MRS. ZAREEN SALEEM ANSARI, ACCOUNTANT MEMBER.-(1). By this consolidated order, we intend to dispose of the above three appeals filed by the appellant/taxpayer against the common order No. 117, 118 and 119, dated 07.01.1999 passed by the learned Appellate Additional Commissioner of Income Tax, Quetta Range, Quetta.
2. Brief facts necessary for disposal of the above appeals are that the assessee/taxpayer is an unlisted company, incorporated with the main object to construct-and operate a Power Generation Plant. The facts giving rise to the present appeals are that the appellant entered into the following to agreements for the purpose of setting up a power plant in quetta:-
(a) Contract dated 26.02.1996 was entered between the appellant and the Fiat (Italy) a company registered in Italy for the manufacture and supply of equipment. Relying upon the provisions of the Avoidance of Double Taxation Treaty between Pakistan and Italy, section 163 of the Income Tax Ordinance, 1979 ("1979 Ordinance") and the fact that the foreign supplier had no permanent establishment in Pakistan, no tax was deducted at source;
(b) Contract dated 29.02.1996 was entered into between the appellant and Fiat Pakistan for the construction of a power plant. No tax was deducted at source, while the Assessing Officer treated the appellant to be an assessee in default and applied the tax rate of 8%. Finally, the Economic Co- ordination Committee (ECC) of the Federal Government decided that the rate of 4% would be applicable. The department accepted the directions of the ECC as communicated by the Central Board of Revenue vide letter C. No. (I)(SS)(WHT)/98-99, dated 13.09.1999, in which the rate of 4% stood settled.
3. In view of above, there is no dispute found with regard to the deduction of tax in respect of the local contract dated 29.02.1996 and the present appeals are to be decided with regards the issue of deduction of tax at source in respect of only the first contract dated 26.02.1996 referred above.
4. As regards first contract dated 26.02.1996 the facts are that since the appellant did not deduct the tax at source, the Assessing Officer vide assessment orders for the three years, all dated 15.09.1998, has treated the appellant as an assessee in default u/s 52 of the Income Tax Ordinance, 1979. The learned CIT(A) vide order dated 07.01.1999 dismissed the appeals of the appellant.
Thereafter the ITAT vide order dated 20.04.1999 allowed the appeals of the appellant. In allowing the appeals the Tribunal was pleased to follow the judgment of the Division bench of the Hon'ble Sindh High Court, Karachi reported as Tapal Energy v. Federation of Pakistan PTCL 2000 CL. Ill, in which it was held that the jurisdiction to frame the assessment u/s 52 of the 1979 Ordinance only vested with the Assessing Officer of the recipient and not the Assessing Officer of the payer and since in this case the assessm ent orders had been framed by the assessing Officer of the payer i.e. The appellant, the tribunal by following the judgment of[1] Section 122C inserted by the Finance Act, 2010 (XVI of 2010), reported as PTCL 2010 BS. 325. This amendment was effective from 5th June, 2010 by the declaration made under the Provisional Collection of Taxes Act, 1931 (XVI of 1931). Earlier this Section was inserted by the Finance (Amendment) Ordinance, 2010 (III of 2(510), (Promulgated on 6th February, 2010), reported as PTCL 2010 BS. 173 & the Finance (Amendment) Ordinance, 2009 (XXII of 2009), (Promulgated on 28th October, 2009), reported as PTCL 2009 BS. 325.
2. Following is an extract from FBR's Circular No. 02 of 2010, dated July 22,2010:~Newly added provisions of sub-sections (1) and (2) of section 122C are aimed at facilitation of a taxpayer where he fails to file return of income in response to requisition of the same by the Department. Under the new scheme of provisional assessm ent, in such cases of noncompliance, option shall be vested with die taxpayer even after finalization of (best judgment provisional assessment) to file a return within a period of sixty days of the service of demand notice resulting from provisional assessment.
Such provisional assessm ent shall cease to have any legal effect if the taxpayer files return of income alongwith wealth statement, wealth reconciliation statement and other required documents, within a period of sixty days from the date of service of provisional assessment orders.
