I. MAHMUD. J.-The following two questions of law said to arise from the order of the Tribunal dated 8-1-1968 in I. T. A, 924 of 1966-67 have bean referred to us for opinion at the instance of the applicant :- "(1) Whether in the facts and circumstances of the case the Tribunal was right in holding that the commission of Rs. 40,715 paid to Indonesian Agent was not allowable in the assessments of the applicants by virtue of section 10 (4) (bb) of the Income-tax Act even though these payments were not chargeable to tax in Pakistan.
(2) Whether in the facts and circumstances of the case the Tribunal was right in holding that the payment of Rs. 40,715 to the Indonesian agents who had rendered the all services in Indonesia was not allowable in the assessm ents of the applicants by virtue of section 10 (4) (bb) of the Income- tax Act without finding that the payment to the Indonesian Agents was chargeable to tax in Pakistan."
2. The applicant-assesses is a public company and carries on business as manufacturer and exporter of yarn. In the year of account, relevant to the charge year 1960-61, the company remitted the sum of Rs. 40,715 as commission to its Indonesian Agent situate in Indonesia, on orders placed by Indonesian buyers for supply of yarn though the efforts of the said agent. The sales were made direct to Indonesian buyers and not on consignment basis. The applicant claimed deduction of this amount from its profits under section 10(2)(xvi) of the Income-tax Act, 1922 (hereinafter referred to as the Act) as expenditure incurred wholly and exclusively for the purpose of its business. Section 10
(4) of the Act provided that :- " . . . . Nothing in clause (xvi) of subsection (2) shall be deemed to authorise (bb) any allowance in respect of any payment by way of brokerage or commission made to a person not resident in Pakistan unless tax has been deducted therefrom under section 18."
No deduction of tat on this amount was made by the applicant at the time of making the payment [to the Indonesian Commission Agent. Therefore, the Income-tax Officer disallowed the applicant's claim for deduction of the same amount as business expense under section 10 (2) (xvi). The applicant preferred an appeal to the Appellate Assistant Commissioner of Income-tax Karachi, who allowed the appeal, holding that as the services were rendered by the Indonesian Agent outside the taxable territories, then commission income did not accrue or arise in Pakistan and was not chargeable to tax in Pakistan, with the result that the applicant was under no obligation to deduct tax at the time of payment under section 18 (3-B) of the Act. The Income-tax Officer went up in appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal following its previous decision reported in (1966) 14 Taxation 96 (Trib.), held that even if the commission is not chargeable to tax in Pakistan for the reason that it did not accrue or arise within the taxable territories, nevertheless if the recipient of the commission is a non--resident and the payment is claimed under section 10 (2) (xvi), then the claim to allowance of the commission as a business expenditure is not permitted unless tax has been deducted therefrom under section 18 of the Act at the time of payment. In this view of the matter the Tribunal set aside the order of the Appellate Assistant Commissioner and allowed the appeal.
3. Section 18 of the Act provides for deduction of tax at source on certain specified types of income, inter alia, "salaries", "interest on securities", and "any sum chargeable under the provisions of the Act" paid to a person not resident in Pakistan. The relevant provision relating to deduction of tax at the time of payment of the commission to the Indonesian Agent, in this case, is subsection (3-B) of section 18 which is as follows :-- "(3-B) Any person responsible for paying to a person not resident in Pakistan any sum not being "interest on securities' chargeable under the provisions of this Act shall, at the time of payment, unless he is himself liable to pay any income-tax and super-tax thereon as an Agent, deduct tax. In accordance with the provisions of subsection (t) of section 17."
4. The contention put forward on behalf of the applicant before the taxing authorities and, before us, by Mr. A.I Athar, learned counsel for the applicant in this reference. Is that in view of the finding of fact that no services were rendered by the Indonesian commission Agent in Pakistan and that consequently, no Income had accrued or arisen to him within the taxable terri--tories, the commission was not "chargeable" to tax under the Act and the applicant was under no obligation to deduct tax therefrom at the time of payment under section 18(3-B). Therefore, it wag contended that the bar placed on the admissibility of this payment by section 10 (4) (bb) could not be invoked. In support of his submission, Mr. A.I Athar referred to Commissioner of Income-tax, Bombay City v. Cooper Engineering Limited (1968) 68 1 T R 457. In that case the respondent assessee had paid an amount of R9. 2,224 to Messrs I ate Ltd , London, by way of agreed interest on unpaid amount of bills of the foreign company for machineries exported to the assessee in India.
