The appeal has been filed against the order dated 17-4-2010 passed by the respondent No. 1 under section 122(5-A) of the Income Tax Ordinance, 2001 for the tax years 2004, 2005, 2006, 2007, 2008 and 2009 which was upheld by the respondent No. 3 vide order dated 2-12-2010. Hence the instant appeal on the following grounds:-- Grounds of Appeal of the Appellant:--
(1) That the Commissioner, Inland Revenue (Appeal is not justified to ignore the decision of Appellate Tribunal Inland Revenue at 2010 PTD (Trib.) 878. The Additional Commissioner on the findings of audit for the tax year 2007 has invoked section 122(5A) which may be declared unlawful.
(2) That the Commissioner, Inland Revenue (Appeals) was not justified to reject the appellant's arguments regarding delegation of powers under section 201(IA). The order of Additional Commissioner is without jurisdiction, which may be declared unlawful and void ab initio.
(3) The Commissioner (Appeal) was not justified in accepting the notice as well as assessment order for multiple years i.e. Tax years 2000 and 2009 when the higher Appellate forums in cases reported at 2007 PTD 1651, LHC, 2006 PTD (Trib.) 661, 2005 PTD (Trib.) 234, have declared such treatment unlawful. The notices for multiples years as well as assessment order for the tax year 2008-2009 may be declared unlawful and void ab initio.
(4) The Commissioner, Inland Revenue (Appeal) is not justified in accepting the treatment of Additional Commissioner of rejecting the revision of return. The revised return may be accepted.
(5) That the Commissioner Inland Revenue (Appeal), ignoring the judgment of the appellant and without going into facts of the case is not justified in upholding the treatment meted out by the Additional Commissioner to hold the appellant outside the purview of Clause 131 of Part-I of the 2nd Schedule of Income Tax Ordinance, 2001. The appellant fully qualifies for exemption from tax under Clause 131 of Part-I of 2nd Schedule of the Income Tax Ordinance, 2001 which may be allowed.
(6) The Commissioner, Inland Revenue, (Appeal) is not justified to accept the wrong findings of the Additional Commissioner. The expenses pertaining to FTR was properly apportioned according to the PRAL software. The Additional Commissioner wrongly and unjustly added expenses relating to FTR instead of deducting, which may be allowed.
(7) The Commissioner, Inland Revenue (Appeal) was not justified in upholding the treatment of Additional Commissioner to and back proportional . Income as well as proportional expenses relating to FTR. The proportional relief for FTR may be allowed.
(8) That the appellant may be allowed to and, delete, amend, or alter any ground of appeal on or before the hearing of appeal.
2. Brief facts of the case are that the taxpayer company filed its return for the tax years 2008 and 2009 under section 114 of the Income Tax Ordinance, 2001 declaring income of Rs.10,104,601 and Rs.3,672,218 respectively. Later on the taxpayer company revised its return and declared income as Rs.8,384,055 and Rs.3,163,598 for the tax years 2008 and 2009 respectively which was deemed as amended assessm ent under section 122(3) of the Income Tax. Ordinance, 2001. Consequent upon examination of the assessm ent record of the appellant by the Additional Commissioner, Inland, (Revenue), (Audit-I), R.T.O., Rawalpindi, it was found that unlawful adjustments and inadmissible expenses were claimed and, therefore, the amended assessment completed under section 122(3) was further amended under section 122(5A) of the Ordinance ibid vide order dated 17-4-2010 and taxable income for the tax years 2008 and 2009 was thus assessed as Rs.10,847,142 and Rs.5,393,154 respectively. Aggrieved by the aforesaid order the appellant filed appeal before the Commissioner, Inland, Revenue, (Appeal-I) which was dismissed vide order dated 2-12-2010. Hence the instant appeal on the grounds as mentioned in Para (1) above.
3. The case was fixed for hearing on 13-1-2011 and finally on 30-4-2011. Both the parties were given ample opportunity to defend their case.
4. Arguments of the Appellant:-- (4.1) The appellant reiterated his grounds of appeal as mentioned in Para (1) above mainly stressing that the case of the appellant falls within the purview of Clause 131 of Para-I of the 2nd Schedule of Income Tax Ordinance, 2001. The appellant fully qualifies for exemption from tax under Clause 131 of Part-1 of 2nd Schedule of the Income Tax Ordinance, 2001 which may be allowed.
