or commercial profit was thus accepted. As a result of the above pronouncement, which remains in the field, payments made to satellite companies are to be treated as commercial profits. Such profits were only taxable in Pakistan if the recipient satellite companies had permanent establishments (PE) in Pakistan. Neither do these companies have any permanent establishments in Pakistan nor did the Department ever make a case to this effect. Learned AR contended that while disposing of appeals for the assessm ent year 2002-2003 and tax year 2003 the CIT(A) upheld Assessing Officer's treatment of the payments to satellite companies as royalty. This treatment is in conflict with both the above referred two judgments of the Tribunal. In the first case the Tribunal held the payment to be in the nature of fee for technical services whereas in the latter case it was held to be commercial profits. He stated that main reason assigned by the Assessing Officer for treating the payment as royalty was the alleged use of scientific equipment by the appellant. This reason is not correct in view of the fact that no scientific equipment of the satellite companies was in use by the appellant. In fact, the recipient company was providing service to the appellant by using its satellite as a result of which it was deriving commercial profits.
37. Learned AR stated that the assessee company did not use satellite as a whole. It rather used the transponders installed in the satellite. The transponder receives the signals from the ground and relays to the desired destination through electro-magnetic waves. There are many transponders in one satellite and can be used by more than one client, at one time. Payments released on account of use of these facilities were in fact on account of professional services and withholding tax was, therefore, not deductible from these payments.
38. Learned DR stated that payments made to Asia sat Hong Kong and Intelsat Washington DC, USA for satellite facilities are in the nature of "royalty". The assessee company was under legal obligation to deduct tax under section 50(3) from the payments released to these companies. He stated that under the provisions of section 50(3) it is only the Deputy Commissioner of Income Tax who is competent to certify that withholding tax is not deductible from any payment made to a nonresident. These powers of certification of exemption from withholding tax cannot be assumed or exercised by any person or authority other than the Deputy Commissioner of Income Tax. He contended that the assessee company presumed that payments being released by it are exempt from deduction of withholding tax. This presumption does not have any support from the law. The company itself has assumed the powers of certification of exemption from withholding tax. This assumption and exercise of powers by the company is unlawful because it is exclusively the competence of the Deputy Commissioner of Income Tax to give a certificate of exemption in every suitable case.
39. Learned DR stated that the payments were made by Messrs PTCL to the non-resident recipients, on account of consideration for the use of transponder, in respect of both belonging to the countries having Avoidance of Double Taxation Treaty with Pakistan and having no such Treaty. In case of those having treaty the treatment of the said payment would be governed by the stipulations of the respective Treaty between the country of non-resident recipient and Pakistan, while the payments to the non-resident recipient originating from the countries having no such treaties, would be governed by law of land i,e,, the Income Tax Ordinance, 2001 as Pakistan source income. Thedepartment classified the payments made to non-resident recipients, on account of consideration for the use of transponder, in accordance with the stipulations of respective Double Taxation Treaties between the country of recipient and Pakistan and with the provisions of the Income Tax Ordinance, 1979/2001 as royalty. While making such payments to the non-resident companies having no permanent establishment in Pakistan neither any tax was deducted by Messrs PTCL under the provisions of section 50(3) of the Income Tax Ordinance, 1979 or section 152 of the new Ordinance, 2001 nor any certificate was obtained by the payer company under the proviso to the section 50(3) of the Income Tax Ordinance, 1979 and under the provisions of section 152(5) of the Income Tax Ordinance, 2001. Consequently the deductions claimed on account of these payments were disallowed by the department under the provisions of section 24(b) of the late Ordinance and under section 24(c) of the new Ordinance. The Commissioner Appeals upheld the disallowance made by the department, however, while doing so he classified these payments as royalty in assessm ent year 2002-2003 and tax year 2003 and technical services in assessment year 2001-2002. The department while assessing the payments made to the non-resident recipient covered by a treaty for the Avoidance of Double Taxation treated the said payments as royalties since these payments were for the use of transponder, a scientific equipment fell squarely within the scope of definition of royalty contained in, respective treaties which is reproduced below:-- "The term "royalty" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copy right of literary, artistic or scientific work including cinematography films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for use of, or the right to use, industrial, commercial, or scientific equipment, or for information (Know-how) concerning industrial, commercial or scientific experience."
40. According to DR the Chamber's Dictionary of Science and Technology, 'transponder(communication), is defined as an equipment forming part of a communications satellite, which receives signals from a ground station at one frequency and re-transmits them to another ground station or to domestic satellite receivers at another frequency'. In Mc. Graw Hill's Dictionary of Scientific and Technical Terms, the meaning given is "a transmitter-receiver capable of accepting the challenge of an interrogator and automatically transmitting an appropriate reply".
Any equipment which uses the rules and method of science is called scientific equipment (Elementary Edition Webster's New World Dictionary). A transponder is therefore, scientific equipment and any payment/ consideration for the use of transponder (which is scientific equipment) is royalty. Learned DR contended that the AR of the petitioner company has also admitted that a transponder is scientific equipment. As per agreement between Messrs PTCL and the non-resident recipients the royalty was paid in consideration for the lease of transponder to the petitioner company.
41. Learned DR stated that the CIT(A) was fully justified in upholding addition on account of non- deduction of tax under section 50(3) from payments to non-resident satellite companies for the reason that this payment, in fact falls within the definition of "royalty" and the term royalty has been defined in Article 12 of the Double Taxation Treaty with Canada, UK, Philippines, UAE and Netherland, where major payments were made by the assessee company and the non-residents do not have a permanent establishment in Pakistan. The relevant Article is reproduced as under:- "The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copy right of literary, artistic or scientific work including cinematography Ours and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for use of, or the right to use, industrial, commercial, or scientific equipment, or for information (Know-how) concerning industrial, commercial or scientific "experience."
