1. SHAHID MASOOD MANZAR (CHAIRMA N).--- The above mentioned appeal has been filed by the taxpayer for Tax Year 2019 against the impugned order dated 09/01/2019 passed by the learned CIR(A), Lahore.
2. Brief facts of the case are that the appe llant derives income from providing manu facturing services by converting liquefied natural gas into gaseous form for supply to National Network. Messrs PGP Consortium Ltd., for the period of 15 years, obtained Floating Storage and Re-gasification Unit (FSRU) on lease from a resident company of Singapore Messrs BW FSRU 11 PTE Limited. Since there exists Avoidance of Double Taxation Treaty between Pakistan and Singapore, therefore, considering that income of non-resident company falls under Article 7 of the Treaty (Business income), the appellant, under section 152(5) of the Income Tax Ordinance, 2001, notified for making payment to the non-resident company , without deduction of tax. As per Article 7 of the Treaty , business income of non-resident company is liable to be assessed in the Singapore. Income Tax Department is of the view that FSRU is an equipment and that the payment made towards right to use the equipment is chargeable to tax in Pakistan under Article 12 of the Treaty . Commissioner IRS Zone-6, Corporate Regional Tax Office rejected the request of taxpayer for payment to non-resident company without deduction of tax against which appellant filed appeal before the learned Commissioner Inland Revenue (Appeals), who also upheld the order of Zonal Commissioner . Learned Commissioner Inland Revenue (Appeals) held that FSRU is an Industrial Equipment, the payments made by PGP Consortium Ltd to non-resident company were in the nature of "Royalty", hence taxable in Pakistan under Article 12 of Avoidance of Double Taxation Treaty between Pakistan and Singapore. Hence this appeal before this Tribunal on the following grounds: 1) That the Order of CIR(A) is bad in law and against the facts of the case.
2. 2) That the CIR(A) unlawfully upheld, the order passed for rejection of notification given for making payments to non-resident without deduction of tax.
3. 3)That M/s PGP Consortium Limited hired floating storage and regasification unit (FSRU) from non-resident company M/s BW RSRU II PTE LIMITED.
4. 4) That FSRU which is a ship having fitted with regasification plant is intangible moveable asset.
5. 5) That anything which has ability to move from one place to another place is a moveable asset.
6. 6) That lease income from tangible movable is liable to be assessed as business income under section 18(1)(c) of Income T ax Ordinance, 2001.
7. 7) That leasing of FSRU is regular business of non-resident company .
8. 8) That according to Article 7 of Tax treaty between Government of Pakistan and Singapore, business income of enterprise of contracting state shall be taxable only in that state unless business is carried on through permanent establishment.
9. 9) That it is an admitted facts that no permanent establishment of non-resident company exists in Pakistan hence, no tax is deductible/chargeable in Pakistan.
10. 10) That the Zonal Commissioner IR as well as Commissioner (Appeals) has unlawfully treated the "business income" of non-resident company as "Royalty income"
11. 11) That Industrial or scientific equipment is in fact a set of tools to complete as task whereas FSRU has a re- gasification plant comprising of machines and equipment, 12) That CIR(Appeals) while deciding the appeal ignored the binding decisio n of learned Tribunal vide ITA No.2495/LB/2018 dated 30.07.2018.
12. 13) That learned Tribunal in the above quoted judgment held that the payments made to non-resident company do not attract the provisions of Article 12 (Royalty Income) of treaty for avoidance of double taxation.
13. 14) That learned Tribunal in the above quoted judgment held that the payments fall under article 7 of treaty (Business income) hence no tax is liable to be deducted by the payment of the money .