The assesses claimed deduction in respect of the amount paid to the non--resident company, but it was disallowed by the Income-tax Officer, because the assessee had not deducted tax before payment. The Appellate Assistant) Commissioner agreed with the Income-tax Officer. On appeal to the Tribunal, the contention of the assesses was accepted and it was held that as no part of the services were rendered in India, the amount of interest paid to Messrs Tata Ltd., London was outside "the scope of section 18 (3 B)". On a reference by the Commissioner of Income-tax, the High Court agreed with the Tribunal and held that the amount of interest paid to Messrs Tata Ltd., London was not an amount chargeable to tax under the Act. Therefore, the assessee was under no obligation to deduct the tax thereon at the time of payment and that he was entitled to claim the amount as a deduction under section 10 (2) of the Indian Income-tax Act, 1922.
5. The above case, no doubt, supports the learned counsel's submission. But, in our opinion, the case is distinguishable, for it was not considering any section comparable to section 10 (4) (bb) of our Act which was enacted in 1957. A plain reading of clause (bb) shows that its language is restrictive and worded in the negative. It provides that any allowance in respect of any payment by way of brokerage or commission made to a non-resident person shall not be deemed to be unauthorised se business expenditure under section 10 (2) (xvi) unless tax has been deducted therefrom under section 18. In other words, the deduction of tax at the time of payment is made a condition to the allowance of the claim in respect of the payment of brokerage or commission. It is pertinent to observe that it is not a condition for the allowance of business expenditure of payment of every kind made to a non-resident person that it shall not be authorised unless tax has been deducted therefrom under section 18, but only of payment of brokerage or commission, which are specifically provided for in clause (bb). As rightly observed by the Tribunal, the Intention of the Legislature in enacting clause (bb) appears to be that the amount of brokerage or commission payable to a non-resident should not altogether escape the incidence of taxation, and the payer who is claiming the deduction of amount from his profits as a business expenditure, must deduct tax at the time of payment in accordance with the provisions of subsection (1) of section 17 of the Act, leaving it either to the non-resident person to obtain a certificate in writing from the Income- tax Officer under the proviso to section 18 (2-B) specifying the rate at which the tax may be deducted, if and/or a prayer to obtain an order to that effect.
6. It was urged by Mr. A.I Athar that the rate at which the tax is to be deducted at the time of payment under section 18 of the Act, will not be known until the Finance Act is enacted prescribing the rate of tax for the previous year. This submission is misconceived acid is without any force, because Section 6(6) of the pertinent Finance Ordinance, 1959, prescribed the current rate of tax for making the deduction of tax under section 18. The rates were mentioned in the First Schedule to the said Ordinance and they were applicable as respects the relevant accounting period ending 31-3-1960, daring which period the commission was paid to the Indonesian Agent in the present case.
7. Section 18 (3-B) is expressed in the widest possible terms. It covers all sums (other than "interest on securities") chargeable under the provisions of the Act and payable to a non-resident, which are in the nature of income, that is pure income, as opposed to payment of a sum which in the bands of the recipient is a grading receipt, e.g., price of goods sold paid to a nonresident seller. In the former case of payment of a sum which is a pure income, profit, the payer is bound to make the deduction of tax at the time of payment to the non-resident and he is not concerned with the ultimate result of the assessm ent of the non-resident person, to whom the payment is made, which is a matter between the non-resident and the Revenue. In Aggrawal Chamber of Commerce Ltd. v. Ganpat R.I Hira Lal (1958) 33 1 T R 245 the Indian Supreme Court observed at page 253 as follows t-- "These persons who are bound under the Act to make deduction at the time of payment of any income, profits or gains are not concerned, with the ultimate result of the assessment. The scheme of the Act is that the deductions are required to be made out of "salaries", 'interest on securities' and other heads of "income, profits and gains' and adjustments are made finally at the time of assessm ent. Whether in the ultimate result the amount of tax deducted or any lesser or bigger amount would be payable as income-tax in accordance with the law in force would not effect the rights, liabilities and power of a person under section 18 or of the agent under section 40 (2) and 42 (1)."
8. For the foregoing reasons, we answer the first question In the affirmative. In our opinion. The Tribunal was right in holding that the commission of Rs. 40,175 paid to the Indonesian Agent was not allowable as a deduction in the assessment of the applicant by virtue of section 10 (4)(bb) of the Act, even though these payments were not chargeable to tax in Pakistan.
9. The second question does not arise for our opinion, as the first question assumes that the payment was not chargeable to tax in Pakistan as it did not accrue or arise within the taxable territories for the reason that service was rendered abroad.
There will be no order as to costs.