42. Learned DR stated that the term "royalty" has been defined in section 2(54) of the Tax Ordinance, 2001 as any amount paid or payable, however, described or computed - whether periodical or lump-sum; as consideration for the use of or right to use any industrial, commercial, scientific work. It also includes the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fiber or similar technology in connection with television, radio or internet broadcasting. Learned DR emphasized that the satellite or its transponders can clearly be termed as 'commercial or scientific equipment and therefore any payment as consideration for its use is in the nature of royalty, which is income of the non-resident companies.
The assessee company was liable to withhold tax on payments made to non-resident companies.
Pakistan does not have any Double Taxation, Treaty with Hong Kong. As regards the payment of satellite charges to Asia sat, Hong Kong, it was stated that M/S PTV also had made similar payments to Messrs Asia Satellite Hong Kong for hiring transponders during the assessment years 1992-93 to 1994-95 without making deduction of tax. The department invoked the provision of section 52 by treating PTV as an assessee in default and charged tax under section 52/86 of the Income Tax Ordinance, 1979. This action of the department was upheld by the Tribunal vide its order ITAs Nos.194 to 199/IB/97-98 dated 18-7-2000. Subsequently PTV has been properly deducting tax from similar payment to Messrs Asia Satellite, Hong Kong. Learned DR further stated that the honourable Karachi High Court Karachi and its judgment reported as 1989 PTD 126 in the case of Messrs Gulberg Textile v. Commissioner of Income Tax has held that commission paid to non- resident without deduction of tax at source is inadmissible deduction from the profit of the company as a business expenditure. It was further held that the Tribunal was right in holding that the commission of Rs,40175 paid to the Indonesian agents was non allowable as a deduction in the assessm ent of the applicant by virtue of section 10(4)(bb) of the Act even though these payments were not chargeable to tax in Pakistan. He stated that this ratio settled by the honorable High Court Karachi is fortified in the Tribunals order in ITAs Nos. 763 to 765/IB 1996-bb the case of Messrs Hub Power Company Ltd. v. DCIT Circle-01, Companies Zone, Islamabad. The Tribunal has observed that:- "We have examined the arguments, of both the side on this point. Going through the facts of Gulberg Textile Mills, we are not persuaded to interpret the observation quoted in the preceding paragraph, in that case in the manner as desired by the learned AR of the assessee. In fact in that very case, their lordships of the Karachi High Court have quoted a portion of judgment of Indian Supreme Court in re: Messrs Agarwal Chamber of Commerce Ltd., v. Ganpat Rai Hira Lal (1958) 33 ITR 245. In that case it was held that those persons who are bound under the Act to make deductions at the time of payment of any income, profits or gains are not concerned with the ultimate result of the assessm ent. Whether in the ultimate result the amount of tax assessed or any lesser or bigger amount would be payable as income tax in accordance with the law in force would not affect the rights, liabilities and power of a person under section 18 or of the agent under sections 40(2) and 42(1). We would like to point out that in the case of Gulberg Textile Mills, that even though the commission paid to the non-resident agent was not chargeable to tax in Pakistan yet the amount paid was not allowable as deduction by virtue of section 10(4)(bb), as the tax had not been deducted from the payments made. In this regard we may also refer to a case cited as CIT v. Esso Pakistan Fertilizer Ltd. 1990 PTD 787. In that case, a reference has been to a case of Indian jurisdiction in re: P.C. Ray and Co. v. A.C. Mukarjee (AIR 1995 CAL 131) wherein it was held that the word "chargeable" in section 18(3B) was not to be treated as equivalent of "assessable" to income tax and connoted a sum liable in its nature to be brought into computation in an assessment, that is to say as belonging to one or other heads of income as set out in section 6 of the Act. Their lordships of the Karachi High Court held that section 18(3B) of the Act, is a code in itself and virtually covers all sums payable to nonresidents chargeable under the Act and as such sums may or may not be of a determinate character. Absence of the provisions in the statute leave no machinery for the remitter to resort to, with a view to find out proportionate amount chargeable and he being not armed with the powers of an assessing authority, must therefore, withhold all or any sum as a whole, which have element of chargeability or, on failure become person liable under section 18(7) of the Act. It was further held that it, is none of the functions of the person obliged to make disbursement under section 18(3B) of the Act to sift and assess to whether and what portion of the amount projected to be disbursed is taxable or not at all is so taxable. Having regard to the law expounded in the said case we are of the view that where a person is obliged to deduct tax under section 50(3), he must deduct tax from the whole of the amount to be paid. Even otherwise, the person making payment is not in a position to determine as to what is the proportion of the income/profit which the recipient has earned out of the payment received by him. The function of determining the income of non-resident recipient is to be performed by the Assessing Officer and not by the paying person. The proposition that the Assessing Officer should first determine the income of the non-resident and the tax payable thereon end then demand the tax from the paying person under section 52 is neither tenable nor practicable. The liability of the paying persons to deduct tax under section 50(3) is quite distinct from the ultimate tax liability that may be determined on assessm ent of income of the non-resident."
43. Learned DR averred that the honourable Dhakka High Court in its judgment reported as 1961 PTD 900 = 1961 PLD Dacca 602 has held that interest paid to a non-resident creditors without deduction of tax at source under section 118(38) is an inadmissible deduction under section 10(2)(iii). He emphasized that in the light of these facts and findings of ,.The Tribunal and High Court, CIT(A) has rightly upheld the addition on account of non-deduction of tax under section 50(3) from payments to non residents satellite companies.
44. Learned DR stated that nature of payment has to be seen in the light of agreement between the assessee company and the satellite companies. The Assessing Officer treated the payment in question as royalty. In the taxes being relied upon by assessee's AR the question of royalty was not debated or discussed. The company is paying "rent" to the satellite companies. "Rental" is included in the definition of "royalty".
