SHAHID MASOOD MANZAR (CHAIRMAN).----This appeal has been filed against the impugned order bearing No.CIR(A)/SKT I.Tax/433 dated 05.12.2017 passed by the learned Commissioner Inland Revenue (Appeals), Sialkot on the following grounds: -
1. That the appellate order under section 129 of the Income Tax Ordinance, 2001, passed by the learned Commissioner Inland Revenue, (Appeals), Sialkot is bad in law and against the facts and circumstances of the case.
2. That the learned CIR (A) was not justified in remanding back the case for de novo consideration.
3. That the learned CIR (A) was not justified that the assessment came to knowledge of the appellant when the bankers had informed that tax department has looted the account by way of attachment under section 141 of the Income T ax Ordinance, 2001.
4. That no notice, order or correspondence was received by appellant through registered post, courier service or personally under section 218(5) read with section 218(1) of the Income T ax Ordinance, 2001.
5. That the learned CIR (A) was not justified that the order passed by learned ACIR is patently illegal on the point of jurisdiction. BTB was not allowed to make assessments until 01-08-2013 where Board has allowed Commissioner Inland Revenue (BTB, IP and FTD and HRM) to make assessment under sections 122 and 122C only. Assessment under section 121 was not authorised to the BTB officials.
6. That appellant is non-resident Pakistani, engaged in Restaurant business in France where he is earning his livelihood. Since he does not have any Pakistani Source Income, therefore, section 111 cannot be invoked. Even otherwise he had enough agricultural income to purchase this property.
7 That the learned CIR (A) was not justified that the ACIR has failed to declare nobody as representative of the taxpayer under section 172 of Income Tax Ordinance, 2001, therefore, the entire exercise is illegal and without jurisdiction.
8. That the appellant had brought in money through legal sources and channels. Which are not subject to invoking of section 111 of the Income Tax Ordinance, 2001.
9. That section 111 is not applicable on the non-residents therefore, the learned ACIR has illegally invoked the provision which is void ab initio and illegal.
10. That the appellant has not visited Pakistan in the aforesaid period and invoking ex parte assessment under section 121 of the Income T ax Ordinance, 2001 is patently illegal and injustice.
11. That the appellant craves leave to add, alter, withdraw and substitute all or any grounds of appeal on or before the date of hearing.
2. Brief facts of the case are that the appellant is a French National and is not a resident of Pakistan. He is engaged in the business of restaurant and is owner of one in Paris, France and holds that his source of income is outside Pakistan. The proceedings in the case were started by ACIR on the basis of information where it was alleged that the taxpayer purchased properties for the consideration of Rs.34,32,000/-. Notice under sections 114(4) and 116(1) of the Income Tax Ordinance, 2001 was issued but on the day of the hearing neither anyone appeared, nor filed any reply. Later on, notice under section 111(1)(b) of the Income Tax Ordinance, 2001, were issued, but to no avail.
Consequently, the ACIR completed assessment under section 121(1) of the Income Tax Ordinance, 2001 vide order dated 28-04-2012 received on 02-06-2016, creating a tax demand of Rs.8,58,000/- and subsequently attached the bank accounts and recovered the impugned tax so assessed under section 140 of Income Tax Ordinance, 2001.
Aggrieved of the treatment, the taxpayer filed the first appeal before the Commissioner Inland Revenue (Appeals), Sialkot who vide his impugned order No.CIR(A)/SKT-I.Tax/433 dated 05.12.2017 remanded back the assessment passed by the ACIR for de novo consideration.
Again being aggrieved, the taxpayer filed instant appeal before this forum.
3. The taxpayer is represented by Mr. Tahir Razzaque Khan, FCA, and Mr. Shaheer Bin Tahir, Advocate, both representing the taxpayer in the capacity of Authorised Representatives. The Departmental Representative in this case was Mr . Tariq Javaid Burki, learned Additional Commissioner Inland Revenue.
4. The following submissions were made by the learned AR of the appellant in this case:-
(i) It was contended that learned CIR(A) was not justified in passing the order and remanding the matter for de novo consideration because of the fact that the appellant is not a resident of Pakistan and is a French citizen. In order for a tax liability to be attracted, it first needs to be proved by the department that the taxpayer was in Pakistan, subject to section 82 of the ITO, 2001, which lays down the circumstances under which one can be held to be a resident of a state, for the tax year i.e. the 183 (one hundred and eighty three) days rule. It was contended that the appellant is an owner of a Restaurant, in Paris, France, and holds that as his source of income.
(ii) Furthermore, learned CIR(A) has erred in assessing him as a resident whereas the appellant is in fact a resident of France.
The department has simply assumed that by virtue of having property in Pakistan renders the appellant as a resident of the country, without concerning the relevant authorities (i.e. the French embassy) or having done any conclusive study into the double tax agreement between the two countries, which provides the taxpayer with relief under Article 4(2)(b) of the Convention between the Government of the French Republic and The Government of the Islamic Republic of Pakistan For the Avoidance of Double Taxation And the Prevention of Fiscal Evasion with Respect to Taxes on Income (henceforth "The Convention")
(iii) It was vehemently submitted by the learned AR that the application of section 111 of the ITO, 2001, is only applicable to individuals who are residents of Pakistan for the Tax-Year as illustrated in section 82 of the ITO, 2001. Attention was drawn to the matters of international tax case law and the residence test, as imposed under the national legislation under section 82(a) of the ITO, 2001. The test laid out in the provision provides that the person to be in Pakistan for a total of 183 days, to attract the tax liability under the provisions. The taxpayer in this regard, has not been a resident of Pakistan for said number of days; as is evident from his passport issued by the French Government. This hereby excludes him from the definition of a "resident" under section 82(a) of the ITO, 2001.