3. The learned AR briefly introduced the nature and kind of FSRU. He stated that FSRU is a ship on which re- gasification plant is fitted. FSRU, which has storage and re-gasification ability comprises of storage tanks, boilers, propulsion motors, cargo pumps, compressors, gas combustion units, discharge heads etc. Learned AR stated that this Tribunal vide judgment ITA No.2495/LB/2018 dated 30.07.2018 has already thrashed the issue with reference to "Plant", "Machinery" and "Equipment" and taxability under Article 12 or Article 7 of the Treaty . He stated that DB of this Tribunal vide above quoted judgment has already held that the FSRU being a plant fitted over a ship does not fall under the category of "Equipment". It has also been held that payments to non-resident company on account of rent do not attract the provisio ns of Article 12 of Treaty rather these fall under Article 7 hence no tax is liable to be deducted from the payments.
14. It is argued that the department should have to determine the chargeability of payment under Income Tax Ordinance, 2001 and then see what Avoidance of Double Taxation Treaty holds regarding deduction of tax. He stated that under section 107 of the Ordinance, provisions of agreement have overriding effect vis-a-vis income tax laws including section 152 of the Income Tax Ordinance, 2001.
15. According to learned AR, Royalty as well as income from lease of any building together with plant and machinery is chargeable to tax under section 39 under the head "Income from other sources", and the legislation under section 18(1)(d) has specifically charged income from hire on lease of tangible moveable asset under the head "Income from Business". He stated that as per definition of Royalty given in section 2(54)(e) of Income Tax Ordinance, consideration paid for use or right to use scientific or industrial equipment shall be charged under the head "Royalty". Learned AR contended that although the learned Tribunal in its judgment ITA No.2495/LB/2018 has held that re-gasification plant fitted on ship is not an equipment and has held that terms "Plant" "Machinery" and "Equipment" are quite distinguishable and different from one another . According to him if for a moment it is assumed that re-gasification plant is an equipment, then FSRU being movable tangible asset/equipment shall fall outside the scope of "Income from Other Sources" being specifically included under the head "Income from Business" through clause (d) of subsection (1) of section 18 of Income Tax Ordinan ce, 2001. He stated that as held by quite a number of appellate forums "Specific law Prevails over General law". He in its support placed reliance upon judgments reported as 1993 SCMR 1644, 2008 PTD (Lah H. C) 838, 2011 PTD (Sindh H. C) 2042, 2011 PTD (Trib) 382. He stated that as held by Hon'ble Lahore High Court hi judgment reported as 2008 PTD 838, when in fiscal statute two interpretations are possible then issue is to be resolved in favour of taxpayer . He argued that Tribunal in judgment 2018 PTD 382, relying upon judgment of Apex Court, 2001 PTD 19, has held that in the presence of specific provisions, the issue cannot be dealt under general provisions. He before this court also submitted detailed working and description of FSRU and also difference in "Plan t" "Machinery" and "Equipment" which we do not need to reproduce as it is the part of discussion of this Tribunal's earlier order vide ITA No.2495/LB/2018 dated 30.07.2018.
16. It is argued that making payment to non-r esident without deduction of tax, issuance of notice under section 152(5) of Ordinance has been discussed in detail by the Hon'ble Karachi High Court in Judgment reported as 2010 PTD 1159. He stated that as held by the Hon'ble Karachi High Court, the use of word "shall" in section 152(5) could not be construed that it is mandatory provision of law rather it is directory provision for which taxpayer cannot be penalized. He stated that since Tribunal vide Judgment dated 30.07.2018 has already held that the payment made to non-resident company is covered by Article 7 of Treaty , therefore, upon notification to the Commissioner under section 152(5), the Zonal Commissioner should have allowed to make the payment without deduction of tax. When asked from the AR regarding pendency of matter of deduction of tax from payments made to non-resident at Lahore High Court, he stated that since Tribunal had already held that payments are covered under Article 7 of Treaty , therefore, appellant withdrew the Writ Petition filed before the Lahore High Court. The learned AR of taxpayer stated that Hon'ble Karachi High Court has held the issuance of notice for non-deduction of tax as "directory", therefore, notice issued informing the Commissioner for non-deduction of tax from payments made to non-resident for period of 15 years should be sufficient and taxpayer is not unde r obligation to seek approval of Commissioner every month under sections 152(5) and 152(5A) of the Income Tax Ordinance, 2001. He has, therefore, requested to vacate the impugned order .