45. Learned DR stated that in Chamber's Dictionary of Science and Technology, 'transponder(communication), is defined as an equipment forming part of a communications satellite, which receives signals from a ground station at one frequency and re-transmits them to another ground station or to domestic satellite receivers at another frequency". In Mc Graw Hill's Dictionary of Scientific and Technical Terms, the meaning given is "a transmitter-receiver capable of accepting the challenge of an interrogator and automatically transmitting an appropriate reply".
Internet search shows that in satellite communications satellite's channels are called transponders, and each transponder is a separate transceiver or repeater. Most combats are microwave radio relay stations in orbit, and carry dozens of transponders, each with a bandwidth of tens of megahertz. Most transponders operate on a 'bent pipeprinciple, referring to the sending back of what goes into the conduit with only amplification and a shift from uplink to downlink frequency, as opposed to a 'regenerativesystem whereby the signal is used to remake and demodulate the signal. With data compression and multiplexing, several video (including digital video) and audio channels may travel through a single transponder on a single wideband carrier. Original analog video only has one channel per transponder, with subcarriers for audio and automatic transmission identification service ATIS. Non-multiplexed radio stations can also travel in single channel per carrier (SCPC) mode, with multiple carriers (analog or digital) per transponder. This allows each station to transmit directly to the satellite, rather than paying for a whole transponder, or using landlines to send it to an earth station for multiplexing with other stations.
46. We have considered the issue as to whether transponder is electronic equipment or not.
Although most of the machineries are electronically operated but a distinction has to be drawn between electronic machinery and electronic equipment. For this purpose internet search was undertaken which showed that "machine" is a device that uses energy to perform some activity.
Historically a device performing or assisting in performing any type of work through use of electric energy can be classified as an electric or an electronic machine e.g.; computer, aero plane, railway engine and air conditioners etc. "Equipment" is a set of tools or devices used for particular purposes. Every-machinery is also an-equipment but every equipment may not be machinery. In our opinion a transponder fitted in a satellite is certainly an-electronic equipment.
47. We have considered arguments of both the sides. We tend to agree with the arguments of learned DR that the assessee was under legal obligation to deduct tax under section 50(3) from payments made to nonresidents. However, certificate of exemption or lower rate could be obtained from the Assessing Officer on an application in every suitable case. For the sake of reference provisions of section 50(3) are reproduced as under:- S.50(3).---Any person responsible for paying go a non-resident any sum chargeable under the provisions of this Ordinance (other than income to which subsection (1) or subsection (2) or, subsection (2A) or subsection (3A) or subsection (4) or subsection (4A) or subsection (6A) or subsection (7A) or subsection (7C) or subsection (7D) applies) shall, unless such person is himself liable to pay tax thereon as an agent deduct, at the time of payment, tax at the rates specified in the. First Schedule: Provided that where the Deputy Commissioner gives a certificates in writing (which certificate he shall give in every proper case on the application of the assessee) that to the best of his knowledge and belief, the assessee shall not be liable to pay any tax under this Ordinance or shall be liable to pay tax at a ,rate which is less than the rate specified in the First Schedule, the person responsible for paying any income referred to in this subsection. To such recipient shall, until such certificate is cancelled by the Deputy Commissioner, pay the amount involved without deduction or .Deduct the tax at such less rate, as the case may be: Provided that nothing contained in this subsection shall apply to any payment made to a branch in Pakistan of a non-resident banking/or insurance company.
48. In the Black's Law Dictionary (8th Edition) royalty is compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced. A payment which is made to an author or composer by an assignee, licensee or copyright holder in respect of each copy of his work which is sold, or to an inventor in respect of each article sold under the patent. Royalty is share of product or profit reserved by owner for permitting another to use the property. In its broadest aspect, it is share of profit reserved by owner for permitting another the use of property. Alamo Nat. Bank of San Antonio V. Hurd, Tex. Civ. App., 485 S.W.2d 335, 338."
49. Any payment for the use of electronic equipment is a payment on account of royalty. Payment made by the assessee-company to the non-residents was in the nature of royalty on which tax was deductible under section 50(3). The powers of issuing certificate of exemption or a certificate of low rate of withholding tax can be given only by the Deputy Commissioner of Income Tax. No other person or authority can assume such powers to determine as to whether or not withholding tax is deductible from any payment made to a non-resident. Thus assessee was under legal obligation to deduct withholding tax under section 50(3) from payments made to non-residents.
The assessee company did not make such deduction. It also failed to obtain a certificate of exemption or a certificate of low rate of tax deduction from the concerned Deputy Commissioner of Income Tax. In these circumstances the company committed a default in tax deduction at source from the payments released to non-residents. The Assessing Officer, therefore, rightly disallowed the expenditure claimed on account of payments to nonresidents.
50. The assessee company had used the electronic property of nonresident satellite owners and payments made to them were in the nature of royalty. The rival parties have dragged this issue into controversy as to whether these payments are in the nature of royalty or fee for technical services or business profits. In our opinion this controversy is totally irrelevant In fact the fundamental problem relates to the deduction of withholding tax at source under section 50(3) from payments released to non-resident satellite companies. Under the provision of section 50(3) the assessee company was bound to make deduction at the time of making payments. It was not business of the assessee-company to determine as to whether these payments were liable to assessm ent as taxable income of the recipients. It has been held by the higher courts that in the ultimate result the amount of tax assessed or in lesser or bigger amount would be payable as income tax in accordance with the law enforced would not affect the liabilities and obligations of the persons responsible for making deduction of tax at source. Even though the income of non- resident recipient is exempt from tax, the persons making payments to them would not be absolved of their liability of making tax deduction at source. The provisions contained in section 50(3) of Income Tax Ordinance, 1979 virtually covered all sums payable to non-residents irrespective of their character. The person responsible for making deduction of tax at source does not have any powers to find out the chargeability of payments to tax. It was none of the functions of the assessee company to enter into sifting the ultimate fate of taxability or exemption of the payments which were liable to deduction of withholding tax at source. The assessee company could not determine as to what is the proportion of the income/properties which recipients had earned out of payments received by them. The function of determining the income of non-resident recipients has been assigned by law to the Deputy Commissioner Income Tax. If in the opinion of the assessee company the payment released to non-resident recipients were not liable to deduction of withholding at source an exemption certificate must have been obtained from the concerned Deputy Commissioner Income Tax. The assessee company did not make the tax deduction at source from the payments made by it to non-resident recipients nor did it obtain a certificate of exemption from the concerned DCIT. In these conditions the assessee company committed a default in making P deduction of withholding tax from the payments made by it.