(iv) It was contended by learned AR that the person is not a resident of Pakistan for the tax year, as he had not been in Pakistan for a total of one hundred and eighty-three days for the tax-year 2008.
(v) Learned AR also submitted that another issue that needs the careful consideration, is that of the application of section 1(2) of the Income Tax Ordinance, 2001. The section states that the authority of the letter of the law laid out in the Income Tax Ordinance, 2001, extends to the whole of Pakistan. The issue that arises here is one of jurisdiction. Due to the fact, that the person does not live in Pakistan, the application of unexplained income does not arise under section 111 of the Income Tax Ordinance, 2001. Furthermore, as the individual in question is not a "resident" of Pakistan, the issue of unexplained income under section 111 is also ill-founded.
(vi) Stemming from the above-mentioned argument, it is thus elucidated that Section 111 of the Income Tax Ordinance, 2001 would attract tax liability only if the individual in question is a "resident". Reliance was placed on the decision of the ATIR in ITA No. 57/1B/2015 dated 16.02.2015 in identical circumstances and ITA No. 1066/LB/2013 dated 15.08.2013 where the Tribunal held that:-
5. "we would like to clarify that a citizen can be made liable to pay tax only on the basis of unambiguous and explicit law. In fiscal statute there is no room for any presumption or intendment and no provision of law can, by any process of argumentation or interpretation be loaded with meaning or intentions which plain language of the provision does not convey. In this case, we are of the considered view that the department is trying to screw the taxpayer and extorting tax without observing the cardinal principal of tax laws discussed above. The department functionaries are also acting under sheer ignorance and not following procedure laid down in statute and circulars and clarifications issued by the FBR which are binding on all functionaries working under FBR under the law.
6. We are of the view that once it has come on record and has been established that the appellant is a French National Pakistani having sufficient sources of income through running Restaurant in France and having transferred foreign currency through proper Banking channels or otherwise by legal means, there was no justification to harass the appellant which is discouraging him to invest in Pakistan. He has no means/business in Pakistan and all sources of income are in France and has only made investment in Pakistan by purchasing landed property through foreign exchange brought from France. It is further observed that tax is not a forced liability but in fact it is a responsibility to owe to the state a proportionate share given by the taxpayer for utilizing and consuming the services provided by the state. Its determination must be made with a view to keep the above principle intact and to maintain confidence and to boost the encouragement in the taxpaying society so that the tax should not be taken by the concerned public to be a harsh imposition but a duty. The Honourable High Courts and this Tribunal has held in many cases that it is high time to develop tax culture in the working classes which will help the enforcement of self-assessment at large and the tendency of concealment of taxes shall be gradually discouraged and public would rather prefer to be the taxpayer instead of tax swallowers. Similar is the position regarding Foreign National making investment, they should be encouraged rather forced to make investment in other countries".
(vii) The learned AR of the appellant as a matter of procedural accuracy has drawn our attention to the issue of the service of documents, due to which reliance is placed on Sections 172(5) and 218 of the ITO, 2001. The relevant provisions read as under:- "172. Representatives.----(1) For the purposes of this Ordinance and subject to subsections (2) and (3), "representative" in respect of a person for a tax year, means --
(a) where the person is an individual under a legal disability , the guardian or manager who receives or is entitled to receive income on behalf, or for the benefit of the individual;
(b) where the person is a company (other than a trust, a Provincial Government, or [Local Government] in Pakistan), the principal of ficer of the company;
(c) where the person is a trust declare d by a duly executed instrument in writing whether testamentary or otherwise (including any Wakf deed which is valid under the Mussalman Wakf Validation Act, 1913 (VI of 1913)), any trustee of the trust;
(d) where the person is a Provincial Government, or [Local Government] in Pakistan, any individual responsible for accounting for the receipt and payment of moneys or funds on behalf of the Provincial Government or [Local Government];
(e) where the person is an association of persons, the 'Principal officer of the association or, in the case of a firm, any partner in the firm;
(f) where the person is the Federal Government, any individual responsible for accounting for the receipt and payment of moneys or funds on behalf of the Federal Government; or
(g) where the person is a public international organisation, or a foreign government or political sub- Division of .a foreign government, any individual responsible for accounting for the receipt and payment of moneys or funds in Pakistan on behalf of the organisation, government, or political sub-Division of the government.
(2) Where the Court of Wards, the Administrator General, the Official Trustee, or any receiver or manager appointed by, or under , any order of a Court receives or is entitled to receive income on behalf, or for the benefit of any person, such Court of Wards, Administrator General, Official Trustee, receiver , or manager shall be the representative of the person for a tax year for the purposes of this Ordinance.