However, a return filed in response to provisional assessment shall be valid only if accompanied with wealth statement, wealth reconciliation statement and explanation regarding source of assets in question. However, if the taxpayer fails to file return of income even after a period of sixty days of receipt of the demand notice resulting from a best judgment provisional assessment, such assessm ent shall attain finality on completion of a period of sixty days from the date of service of assessm ent order.
3. Also reported as PLD 1997S.C. 700 = PTCL 1997 CL. 478.
[4]Also reported as (1997) 76 Tax 131 [5]Also reported as (1993) 68 Tax [6]Under Section 176 of the Ordinance the Commissioner can issue notice to obtain information or evidence from any person.
7. One million BTU. BTU is a traditional unit of energy equal to about 1055 joules (Wikipedia)
[8]Sections 122(5) (i), (ii) & (iii)
[9]The Free Dictionary by Farlex
10. Reading Law - The Interpretation of Legal Texts by Antonin Scalia and Bryan A Gamer -WEST- 2012. Page 428.
The Hon'ble High Court annulled the assessments holding that the assessment orders were framed by an officer possessing no jurisdiction in the matter. Being aggrieved with the order of the Tribunal dated 20.04.1999 the department preferred appeals before the Hon'ble Balochistan High Court, Quetta, which vide order dated 22.09.1999 was pleased to set-aside the order of the Tribunal, dated 20.04.1999, remanding the matter back to the ITAT for the purposes of "re-writing the order" since according to the Hon'ble High Court the order of the Tribunal was non-speaking in nature.
1. In pursuance of the order of the Hon'ble Balochistan High Court dated 22.09.1999, referred above, this Tribunal in the second round of proceedings passed an order dated 11.09.2001. Para 2 of the order of the ITAT dated 11.09.2001 is important which, inter alia, refers to the fact that the then learned counsel for the appellant had only pressed one ground; and on that ground the learned Tribunal vide its order dated 11.09.2001 was pleased to remand the matter back to the Assessing Officer for fresh adjudication in accordance with law.
2. Again being aggrieved against the order of the Tribunal dated 11.09.2001 the appellant preferred Reference Applications u/s 136(1) of the 1979 Ordinance, referring a number of questions of law for opinion to the Hon'ble High Court. However, vide order dated 08.04.2003 the Tribunal was pleased to refer only one question to the Hon'ble High Court, which reads as follows:- "Whether the Tribunal is justified legally in observing that the provision of sub-section (4) of section 50 becomes operative when the withholding agent as a person as prescribed in that sub-section and he makes payments of the nature as prescribed thereunder and the only situation in which the withholding agent is not to withhold tax under sub-section (4) of section 50 of the Ordinance is that when the recipient produces a certificate from his Commissioner to this effect?"
3. Thereafter, the appellant preferred three Reference Application u/s 136(2) of the 1979 Ordinance before the, Hon'ble High Court of Balochistan at Quetta, bearing ITRs Nos. 1, 2 and 3 of 2003. The said reference applications u/s 136(1) and 136(2) of the Ordinance came up for hearing before a Division Bench of the Hon'ble Balochistan High Court at Quetta on 23.06.2005. On behalf of the appellant it was argued that the learned ITAT while passing its order dated 11.09.2001 had gone beyond the mandate given by the Hon'ble Balochistan High Court at Quetta in its order/judgment dated 22.09.1999. It was . Submitted before the Hon'ble High Court that as per the order dated 22.09.1999, the Tribunal was directed to re-write the judgment by way of a speaking order, whereas the Tribunal had gone on to remand the matter to the authorities below vide its order dated 11.09.2001.
The Hon'ble Balochistan High Court vide its order dated 23.06.2005 was pleased to set-aside the impugned orders of the Tribunal and remanded the matters back to it with a view to facilitate disposal of the present appeals in terms of the order of the Hon'ble Balochistan High Court dated 22.09.1999. Vide order dated 28.07.2005 the Hon'ble Balochistan High Court at Quetta rectified a mistake in its earlier order dated 23.06.2005, the effect of which is that the present appeals before the Tribunal are deemed to be pending and the> same are to be decided afresh in terms of the judgment of the Hon'ble Balochistan High Court dated 22.09.1999.