Since this default was established on record, the Assessing Officer was fully justified to disallow the claim in the light of relevant provisions of law and CIT(A) has also rightly confirmed this addition.
51. We agree with arguments of learned DR that learned CIT(A) was not justified to hold that INTELSAT was exempted from withholding tax. The fiscal domicile of a foreign company is as important as its physical domicile. The International Telecommunication Satellite Organization created by resolution of General Assembly of United Nations may have its income exempt from tax in Pakistan but Intelsat UK Ltd., is a separate entity from the International Telecommunication Satellite Organization. It cannot avail any exemption from tax in Pakistan. In our opinion payments made to this company were also liable to, deduction of tax at source because these payments were in the nature of royalty on which tax was deductible under section 50(3). Learned CIT(A) failed to appreciate the factual position of the matter and wrongly held that tax was not deductible at source from payments made to this company. In our opinion the Taxation Officer has rightly held that these payments are liable to withholding tax at source. Since no such tax deduction was made, therefore, the claim of expenditure on this account was rightly disallowed by the Assessing Officer.
52. In the light of these facts we hereby vacate the orders of learned CIT(A) on this issue relating to INTELSAT and restore the orders of Assessing Officer on this point. As a result the departmental appeal on this point shall stand accepted. We have noted that both the Assessing Officers as well as learned CIT(A) rightly disallowed the assessee's claim on this account relating to ASIASAT. Their orders on this point are, therefore, up-held and assesseeappeal being devoid of any merit is rejected on this point.
53. All these appeals are disposed of in the manner and to the extent as indicated above.
(Sd.)
(KHALID WHAHEED AHMED) (ISTATAAT ALI)
Chairperson Accountant Member (MUHAMMAD JAHANDAR) Judicial Member
54. I have had the advantage of going through the order proposed to be delivered by the learned Accountant Member and feel to add some of my findings on the issues involved in these appeals.
However, it seems that there is hardly any need to reproduce the facts and the questions in dispute as these have already been ably delineated. The first question addressed is the borrowing cost on acquisition of machinery.
55. BORROWING COST ON ACQUISITION OF MACHINERY:---The assessee company claimed a sum of Rs,94,511,846 in assessm ent year 2001-2002, Rs,54,071,578 in assessment year 2002-2003 and Rs,13,132,000 for tax year 2003 as interest on borrowed capital. During assessment, the Assessing Officer for assessm ent year 2001-2002 disallowed the claim for the reason that the assets so acquired through borrowing had not been commissioned. In appeal, learned CIT(A) held the expense having 'rightly been treated as pre-production expense should be capitalized. In assessm ent year 2002-2003, the Assessing Officer disallowed the claim on the ground that it was not for the purpose of increasing the efficiency of the existing set up but for new production.
However, in appeal learned CIT(A) held that a large portion of borrowed capital was used for acquisition of machinery which was installed, commissioned and put to use for improving the efficiency as the old system of Analogue was converted to the Digital system. He then proceeded to give the directions to re-determine the inadmissible capital expenditure and admissible revenue expenditure. For the tax year 2003, learned CIT(A) again remanded the case, for in his view, the facts for tax year 2003 were not different than the assessment year 2002-2003. It appears that a case reported as 1993 SCMR 1224 = 1993 PTD 758 was referred to before learned CIT(A) who, however, found that it was distinguishable from the case in hand as the assessee herein acquired a loan for installation of new telephone lines and for new production.
56. Before this Tribunal, learned AR has contended that learned CIT(A) upheld the disallowance of borrowing cost, incurred by the assessee by misinterpreting the aforesaid judgment of the Supreme Court and that the Court had clearly held that deduction of interest paid, in respect of capital borrowed was to be allowed in a running concern regardless of the fact whether the stage was pre-production or otherwise. As against this, learned DR argued that the learned CIT(A) was justified in upholding the disallowance. He added that the assets acquired out of borrowed capital on which interest was claimed had not been commissioned during the relevant year, therefore this expense, being in the nature of capital expenditure could not be allowed as deduction from income chargeable to tax and that the expenditure on installation of new telephone lines should be capitalized.
57. It seems that the question in relation to interest expense on borrowings for acquisition of machinery stands resolved by the Supreme Court judgment viz 1993 SCMR 1224 = 1993 PTD 758 referred to by learned AR and it looks necessary to briefly narrate the facts of this precedent. In the precedent the appellant was engaged in the manufacture of paper board and packing material and in return claimed deduction of interest amounting to Rs,147,668 on loan borrowed from PICIC for import of machinery. The Income Tax Officer disallowed the claim on the ground that the interest related to "Pre-Production Stage". The matter went upto the Supreme Court and while seized of this question, it was held by Supreme Court as under:-- "Firstly claim of assessee for deduction of interest amounting to Rs,147,668 on loan borrowed from PICIC for, import of machinery is justifiable and valid for the reason that loan was obtained while company was already at the normal stage of production and manufacturing activities were going on."
"Secondly in the findings of ITO, there is a reference to preproduction stage which is not supported by the record for the reason that loan was not obtained for installation of machinery in order to go for new products but to add efficiency to the production already in existence, hence question of preproduction stage did not arise and in any case, reference to preproduction stage was unnecessary as deduction of interest under section 10(2)(iii) is to be allowed in full regardless of the fact whether stage was pre-production or otherwise. Assessee did his best to convince the ITO that loan was obtained to install machinery to increase efficiency of existing productivity and not for new production and in that connection produced documents but ITO was not convinced."