(3) Subject to subsections (4) and (5), where a person is a non resident person, the representative of the person for the purposes of this Ordinance for a tax year shall be any person in Pakistan -
(a) who is employed by, or on behalf of, the non-resident person;
(b) who has any business connection with the non-resident person 1.1 [Explanation.---In this clause the expression "business connection" includes transfer of an asset or business in Pakistan by a non-resident;]
(c) from or through whom the non-resident person is in receipt of any income, whether directly or indirectly;
(d) who holds, or controls the receipt or disposal of any money belonging to the non-resident person;
(e) who is the trustee of the non-resident person; or who is declared by the Commissioner by [an order] in writing to be the representative of the non-resident person.
(4) A bona fide independent broker in Pakistan who, in respect of any transactions, does not deal directly with, or on behalf of, a non-resident principal but deals with, or through a non-resident broker , shall not be treated as a representative of the non resident principal in respect of such transactions, if--
(a) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and
(b) the non-resident broker is carrying on such transactions in the ordinary course of its business and not as a principal.
(5) No person shall be declared as the representative of a non resident person unless the person has been given an opportunity by the Commissioner of being heard.
218. Service of notices and other documents.---(1) Subject to this Ordinance, any notice, order , or requisition required to be served on a resident individual (other than in a representative capacity) for the purposes of this Ordinance shall be treated as properly served on the individual if - a) personally served on the individual or, in the case of an individual under a legal disability or a non- resident individual, the representative of the individual.
It was rudimentary for Commissioner Inland Revenue to make someone representative under section 218(1)(a) by exercising the power under section 172(5). In this case no one was made representative under section 218(1)(a) read with section 172(5) on whom the notice could be served. In light of the above provision, it was submitted that the service of documents made was not done so in a proper fashion, if at all. The show-cause notice was not served on the person/taxpayer , who was not in Pakistan when it was issued. Only this fault render the entire proceedings void ab inito.
Furthermore, it was submitted that the service should have been made to his repre sentative under section 172. As this was not the case, the issue at hand is liable to be dismissed on the bases of procedural misconduct, as continuation with this case would only lead to the apparent misapplication of the law and the procedure laid down for the service.
(viii) He submitted that the Department understands the necessity of and caus ality between proper service of documents and the application of the law, as both go hand in hand, and a procedural impropriety smears the case with uncertainty , which in this scenario goes against the spirit and the judiciousness on part of the tax department.
(ix) That the learned AR has contended that, in order to establish the appellant, as a tax resident of Pakistan, the tax authorities need to apply the residence test, as laid out under Article 4(2) of The Convention between Pakistan and France. The Convention implores that the term "resident of a Contracting State" means a person who "under the laws of that State, is liable to tax therein by reason of his dom icile, residence, place of management or any other criterion of a similar nature". The Convention lays tests for the tax authorities to overcome in over to decide whether the individual is a resident or not, in the failure of which, would trigger the application of a Mutual Agreement Procedure laid out in Article 25 of The Conventi on (which reproduces the words of the OECD Model Tax Convention) under which the tax authorities would take up the issue with the French Tax Authorities. His submission with reference to taxpayer of non-residents read as follows:-
(x) For the sake of understanding and case the relevant provisions of The Convention, vis--vis the OECD Model Tax Convention (MTC) are reproduced below:
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this does not include any person who is liable to tax in that State in respect only of income from sources in that State.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows; a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (center of vital interests); b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; c) if he has a habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; c) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
(xi) The paras (a) to (d) above are tie breaker tests which usually found in every treaty by the virtue of the treaty.
In regard to the provisions laid out above, it should be noted that the taxpayer would have to fall under the definition of a resident under Article 4 of The Convention. In order to do so, Article 4 of The Convention lays out four tests that need to be satisfied, i.e. Permanent Home and Centre of Vital Interests, Habitual Abode, Nationality and Mutual Agreement. To illustrate the tests, reliance is placed on Klaus Vogel on Double Taxation Conventions, Fourth Edition which is reproduced as under:- 83 If an individual has his permanent home in one of the Contracting States, he is deemed to be a resident of that State for convention purposes because his attachment to this state is reflected thereby. Where the taxpayer has a permanent home in both Contracting States, a closer look must be taken in order to determine to which Contracting State the taxpayer's attachment is closer, which is decided by his centre of vital interests. The systematic position of permanent home and centre of vital interests in a single sub-paragraph, as well as the wording "centre" (of vital interests), suggest that the taxpayer will have some vital interests at his permanent home. Thus, if the taxpayer is connected to both Contracting States via vital interests, their "centre" is decisive for the taxpayer's residence.
(xii) The commentary then goes on to illustrate how the first of the two-limb tie-breaker test would play out.
This is reproduced as under: a. Permanent Home. Under the first tie-breaker test a dual-resident individual is a resident in the state where he has a permanent home available to him. A permanent home is something more than just a place to sleep and keep some belonging on a temporary basis. Rather , the permanent home must be of such quality that it is of vital interest to the individual. The criterion "permanent home" solves the conflict where dual residence arises as a consequenc e of a permanent home in one Contracting State and a stay of some length in the other .
(b) If an individual is found to have a permanent home in both Contracting States, his residence for DTC purposes is decided by the second portion of the Article 4(2) (a) OECD and UN MC test: i.e. which permanent home is the taxpayers "cen tre of vital interests". An individual has his vital interests in the State in which his personal and economic relations are closer , between the two Contracting States.
(xii) This is further defined to show the variety of factors that may be taken into account when considering which Contracting State is to be considered the State where the individual has "closer" ties. This would be decided taking into account the personal and economic relations. It should also be stated that an individual cannot have "closer" ties to both the Contracting States.