(4.2) The appellant argued that the software of PRAL was unable to segregate the appellant's income from non-taxable income due to certain problems. However, the taxable income and exempt income was correctly revised by them manually.
(4.3) The appellant further argued that he provides engineering and technical services to Messrs BMC of Turkey under an agreement. The entire receipts are in US$ and are received in bank account in Pakistan. Under clause 131 of Part-I of Second Schedule of the Income Tax Ordinance, 2001 these receipts are exempt from tax. Besides this there are receipts as indenting commission which falls under FTR.
(4.4) The minimum tax on its turn over in order to meet the provisions of section 113 and even the tax on commission was paid on higher side during 2008. In tax year 2009 there was no provision for minimum tax, therefore, the copy of the audited accounts can be perused.
(4.5) The appellant concluded his arguments with the reservation that there appears nothing prejudicial to the interest of the revenue, thus, section 122(5A) of the Income Tax Ordinance, 2001 is not attracted in this case. Therefore, the order passed by the respondent No. 1 and upheld by the respondent No. 3 may be set aside. The learned AR presented case-law in Eli Lilly Pakistan's case (2009 PTD 1392) decided by the Supreme Court of Pakistan and ATIT (2010 PTD 355).,
5. Arguments of the D.R./L.A.: (5.1) The D.R./L.A. Supported the order passed by the respondent No. 1 and upheld by the respondent No. 3. He stated that the appellant did not revise his income tax returns and audited accounts strictly in accordance with the requirements envisaged in section 114(6) of the Ordinance which provides as under:-- Section 114(6).---Subject to subsection (6-A) any person who, having furnished a return, discovers any omission or wrong statement therein, may file revised return subject to the following conditions namely:
(a) It is accompanied by the revised accounts or revised audited accounts, as the case may be, and
(b) the reasons for revision of return, in writing, duly signed, by the taxpayers are filed with the return.
(5.2) The D.R./L.A. Stated that the appellant while revising his return did not comply with any of the above-said requirements of section 114(6) besides declared its principle business activity as "sale of motor vehicles" whereas in the previous and future years the business activity has been declared entirely different i.e. "Architectural and Engineering activities and related". Moreover, the appellant did not pay any tax on the revised taxable income.
(5.3) The D.R./L.A. In rebuttal of appellant stance of defectiveness of the PRAL's software stated that no other taxpayers filed any complaint on this account regarding working and entry to taxable income and tax. The treatment extended by the respondent No. 1 is well within the framework of the law and he has rightly rejected this stance of the appellant.
(5.4) The D.R./L.A. Stated that before adverting to the issue of exemption under clause 131 it is imperative to see what are the requirements to qualify such exemption which are summarize below:-- Exemption under clause 131.---Is available in respect of income of a company derived:--
(a) By way of royalty, commission or fees from a foreign enterprises.
(b) In consideration for the use outside Pakistan of any Patent, invention, model design, secret process or formula or similar property right, or information concerning industrial commercial or scientific knowledge, experience or skill made available or provided;
(c) In consideration of technical services rendered outside Pakistan;
(d) Received in Pakistan in accordance with the law for the time being in force for regulating payment and dealings in foreign exchange.
The D.R./L.A. Stated that bare perusal of the above provision reveals that "services rendered or provided out side Pakistan are exempt from tax subject to receipt of payments through banking channels." No other inference can be drawn. Whereas the technical service provided by the appellant to the foreign client includes jobs undertaken in Pakistan. Hence claiming different expenses which have no nexus with the principle business activity has proved that receipts declared have not been representing and restricting itself to the consideration of services rendered and provided outside Pakistan. Similarly the provision of services/expenses on account of Air fuller repairs, Custom clearance and trials of truck/vehicles, repair and maintenance of vehicle sold to Pak Army/Air Force etc. And receipts other than from their Principal i.e. BMC (a foreign entity) are not covered under exemption clause 131 of the Ordinance. This Tribunal is of the confirmed opinion that the learned respondent No. 2 has rightly made the characterization of receipts in an articulate manner in ascertaining the correct position in so far as mentioned in clause 131.
