The above titled further appeal pertaining to the tax year 2007 at the instance of the taxpayer has been directed against the appellate order dated 30-9-2009 recorded by CIT(A-I) Islamabad, whereby as far as eight grounds have been taken as per memo. Of appeal but only the issue regarding addition of Rs.231,000,556 under section 21(c) of the Income Tax Ordinance, 2001 (hereinafter called the Ordinance) made on account of non-deduction of tax under section 152 of the Ordinance has been placed before the Larger Bench for adjudication as per ground No.8, which, reads as under:-- "Notwithstanding the ground at `(2)' the learned CITA was not justified in upholding addition of Rs.231,000,556 under section 21(c) of the Ordinance on account of non-deduction of tax under section 152 of the Ordinance from payments to nonresident satellite companies disregarding the fact that no tax was required to be deducted from the said amount under section 152 of the Ordinance."
2. Brief facts emanating from record are that the taxpayer, a public limited company, deriving income from providing basic telephone services to its subscribers filed return for the year under consideration disclosing net income of Rs.14,135,249,683, which was deemed to be assessed in terms of section 120 of the Ordinance. Subsequently, it was realized by the taxation officer that the assessm ent already completed under section 120 of the Ordinance was erroneous in so far as prejudicial to the interest of revenue. Therefore, earlier deemed assessment was amended by resorting to provision of section 122(5A) of the Ordinance and revised income of the taxpayer company was determined at Rs.23,449,754,075. Later on the case of the taxpayer company was further selected for audit under section 177(4)(b) and (d) of the Ordinance by the Commissioner of Income Tax (Audit) LTU Islamabad and record was sent to the concerned taxation officer for further proceedings in this regard, who vide order dated 3-7-2009 under section 122(1) of the Ordinance assessed income at Rs.30,151,549,795. Feeling aggrieved, the taxpayer preferred appeal before the learned CIT(A-I) Islamabad, who also upheld the action of taxation officer in toto.
3. Coming to the issue regarding addition of Rs.231,000,556 made under section 21(c) of the Ordinance made on account of non-deduction of tax under section 152 of the Ordinance on account of satellite charges, the perusal of record reveals that the taxpayer company claimed expenses at Rs.2,386,648,000 incurred on account of foreign network operators and satellite charges. The taxpayer was required to furnish break up of these expenses, copies of ledger account and proof of tax deduction under section 152 of the Ordinance by way of issuance of IDR dated 18-4-2008. In response to that, it was intimated by the taxpayer, that out of total expenses an amount of Rs.231,000,556 was paid as satellite charges. Only invoice were details of these charges were provided whereas proof of deduction of withholding tax under section 152 was not furnished. The taxpayer was again requested to provide proof of withholding tax deduction. In response, vide letter dated 7-5-2009 it was intimated that no withholding tax was deductible on the payments made on account of telecommunication services, which constitute business profit' of the recipient company. The stance taken by the taxpayer company was rejected by the taxation officer. The amount of Rs.231,000,556 paid on account of satellite charges by the taxpayer was treated to be paid on account of use of transponders of foreign satellite company falling within the definition of royalty in the light of provisions contained in section 2(54) of the Ordinance as well as Article 12(3) of the Avoidance of Double Taxation Treaty (hereinafter called the ADTT) between Pakistan and UK. Therefore, the taxation officer added entire amount of Rs.231,000,556 under section 21(c) of the Ordinance. Feeling aggrieved, the taxpayer preferred appeal before CIT(Appeals-I), Islamabad, who also upheld the action of taxation officer.
4. The learned counsel appearing for the taxpayer has vehemently argued that the action of both authorities below is not only arbitrary but also contrary to facts of the case. He has elaborated his view point by maintaining that the amount in question was paid to a non-resident, satellite company having no permanent establishment in Pakistan and income earned by it resulting from transactions with the taxpayer/ appellant in the form of payment of satellite charges constitutes its business income and not royalty. He has submitted that in the light of section 2(54) of the Ordinance, the word "Royalty" deals with intellectual property like books or any research or study compiled in the form of book and machinery or equipment. He has stressed that .Satellite or its transponders being machinery or equipment or device cannot be brought to the meaning of royalty. He has further submitted that the issue under consideration already stands settled in favour of the taxpayer/appellant by this Tribunal vide reported judgment cited as (2002) 86 Tax 271 (Trib.), wherein it has been held that fee received for use of transponders by the company, who set up a satellite in the space to earn income, does not fail within the meaning of "fee for technical services" but it constitutes commercial profit of the company. In order to lend credence to his submissions he has thrown light on the word 'Royalty' and has read before us section 2(54) of the Ordinance.