4. Mr. Muhammad Naseem, the learned counsel for the appellant has contended that at the time when the original assessm ents were framed i.e. 15.09.1998 the judgment in the Tapal Energy case (PTCL 2000 CL. Ill had held the field) and the amendment in section 52 by insertion of an explanation thereto was only brought about on 01.07.1999. Therefore, according to him the subsequent judgment of the Hon'ble Sindh High Court i.e. Continental Chemical v. Pakistan PTCL 2001 CL. 454 whereby it was held that in view of the amendment the Tapal Energy case was inapplicable and is not applicable retrospectively on transactions which were past and closed. He has further stated that the supplier in this case is Fiat (Italy), which does not have any permanent establishment in Pakistan.
5. It was further vehemently argued by the learned counsel for the appellant that according to Article 7(1) of the Avoidance of Double Taxation Treaty between Pakistan and Italy, the foreign supplier was not taxable and hence there was no obligation on the part of the appellant to have deducted any tax at source.
6. Lastly, Mr. Muhammad Naseem has stressed that prior to 01.07.1998 all the payments had been made by the appellant to the supplier; thus at the time of the making the payments section 50(4) did not require any tax to be deducted at source in respect of the non-resident. He has further relied upon: 1983 CLC 1585, 1988 SCMR 715, 1993 SCMK 1905, 1986 SCMR 96, 2005 PTD 259, AIR 1961 SC 1425, AIR 1967 SC 651, AIR 1962 SC 1621 AND AIR 1968 SC 1336.
7. Mr. Ayaz Mehmood, the learned DR, on the other hand supported the orders of the officers below.
He has contended that the appellant was rightly treated as assessee in default as it has failed to deduct income tax at source. In support of his contention he has referred the Article 5 of the Avoidance of Double Taxation Treaty between Pakistan and Italy dated 27.02.1992 which defines "permanent establishment" to mean a fixed place of business in which the business of the enterprise is wholly or partly carried on. He has further submitted that the term "permanent establishment" shall include especially the following:-
(a) a place of management;
(b) branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, a quarry or other place of extraction of natural resources;
(g) permanent sales exhibition;
(h) a building site or construction, installation or assembly project or supervisory activities in connection there-with, where such site, project or activity continues for a period of more than 6 months.
12. It was further submitted by the learned DR that the foreign supplier falls under category (h) above as it was acting in pursuance of the second contract dated 29.02.1996 i.e. The foreign supplier pursued the turn-key contract with the appellant. The learned DR has also attempted to submit that for the second contract dated 29.02.1996 the tax ought to have been deducted at 8% instead of 4%. The learned DR further argued that:
(1) The Hon'ble High Court of Baluchistan held vide order 1/2004, dated 22.05.2005 that "both the learned counsel for the parties after having gone through the impugned order here agreed herein for remand of the case to the Income Tax Appellate Tribunal Karachi for deciding the matter afresh.
The order dated 18.04.2003 passed by Income Tax Appeals No. 01, 02 & 03 of 1999 be deemed to be pending for decision afresh strictly keeping in view of observations made in the judgment dated 22.09.1999 passed by this Court in the above said appeals.
The Appellate Tribunal shall decide the matter after ' hearing the parties within a period of three months from passing of this order.
(2)The Hon'ble High Court of Baluchistan, Quetta held vide order 1,2, 3/1999 dated 22.09.1999.