"Fifthly, in this case like in the case of Khairpur Textile Mills supra assessee was already in business and entitled to appropriate profits and bear the losses which operation continued after obtaining loan for installing additional machineries hence interest paid on the amount of loan was rightly claimed as revenue expenditure for subsequent charge year."
"It thus satisfied the test to bring it within the, four corners of section 10(2)(xvi) as revenue expenditure laid out wholly and exclusively for the purpose of business."
58. It appears that corresponding provisions of section10(2)(iii) of the repealed Income Tax Act, 1922 were contained in section 23(1)(vii) of the repealed Income Tax Ordinance, 1979 which reads as follows:-- "23(1). In computing the income under the head "income from business or profession", the hollowing allowances and deductions shall be made, namely:--
(i) to (vi)......
(vii) any interest paid in respect of capital borrowed for the purposes of business or profession"
59. Now, if the facts of the case in hand are examined in the light of the above findings by the Supreme Court it seems that it is covered by the precedent. Here, admittedly, the assessee company is already a running concern and seemingly it intended to enhance its efficiency by inducting into operation new equipment/devices as have emerged in the telecommunication field.
It is on record that the borrowed capital was being used in converting old system of Analogue into one to the Digital System. It thus appears that the action taken by the forums below is not in line with the rule laid down by Supreme Court and is thus exceptionable. Resultantly the assessee's appeals in all the three years are accepted, and the assessee shall be entitled to claim borrowing cost on acquisition of machinery, however the said claims shall be subject to re-verification by the Taxation Officer.
60, BAD DEBTS:---For assessm ent year 2001-2002, a claim of bad debts of Rs,4,180,874,040 was made but the Assessing Officer disallowed for the reason that these were not written off during the year under consideration. This addition was confirmed by learned CIT(A). In respect of assessment year 2002-2003, bad debts of Rs,3,274,186,309 were disallowed as the Assessing Officer found that all measures and steps for recovery of the debts were not taken. Learned CIT(A) in appeal set aside the findings and remanded the case for re-examination. In the tax year 2003, the disallowance of bad debts which had been stately written off were again set aside by learned CIT(A) for re- verification of claim. Now the assessee is in appeal before this Tribunal challenging the confirmation of add-back on this account for assessment year 2001-2002 and its setting aside for assessm ent year 2002-2003 and tax year 2003 by learned CIT(A).
61. In arguments learned AR stated that disallowance of claim of bad debts have been upheld for the assessm ent year 2001-2002 by learned CIT (A) for the reasons that the debts were not written off during the relevant income year; that these debts related to a period when income of assessee's predecessors was not subject to income tax and that the debts belong to a period before the assessee-company came into existence. Learned A.R. Maintained that the debts were actually written off on 30-6-2001 and this action was approved on 8-11-2001 by the Board of Directors. He added that the debts invariably become bad much later than the date of their creation. A debt which is considered as recoverable, at one time gets bad or irrecoverable at a later stage when all rays of hope of its recovery die down. Therefore, a deduction, on account of a bad debt being a loss becomes allowable at a time when the debt is irrecoverable. He further mentioned that debts were created by assessee's predecessors whose business has been taken over by the assessee. Learned AR contended that the matter of allowance of bad debts in the case of, succession by business has been dealt with by Madras High Court in the case of Mettur Sandalwood Oil Co. v. Commissioner of Income Tax, reported as 47 ITR 781 and it was held that constitution of a partnership to continue and carry on the erstwhile joint family business as a result of partition brought about a succession by the firm of the pre-existing business and that the assessee firm was entitled to claim the allowance of bad debts. Learned AR stated that in the case in hand the debts written off for assessment year 2001-2002 related to three different periods; the first is up to 14-12-1990 i,e,, when the assets were under the control of the Telephone and Telegraph Department of the Federal Government; the second period runs from 15-12-1990 to 31-12-1995 during which period the business was owned by Pakistan Telecommunication Corporation which was exempt from income tax and the third period was from 1-1-1996 to 30-6-2000 during which period the assessee was exempt from income tax. Learned AR referred to the conditions laid down in section 23(1)(x) of the repealed Ordinance, 1979, which require (a) that the amount of bad debt must actually be written off; and (b) thatthe amount claimed as a bad debt must be determined to be irrecoverable by the Assessing Officer. He contended that the assessee has fulfilled both these conditions for allowance of bad debts; firstly, that the debts have actually been written off during relevant income year and the date of approval of the writing off by the Board of Directors at a subsequent period has no bearing on the action of writing off which undoubtedly was made in the relevant income year and secondly that all measures and steps were taken for recovery of debts especially when the caseswere referred for recovery to Magistrates but of no avail.
62. As against this, learned DR contended at the out-set that every revenue expenditure, in order to be admissible must have some relevance to the earning of income for the year under consideration and added that the allowance of bad debt, pertaining to non-taxable income cannot be allowed against the taxable income. The assessee, at present, is a public Ltd. Company whereas, it was a government department namely Telegraph and Telephone Department established in 1967 and remained as such up to 14-12-1990 thereafter through Ordinance XVII 1990 promulgated on 15-12-1990, it became Pakistan Telecommunication Corporation which status it enjoyed up to 31-12-1995 and the income of the Corporation was exempt. Then through Pakistan Telecommunication (Re-Organization) Act, 1996, the corporation came to an end and under the new law, a public limited company namely Pakistan Telecommunication Corporation Limited was incorporated w,e,f,, 1-1-1996 and was granted exemption from Income Tax for three years from its incorporation under clause (140-B) of Part-I of Second Schedule to the repealed Ordinance, 1979.