( xiv)
(1) ...many factors from the taxpayers private and economic sphere are relevant to determine his personal and economic relations. In practice the courts have inter alia, based their decisions on an evaluation of facts surrounding the following non-exhaustive list of facts: house, family home, furnishing, rented apartment, owned apartment, passport, sharing a room, no rent, no lease, place where the taxpayer was born and raised, children, country of birth of children, spouse, country of divorce, where spouse seeks employment, family visits, other family members such as parents, partner, friends, acquaintances, memberships... etc.
(xv) Reliance is placed to the Commentary of the Article 4(2) of the OECD Model Tax Convention, which forms the basis of The Convention and every DTC that is signed.
Paragraph 2
15. If the individual has a permanent home in both Contracting States, it is necessary to look at the facts in order to ascertain , with which of the two States his personal and economic relations are closer . Thus, regard will be had to his family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property , etc. The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention. If a person who has a home in one State sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first State.
(xvi) Further reliance is placed on the book by Mr. Phillip Baker , who in Double Taxation Conventions 3rd Edition, states the following: "There have been several Canadian decisions on the meaning of the phrase centre of vital interests. In Michael Hertel v. MNR (1993) 93 D.T.C. 721 (Tax Court of Canada)the taxpayer was a resident of both Canada and West Germany and had permanent homes in both countries. However, he lived with his wife and children in Germany, where his business was located, he had ties with the community and church ties. The Tax Court concluded that his center of vital interests was in Germany. In Henry and Louise Endres v. MNR (1998) 98 D.T.C. 1101 (Tax Court of Canada). The taxpayers were residents of the US and Canada, but their home in Nova Scotia was leased with minimal furniture, their children were at school in the US and the taxpayers' business and social lives were in the US. The Tax Court concluded that their centre of vital interests was in the US. Finally, in DaleBoston v. R. (1997) 98 D.T.C. 1124 (Tax Court of Canada) the taxpayer moved from Canada to Malaysia to take up an employment. His wife and family remained in Canada, though his relations with his wife were strained. The Tax Court concluded that he was not resident in Canada, but if he were, the tie-breaker fell on the side of Malaysia. Though he had permanent homes in both countries, his personal life was centered in Malaysia and his family in Canada was not a strong enough magnet to draw him back other than for two short periods during the three years."
(xvii) Reliance is also placed on the following cases in regards to the 'economic activity and relations':
(i) Black v . R reported as 16 ITLR 573 The issue revolved around a taxpayer who was a resident of Canada under. the domestic laws, but was also resident (non-domicile) in the UK under the UK domestic law. Under the UK-Canada Double Taxation Treaty, he was treated as a resident of the UK, for the purposes of the convention. A person may live in one country, but may be taxed in the country where the income is sourced.
(ii) Yates v. Revenue and Customs Commissioners reported as 15 ITLR 205. The issue revolved around the issue of a taxpayer , who had claimed that she was not a tax resident of the UK, and if she was, she was also a tax resident in Spain. It was held that the taxpayer's personal and economic relations had been closer to the UK than they had been with Spain for the period in question. Therefore, for tax purposes, the day count was calculated, and subject to that, she was held to be a resident of the UK for the relevant tax period.
(iii) Garcia v . Canada reported as 10 ITLR 179 The issue in this case revolved around a taxpayer who received a bonus while he was in Canada, from the US. When the bonus was taxed in Canada, he argued that he was a resident in the US, where he had the strongest economic connections. He was held to be a resident in Canada, where he had a permanent home available to him.
(iv) Abdul Razzak Am Memon v . CIT (International T axation) reported as 9 ITLR 139 In this case, an investor asked for an advance ruling on whether he was a resident of India, even though he was domiciled in the UAE. It was held that a person would only be subject to the treaty only if he satisfied the requirement of being a resident of one or any of the contracting state.
(v) Alchin v. R reported as 7 ITLR 851 The taxpayer had a permanent residence in both Canada and the US. The case was dealt with on the issue of Habitual Abode and it was decided by the Canadian Tax Court that Habitual Abode meant the usual, constant continual place of residence.
(xviii) Alternatively, if the first test is not satisfied, the tax authorities must move on to the second test, i.e. Habitual Abode; it should be stated that this is a stand-alone tie-breaker test, meaning, that it would be analysed independently of the tests mentioned above. In other words, this test is not linked with any other tests, and is not subject to the conclusion of the other tests. Furthermore, it should also be mentioned that the Habitual Abode test would only be triggered when the first test of Permanent Home and Centre of Vital Interests cannot be conclusively determined in the way that either the establishment of a permanent home is an issue and cannot be found, or secondly, that the Centre of Vital Interests cannot be established.
(xix) In order to establish which Contracting State is the individual is staying in, ascertaining that the Vital Interests cannot be deduced from the facts of the case, Habitual Abode turns to a pure quantitative representation of the facts. It then allows the tax authorities to decide which Contracting State the individual has a certain connection to. It should be stated that this by no means is a day-to-day counter for the number of days spent in one Contracting State versus the other. It purely looks at whether there is a considerable difference in the period of time spent between one Contracting State or the other. In this case it was France and Pakistan. (xx) The third test that the tax authorities need to apply is that of Nationality. As stated above,the test for Nationality has been provided for under the OECD Model Tax Convention, and also The Convention.