3. The learned DR on the other hand supported the impugned order of Commissioner Inland Revenue as well as Commissioner (Appeals). It has been stated that definition given in section 2(54)(e) of Ordinance makes it abundantly clear that payment made for the use of Industrial Equipment is chargeable to tax under the head "Royalty", therefore, as, it falls under Article 12 of Treaty , hence, tax is liable to be deducted from the payments made to non-resident. The learned DR contended that Federal Board of Revenue, in another case of similar nature, gave Advance Ruling that the payment made to non-resident falls under the mandate of "Royalty". He has, therefore, requested to reject the appeal.
4. We have heard the arguments of the learned AR as well as learned DR. We have also gone through the judgment of this Tribunal vide ITA No.2495/LB/2018' dated 30.07.2018 and judgment reported as 2010 PTD (Kar H.C) 1159. First we will discuss the issue with reference to Royalty and Business Income vis--vis section 39 read with sections 2(54)(e) and 18 respective ly. We agree with the arguments of learned AR that firstly we have to determine that under which head of income the non-resident is chargeable to tax. Once it is determined, then it is to be seen that whether the amount paid is likely to be taxed in Pakistan under "Avoidance of Double Taxation Treaty" between Pakistan and Singapore.
17. We have observed that Royalty is chargeable to tax as "Income from Other Sources" under section 39 of Income Tax Ordinance, 2001. Definition of Roya lty is given in clause (e) of subsection (54) of section 2 of Income Tax Ordinance, 2001 which is reproduced below:- "(54) "Royalty" means ... .....
(a) .... .... ....
(b) .... ..... ....
(c) .... .... ....
(d) .... .... ....
18. (e)the use of or right to use any industrial commercial on scientific equipment.
(f) .... .... .....
19. Business income is chargeable to tax under section 18 of the Income Tax Ordinance, 2001 which is reproduced as under:- "Section 18. Income from business.- (1) The following incomes of a person for a tax year, other than income exempt from tax under this Ordinance, shall be chargeable to tax under the head "Income from Business:
(a) .... .... ....
(b) .... .... ....
(c) Any income from the hire or lease of tangible movable asset."
20. The definition of royalty given in section 2(54)(e) is "General" which means payment against right to use of any industrial equipment shall be charged to tax as "Royalty" under the head "Income from Other Sources". As per Article 12 of the "Avoidance of Double Taxation Treaty" between Pakistan and Singapore, the tax is liable to be deducted in Pakistan at the rate specified in the Treaty . Now for a moment we assume that FSRU is an equipment but section 18(1)(c) specifically holds that any income from the lease of tangible movable asset is to be charged to tax as "Income from Business". In our opinion section 18(1)(c) is specific as it charges to tax income from lease of tangible moveable asset. FSRU which is a ship on which re-gasification plant has been fitted, whether it is "Plant" or "Machine" or "Equipment" may be a dispute, but undoubtedly FSRU is tangible movable asset, therefore, lease income is chargeable to tax under the head "Income from Business". There are number of judgments which hold that specific provisions overrule general provisions and that when two interpretat ions are possible, then one that favours the taxpayer is to be adopted. Reliance in this regard is placed on following case laws: 1993 SCMR 1644 "Special provision and general provision covering the same field---Where a special provision had been made on a subject and there was also a general provision susceptible of covering the same field and the matter was covered by both the provisions, presumption would be that the general provision was not intended to interfere with the operation of the special provision, the case would have to be dealt with under the latter (special) provision."
21. 2011 PTD (T rib) 382 "It is a well-settled principle of law that when specific provision for any issue is obtaining in the statute, then that issue cannot be dealt with under the general provisions of the statute. In this regard reliance is placed on a reported case-law cited as 2001 PTD 19 wherein their Lordships observed as under:- "In presence of a specific provision of law applicable to the situation the Assessing Officer could not have resorted to any other provision of law ."