Now in this background, admittedly, the debts claimed by the assessee company to be bad, relate to a period from 1967 to 1995 when the income of the then bodies were exempt. Learned DR further contended that although the company earned big profits from 1967 to 1995 which were more than Rs, 110 billion, yet these so called bad debts were not written off and the assessee waited for termination of exemption period and made the claim only when its income became taxable. He added that it was done intentionally to reduce the taxable income and tax liability. Besides, these debts are mostly the outstanding telephone bills and strangely the taxpayer took a period of over 30 years to write them off therefore the assessee neither deserves any favorable treatment nor it is warranted by law. Learned DR argued that the intention of the legislature appears to be that relief can only be granted when revenue has been offered for taxation in the earlier years on accrual basis and subsequently a part of this revenue, which has already suffered taxation is not actually recovered despite all efforts. He emphasized that the so called bad debts relating to exempt period cannot be allowed against the income of the taxable period. He, referred to 2005 PTD (Trib.) 621 to contend that the exempt income does not constitute assessable income and that the assessee has failed to produce any material to the effect that the said bad debts had been written off after exhausting all the measures of recovery.
63. To begin with, it does not seem out of place to highlight in, brief some of the aspects relatable to bad debts. This appears to be -a loss, which in given circumstances may be claimed as deduction in order to arrive at, the net income. Generally a debt proper is that which one owes to another, any money, goods or services that one is bound to pay to another, a pecuniary due or a liquidated demand. A debt has invariably been treated to be bad when it becomes irrecoverable and the eventuality of in- recoverability rests upon the fact when the debtor is in bad financial position and is unable to repay the debt, either wholly or in part or it may be that the debtor is in sound financial position but he denies his liability to pay or it is otherwise prudent and expedient for the assessee not to seek to recover the debt. Further so far as the steps to recover the debt are concerned it is not always essential that the creditor should go to a court of law to enforce his claim and that he could 'write off the debt as irrecoverable only after he failed, in court. It may happen that on an examination of the circumstances and after taking appropriate legal advice the creditor may come to a conclusion that any resort to a court of law would only result in his throwing good money after bad or, that his chances of recovery are doubtful and slender, therefore in such circumstances, the creditor may claim the debt as a 'bad debt'. In this regard it is also mentionable, as to at what point of time a debt becomes bad. Essentially it is a question of fact and there is no general rule or universal test. The decision has to be arrived at after, considering all the facts and circumstances of each case. While the age of-a debt is no doubt a relevant factor to be taken into consideration yet the mere fact that the debt has become barred under the law of limitation does not itself make it is a bad debt. A statute-barred debt is not necessarily bad; neither is a debt which is not statute-barred necessarily good.
64. Further, it seems that Me issue of bad debt has remained under consideration by the superior courts and for ready reference a case reported as 1976 PTD 237 may be quoted. In this case it has been held that a debt become bad only when the question of all rays of hopes of recovering it are lost. It is the estimate of the facts in a given case and in-recover abilities of a debt which is essential for determination. It has also been held that one of the reasons for treating a debt to be bad may be its being barred by time but surely this cannot be the only reason. It is also mentionable on the basis of a judgment delivered by. Madras High Court reported as 47 ITR 481 that if a business, along with its assets and liabilities, is transferred, it is merely an incidence flowing from the transfer of the business, from the previous owner to the new owner/transferee and unless otherwise provided, all rights are implied in the transfer of a business and, shall have to be regarded as belonging to the new owner.
65. Besides, there is another important aspect of this case, which seems to have emerged in the light of sections 34 and 35 of the Pakistan Telecommunication Re-organization Act, 1996. For convenience sake these provisions are reproduced as under:- "34. Establishment of the Company, etc.---(1) As soon as may be, after the commencement of this Act, the Federal Government shall establish a company to be known as the Pakistan Telecommunication Company, limited by shares and cause it to be incorporated under the Company Ordinance, 1984 (XLVII of '1984), with the principal object of provision of domesticand international telecommunication and related services consistent with the provisions of this Act.
(5) .
(6)
35. .Vesting of the rights, property and liabilities of the Corporation. (1) The Federal Government may, by orders, direct that all or any property, rights and liabilities to which the Corporation was entitled or subject to immediately before such orders, and identified therein, shall, on such terms and conditions as the Federal Government, may determine, vest in--
(a) the Company:
(b) ...
(c) ...
(d) ...
(e) ...
(7) ...
(8) In this section, "property" includes assets, rights and entitlement of every description and nature wherever situated and "liabilities includes duties, obligation, loans encumbrance, claims and charges of every description and nature (actual or contingent), whether or not they are capable, under any law of Pakistan or of any other State or under any agreement or otherwise, or being vested, transferred to assigned by the Corporation.
(9) ...
38. Exemption from taxes, audit, etc.---(1) The company shall not, till the 30th June, 1999, be liable to pay any income tax, super tax or wealth tax on its income, profits or gains.
(2) ..
66. Now in the light of above provisions and given circumstances it transpires that after the promulgation of the aforesaid Act,, he Federal Government had to establish a company to be known as Pakistan Telecommunication Corporation to whom shall have to vest all rights and liabilities, once held by predecessor organizations. In other words all rights and liabilities of former organizations, of which Pakistan Telecommunication Company Limited would be a successor, stand devolved on this company. It therefore appears that the assessee company on its coming into being could to recover the dues if any which accrued to the former organizations from time to time and the entitlement of Pakistan Telecommunication Company Limited can not be disputed.
Thus, the assessee when it came into being might in the light of above discussion make a decision as to when these debts should be written off of as having become irrecoverable and prove this fact before the tax officer. Resultantly it seems necessary to vacate the findings of both the forums below in all the years under consideration and after remanding the cases to Taxation Officer direct that in view of above findings, the issue of bad debts be decided afresh understandably of course while living within the parameters laid down by the relevant law.