There are two main limbs that need to be considered at this outset. Firstly, that the only reason to come to the test of Nationality is when the other tests have not yielded results and the matter of where the individual is a resident is still a matter of contention. This is by contrast not a tie-breaker test and has no actual relation with residence. It states that the Contracting State, of which the individual holds the nationality to, has the right to tax. In this regard, the case of Podd v. Commissioner (1999) reported as 1
1. T.L.R. 485 may be important where the proof of nationality was used to determine residence, and thus the taxpayer was allowed treaty benefits.
If none of the tests fulfil the criteria of residence, then The Convention has within it, a Mutual Agreement Procedure, which allows the Tax Authorities in Pakistan to decide the tax issues with the French Tax Authorities, on their own accord to fulfil the fourth test in Article 4(2) of The Convention.
(xxi) With the above submissions in mind, it would be prudent to apply the facts to the case at hand for the purposes of tax relief. In order to do so, reliance is placed on the above mentioned discussion. Therefore, subject to the tests laid out in Article 4 of The Convention: A) The appellant has a permanent house in Paris, France. In order to assess his Personal and Economic relations, reliance is placed on the following facts: i) The appellant has a business in Paris, whereby , he is a restauranteur , carrying business through a restaurant that serve Pakistani/Indian cuisine; ii) The appellant, in order to make payments to employees, has a bank account in France. iii) The appellants family live in Paris and have lived so for several years. iv) The appellant's French tax number is attached with his Tax Returns. v) The appellant's children were born in France and are French citizens.
B) The client does not come to Pakistan as a routine, and even so, does not stay for long enough to establish himself a resident of two countries. Reliance is placed on the test of "considerable time".
Therefore, to suggest that Pakistan is his Habitual Abode would be incorrect in law and also contrary to the facts of the case.
C) The appellant is a naturalised French Citizen. He holds a French Passport.
(xxii) In light of the above discussion, it is requested that the Appellate Tribunal Inland Revenue may be directed to allow the appeal with directions to issue refund, of the amount extorted by the tax officials by illegal invoking of section 111 of the ITO, 2001 along with compensation admissible from the date of usurpation. He requested that an appropriate order may be passed by the Hon' able ATIR.
The learned AR on the basis of the above arguments has requested to vacate the impugned orders of the authorities below.
5. On the other hand, the DR vehemently, repeated the grounds of the department as his contentions to the arguments made by the learned AR. He supported the orders passed by the Assistant Commissioner Inland Revenue as well as the learned Commissioner Inland Revenue (Appeals). He stated that the said orders are within the framework of the law and there is no illegality or infirmity in the same. Accordingly, he prayed that the taxpayer's appeal may be dismissed being devoid of merit.
6. We have heard the verbal and written arguments of both the parties and perused the available record and the provisions of the law , case law referred and other submissions very carefully .
We would like to dilate upon the ground s of appeal which states that section 111 of the Income Tax Ordinance, 2001 cannot be invoked on non-resident French national without first proving that he has earned the income from Pakistan source. In the absence of evidence in the hands of the department no tax can be imposed.
The following facts transpires from the submissions above:-
(i) that appellant is a French national since 1993;
(ii) that he earns his livehood abroad and have business in Paris under the name and style "Hamalaya Restuarant" and has permanent place of residence (home) where is abodes abroad;
(iii) that his business is subject to income tax/corporation tax under the laws of France; (iv) that he is also taxpayer with the Revenue authorities in France;
(v) that he has no place of business or source of earning in Pakistan; and
(vi) that he is habitual abode in France.
The above findings have never been controverted by the ACIR at any point of time during the assessment by the department.
The appellant was liable to be assessed in accordance with the Article 4 of the Convention between the Government of Islamic Republic of Pakistan and the Government of French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income vide SRO No. 729(1)/96 dated 02-09-1996 (referred hereinafter as 'Tax Treaty'). The relevant portion of tax treaty is reproduced for the benefit of ready reference:- Article 4 Resident
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: - he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests); b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.
7. According to the record this fact is evident that the appellant has an established business in France and resides abroad. In Pakistan, he has purchased a certain piece of land in Pakistan regardle ss how the amount was paid. At this stage, if at all we presume that he has permanent home in both the states (i.e., France and Pakistan) though it is not alleged by the department at any point of time. Even then, the taxpayer cannot be subject to Pakistani tax because the center of vital interest is France and his personal and economic relations are closer .
8. We would like to refer to the tax comm entary on double taxation called Klaus Vogel on Double Taxation, Fourth Edition, by Ekkehart Reimer and Alexander Rust, at pages 223-224 wherein the "tie breaker tests" have been discussed in relation to tax treaties as under:- [Tie Breaker Clausero solve this conflict special rules must be established which give the attachment to one State a preference over the attachment to the other State. As far as possible, the preference criterion must be of such a nature that there can be no question but that the person concerned will satisfy it in one State only, and at the same time it must reflect such an attachment that it is felt to be natural that the right to tax devolves upon that particular State.