22. 2008 PTD (Lah H. C) 838 "Fiscal statutes---Charging provisions---T wo interpretations --- Scope---Method of interpretation of charging provisions in fiscal statute is that where two interpretations arte equally possible, then issue is to be resolved in favour of tax payer and not in favour of the revenue.
23. Fiscal statutes---T ax charging---Principle---T ax cannot be charged by implication and there is no equity about tax--- In taxing statutes one has to look at what is clearly said---One can only look fairly at the language used and there is no room for intendment."
24. 2011 PTD (Sindh HC) 2042 "When special statute provides something to be done in a particular manner , then general provisions are ousted."
25. On the basis of discussion made above, we hold that payment made towards lease of FSRU (tangible movable asset) shall be assessed as "business income", and by no stretch of mind it can be taxed as "Royalty".
26. According to section 107 of the Income Tax Ordinance, 2001, provisions of agreements for Avoidance of Double Taxation override tax law, therefore, after settling the issue of chargeability , it is mandatory to apply the provisions of treaty between Pakistan and Singapore. Article 12 of the Treaty dealing with the taxation of "Royalty" is ruled out, whereas, Article 7 of the Treaty dealing with the taxation of business income comes into play. Clause -(1) of the Article 7 of the Treaty is reproduced as under:- "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. If the enterprise carries on business as aforesaid, the profits of the enterpri se may be taxed in the other State but only so much of them as is attributable to that permanent establishment."
27. In view of discussion made above, we are of the view that FSRU is a movable tangible asset chargeable to tax as business income, the payments made by PGP Consortium Ltd. to non-resident company are taxable only in Singapore as no dispute exists regarding non-presence of permanent establishment of non-resident company in Pakistan.
5. Now we come to another aspect i.e. whether FSRU is "Equipment" so as to charge the payments to tax under Article 12 of the Treaty . Since this Tribunal, in the Judgment ITA No.2495/LB/2018 dated 30.07.2018, has made detailed discussion so we feel it important to reproduce the findings of this Tribunal given in the above quoted judgment.
28. "Section 152 of the Income Tax Ordinance, 2001 deals with the deduction of tax from the payments made to the non-resident. Tax on payments towards royalties is to be deducted under subsection (1) of section 152, whereas, tax on payments other then royalties, technical services, contracts, advertisements, insurance premium etc is to be deducted under subsection (2) of section 152. Since, according to provisions of section 107 of Income Tax Ordinance, 2001, and pronouncements of appellate forums, agreement for the avoidance of double taxation prevails over the Income Tax Ordinance, therefore, this Tribunal shall restrict itself toward applicability of "Article 7" or "Article 12" of the T reaty .
29. We have gone through the definition of "equipment" and machine from the webside www .quora.com.
30. "Machine Machine is a singular noun or a verb. The noun covers two things. Firstly an object made up of number of parts designed to perform a task. It has an input, normally power of some description, and generates an output such as a product or a movement. Machinery is a collection of machines that operate together to perform a single task."
31. "Equipment The subtlery of difference with machine is that equipment does not inherently do anything. It does not convert anything to anything else. It does not anything but is essential for a task."
32. The above definitions reveal that there is marked difference between "Machine" and "Equipment". It is a matter of common knowledge that different "Machines and Equipments" constitute a Plant. We agree with the arguments of learned A.R that a "Cement Plant" cannot be called as "Cement Equipment", a Fertilizer Plant cannot be called as "Fertilizer Equipment" and similarly with the same ratio a "Re-gasification Plant" cannot be called as "Re- gasification Equipment". The three terms, "Plant" "Machinery" and "Equipment" are different from one another; also get support from the fact that in Income Tax Ordinance at various occasions these have separately been used. In Clause (60A) of Part IV of Second Sche dule to Ordinance exemption from provisions of section 148 have been granted by using three terms "Plant" "Machinery" and "Equipment". Had these been same things, then three separate terminology would not have been used. Furthermore we have gone through the clause (91) of Part of Second Schedule where exemption from provisions of section 148 have been granted only to the "equipment" and not to machinery or plant which again proves that "equipment" is different from Plant and Machinery . Furthermore the equipments mentioned in Clause (91) do not have ability to produce an output different from input.