In our opinion, the Income Tax Tribunal had not delivered/passed a speaking judicial order, to clinch the issue, involved in the appeals, including the question of jurisdiction, pertaining to assessm ent of tax, by the Income Tax Authorities, against the assessee who have no appropriate for us to independently dilate upon the question of jurisdiction, because this question can only be considered by the Tribunal, after making reference to the rights and liabilities of parties, arising out of the agreements, executed between them, to achieve the object. However, while pondering upon question, the Tribunal was simultaneously bound to pass a speaking judgment containing reasons prevalent upon it, to form final opinion against any of the party before it and lack of reasons mentioned in the order would be a ground to draw inference that authority ceased with the matter had not applied its judicial mind. In as much as the reader of the judgment would also not be in a position to assess, that what are those basis which made the Tribunal to conclude, that the income tax authorities have no jurisdiction to assess income tax against the companies, having no permanent establishment in Pakistan, but taking out the profit, from the business without paying the tax. In this it may be noted that the law declared by the Superior Courts, is bound to be followed, in letter and spirit but with reference to the fact involved in each case and it is to be seemed that the principle enunciated by the Superior Court can be fully applied on a particular case, keeping in view its peculiar facts and circumstances, and then of concourse Authority ceases with the matter can seek support from such judgment, to arrive at a particular conclusion concerning the proposition, involved in the matter, but in the instant case the ITAT without dilating upon the factual aspect of the case, had disposed of the question relating to jurisdiction, by solely making reference to the earlier judgment pronounced by Hon'ble Sindh High Court. Therefore, in our opinion it will be in the interest of justice if the case is remanded to ITAT for re-writing of judgment, after hearing all concerned as well as keeping in view the observations made herein above. For the foregoing reasons, the impugned order dated 20.04.1999, passed by the ITAT (Pakistan) Karachi, is set-aside. Case is remanded to the ITAT for re-writing of the judgment after providing opportunity to both the parties.
13. The learned DR argued that the order of the Tribunal is set- aside in view of above.
14. The learned DR further contended that following to issues are to be decided by the learned ITAT now:
18. taxable in Pakistan?
1. Whether the rate applied @ 8% by treating the contract as a turnkey contract is correct or rate should be 4%?
He further contended that as per Article of Double Taxation Treaty signed by the Government of Pakistan with the Government of Italy which is enforced with effect from February 27, 1992 (citations: 93 TNI 96-16 Doc 93-31441) permanent establishment has been defined as:
(1) For the purposes of this contention, the term "permanent establishment" means a fix place of business in which the business of enterprise is wholly or partly carried on.
(2) The ferm "permanent establishment" shall include specially:--
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, a quarry or other place of extraction of natural resources;
(g) permanent sale exhibition;
(h) a building site or construction, installation or assembly project or supervisory activities in connection there-with, where such site, project or activity continues for a period of more than six months; So as per Clause (h) cited above, the non-resident company (M/s. FIAT A VIO ITALY) does have a permanent establishment in Pakistan hence taxable in Pakistan; Clause (b) of sub-para (2) of para e clearly stipulates the rate 8% for turnkey contract. CBR Circular No. 4(I)SS 98-99 clarifies the turnkey contract and rate applicable thereon.
As such the PE does exist as the company later on opened its office in Pakistan and registered as branch in Pakistan in 1998. (Ref: IN Pasha AR of the taxpayer's written arguments page I6). Meaning thereby the company was managing its affairs through Pakistani company which is by all means are permanent establishment in Pakistan, hence taxable in Pakistan.
The issue of PE as well as turnkey contract has been discussed by the learned ACIT(A) Quetta in its order No. 117,118 &119, dated 07.01.1999, wherein he upheld the order of Assistant Commissioner confirming his action.
The issue of jurisdiction was not raised by the AR of the company (Mr. I. N. Pasha) before the ACIT(A) but it was raised before the ITAT later on. This was done to create confusion before the learned ITAT and its totally incorrect, the Assessing Officer had rightly exercised his jurisdiction while passing the order u/s 52/86 of the Income Tax Ordinance, 1979.
15. The learned DR further prayed that case may kindly be decided in the light of substance, true facts and circumstances. The order passed by the Assistant Commissioner of Tax and then upheld by the learned CIT(A) Quetta in lawful and is within his legal jurisdiction.
16. The learned counsel for the appellant has vehemently contended that there is no dispute with regards to the second contract dated 29.02.1996 and the learned DR is unnecessarily invoking such dispute which has been finally settled by the directions of the ECC. He has further stated that with regards the supply of goods under the first contract it is a matter between to principals i.e. The appellant and the foreign supplier. Hence there is no question of invoking any liability against the foreign supplier in relation to such supplies and for that purpose the foreign supplier has no permanent establishment.