In further analyzing the tie breaker clause, he suggest that recourse not be made to domestic legislation when looking to the tie-breaker test, as it would upset the basic fabric of agreement upon which the Tax Treaties are based. The tests for the tie breaker clause are reproduced below:- a. Permanent Home and Centre of Vital Interests If an individual has his permanent home in one of the Contracting States, he is deemed to be a resident of that State for Convention purposes because his attachment to this State is reflected thereby. Where a taxpayer has a permanent home in both Contracting States a closer look must be taken in order to determine to which State the taxpayer's attachment is closer, which is decided by his centre of vital interests. aa. Permanent Home. Under the first tiebreaker test of dual-resident individual is a resident in theState where he has a permanent home available to him. A permanent home is something more than just a place to sleep and keep some belongings on a temporary basis. Rather the permanent home must be of such quality that it is of vital interests for the individual. The criterion 'permanent home' solves the conflict where dual residence arises as a consequence of a permanent home in one Contracting State, and a stay of some length in the other. In such cases, the permanent home criterion reflects the underlying reason for using residence as a basis of taxation. bb. Centre of Vital Interests. If an individual taxpayer is found to have a permanent home in both Contacting States has his centre of vital interests[...] An individual has his centre of vital interests in the state with which his personal and economic relations are closer, as between the two Contracting. States. A taxpayer's personal and economic relations include a host of factors from the taxpayer's private and economic sphere that must be considered, implying a massive workload on the taxpayer, the tax authorities and the tax courts 1.4 The term 'closer' as the comparative degree of 'close' indicates that there can be only one centre of vital interests and that it has to lie in either of the Contracting States. An individual cannot have 'closer' personal and economic relations to both Contracting States.
Habitual Abode Article 4(2) (b) of the OECD and UN MC sets the 'habitual abode' of a taxpayer as the second stand-alone tiebreaker criterion. Once it has been established that an individual taxpayer has either (i) a permanent home available to him in both Contracting States but that his centre of vital interests cannot be definitely determined to be one or the other, or (ii) he does not have a permanent home available to him in either Contracting State, the taxpayer's habitual abode tips the balance towards the State where he stays more frequently. Therefore the individual's stay at his permanent home as well as any other place in the same State has to be taken into account. c. Nationality If an individual has an habitual abode in both Contracting State, or in neither, he is deemed to be a resident of the State of which he is a national. As mentioned before, nationality provides a strong connection between a country an an individual.
1.4 Contrary to other tiebreaker criter ia, nationality does not necessarily require a territorial relationship and this no actual relationship to residence. It is, instead used as an alternative concept in addition to residence.
9. In regards to the circumstances for determining the closest centre of vital interests; the extract from Indian Double Taxation Agreements and Tax Laws with OECD Commentaries on Articles of Model Tax Convention by D. P. Mittal (Sixth Edition), para 10.13 at page 1.406, is relevant and provides very useful guidelines for determining the circumstances for closest centre of vital interest:- "Circumstances for determining closest centre of vital interest---To ascertain with which of the two States his personal and economic relations are closer, regard may be had to his family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property etc. the circumstances must be examined as a whole, but it is nevertheless obvious that considerations bases on the personal acts of the individual must receive special attention (see OECD Commentary, para 15)."
Another landmark book Double Taxation Treaty by Philip Baker-that illustrated the application of the test of centre of vital interest by quoting several Canadian decisions, in his book Double T axation Conventions: "There have been several Canadian decisions on the meaning of the phrase centre of vital interests. In Michael Hertel v. MNR [1993] 93 D.7'.0 721 (Tax Court of Canada) the taxpayer was a resident of both Canada and West Germany and had permanent homes in both countries. However, he lived with his wife and children in Germany, where his business was located, he had ties with the community and church ties. The Tax Court concluded that his Centre of vital interests was in Germany. In Henry and Louis Endres v. MNR [1998] 98 D.T.C. 1101 (Tax Court of Canada) the taxpayers were residents of the US and Canada, but their home in Nova Scotia was leased with minimal furniture, their children were at school in the US and the taxpayers' business and social lives were in the US. The Tax Court concluded that their entre of vital interests was in the US.
Finally, in Dale Boston v. R [1997] 98 D.T.C. 1124 up an employment. His wife and family remained in Canada, though his relations with his wife were strained. The Tax Court concluded that he was not resident in Canada, but if he were, the tie-breaker fell on the side of Malaysia. Though he had permanent homes in both the countries, his personal life was centred in Malaysia and his family in Canada was not a strong enough magnet to draw him back other than for two short periods during three years."
10. We are also fortified with the under-mentioned cases from the International Tax Law Reports (ITLR), published by LexisNexis under the Editorship of Mr. Philips Baker. These case laws are relating to international tax jurisdictions (for the sake of brevity these judgments are not discussed in detail). In these cases it has been unequivocally held that center of vital interest is place where economic activity is generated i.e., there are closest economic ties. The Courts have preferred to 'economic activity and relations' over mere 'residence or personal relations' as a tie breaker, when the economic activities and the residence are not simple to assess. The following case law provides further clarification: "1. Black v.. R reported as 16 ITLR 573 decided by Tax Court Canada, resolving the tie break of a taxpayer resident in Canada and UK. The taxpayer was Canadian citizen but was resident of UK for Tax purposes. It was held that taxpayer shall be assessed in Canada because he derives his income from Canada.