33. From "Wikipedia" we have studied re-gasification, which is a process of converting liquefied natural gas (LNG) at - 162C temperature back to natural gas at atmospheric temperature. For this purpose LNG gasification plants are used which can be located on land as well as on floating barage. In the conventional re-gasification plant, LNG is heated by sea water to convert it to natural gas.
34. We have very carefully studied the FSRU obtained as lease from the non-resident company . As per documents given by the taxpayer , it is a ship having 292.57m length and 43.4m bredth. LNG storage and re-gasification Plant is fitted on this ship which means FSRU has storage as well as re-gasification ability . The Plant comprises of storage tanks, boilers, propulsion motors, cargo pumps, compressors, gas combustion units, discharge heads etc. We have also gone through the highly technical process of working of re-gasification plant.
35. The discussion made above leaves no doubt in our mind that "FSRU" is a ship fitted with re-gasification Plant. The words used in "Article 12" of the treaty "Industrial and Scientific Equipment" cannot be used for the "Storage and re-gasification Plant".
36. We have also gone through the judgments referred by the learned A.R regarding taxation according to letter of law: 2014 PTD 2016 --Supreme Court of Pakistan "---Word in a statute --- Meaning assigned ---Scope--- Ordinary and natural meaning --- Basic rule for interpretation of statutes was to give the words their ordinary and natural meaning."
37. 2000 PTD 3765 --Lahore High Court ---Fiscal Statute--- Principles.
(i) Only words of the statute should be looked into.
(ii) Levy can only be made by express and exact words.
(iii) A person must be taxed only if he comes within the letter of law otherwise he is free even through his case falls within the spirit of law .
(iv) Only the letter of law is to be looked into and that there is no room for any intendment, equity or presumption.
(v) Fiscal statutes should be strictly construed so far liability to tax is concerned.
(vi) Language of a taxing statute should not be stretched to hold subject liable to tax.
(vii) Where two equally reasonable interpretations are possible one strict and other liberal, then the one favourable to the subject should be adopted.
(viii) in fiscal statute every word must be construed in the perspective it has been used, that nothing should be considered as superfluous, or surplusage.
(ix) Subject should be allowed to escape the incidence of taxation if he cannot be brought within the four corners of words of law .
38. In view of facts of the case that we are of the considered opinion that FSRU which is storage and re-gasification plant is not "equipment" on which payment is to be considered as "Royalty" under article 12 of the treaty . We are constrained to follow the judgments of the Hon'ble Supreme Court and High Court that only words of statute should be looked into and there is no room for any intendment, equity or presumption. As held by the Hon'ble apex court of Pakistan basic rule of interpretation is to give the words their ordinary and natural meaning. it is brought on record that in the Income Tax Ordinance under section 18(1)(c), income from hire or lease of tangible movable property is specifically to be charged to tax under the head "Income from business". FSRU, a ship, having storage and re-gasification plant is moveable tangible asset.
39. In view of discussion made above we hold that the FSRU does not fall under the category of "Equipment" rather it is a re-gasification plant, fitted over a ship therefore payments on account of rent to non-resident company do not attract the provisions of Article 12 of the treaty for avoidance of double taxation, the payments fall under Article 7 of the treaty and since no permanent establishment of the non-resident company exists in Pakistan therefore, no tax is liable to be deducted from the payments."
40. After perusal of the above decisions of the Tribunal, we find no reason to differ with the findings given by our learned brothers in the ITA No.2495/LB/20 18. We, after fully agreeing with the above findings hold that FSRU is not an equipment therefore, rent paid to non-resident company does not call for any deduction under Article 12 of the Treaty for Avoidance of Double Taxation. The payments come within scope of Article 7 of the Treaty hence, as per provisions of Article 7, no tax is liable to be deducted.