67. NON DEDUCTION OF TAX FROM PAYMENTS TO NON RESIDENTS:---At the outset it seems necessary to recapitulate the facts. For the assessment year 2001-2002, learned CIT(A), in his order dated 19- 9-2002 observed that as per learned A.R payments up to 18th July, 2001 were made to ., "International Telecommunications Satellite Organization"( INTELSAT) and thereafter to a U.K. Based company Intelsat U.K. Limited and thus no disallowance could be made under Pak-U.K. Tax Treaty as the, same is not applicable.. Learned CIT(A) held this assertion of A.R. To be correct and that the Pak-U.K Tax Treaty was not applicable to any dealings by International Telecommunication Satellite Organization. Learned CIT(A) further observed that this Organization (INTELSAT) came into being in 1973 pursuant to a Resolution No, 1721 (XVI) of the General Assembly of the United Nations.
Its Headquarter was in Washington and an inter-governmental organization. Pakistan being one of its members, Article XV of Agreement creating the Organization gave exemption for income tax to the income of the Organization. Further in relation to assessment year 2001-2002 besides INTELSAT payments are also shown to have been made to Asia sat, Hong Kong and in case of Hong Kong there being no double taxation treaty domestic law i,e, the repealed Ordinance, 1979 was applicable. In this regard, learned CIT(A) observed that the definition of royalty given in the repealed Ordinance, 1979 does not cover the amount paid to Asia sat, Hong Kong. In respect of assessm ent year 2002-2003, learned CIT(A) upheld in his order dated 24-12-2003 the treatment by Assessing Officer of the payments made to Messrs Intelsat U.K. Limited, to be a royalty and also taxable in Pakistan as per Double Taxation Treaty. He thus endorsed the disallowance for non- deduction of tax relating to tax year 2003, and found in his order dated 15-7-2004 that treatment for this year being similar to that of preceding year is not open to question.
68. What is thus gleaned from the above statement of facts is that in the year 2001-2002, there being no double taxation treaty with Hong Kong, tax treatment of Asiasat Hong Kong was to be governed by the repealed Ordinance, 1979. Further up to 18-7-2001, payments were also made to Messrs Intel Sat an Organization which stately came into being X in 1973 pursuant to a Resolution of the General Assembly of the United Nation and Pakistan was one of its members. However, for the assessm ent year 2002-2003 and the tax year 2003 it seems that payments were made only to Intelsat U.K Limited, a U.K based company and in view of their being Pak-UK double taxation treaty, the payments were to be regulated by the said treaty.
69. Now, first of all, let us take up the payments in respect of assessment year 2001-2002 made to International Telecommunication Satellite Organization (Intelsat). As shown above as per Article XV of agreement the income of this Organization was exempt and the relevant extract of the Article is reproduced as under:-- "(a) The headquarters, of INTELSAT shall be in Washington.
(b) Within the scope of activities authorized by this Agreement, INTELSAT and is property shall be exempt in all States Party to this Agreement from all national income and direct national property taxation and from customs duties on communications satellites and components and parts for such satellites to be launched for use in the global system. Each party undertakes to use its best endeavors to bring about, in accordance with the applicable domestic procedure, such further exemption of INTELSAT and its property from income and direct property taxation, and customs duties, as is desirable, bearing in mind the particular nature of INTELSAT."
As pointed out above, it seems that learned CIT(A), while dealing with this aspect of the case in his order dated 19-9-2002 after highlighting the said Article came to the conclusion that disallowance was not justified and thus deleted the same. Nothing has been shown to take an exception to such a findings; Pakistan being a signatory to the agreement, the income of INTELSAT appears to be exempt from tax in Pakistan. Thus in this regard findings of learned CIT(A) are up held.
70. Further in respect of assessm ent year 2001-2002 payments also having been made to Asia sat, Hong Kong, were treated as royalty by the Assessing Officer on the ground that the Satellite or its transponder could be clearly termed as "Commercial or Scientific Equipment" and therefore any payment as consideration for its use was in the nature of royalty and the assessee was liable to withhold tax under section 50(3) on payments made to these non-resident satellite company.
However, it seems that the assessee's contention in respect of Asia Sat Hong Kong remained that payments made to this company were to be treated as commercial profits and were only taxable in Pakistan if the recipient satellite company had permanent establishment in Pakistan. Neither does this company had any permanent establishments in Pakistan nor did the Department ever make a case to this effect and that the definition of royalty as contained in section 12(4) of the repealed Ordinance, 1979 did not cover such kind of payments. This contention in the said year was upheld by learned CIT(A).
71. Now it is to be seen as to how the repealed Ordinance, 1979 defined the word royalty. For ready reference the relevant provision is section 12(4) which is reproduced as under:- "Any income by way of royalty payable by;-
(a) a person who is a resident, except where the royalty is payable in respect of any right property or information used or services utilized for the purposes of a business or profession carried on by such person outside Pakistan or for the purposes of making or earning any income from any source outside Pakistan; or
(b) a person who is non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in Pakistan or for the purposes of making or earning any income from any sources in Pakistan.
Shall be deemed to accrue or arise in Pakistan.
Explanation:--For the purposes of this subsection and subsection (4) of section 31, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for-
(i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention model design, secret process or formula, or trade mark of similar property:
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret process of formula, or trade mark or similar property:
(iii) the use of any patent, invention, design, secret process or formula, or trade mark or similar property:
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including firms or video tape for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition or cinematograph films; or
(vi) the rendering of any services in connection with the activities referred to in clauses (i) to (v).
A bare perusal of the above shows that primarily, royalty as provided, deals with intellectual property and cannot be stretched to the use of any machinery or equipment. The legislature in the use of the words is very specific and by no intendment, the use of satellite can be brought within the meaning of royalty. The acceptance of the contention of Assessing Officer would amount to reading something in the statute which is surely not there in the letter of the law. This view also gets strength from the fact that the new Ordinance i,e, Income Tax Ordinance, 2001, in section 2(54) while defining the term royalty has covered and treated this kind of payment, that is consideration for use of satellite, as royalty. It may be inferred that had the repealed Ordinance, 1979, contemplated this kind of payment as royalty, a different definition would not have been provided in the new ordinance.
