By this single order we intend to dispose of these fourteen appeals, filed by the appellant/taxpayer against the combined impugned order passed by the learned CIR(A) dated 26-8-2013 on the following common grounds:-- "(2) The learned Commissioner Inland Revenue Appeals (Zone-II) erred in misinterpreting the minutes of Memorandum of Understanding agreed upon between the Pakistan Ship Agents'
Association and the Tax Administration.
(3) The learned Commissioner Inland Revenue Appeals (Zone II) erred in holding that the company had misinterpreted the term profit from operation in international traffic' as contained in Article 8 of Pakistan- Belgium Tax Treaty (the Treaty).
(4)Without prejudice to the Ground No, 3, the Learned Commissioner Inland Revenue Appeals (Zone II) while passing the order violated the provisions of the Article 31 through 33 to the Vienna Convention of the Law of Treaties.
(5) Without prejudice to the ground No, 4, the Learned Commissioner Inland Revenue Appeals (Zone II) erred in relying on the provisions of the Article 8 of Pakistan---Malta Tax Treaty.
(6) Without prejudice to the ground Nos, 4 and 5 the DCIR erred in misinterpreting the judgment of High Court pertaining to the tax payer"
2. Brief facts of the case as gathered from the record are that the appellant/taxpayer being the resident agent of non-resident shipping line i,e, Messrs Safmarine Containers Lines N.V Belgium is engaged in both import and export of containerized cargo and container service charges [CSC], Terminal Handling Charges [THC] and container detention charges [CDC]. The receipts thereof are charged by the Appellant/Taxpayer on behalf of non-resident shipping line Messrs Safmarine Container Lines NV Belgium, who is a non resident company incorporated in Belgium engaged in the shipping activities. The appellant company claimed "exemption" from tax on the declared receipts derived from Container Service Charges, Terminal Handling Charges and Container Detention Charges under the provisions of Article 8 para 3 of A the Double Taxation Treaty entered into between Pakistan and Belgium without any tax liability in respect of collection on account of Container Service Charges, Terminal Handling Charges and Container Detention Charges.
3. Earlier this issue was decided by the Taxation Officer and such receipts were subjected to taxation @ of 8% under section 7 of the Income Tax Ordinance, 2001 against which the appellant/taxpayer preferred an appeal. The learned Commissioner (Appeal) while deciding the appeal, set .aside the impugned order passed under section 143(2) of the Income Tax Ordinance, 2001 for de novo proceedings on the ground of non-allowance of adequate opportunity of being heard to the appellant. The remanded proceedings were initiated by the DCIR and after examining the explanation offered by the appellant/taxpayer, the DCIR has again held that such receipts are subject to taxation @ 8% under section 7 of the Income Tax Ordinance, 2001. The appellant/taxpayer again filed the appeal before the learned Commissioner (Appeals-II) against the impugned order. This time, the learned Commissioner (A) has upheld the order of DCIR with the following observations:-- "Therefore, following the dictum laid down by various Superior Appellate fora, the undersigned cannot extend the claim of exemption from tax from the receipts earned from CDC, THC and CSC and is hereby discarded.
For the foregoing reasons, I hold that the impugned orders passed under sections 124/143(2) and 143(2) does not suffer from legal/factual infirmities to warrant any interference. The same is hereby CONFIRMED."
4. Being aggrieved and dissatisfied from the impugned orders passed by the authorities below, the appellant/taxpayer filed the present appeals before this Tribunal.
5. On the date of hearing Mr. Saqib Masood, FCA attended on behalf of the appellant/taxpayer and Dr. Shamsuddin Qazi D.R. attended on behalf of the department/respondent.
6. During the course of protracted proceedings before this Court, learned AR of the appellant contended that order of the learned Commissioner Inland Revenue (Appeals-II) as well as the order of the DCIR are bad in law and on facts. The AR of the appellant submitted his submission as follows:-- Rules for Interpretation of Double taxation Treaty [DTA] Without prejudice to the above point we would like to submit that treaties are international agreements which are entered into between the Governments of two Sovereign States and it has been stated in plethora cases that treaties are to be interpretated liberally and not as a statue and the case-law.
