NAZIR AHMAD (JUDICIAL MEMBER).---The above titled appeals pertaining to tax years 2003, 2005, 2006, 2007 and 2008 have been filed at the instance of the department. The representatives on behalf of rival parties are present. Therefore, the same are being disposed of as under:-- Tax years 2003, 2005 and 2006 2. For the charge years the appellate orders dated 29-3-2008, 25- 8-2008 and 25-8-2008 have been assailed by the department whereby deletion of addition made on account of 'royalty' has been agitated for the all the years under consideration.
3. Brief facts emanating from record are that the taxpayer/respondent, a private limited company, deriving income from manufacturing of car air-conditioners, filed returns declaring income at Rs.
26,448,322, Rs. 121,195,979 and Rs. 151,920,638 for the tax years 2003, 2005 and 2006 respectively, which were accepted as per section 120 of the Income Tax Ordinance, 2001 (hereinafter called 'the Ordinance'). Subsequently, on examination of assessment record, it was observed by Additional Commissioner that assessm ents completed under section 120 of the Ordinance were erroneous in so far as prejudicial to the interest of Revenue for the reason that the taxpayer company had failed to deduct tax on the payments made to the non-resident company i.e., Messrs Sanden Corporation Japan amounting to Rs.12,805,479, Rs.14,245,436 and Rs.15,417,176 for the tax years 2003, 2005 and 2006 respectively. Therefore, the taxpayer company was confronted by way of issuance of notice under section 122(9) of the Ordinance and in response, the explanation, tendered by the taxpayer company vide letter dated 10-12-2007 was treated unsatisfactory, which resulted passing of amended assessm ent order by the taxation officer under section 122(5A) of the Ordinance by way of making addition on account of royalty for the years under considerations. Feeling aggrieved, the taxpayer preferred appeal before learned CIT/WT(Appeals) RTO, Lahore, who cancelled the amended assessm ent orders under section 122(5A) of the Ordinance. . Against the treatment meted out by the first appellate authority, the department has come up in appeal before this Tribunal, whereby the deletion of addition made on account of royalty has been agitated.
4. The learned DR has termed the relief allowed by the first appellate authority to be arbitrary and contrary to facts of the case. He has elaborated his view point by maintaining that in the light of provisions contained in section 21(c) of the Ordinance, the taxpayer company was under legal obligation to deduct tax on the payments made on account of royalty to non-resident company.
Since, the taxpayer company has failed to comply with the mandatory provisions of the section 21(c) of the Ordinance, therefore, additions made on account of royalty by the taxation officer for the years under consideration were quite justified against which, deletion ordered by the learned CIT(A) is not sustainable under the law. He, therefore, prays for vacation of the impugned order on the issue under consideration and restoration of the treatment meted out by the taxation officer.
5. On the other hand, Mr. M. Waseem Chaudhry, learned counsel appearing on behalf of the taxpayer company has fully supported the impugned orders by maintaining that according to section 107(2) of the Ordinance which relates to implementation of agreements for the avoidance of double taxation it overrides any tax law presently enforceable in the country. The taxpayer company enjoys exemption from deduction of tax on the remittances on account of royalty in the light of provisions contained in Articles VII and VIII of Avpidance of Double Taxation Treaty between Pakistan and Japan as well as section 6(2)(c) of the Ordinance, therefore, provisions of section 152 of the Ordinance regarding tax deduction on the payments made to Messrs Sanden Corporation, Japan, a non-resident company, on account of royalty are not applicable. He has further contended that vide letter dated 17-9-2008, the learned Commissioner of Income Tax, Enforcement and Collection Division, L.T.U, Lahore has himself allowed exemption from deduction of tax on the payments on account of Royalty. In order to lend credence to his submissions, he has furnished before us a copy of the said letter, which is placed on file. It is also the contention of learned counsel that the issue under consideration already stands resolved in favour of the taxpayer company by the honourable Karachi High Court vide reported judgment cited as 2010 PTD 1159.
6. We have heard the arguments advanced by rival parties and also carefully gone through the relevant record available on filed as well as case-law referred before us on behalf of the taxpayer.
The sole contention of learned DR is that according to the provisions contained in section 21(c) of the Ordinance, the taxpayer was under legal obligation to deduct tax on the payments made on account of Royalty to nonresident company whereas on the other hand, the learned Counsel is of the view that the provisions of section 21(c) of the Ordinance are not applicable in the case of the taxpayer company due to exemption from tax in Pakistan in the light of provisions contained in Articles VII and VIII of the Avoidance of Double Taxation Treaty, which read as under:-- Article VII (1) Royalties paid as consideration for using, or for the right to use, copyrights, patents, designs, secret processes and formate, trade-marks or other like property and royalties or rentals in respect of motion picture films and films for use in connection with television in one of the contracting States shall be treated as income from sources within that contracting State and shall be taxable by that contracting State.
(2) Notwithstanding the provisions of paragraph (1) of the present Article, royalties or rentals mentioned therein derived from sources within one of the contracting States by a resident or a corporation of the other contracting State, not having a permanent establishment in the former contracting State shall be exempt from the tax of the former contracting State.
(3) Where any royalty or rental exceeds a fair and reasonable consideration in respect of the right for which it is paid, the exemption provided by the present Article shall apply only to so much of the royalty or rental as represents such fair and reasonable consideration.
Article VII (1) The Government of one of the contracting States shall be exempt from the tax of the other contracting State with respect to interest on loans or dividends received by that Government from sources within that other contracting State.
(2) The State Bank of Pakistan and the Export and Import Bank of Japan shall be exempt from the tax of the other contracting State with respect to interest on loans or dividends from sources within Japan and Pakistan respectively.