17. It is further contended by learned AR that the matter is remanded only for the purpose of "re- writing of judgment". If this contention is taken to its logical end, it means that the conclusion of the Tribunal is to remain the same, whereas the judgment is to be re-written with better reasons and after giving parties proper opportunities.
18. The learned AR further contended that the to issues as proposed by the learned DR are absolutely contrary to the record. In fact they are at variance with earlier stances of the learned DR when he had stated that the matter has been remanded for rewriting of the judgment. If this is so then the conclusion of the earlier order dated 20.04.1999 stands revived and the Tribunal only has to be come up with a speaking order with reasons to substantiate such a conclusion. He argued that without prejudice to the above, the first issue is not the only issue which arises out of the orders of the Hon'ble Baluchistan High Court dated 22.09.1999 and 22.05.2005, a bare perusal of the first order of the Hon'ble Baluchistan High Court dated 22.09.1999 would show that the Hon'ble High Court was pleased to order on open remand on all the relevant factual, legal and jurisdictional questions. Reference was also made to observations of the Tribunal that the foreign supplier had "no permanent establishment in Pakistan". It was also observed by the Hon'ble Baluchistan High Court that the Tribunal had made no reference to the factual aspects of the matter and on this score the matter was remanded back to the Tribunal for re writing of the judgment.
Therefore, as per the mandate conferred by the Hon'ble Baluchistan High Court in its order dated 22.09.1999 the Tribunal had to decide the factual, legal and jurisdictional aspects arising from the facts of the case. It was in this context that the Hon'ble Baluchistan High Court in its order dated 22.05.2005 was pleased to set-aside the subsequent order of the Tribunal in remanding the proceedings since the mandate of the earlier order of the Hon'ble Baluchistan High Court dated 22.09.1999 had not been complied with. Thus the Tribunal has to decide all jurisdictional, legal and factual questions arising out of the matter. He argued that the learned DR is absolutely incorrect to suggest that any issue pertaining to the rate of deduction of tax at source at 8% or 4% on turnkey contracts in respect of the first contract is alive. The learned AR denied the contents of the conclusions/prayer of the learned DR as incorrect. The said prayer may be rejected and the appeal may be allowed as prayed.
19. We have heard the rival arguments, perused the record and the case laws cited at bar.
20. The contention of the learned DR that the deduction of tax for turnkey power projects should be at 8% not 4% in respect of the second contract dated 29.02.1996 is found incorrect. The ECC directive as accepted by the FBR has already settled the issue with regards the second contract.
The argument of Mr. Naseem the learned AR seems to be correct in submitting that the learned DR is unnecessarily reopening a dispute which has been long settled. Even otherwise the contention of the learned DR with regard to the second contract order does not emanate from the orders of the Hon'ble Baluchistan High Court dated 23.06.2005 and 28.07.2005 in response to which the present proceedings have been commenced.
21. It is worthwhile to observe here that at the time when the original assessments were framed on 15.09.1998 the operative judgment which holds the field was the Tapal Energy case reported as PTCL 2000 CL. 1H in terms whereof the jurisdiction u/s 52 of the Income Tax Ordinance, 1979 only vested with the Assessing Officer of the recipient and not the payer. In the present case the said assessm ents dated 15.09.1998 were framed by the assessing Officer of the appellant (i.e. Payer), whereas for the purposes of section 52, before amendment, the jurisdiction vested with the assessing Officer of the recipient. Hence all the original assessment orders dated 15.09.1998 are void. It is correct that section 52 of the 1979 Ordinance was amended by the Finance Act, 1999, which was only effective from 01.07.1999. The amendment was in the shape of an explanation to section 52 of 1979 Ordinance, which was noted by the Hon'ble Sindh High Court in the case of Continental Chemical v. Pakistan PTCL 2001 CL. 454 in which, by a majority of to against one, it was held that after the amendment by the Finance Act, 1999 for the purposes of section B 52 of the 1979 Ordinance, the jurisdiction to treat a person as an assessee in default lay with the Assessing Officer of the payer