6. We have also gone through the findings given by the Hon'ble Karachi High Court in the judgment reported as 2010 PTD 1159. Hon'ble Karachi High Court, regarding legal obligation of the payer to obtain nil withholding certificate from Commissioner , in paras 16, 17 and 18 of the judgment holds: "16. Now coming to the second limb of the argument of the petitioner that the respondents are misinterpreting the provisions of F.A. 2008 in demanding that prior remitting these amounts to the foreign enterprises the petitioner are under the legal obligation to obtain a nil withholding certificate from the Commissioner as per the provision of section 152(5) of the Ordinance. In our view the issue can also be judged from another angle. We find that although the provision of section 152(5) of the Ordinance directs a taxpayer to seek approval from the Commissioner for remitting the payment to the non-resident without deduction of tax, however , they do not specify as to the penal consequences in the even t the approval is not obtained. We also note that the legislature has used the word "shall" requiring the person to furnish to the Commissioner the relevant information should he choose to obtain the approval under section 152(5) of the Ordinance, and states as under:- "the person shall, before making the payment, furnish to the Commissioner a notice in writing setting out-
(a) the name and address of the non-resident person; and
(b) The nature and amount of the payment."
41. "17. A view is taken by the counsel of the department that by using the word "shall", the legislature has made the above provision mandatory in nature and defiance whereof must result in action against the taxpayer . However , we are not impressed with this argument for the reason that section 152 of the Ordina nce as a whole does not specify the consequences of not following the requirement of informing the Commissioner if the person chooses to make the payment without deduction of tax. We are of the view that merely on the basis of the use of the word "shall" it could not be construed that it is a mandatory provision of law but is a directory provision and for not following a directory provision, a taxpayer cannot be penalized."
18. Conversely , the provisions of subsecti on (5A) of section 152 of the Ordinance also require the Commissioner to pass an order within 30 days of the receipt of the application from the taxpayer under section 152(5) of the Ordinance. Here also, the word "shall" has been used. However , it has not been specified as to what will happen in case the Commissioner does not pass an order within the period provided in section 152(5) of the Ordinance.
42. Accordingly , we can safely say that these provisions are also not mandatory . Although by going with the argument of the counsel for the department that the provisions of section 152(5) of the Ordinance are mandatory , it can be said that the provisions of section 152(5A) of the Ordinance are also mandatory but as stated above, we are not inclined to hold this for the reason that mere use of the word "shall" does not make a provision mandatory ."
43. We have noted that the Hon'ble Karachi High Court in the above quoted judgmen t has very ably guided that the giving of notice by the Commissioner under section 152(5) for making payment to non-resident without deduction of tax and passing of order by Commissioner under section 152(5A) are directory in nature.
44. After considering the above discussed facts and the case law we are of the considered view that the Payments made to non-resident company as rent of FSRU are chargeable to tax as "business income" under Article 7 of the Treaty , hence no tax is liable to be deducted from the payments. The FSRU is not an "equipment", rent of which can be charged to tax as "Royalty" unde r Article 12 of Treaty , hence, PGP Conso rtium is not liable to deduct any tax from the payments. The notice given by the PGP Consortium Ltd to Commissioner for making the lease payments to non-resident company in view of provisions of Article 7 of the Treaty is according to law, it does not suffer with any legal infirmity and the Zonal Commissioner was not justified in rejecting the intimation given by the PGP Consortium Ltd. Similarly , learned Commissioner IR (Appeals) was not justified in rejecting the appeal of the appellant.
45. We, therefore, cancel the orders of Zonal Commissioner and the learned Commissioner (Appeals), allow Messrs PGP Consortium Ltd. to make the payments to non-resident company without deduction of tax and also hold that since intimation to Zonal Commissioner has already been given to make the payment to non-resident company without deduction of tax for the period of fifteen years, therefore, payments in future to non-resident company shall be made without giving any further notice as the notice already given serve the purpose of law .
7. The appeal is decided in the manner referred above.