5. He has submitted that the definition of the term 'royalties' does not cover telecommunication services. There is no dispute on the issue that the services of satellite operators are 'telecommunication services'. This term is not defined in the Ordinance or the ADTT. Therefore, it is legally permissible to look for this definition from other authoritative sources and as per accepted legal principle, words not defined in a statute should be understood from laws which are pari- materia and as per Maxwell 12 Edition page 66. Laws are regarded to be pari-materia when they deal with the same person or thing or class. He has also placed reliance on Article 12(3) of ADTT and has asserted that the term 'royalties' as used in this article mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information (know- how) concerning industrial, commercial or scientific experience.
6. The learned counsel submitted that the nature of contract between PTCL and IntelSat UK is not of leasing out or letting out of satellite or transponder. The contract is for procuring telecommunication services. According to the Agreement, PTCL has not made any payment that qualifies to be "a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information (know- how) concerning industrial, commercial or scientific experience".
7. The learned counsel further submitted that PTCL did not acquire the physical possession of the transponder but simply its transmission capacity: the satellite was operated by the IntelSat UK and PTCL had no access to the transponder that was assigned to it. It is established position of law that in such cases, the payments made to the satellite operator will be in the nature of payments for services, to which Article 7 of ADTT applies, rather than payments for the use, or right to use industrial, commercial or scientific equipment. He emphasized that PTCL in its Agreement with IntelSat UK has not acquired the physical possession of the transponder but simply utilized its transmission capacity. IntelSat UK thus received payment chargeable to tax under Article 7 and not Article 12 of ADTT as wrongly interpreted by the Taxation Officer, Commissioner of Appeals and this honorable Tribunal in I.T.As. Nos.1024 and 1025/1B/2006.
8. The learned counsel reiterated that in the present case, the service provider is not proprietor of any intellectual property or any equipment related thereto. Clause 18 of the Agreement confirms that the intellectual property relates only to technical guidelines and operating procedures (such as standard of earth station to be used) developed by IntelSat. This clause clearly shows that IntelSat UK does not have any intellectual rights over the underlying technology related to satellites and transponders, it is thus not authorized to sublet it to any other party. The intellectual property, the use of which is being allowed, is necessary to render the service and is only ancillary in nature.
IntelSat does not invoice the use of such intellectual property, which confirms that payments are not on account of royalty at all. It is clear from the Agreement that IntelSat UK is providing 'telecommunication service' to PTCL and payments received by it constitute business profits. This honourable Tribunal in 2002 PTD (Trib.) 2679 relying on the judgment of Madras High Court in Skycell (2001) 251 ITR 53 (Mad.) held that amount paid to a satellite company constitutes business profits. Conclusions drawn in these judgments are based on the comparison of services of satellite operators with other services such as those provided by mobile telephone companies. The honourable Tribunal after exhaustive discussion held that the satellite services were not different in nature from those of mobile phone companies since both offer their customers services based upon highly sophisticated technological infrastructure. In other words, the Tribunal held that services of satellite operators were 'telecommunication services' and could not be treated anything else but commercial profits.
9. The learned counsel while explaining the nature of payment submits that satellite transponder is not a 'scientific equipment' and payment made for its use by PTCL is not royalty in the hands of IntelSat under the Ordinance and ADTT as contented by the department which is erroneous assertion on their part. Firstly, the satellite operators have rendered telecommunication services allowing procurement of 'Satellite Capacity' via the 'Space'Segment' and related services as per Clause 4 of the Agreement, whereas the term 'Satellite Capacity' means " Capacity provided by Company [IntelSat] on any Satellite in connection with the provision of Services". This confirms beyond any doubt that IntelSat provides telecommunication services to PTCL and there is no letting out or lease of satellite or transponder involved as wrongly assumed by the Department.
Secondly, it is incorrect to say that the appellant has made 'use' of the transponder since the appellant has. No control over the transponder. The appellant never operated the transponder. The Agreement between IntelSat does not award any right whatsoever to the appellant to operate the transponder or the satellite. Entire control and operation lies with the satellite operator who has used this equipment to render telecommunications services. Income derived by IntelSat from PTCL is business income, which is not chargeable to tax in Pakistan in view of Article 7(1) read with Article 5 of ADTT as it has no Permanent Establishment in Pakistan.
10. The upshot of the arguments of the appellant's counsel is that since the appellant does not make 'use' of the satellite equipment with a controlling right, services of the satellite operator does not fall within the definition of 'Royalty' either under the domestic law i.e. Section 2(54) of the Income Tax Ordinance, 2001 or Article 12(3) of ADTT between Pakistan and United Kingdom.