2 Yetes v. Revenue and Customs Comm issioners reported as 15 ITLR 205 decided by First-T ier Tribunal (Tax), UK. In this case, the taxpayer was a UK-born British citizen. In 1990 she commenced living with Mr. McKee, also a UK citizen, first in Dublin and then in England. The taxpayer moved with Mr. McKee twice and eventually they bought a residential property , Kingston Hall.
The taxpayer suffered from a degenerative condition and in 2000 she rented an apartment in Spain as her health would benefit from the warm dry weather. Mr. McKee intended to go to live with her in Spain when his business had reached a suitable state. Over the next few years, the taxpayer made frequent trips to the UK, staying at Kingston Hall. She also had her main bank accounts in the UK, using Kingston Hall as her address and she also used that address in correspondence with the Department for Work and Pensions by which she was granted a disability allowance. The taxpayer was in the UK over Christmas in 2003, 2004 and 2005 and spent part of the Christmas period of 2006 in the UK and part in Dubai. She spent more days in Spain than in the UK in six out of the eight tax years from 2000-2008. She undertook some voluntary work in Spain and also became director of a company set up to own and manage an investment property. Mr. McKee's business affairs did not work out as hoped and he spent only some weekends and annual holidays in Spain. Over the period, the taxpayer engaged in a number of transactions by which she acquired shares in companies from Mr. McKee and then sold them at substantial profits. By 2008, the taxpayer had become concerned about her relationship with Mr. McKee and returned to the UK to live with him permanently. Revenue and Customs assessed the taxpayer for capital gains tax. The taxpayer appealed, arguing that she had not been resident in the UK at the time, or that if she had, she had also been resident in Spain and that for the purposes of the double taxation agreement between the UK and Spain she had been resident in Spain and the gains were therefore only taxable in Spain.
The tribunal examined the day count and agreed that for the purposes of Spanish domestic law, the taxpayer had been resident in Spain in the relevant years and proceeded to determine whether she had also been resident or ordinarily resident in the UK. It was held that (a) On the evidence, and examining the nature of the taxpayer's absence from the UK, it was not established that there had been a distinct break in the pattern of the taxpayer's life sufficient to establish that she had ceased to be resident and ordinarily resident in the UK. The taxpayer had retained substantial connections with the UK; she made frequent return trips to the UK, where she stayed at Kingston Hall which she also used as an address for important correspondence and which was on the evidence her home as well as that of Mr. McKee with whom she was in a close relationship. She had also corresponded with the Department for Work and Pensions as if she was resident in the UK. She had continued to derive all her finances from the UK and her work and social life in Spain had not replaced those in the UK (b)
The taxpayer's personal and economic relations had been closer in the relevant years with the UK than with Spain. The centre of her vital interests was the UK. Not only did she have a permanent residence in the UK but Mr. McKee was central to her economic affairs. Her income, including disability allowance, was derived entirely in the UK and her banking arrangements were in the UK apart from what was required for local needs in Spain.
Most of her family lived in the UK and she had little socialties in Spain. She was hence a resident of the UK in the relevant years for the purposes of the double taxation agreement.
Garcia v. Canada reported as 10 ITLR 179 decided by Tax Court of Canada. This case relates to tie-break of a taxpayer who has been resident in US but sent to Canada. The taxpayer had been resident in the US and was sent to Canada for two years by his employer . In the event he did not return to the US. In the first two years in Canada the taxpayer bought a house in which he and his family lived and he sold his house in the US, as he had done each time he moved within the US. He maintained investments and connections in the US. After he had moved to Canada, the taxpayer received a bonus in respect of the previous year. The taxpayer argued that the bonus was not taxable in Canada under the terms of the Canada-US double taxation agreement as it was income derived from the US. The taxpayer also argued that he was resident in the US as his place of strongest economic connection. He argued that he was not resident in Canada as he did not have a permanent home in Canada as he had not formed the intention of remaining there long-term.
The Revenue assessed his income to include the bonus and the taxpayer appealed. The Tax Court of Canada held that (1) The taxpayer was resident in Canada where he had a permanent home available to him, while he had no such home in the US. An intention to remain in a country long-term was not required to render a home permanent. Permane nce required that the taxpayer had arranged and retained the home for his permanent use as opposed to temporary use or for visits of short duration. It did not matter whether the home was owned or rented, furnished or unfurnished (2) The word 'derived' which was not defined in the treaty , was not to be interpreted as a technical accounting term. Rather , it meant something akin to 'having its source'. Since the income came from employment when the taxpayer was resident in Canada, it was liable to tax in Canada. If the services concerned were performed in the US it would also be taxable there with tax credit given in Canada.
4. Abdul Razak A Meman v. CIT (International Taxation), reported as 9 ITLR 139 decided by Advance Ruling Authority of India. This case deals with a situation where the Tax Treaty does not apply. The applicants before Authority for Advance Rulings (Income Tax) were Indian nationals resident in the UAE. They claimed to be entitled to the benefit of the India-UAE double tax convention in relation to investments made in India and sought advance rulings from the Authority on that question. The director of Income-tax (International taxation) submitted that the applicants were not entitled to the benefit of the convention as individuals were not subjected to income tax or capital gains tax in the UAE. The question to be answered was whether the applicants were 'resident' in the UAE within the meaning of that term as used in Art. 4(1) of the convention: 'For the purpose of this Agreement the term 'resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature.' The Authority ruled that being liable to tax in a contracting state implied an existing tax liability not simply the possibility of such liability being imposed in the future. As individuals were not currently taxable entities under the provisions of the UAE Decree they could not be considered 'resident' in the UAE within the meaning of art 4(1) of the convention. An individual could be a treaty subject only if he satisfied the requirement of being a resident of one or both of the contracting states and an individual who was not a resident of any of the contracting states could not be treated as a treaty subject and therefore could not claim the benefit of the treaty.