Without prejudice to the above we would like to further state that under section 7 of the Ordinance the word freight has not been reflected explicitly whereas the words used in the aforesaid section is income from the operation of business of ships which in itself clarifies that the intent of the legislature is to tax such receipts (Freight charges, Terminal Handling Charges, Container Detention Charges and Container Service Charges) at the rate of 8 percent.
On that score the provision of Article 8 of the DTA between Pakistan and Belgium is very relevant and at the same time the words used in the treaty is very clear that the Profit from the operation of the ships shall be taxable in Belgium.
The point that the provision of the treaty does not has a inclusive definition which covers such receipts will not hold good on the ground that the wordings used covers the whole-operations of the ship. The contention is duly supported by the Commentary on the Convention of the Double taxation treaty which has been issued by the OECD [Organization for Economic Cooperation and Development].
Further to that the contention of the tax department is that the Commentary is not guide to interpret the provision of Article 8 of the DTA does not hold any ground as in various case-laws the OECD commentary has been suggested by the High Court to be an authoritative guide for interpreting the provision of the treaty and to understand the intent of the sovereign states at the time of signing of the treaty.
Rules for taxation of the receipts of the Non-resident Without prejudice to the above we would like to further contest that if Article 8 of the treaty does not cover the said receipts then the taxation of the said receipts cannot be resorted to section 7 of the Ordinance. On that score we would like to further submit that the said receipts are earned by non- resident and are to taxed within the purview of the four walls of the treaty.
In this context we would like to elaborate that if Article 8 does not applies then the provision of Article 7 "Business Profits" and Article 22 "Other Income" of the DTA between Pakistan and Belgium shall apply case-law and the treaty.
Article 7 of the DTA between Pakistan and Belgium clearly states that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.
In light of the above provision of Article 7 it is clearly stated that Business income of the enterprise resident of Belgium shall be taxable in Belgium only except where the enterprise carries on business in the other contracting State through a Permanent Establishment [P.E.]. However in the instant case there is no Permanent establishment of Safmarine in Pakistan.
On that score if we look at the Article 5 of the treaty which defines the Permanent Establishment it has been categorically stated that for P. E it has to be a dependent agent whereas in the instant case the company is not an independent agent of the non-resident. In support of our contention Agency Agreement, where in the clause 2.3 agents is allowed to accept the agency of other shipping line with the intimation to the principal.
This argument of Safmarine is further strengthened that for this principal and agency relationship Safmarine Pakistan (Pvt.) Limited has not been compensated in the form of remuneration which has been shown in Agency agreement.
The Article 22 of the treaty also specifies that "Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of the treaty shall be taxable only in that State".
In the said Article 22 of the treaty again the test is of the PE where in the instant case the provisions of Article 5 does not applies as Safmarine does not operates in Pakistan through a PE due to the facts mentioned above.
Legal status of Memorandum of Understanding [MOW Without prejudice to the above in the eyes of law there is no legal sanctity of the Memorandum of Understanding until or unless it has been duly supported by the Revenue authorities by issuing any notification to that effect. The relevant example of that understanding is clearly depicted by the Double taxation treaty agreements signed by the Government of two Sovereign states. If any treaty that has been signed by Government of Pakistan with any other country despite the fact that it has been signed duly by both the countries it will not come into effect until or unless the legal cover has been given by the Ministry of Finance by issuance of Notification/S.R.O.
Here in the case under consideration the tax department is relying on the MOU which has been signed by the departmental representative. In this context we would like to submit that department has relied on the MOU which has no legal backing and has completely ignored treaty provisions which has been issued vide Notification"
Learned AR of the appellant/taxpayer prayed that the orders of the authorities below may please be vacated as per the submission and agreements.
7. On the other hand, Learned Representative for the Department has opposed the contentions submitted by the Learned Counsel for the Appellant/Taxpayer and supported the orders of the officers below. He has contended that Article-8 only covers the "freight charges" which the non- resident shipping lines earned from their business of operating of ship. He further contended that the tax department relied on the other Treaties entered into between Pakistan and other countries and the treaties that have been entered by Government of India with other countries. He further contended that other treaties provides inclusive definition inter=alia for the exemption/concession of these income under the Article 8 of the treaty whereas in case of Safemarine Container there is no such inclusive definition pertaining to exemption/concession given under the treaty between Pakistan and Belgium. He prayed that the order passed by the Learned CIR(Appeals) may kindly be maintained.