(3) Any financial institution owned by one of the contracting State shall be exempt from the tax of the other contracting State with respect to interest on loans or dividends received by that institution from sources within that other contracting State.
7. From the perusal of above, it can easily be gathered that exemption from tax shall be allowable on Royalties paid to the nonresident company falling under the ambit of Avoidance of Double Taxation Treaty. In the case in hand, the agreement of Avoidance of Double Taxation Treaty was executed between the Governments of Japan and Pakistan by virtue of which, the taxpayer company was allowed exemption on the payments made on account of Royalty. Furthermore, in support of his stance, a copy of letter dated 17-9-2008 addressed to the taxpayer company has also been furnished before us which reads as under:-- "Sanpak Engineering Industries (Pvt.) Limited intimated through AR, Waheed Law Associates to remit Japanies Yen 7,565,292 to Sanden Corporation 31-7, Taito 1-Chome, Tokyo, Japan, without deduction of tax under section 152 of the Income Tax Ordinance, 2001, on account of royalty payments. It has been stated that the said royalty payments are not liable to Pakistan taxation in accordance with the provisions of Article VII(2) of the Avoidance of Double Taxation Treaty between the Governments of Pakistan and Japan Sanden Corporation, Japan does not have any permanent establishment in Pakistan.
8. Without any shadow of doubt, the bare reading of the above contents of the letter reflects that Royalty payments made by the taxpayer company have been declared exempt from tax by the Commissioner of Income Tax. The stance taken by learned counsel is further strengthened by the provisions of section 6(3)(c), which read as under:- "(c) any royalty or fee for technical services that is exempt from tax under this Ordinance."
9. The provisions reproduced above need not further elaboration being self-explanatory giving clear impression that Royalty paid to nonresident company is not liable to be taxed. The issue under consideration has arisen between taxpayer and the department for the first time but the same already stands decided at the level of High Court as per reported judgment cited as 2010 PTD 1159, wherein it has been held as under:- "The upshot of the above discussion is that the claim of the petitioner is two fold their first submission is that as the provisions of the treaty have an overriding effect over the tax laws hence the amounts of the re-insurance premium could not be taxed either as Pakistan source income or could be legally deemed to be the payments accruing/arising in Pakistan. The next claim of the petitioner is that since the payment which they are making to the non-resident foreign enterprises is not liable to tax in Pakistan, hence they are not legally bound to deduct any tax at source in respect of the payments being made to the foreign enterprises."
10. The above mentioned ratio settled by the honourable Karachi High Court has further supported the stance taken by the learned counsel that payments made on account of Royalty by the taxpayer company to non-resident company are exempt from Pakistani taxation.
11. In view of the above, we uphold the impugned orders of the learned CIR(Appeals) in the appeals pertaining to tax years 2003 to 2006 in respect of deleting the addition of expense of royalty covered under the agreement for the avoidance of double taxation. The departmental appeals are dismissed being devoid of any merit. We order accordingly.
TAX YEARS 2006 12. For the year under consideration the department has come up in appeal before this Tribunal assailing the appellate order dated 23-6-2008 recorded by CIT/WT(Appeals), RTO, Lahore, on the following grounds taken as per memo. Of appeal:-
(i) That the learned CIT(Appeals) was not justified in holding that default under section 161 of the Income Tax Ordinance, 2001 is beyond the jurisdiction without any cogent reason.
(ii) That the learned CIT(Appeals) was not justified in ordering to delete the charging of tax at Rs.518,506 under sections 161/205 of the Income Tax Ordinance, 2001, without any cogent reason.
13. At the very outset the learned counsel has drawn our attention to last paragraph of page 4 of the impugned order, which reads as under:- "The AR has submitted his letter dated 2-8-2008 intimating that grievance of the appellant with regard to the default under section 161 of the Ordinance in respect of the payment made to Messrs Trend Setters (Private) Limited, Lahore have been redressed by the Taxation Officer/ACIT (Enforcement-04), Large Taxpayer Unit, Lahore through rectification order under section 221 of the Ordinance, dated 28-7-2008. A copy of the said order has been furnished along with the application. The A.R. Has not pressed the relevant grounds of Appeals at Nos. 3, 4 and 5, the same are, therefore, not adjudicated. "
14. In view of above, he has vehemently argued that appeal of the taxpayer was not adjudicated by the learned CIT(Appeals) simply for the reason that grievance of the taxpayer stood redressed by the department itself by way of passing rectification order dated 28-7-2007. He has stressed that since no relief: was granted by the first appellate authority to the taxpayer as the issue under appeal already stood resolved, therefore, cause of action does not rise for filing of instant departmental appeal. The learned DR has not been able to dislodge the line of arguments adopted by learned counsel. The assertions made by learned counsel are forceful being not rebutted on behalf of department. We are also of the considered opinion that since the grievance of the taxpayer already stands resolved by the department itself, therefore, such like situation of the case in hand does not allow the department to come in appeal before this Tribunal, which seems to be filed without proper application of mind. Thereby dismissed being infructuous.
TAX YEARS 2007 and 2008 15. For the years under consideration, appellate orders dated 29-3-2008 and 29-5-2009 respectively both recorded by CIT(Appeals), Lahore have been assailed by the department by way of filing the above titled appeals, whereby issuance of a refund for both the years has been agitated.
16. During the course of hearing, learned counsel has apprised the court that on the issue under consideration the appeal preferred by the department is not maintainable as the refund has already been allowed by the department itself after proper scrutiny of the documentary evidence.
The contention of the learned counsel was confronted to the learned DR for ascertaining the veracity of the statement made at Bar, who also nodded his head in affirmation. In view of the foregoing reason, we are left with no other alternative but to dismiss the departmental appeal for the years under consideration being infructuous. .
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