(5.5) The D.R./L.A. Stated that it is an established principle of interpretation that a claimant of exemption from tax should prove his claim for exemption in clear and unambiguous terms which must be supported with letter of law. A fiscal law with respect to grant of exemption should be construed strictly and no question of equitable construction arises. He relied on the following judgments of higher Courts:--
(i) 1966 PTD 664 and PLD,1996 SC 828 (Provisions granting exemption or privileges have to be construed strictly against the persons claiming the exemption or the privilege).
(ii) 2000 PTD 2958 ("It is an established proposition of fiscal law that the claimant of an exemption has to bring it home without any ambiguity") (i.e) (2000) 81 Tax (H.C. Lah.), 2000 PTD 497. ("where the fiscal legislation embodies exemption/deductions provisions, the same are construed, strictly and against assessee.")
(5.6) The D.R./L.A. Further contended that under Article 177 of the Qanun-e-Shahadat the onus lies on the person who asserts. In the instant case appellant is the right person who possesses the specific information/knowledge about the things required to be proved. He relied on the judgment of the honourable Supreme Court of Pakistan reported at 2002 (S.C. Pak.) (sic) wherein it was held that:-- "We are afraid that the contention raised by the learned counsel has no force because as it has been observed hereinabove that it is the petitioner firm itself who made the supplies, therefore, no one else better than it would have knowledge that from whom the deduction is to be made. The department had successfully discharged its obligation by making reference of the details of the supplies, which were made under different heads as per the contents of the show-cause notice."
6. During the hearing, on Tribunal's pointation that the case-law presented by the AR was irrelevant in the context of the case at hand, the A.R. Proposed that he only wanted to press the ground relating to his case of exemption under clause 131 of Part-I of 2nd Schedule of the Income Tax Ordinance, 2001. Thus, this Tribunal would like to address the entire issues in appeal by framing a single question as under:-- Whether the appellant's entire income from contract with BMC is eligible for "exemption" in terms of clause 131 of Part-I of 2nd Schedule of the Income Tax Ordinance, 2001. (6.1) In order to find answer to the question framed by us, we laboured the entire documentary framework of this appeal comprising the tax returns, P&L statement, the Income Tax Ordinance and the contract between the appellant and its client. At the outset, the appellant admitted that the receipts declared by him include the consideration of other services/works done in Pakistan. However, perusal of the income tax returns filed by the appellant, reveals that the returns are silent with regard to the characterization of receipts from domestic and foreign sources. The statement of expenses also omits the identification of all expenses in account of activities performed domestic or outside Pakistan. Now we turn to analysis of the one page agreement executed between the taxpayer and the foreign enterprise which is silent with regard to fee rates/schedule for technical services and does not cover the treatment to be extended to any service/work done to be performed in Pakistan. Admittedly the consideration for services rendered by the appellant in Pakistan such as maintenance and repair during the warranty period of the vehicle sold by Messrs B.M.C, to Pak Military or Air Force includes expenses incurred by the appellant on trial of truck, air fuller, repair, customs duties on imports of machinery or spare parts. The blanket deduction of these expenses from the gross receipts of the appellant has created unnecessary complexity. The Learned A.R. Did not explain why the appellant considered it necessary to report its income and expenses the way it reported. All, he explained is that the gross receipts were according to the appellant's contract with its client. We find that the contract in question is a "composite contract" executed between appellant and BMC for carrying out "multiple jobs" but it does-not specify which part of the performance of the contract is to be carried out in Pakistan or outside Pakistan. Originally, the appellant, in his income tax return declared its net profit amounting to Rs.10,104,601 and Rs.36,72,218 after deducting the expenses out of total gross receipts of Rs.15,284,181 and Rs.9,951,749 during the year 2008 and 2009, respectively. The appellant has booked the entire receipts from Messrs BMC on account of its execution of multiple jobs including the jobs performed in Pakistan, claiming exemption in respect of the whole gross receipts and has claimed deduction of expenses at the same time. The appellant's expenses in their Profit and Loss Account are inconsistent with the legislative intent behind the exemption clause in question.
Since part of the appellant's receipts are connected with activities performed in Pakistan, the appellant's claim that his entire receipt of Rs.10,847,142 and Rs.5,393,164 for the years C 2008 and 2009 qualify under clause 131 of Part-I of 2nd Schedule of Income Tax Ordinance, 2001 cannot be accepted. The honorable Superior Courts have laid down criteria for Exemption some reported case-law is summarized as follows:-- Provisions granting exemptions or privileges have to be construed strictly (1993 PTD 306) against the person claiming the exemption or the privilege. It is for him to show that he is entitled to the exemption. If the rules do not refer to an item of capital there can be no exemption with regard to it.