8. We have heard the learned representatives from the sides, perused impugned order, the orders passed by the Taxation Officer under sections 124/143(2) of the Ordinance, 2001 and other relevant available record of the case.
9. The previous controversies in the instant case was the issue that whether consideration for carriage of goods or passengers received or receivable by a shipping company in Pakistan embarked outside Pakistan is chargeable under the Income Tax Ordinance, 2001 or not? Further, as to whether the Treaty for the Avoidance of Double Taxation and prevention of fiscal evasion with respect to taxes on income through S.R.O. No,231(I)/59 dated 4-6-1959 covers the goods booked in Pakistan for disembarkation in the other country or not?
10. The issues has already been dilated upon and discussed in detail by the Division Bench of this Tribunal vide order dated 27-1-2007 in I.T.A. No,1236/KB/2006 (Tax Year 2006) which has been followed in a number of cases by this Tribunal including in I.T.A. No, 1236/KB/2006 dated 27-1-2007 as well as I.T.As. Nos,305, 208, 311 etc./KB/2009 dated 26-6-2009, I.T.As. Nos, 85,87,91,94,131 to 133, 370 to 382, 945, 948 and 951/KB of 2009 and 2010 dated 28-5-2010 and I.T.As. Nos,414 to 422, etc./KB/2010 dated 12-8-2010. The view remains that income of said transaction is chargeable in Pakistan and the Tax Treaty between the two countries Pakistan and Belgium applicable on these cases also does not provide any exemption to other charges in Pakistan. Thus a remote reference is available in the earlier decision of this Tribunal mentioned supra.
11.Presently the main issue before us is whether (THC), (CDC) and (CSC) would be treated at par with freight charges for the purpose of 50% reduction in the applicable tax rate? All said and done.
We fully agree to the referred judgment of the Honorable Supreme Court of Pakistan reported as 1966 PTD 664, PLD 2008 SC 446 = 2008 PTD 1157 and Honourable Lahore High Court reported as 2004 PTD (Trib.) 2326 as relied upon by the Taxation Officer and the learned CIR(A) that exemption from tax has to be in express words and it can neither be implied nor stretched. Our emphasis is on the fact that where the exemption was desired by any contracting State it was specifically mentioned by counting the related activities.
12.Following is the summary of some treaties mentioning or not mentioning the ancillary activities.
TREATIES EXPLICITLY GRANTING EXEMPTION TO ANCILLARY INCOME: DTT between Pakistan and Malta signed on 8th October, 1975 and Enforce on 20th December, 1975.
DTT between India and Denmark enforce on 13-6-1989 DTT' between India and Belgium enforce on 1-10-1997 DTT between India and Malta enforce on 8-2-1995 TREATIES GRANTING EXEMPTION TO ANCILLARY INCOME THROUGH SPECIAL PROTOCOL: DTT between India and Germany DTT between India and Japan TREATIES NOT GRANTING EXEMPTION TO ANCILLARY INCOME: DTT between Pakistan and Denmark enforce on 22-10-1987 DTT between Pakistan and Belgium signed on 17-3-1980 and enforce on 2-9-1983 DTT between India and Australia enforce on 30-12-1991 DTT between India and Bangladesh enforce on 27-5-1992
13. Moreover, the tax department entered in an MOU dated 26-5-1997 with the Shipping Agents Association wherein it is resolved that if the ancillary income if not covered by bilateral treaty, it shall be taxed in terms of section 7 of the Ordinance, 2001 at the specified rate of 8% of gross receipts. This MOU is being implemented by the contracting parties without any controversy and the taxpayer has not repudiated the other existing benefits from the accepted interpretation of double taxation treaties.
14.In the context of foregoing, we find no substance in the appeals of taxpayer and these are accordingly rejected.