72. It appears that Karachi Bench of this Tribunal has treated the payments of this kind to be commercial profits while disagreeing with an earlier order of this Tribunal where the payments were held to be fee for technical services. It seems advisable to highlight the facts and the findings of the Karachi Bench reported as 2002 PTD (Trib.) 2679 which are to the effect that assessee in that case had set up a satellite in the space over the Indian Ocean which had various transponders to facilitate the transmission of signals and allocated some frequency to its customers in Pakistan, which were used to transmit and retrieve the signals and the assessee charged service fee for the use of such facility. In the assessm ent proceedings, the assessee contended that receipts were to be treated as commercial profits as this was his business being the owner of the satellite and that it does not provide any technical services and that the satellite was not situated over Pakistan.
However, the Assessing Officer treated the receipts as fee for technical services. The matter went upto the Tribunal and the Tribunal while seized of the matter held that the nature of transaction shows that the assessee had established satellite in space through which signals, were transmitted and retrieved and after a detailed discussion came to the conclusion that payments on account of use of satellite facility, in absence of any double taxation treaty amounted to commercial profit. As regards the earlier case, reported as I.T.As. Nos.194-199/IB-1997-98 decided on 18-7-2000 it was observed that in that case the assessee was using a satellite set up by Asia Satellite Telecommunication, Hong Kong and action was taken against the assessee for failure to deduct tax. The assessee's contention was that the receipts did not fall within the ambit of fee for technical services, however after considering the arguments and relevant provisions of the law, including the provisions of section 30 of the 1979 Ordinance, the learned Bench of the Tribunal sitting at Islamabad held that the receipts of the assessee fell within the definition of fee for technical services. The Karachi Bench of the Tribunal while disagreeing observed that although in that case the agreement was for the transponder's lease yet the learned Bench considered the payments received by Asia Sat to be in the nature of fee for technical services whereas a perusal of the agreement did not show as to how such income can be treated as fee for technical services. All along, the agreement has used the terms lease and rental and Asia Sat has been described by the term lessor and PTV was described by the term customer.
73. From the above, it thus appears that the nature of payments on account of satellite facilities remained under consideration before this Tribunal and in the given circumstances the Karachi Bench's findings holding these payments, in absence of Double Taxation Treaty, to be commercial profits seems correct on the simple ground that these are neither fee for technical services nor covered by the term royalty. One therefore tends to agree with the findings of Karachi Bench. Thus so far as the assessm ent year 2001-2002 is concerned, there being admittedly no Double Taxation Treaty with Hong Kong and the definitions of royalty and fee for technical service contained in the repealed Ordinance, 1979 having not covered such kind of payments, the receipts of, this year to Asia sat Hong Kong, were commercial profits and since there was no permanent establishment in Pakistan were not liable to deduction of Tax.
74. So far as assessm ent year 2002-2003 and tax year 2003 are concerned, the payments seem to have been made only to Intelsat U.K. Here learned AR's contention is firstly that transponder being not a scientific equipment and beyond the control of assessee, the payments do not fall within the contemplation of royalty. As has been mentioned above, payments in respect of these two years, in view there being Pak U.K Double Taxation, Treaty, would have to be regulated by the provisions of this treaty. The Assessing Officer in the assessment order for the year 2002-2003 has reported Article 12 of the Treaty. Incidentally, none of the parties have reproduced the Double Taxation Treaty before this Tribunal, therefore Article 12 is quoted from the assessment order:- "The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copy right of literary, artistic or scientific work including cinematography films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for use of, or the right to use, industrial, commercial, or scientific equipment, or for information (Know-how) concerning industrial, commercial or scientific experience".
Before proceeding further it is to be seen whether or not the transponder owned by the Intelsat U.K.
And having been used by the assessee is a scientific equipment.
75. In this regard it may be stated that the transponder has been variously explained which is to the effect that an automatic device that receives, amplifies and retransmits a signal on a different frequency and a receiver-transmitter that will generate a reply signal upon proper electronic interrogation. A communications satellites channels are called transponders because each is a separate transceiver or repeater. With digital video data compression and multiplexing, several video and audio channels may travel through a singletransponder on a single wide-forced carrier.
Non-multiplexed radio stations can also travel in single channel per carrier (SCPC) mode, with multiple carriers (analog or digital) per transponder. This allows each station to transmit directly to the satellite rather than paying for a whole transponder or using land lines to send it to an earth station for multiplexing with their station. Learned Accountant Member has also extensively discussed the nature of this instrument and came to the conclusion that transponder is a scientific equipment with whom one has to agree. As regards the contention of learned AR that the assessee did not have any control over the transponder which, according to him was necessary in order to treat the payments as royalty, it may be said that undoubtedly the assessee remained in use of transmitting and retrieving the signals by dint of this transponder which would not have been possible but for this facility which was let out to him.
76. Thus in view of the above matter, it is concluded that payments in respect of assessment Year 2002-2003 and Tax Year 2003, shall be royalty as per Article 12 of Pak-UK Double Taxation Treaty.
Resultantly, the treatment in respect of payments relating to assessment year 2002-2003 and tax year 2003 having been endorsed by learned CIT is upheld.
77. So far as the findings of learned Accountant Member on the questions of excess perquisites and addition under section 24(c) of the repeal Ordinance, 1979 are concerned, there does not seem anything to be added and are concurred.
78. Consequently, in view of the above findings, the instant appeals are accordingly disposed of.
(Sd.)
MUHAMMAD JAHANDAR JUDICIAL MEMBER
79. I have gone through the findings of learned Judicial Member on the issues in dispute and concur with those findings. The appeals are thus accordingly disposed of.
(Sd.)
(KHALID WAHEED AHMAD CHAIRMAN)