11, The learned Legal Advisor while rebutting the arguments of the learned counsel of the taxpayer has vehemently argued that during the assessment years 2002-2003 and tax year 2003 the payments made by the taxpayer on account of satellite charges were disallowed due to non- deduction of tax under section 152 of the Ordinance and this action of the taxation officer was also upheld by the CIT(A) as well as the Full Bench of this Tribunal. The Tribunal in the said judgment has held that the payments made by the appellant are royalty as per section 2(54) as well as Article 12(3) of ADTT. He has further contended that the impugned payments were made by the taxpayer company for the use of transponders installed in the satellite, which fall within the definition of the royalty contained in section 2(54) of the Ordinance. It is also the contention of learned Legal Advisor that royalty has also been defined in Pakistan ADTT with UK, as payment of any kind received as a consideration for the use of, or the right to use any copyright of literary, artistic or scientific work' including cinematography films or taps for radio or television broadcasting, any patent, trademark, design or model, plant, commercial, or scientific equipment or for information concerning industrial, commercial or scientific equipment. Inviting our attention to the Full Bench decision of this Tribunal in the appellant's case the learned Legal Advisor emphasized that the issue has already been settled after detailed and exhaustive discussion on the issue under consideration not only by the learned Accountant Member but also by a separate note by the learned Judicial Member, which was also concurred by the then honourable Chairperson. In the said order it was held in an unequivocal manner that the payment made to the IntelSat was 'royalty' and not commercial profit. As per definition given in Article 12(3) of the ADTT the appellant was legally required to deduct tax on such payments failing which the same are liable to disallowance under section 21(c) of the Ordinance. He, therefore, prays for confirmation of the action of both authorities below by way of dismissal of instant appeal.
12. After hearing both the parties, the admitted position on facts is that the appellant in tax year 2007 was denied an amount of Rs.231,000,556 as expense under section 21(c) of the Ordinance, which was paid to Intelset U.K as satellite charges. The payments were made under agreement for providing telecommunication services through satellite. It is explained before us that for providing these services, one of the transponders in the satellite is retransmitting telecommunication services for the appellant in Pakistan. It is also an admitted fact that the recipient of payment in question is a non-resident company based in U.K. Since, Pakistan has a Treaty with U.K for ADTT, therefore, the provisions of Income Tax Ordinance, 2001 shall not apply on the transaction for the purpose of taxing the transaction in question. The reference for this submission was made to section 107 of the Income Tax, Ordinance, 2001. It is also not disputed by the department that the non-resident company does not have a permanent establishment in Pakistan.
13. It is clear from the above noted admitted facts that ADIT was IB applicable to determine the allowability of expense in question under section 21(c) of the Income Tax Ordinance, 2001. The Treaty between Pakistan and U.K as notified through S.R.O. 87(1)/88 dated 18th February 1988, under its Article-7, envisages that "industrial and business profits of an enterprises shall be taxable in its parent country if the enterprises does have a permanent establishment in the other contracting State. However, collective reading of Article-12 of the Treaty, allows taxability of the "Royalties" in a contracting State where it arises.
14. This legal position under the Treaty was a cause of disputed interpretation between the appellant and department. The appellant's contention is that the payment, which is claimed as expense, was made to the non-resident as its business profit. Whereas, the departmental contention is that the payment made to the non-resident was a "Royalty" which is covered within the definition given in sub-article (3) of Article 12 of the Treaty.
15. The department disallowed the expense for the reason that tax was not withheld under section 152 on the payment made to nonresident. As per taxation officer retransmission of the telecommunication services rendered by U.K Company was by use of a scientific equipment.
Therefore, the same fell in the definition of "Royalty" consideration against which should have been paid subject to withholding of tax under section 152 the learned DR has supported the action by taxation officer with a judgment of Full Bench by this Tribunal passed in I.T.A. No.1023/IB/2006 dated 30-5-2009.
16. We have carefully examined the judgment by Full Bench which was authored by the then learned Accountant Member and concurred by two learned Judicial Members, through a separate note on this particular issue in assessment year 2002-2003 and tax year 2003. It is discernable from this order that the appellant started receiving telecommunication services from U.K based non- resident company from the assessm ent year 2002-2003. Earlier such services were being received from Hong Kong based company. Since, Hong Kong and Pakistan had no Treaty for ADTT, therefore, the provisions of Income Tax Ordinance, 1979 were applied. It may be noted that relationship between appellant and U.K based non-resident company is the same from assessment year NO2- 2003 till tax year 2007,, which is governed under agreement entered into in July, 2001. Interestingly, the controversy decided in the judgment by Full Bench was the same as is placed before us i.e., whether telecommunication services/signals received from a transponder in the satellite can be termed as use of scientific equipment or not and whether it fell under the definition of "Royalty" as given under Article 12(3) of the Treaty or not. Learned Accountant Member after discussing the issue at length held in para-50 of the judgment that appellant "used electronic property of non- resident satellite owners and payments made by them were in the nature of Royalty". For these findings learned Accountant Member relied on the definition of transponder taken from different Dictionaries and Internet. Relevant part of the judgment on the definition is reproduced for facility:- ..................... 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 onto domestic satellite receivers at another frequency". In Ms 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 communication satellite's channels are called transponders, and each transponder is a separate transceiver or repeater. Most comsats are microwave radio relay stations in orbit, and carry dozens of transponders, each with a bandwidth of tends of megahertz. Most transponders operate on a 'bent pipe' principle, 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 'regenerative' system whereby the signal is used to remake and remodulate 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 sub-carriers for audio and automatic transmission identification services STIS. Non-multiplexed radib 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."