(PLD 1966 SC 828). Where an exemption from taxation is claimed the words of the exempting clause must be strictly construed in favour of the State. It is based on the theory that the obligation to pay tax is co-extensive with the protection received by the subject and in obtaining an exemption from taxation the particular subject is seeing relief from the obligation at the cost of other assesses but when the words of the notification in its plain reading entitles to the exemption specified therein, the Court cannot go beyond the wordings of the clause to withhold that relief on the theory of equal obligation for equal protection, (PLD 1966 Dacca 523) grants of tax exemptions have to be narrowly construed against tax payer.-(1998 PTD 3835) Law as prevailing in the assessm ent year would apply. (1998 PTD (Trib) 62). If the language of the provision is doubtful, same should be resolved in favour of assesses on the touchstone of the intention of Legislature.
(2000 PTD 497). All exemptions from taxation increase the burden on the other members of the community, they should be deprecated except to the extent permissible by the express language of the Statute, provisions granting exemptions or privileges have to be construed strictly against the person claiming exemption or privilege. The onus in this connection lies on the assessee claiming exemption to establish his plea. The exemption must be strictly construed and confined to the exemption itself and not extended beyond it (1973 PTD 361). Full effect is to be given to the provision creating exemption. Court cannot supply deficiency. (1998 PTD 3669). The interpretation should aim at toe preserve objective objection. (1998 PTD 930).
Exemption provision in a taxing statute has to be construed strictly, (1993 PTD 306) and allowed in such case only where an assesses is able to establish that same is covered by exemption provision on, all force. (2003 PTD 1805) In matters of exemption and relief the law is to be construed liberally and the relief is not to be denied for technical irritants. (2003 PTD (Trib) 1081). Recital of wrong source of power in opening part of notification would not affect validity of amendments made thereby. Expression or words in a notification must be read as such and not in any other way, unless the context requires that the later course should be followed. (2002 SCMR 312). Assessee has to prove himself to be within the four. Corners of the exemption provision. (2002 PTD (Trib) 783).
Particular subject which does not specifically stands exempted, cannot be brought into the category of exemption by stretching the rules which does not permit such interpretation. (1998 SCMR 1950) Doubt or ambiguity, if any, is always to be resolved in favour of the subject and not in favour of the State. (1990 PTD (Trib.) 121) Where two interpretations are possible, one favourable to the assessee should be adopted. (1988 PTD (Trib.) 315).
(6.2) Having viewed the whole issue in the context of the Exemption clause 131 as reproduced in pare 5.4 and the case-law on the subject, we conclude that the income of the appellant earned from the sale of the design of the vehicle represents royalty of 'its' technical and engineering services provided outside Pakistan and therefore, does meet the conditions of exemption provided in the Exemption clause 131. Therefore, this part of the income of the appellant is entitled to tax exemption provided, it is correctly reported by the appellant and standing by the test of verification by the Taxation Officer. The appellant's receipts representing the consideration of certain technical services rendered in Pakistan are held to be ineligible for the benefit of exemption under exemption clause 131 of Part-I of 2nd Schedule of Income Tax Ordinance, 2001. The income falling in this category needs to be clearly quantified and duly taxed. The appellant's claim of expenses in technical services rendered in Pakistan may also be considered on the touchstone of reason and admissibility under the Income Tax Act. However, the onus to prove the rationale and admissibility, of such expenses shall be on the taxpayer.
7. We understand that by misreporting 'its' income and expenses, appellant failed to enable the Taxation Officer to reach an objective conclusion of the case. Based on the insight gained by hearing of the case, we decide that this appeal merits partial success to the extent of acceptance of the appellant's claim of exemption in respect of its income of royalty or commission arising from sale of intellectual property in the design of the vehicle sold to a foreign entity. The Taxation Officer may revisit the appellant's tax demand in accordance with the principle laid down by the Tribunal and recover the due amount of tax appellant's income arising from services rendered in Pakistan.
8. This order consists of 9 pages each bears my seal and signature. ..