5. Allchin v. R reported as 7 ITLR 851 decided by Tax Court of Canada. This is a case of Canadian national who worked in USA but family in Canada. Brief facts of the case are that during the disputed tax years, the taxpayer, a Canadian citizen, worked in the United States. She held d 'green card' and lived with various relatives and friends but had her own keys and living arrangements. Meanwhile her husband and children were in Canada and she would return to visit them on days off and weekends. She filed tax returns in the US for the disputed years and paid US income tax on her worldwide income. The Canadian Revenue claimed that she was still resident in Canada during those tax years and therefore liable to report and pay Canadian income tax on her worldwide income. The taxpayer appealed, referring to the terms of the Canada-US Income Tax Convention. The Tax Court held that the taxpayer had been resident in Canada but the Federal Court of Appeal held that the judge had failed to consider whether the taxpayer had been resident in both countries and remitted the matter to the Tax Court for determination. The Tax Court judge then found that the taxpayer had a permanent residence in both countries and continued to determine the issue of where was her centre of vital interests and her habitual abode.
It has been held by the Tax Court of Canada that (1) he taxpayer had a centre of vital interests in both the US and Canada. Almost all her economic activities were carried on in the. US while her personal relations were much closer with Canada. It could not therefore be determined with which state she had closer personal and economic relations and it was necessary to determine where she had a habitual abode. The decision was that the taxpayer's habitual abode was in the United States and she was resident of that country for the purposes of double taxation conventions.
11.
In this case, the taxpayer has closer personal relations as well as substantial economic relations, to one contracting state (France), while in the other state (Pakistan) he merely has an economic interest that is current (wherein the appellant has just purchased a piece of land). His center for vital interest will be deemed to be the first contracting state, i.e. France. In the case of appellant, it is obvious to us now that the center for vital interest for him is France, and not Pakistan. Once it is established that the center of vital interest is not Pakistan, section 111 read with section 82 of the Income Tax Ordinance, 2001, are thus superseded by, and thus quashed by Article 4 of the Bilateral Tax Treaty between Pakistan and France. Therefore, we hold that the provisions of the Income Tax Ordinance, 2001 cannot be invoked because the Bilateral Tax Treaty between Pakistan and France has an overriding effect on the Income Tax Ordinance, 2001. Furthermore, since the appellant is filing his tax returns in France, in light of the tax treaty between Pakistan and France, no action can be perpetuated in Pakistan by the Pakistan tax authorities.
12. In light of the above discussion we would hold that the appellant has centre of vital interest in France by virtue of his personal and economic interests abroad. He has his habitual abode abroad, and his income is assessed in France. According to the submission in Para 5(xx) wherein the tie breaker test was applied as under on the appellant in terms of Article 4 of the Tax Treaty between Pakistan and France and it was concluded that:- a) The appellant has a permanent house in Paris, France. In order to assess his Personal and Economic relations, reliance is placed on the following facts: i) The appellant has a business in Paris, whereby , he is a restaurateur , carrying business through a restaurant that serve Pakistani/Indian cuisine; ii) The appellant, in order to make payments to employees, has a bank account in France. iii) The appellants family live in Paris and have lived so for several years. iv) The appellant's French tax number is attached with his T ax Returns. v) The appellant's children were born in France and are French citizens.
(vi) The client does not come to Pakistan as a routine, and even so, does not stay for long enough to establish himself a resident of two countries. Reliance is placed on the test of "considerable time".
Therefore, to suggest that Pakistan is his habitual abode would be incorrect in law and also contrary to the facts of the case. vii) The appellant is a naturalised French Citizen. He holds a French Passport.
13. We are constrained to hold that the appellant is absolved from Pakistan taxation and no provision of Income Tax Ordinance is attracted as he does not have any plausible source of income that has deemed to have accrued to him. Section 111 is applicable to residents of Pakistan only and cannot be extended to appellant who is resident abroad and do not have taxable in Pakistan.
We also hold that section 111 of the Income Tax Ordinance, 2001 cannot be invoked on non-resident French National who's habitual abode is in France and have more personal and economic interest in France than Pakistan and has not earned any income from any Pakistan source. The department has failed to discharge it's onus for the reinforcement of Section 111.
14. In the light of above we hold that the appellant is not taxable in Pakistan and section 111 is not attracted to non-resident in the presence of tax treaty between Pakistan and France upon applicable tie-breaker text. We therefore, delete the levy of tax under section 111 made by learned ACIR. The consequential to deletion of liability the Zonal Commissioner Inland Revenue is directed to return the amount extorted from the bank accounts of the appellant and with compensation, if applicable, be paid to the appellant.
Resultantly, we allow this appeal.
15. Before parting with the judgment we would like to acknowledge the assistance provided to us by Mr. Shaheer Bin Tahir, LLM (Tax), Advocate for his research on the subject of international case law on tax treaties and express our gratitude towards his invaluable assistance.
6. Appeal filed by the taxpayer is allowed in the manner discussed above.