17. A separate concurring note written by Judicial Member was ratified by the then Chairman, therefore, the decision by all the Members comprising Full Bench was in favour of the department.
The concurring note is also reproduced hereunder:-- "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 single transponder on a single widefored 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 other stations. 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 treaty 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."
"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."
18. We have also carefully examined the other judgments referred by the appellant but the same are found irrelevant so far as the controversy discussed supra is concerned. Only judgment relevant to the controversy is the judgment by Full Bench of this Tribunal, which is examined and discussed above.
19. Now, we advert to the arguments advanced by both the parties before us, which are noted hereinabove. We are constrained to observe that no new plea has been raised before us except making a stress by the appellant on the old argument that the -transponder despite of being a scientific equipment was not in control of the appellant, therefore, could not be held to be for use of or the right to use the scientific equipment. In support of this assertion, the appellant has referred to nature of contract between PTCL and Intelset U.K asserting that the satellite or transponder was not leased out to the appellant. It was vehemently argued that the contract was for procuring telecommunication services only and which fell within the ambit of Article 7 of the Treaty and should have been treated as commercial profits.
20. Though, sub-article (3) of Article 12 of the Treaty defining term "Royalties" had very extensively been discussed and interpreted by this Tribunal in its Full Bench judgment, yet to determine the above noted plea raised by the appellant before -us. We intend to re-examine the definition of Royalty the same is reproduced hereunder:-- "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 copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial commercial or scientific e 'lament or for information (know-how) concerning industrial, commercial or scientific experience."
(The underlining is for emphasis)
21. The underlined portion out of above quoted definition directly relates to the dispute under consideration. If we rephrase only the underlined portion for better understanding of the intent lying in the definition, the same would be "the term 'Royalty' as used in this article means payments of any kind received as consideration for the use of or right to use scientific equipment". The reproduced portion of the judgment by Full Bench leaves no doubt in concluding that the telecommunication services are being received by the appellant from transponders and the payment made to the non-resident U.K based company is a consideration for the services received through said scientific equipment. The payment having being held to be an obvious consideration as above is a 'Royalty' hence subject to withholding.
22. Further, the framers of the definition have used two words i.e., 'the use of or 'right to use'. It may also be noted that word or is used between two phrases which makes the phrases operateable independently. Before further dilation, we may refer to Dictionary meaning of the word "use".
According to WEBSTER'S NEW WORLD DICTIONARY 3rd EDITION, the word 'use' means (1)"to put or bring into action or service; employ for or apply to a given purpose" (2)"The act of using or the state of being used".
23. The Dictionary meanings of the word use do not suggest that the F thing used should be in possession or control of the user. Argument of the appellant may have some relevance, had the framer of the above quoted definition used words "right to use" only. In that case that user shall have exclusive right for a particular time/period of a thing/ equipment being used. The framers have also used phrase for the use of, which are independently operateable under the definition and has wider connotation, which can include a collective use of a particular thing/ equipment used. The assertion by the appellant that the signals/ transmission of telecommunication received by the appellant were merely services also have no force as no such distinction is available in the definition of "Royalty". The definition only stipulates a payment received/paid as consideration for use of a scientific equipment. It is immaterial whether use of that equipment results into a service in return or relates to a production of tangible thing. This conclusion is strengthened by the use of words like industrial and commercial in the same definition before the words scientific equipment meaning thereby that a consideration paid for any industrial equipment shall also fall within the definition of "Royalty". Similarly, consideration against use of commercial equipment shall also be a "Royalty".
24. In the light of above discussion we see no reason, to deviate from the findings already given by this Tribunal in its Full Bench judgment and for the additional reasons noted above. The appeal by the appellant to the extent of the issue of disallowance of expense amounting to Rs.231,000,556 under section 21(c) is dismissed. The. Rest of the issues/grounds in appeal shall be decided by the Division Bench already dealing with the case. .