and not the recipient. In this judgment no doubt it has been held that the amendment to section 52 by the Finance Act, 1999 is retrospective in nature. But this only means that on 01.07.1999 (i.e. The date on which section 52 was amended by the Finance Act, 1999) if the assessm ents were not framed for the years prior to the Finance Act, 1999, section 52, as amended by the Finance Act, 1999, will be applicable to even those prior years. However, the Continental case PTCL 2001 CL. 454 does not hold the principle that the amendment made by Finance Act, 1999 to section 52 will also apply to a transaction which is past and closed i.e. Where the assessments have already been framed before the advent of the finance Act, 1999. It is an elementary principle of law that although procedural and jurisdictional amendments are C retrospective in nature, unless and until a statute specifically and expressly specifies so, the procedural/jurisdictional amendment will not apply to transactions which are past and closed. In observing so, we are fortified with the following binding judgments of the superior appellate forums:- a) Ghulam Haider Shah v. Chief Land Commissioner 1983 CLC 1585; b) Chief Land Commissioner v. Ghulam Haider Shah 1988 SCMK 715; c) Molasses Trading v. Government of Pakistan PTCL 1994 CL. 222; d) WAP DA v. Capt. Nazeer Hussain & Others 1986 SCMR 96; and e) Gulshan Spinning Mills v. Government of Pakistan 2005 PTD 259.
22. We are therefore of the considered opinion that at the time when the assessments were framed on 15.09.1998 admittedly, the jurisdiction as per the Tapal Energy case PTCL 2000 CL. Ill vested with the Assessing Officer of the recipient and not the payer. Hence the assessment orders are all completely without jurisdiction.
23. We may further observe that there is also plethora of case laws on the point that a jurisdictional defect cannot be cured by any amendment in law, especially where the amendment does not specifically and expressly cure the jurisdictional defect. The following judgments confirm this position:- Dafedar Niranan Singh & another v. Custodian, Evacuee Property (Pb) & another AIR 1961 SC 1425 (d); Bai Achhuba Amarsingh v. Kalidas Harnarth AIR 1967 SC 651 (B); Ujjam Bai v. State AIR 1962 SC 1621; and Keshavlal Jethalal v. Mohanlal Bhagwandas AIR 1968 SC 1336.
24. In the present case amendment made by the Finance Act, 1999, through an explanation to section 52 of the 1979 Ordinance, does not specifically say that it will cure the jurisdictional defect in any assessm ent orders which have already been passed. Accordingly, the amendment made by the Finance Act, 1999 is not applicable to the present controversy and the assessment orders for the three years, all dated 15.09.1998, are a nullity in law.
25. There is another vital aspect of the matter. All the payments were made by the appellant to FIAT, Italy prior to 01.07.1998. Thus at the time of making the payments section 50(4) did not require any tax to be deducted at source in respect of non-resident.
The order of the Tribunal reported in 2001 PTD (Trib) 1816 at page 1823 confirms this position.
Admittedly, in the present case FIAT Italy was a non-resident. Hence there was nothing in the statute which required deduction of tax at source in respect of nonresidents. The proviso to section 50(4)(a) of 1979 Ordinance, which mandated the deduction of tax at source for the nonresidents, was inserted on 01.07.1998, while all payments were made by the appellant before this date and hence there was no obligation on the part of the appellant to have deducted income tax at source.
26. Before parting with these appeals we may observe that on the touchstone of the applicability of the Avoidance of the Double Taxation Treaty, the department has failed to come up with evidence so as to show that at the time of making of the payments in pursuance of the first contract the foreign supplier had any permanent establishment in Pakistan. The burden has not been discharged by the department. Even otherwise the payments to FIAT, Italy in pursuance of the first contract were quite distinct to the payments made to FIAT, Pakistan in pursuance of the second contract.
27. The DR's contention that tax @ 8% was not deducted on the second contract is misconceived in view of such matter having been settled through the directions of the ECC and the FBR/CBR [see para 2(b)] above. Indeed, the orders of the FBR/CBR are binding on all its officers as per section 8 of the 1979 Ordinance and section 214 of the 2001 Ordinance.
28. In light of the above discussion, all the three appeals are allowed and all impugned orders are hereby cancelled.