COMMISSIONER OF INCOME-TAX, KARACHI Versus MESSERS ABBOTT FINANCE CO., S. A. R. L.

1. NAIMUDDIN, J.‑‑ By this reference and references made in I. T. C. Nos. 52/1972, 54/1972 and 58/1972 all under section 66(I) of the Income‑tax Act, 1922 (hereinafter called Act) the Commissioner of Income Tax Karachi, East, seeks answer to the following question of law arising out of the common order of Income‑tax Tribunal, Karachi Bench, Karachi, dated 12th. May, 1970, passed in Income‑tax Appeals Nos. K‑4/149, 150, 151, 152 and 153:

2. "Whether on the facts and in the circumstances of the case the Tribunal was justified in exempting the technical fees, which are deemed to have accrued or arisen in Pakistan in view ‑of the provisions of section 42 of the Income‑tax Act?".

3. In order to answer the question it is necessary to refer to the acts leading to the making of the reference in this case and in the connected cases.

4. Messrs Abbott Finance Co., S. A. R. L., Karachi, is a non‑resident Association of the person (hereinafter called the Assessee) earned royalty for the use of Patent rights at the rate of 1 %. on the net sales of Abbot Laboratories (Pak.) Ltd., (hereinafter called the Company) and fee for technical services rendered to the Company under an agreement between the Assessee and the Company at the rate of % on the said sales.

5. The total amount earned by the assessee on both the counts for each of the following five financial years was as follows:‑

6. Assessment year

7. Amount of Receipts

8. Rs.

9. 1963‑64

10. 15,882

11. 1964‑65

12. 24,617

13. 1965‑66

14. 40,328

15. 1966‑67

16. 65,430

17. 1967‑68

18. 1,11,813

19. The assessee filed income‑tax returns and claimed exemption from payment of income‑tax under both the heads in view of article VII of the at.‑cement for Avoidance of Double Taxation between Pakistan and Switzerland (hereinafter called the Agreement).

20. The Income‑tax Officer (Company Circle IV), Karachi by separate orders dated 30‑11‑1966 disallowed the claim holding that the term `royalty' did not include any royalty or any amount paid in respect of the oration of mines, quarries or other natural resources, and that technical fee earned by the assessee performing specific services was not converted by any provision of the exemption clause of the Agreement and therefore, he subjected the income declared for each of the aforesaid years to tax liability.

21. Aggrieved by the aforesaid orders the Assessee filed separate Appeals Nos. K‑4/149, 150, 151, 152 and 153‑B with the Appellate Assistant Commis sioner of Income‑tax 'B' Range, Karachi, who by a common order dated 14‑2‑1968, allowed all the appeals holding that the amount earned on account of `royalty' for use of patents, was exempted under Article VII of the Agreement in view of the term `royalty' defined in the agreement between the Assessee and the Company and that the fee earned on technical services was exempted under the Article III of the Agreement, as the assessee had no `permanent establishment' in Pakistan, as defined therein. The clause III of the Agreement reads as follows:

22. "The industrial or commercial profits of a Swiss enterprise shall not be subject to Pakistan tax unless the enterprise carries on a trade or business in Pakistan through a permanent establishment situated therein. If it so carries on a trade or business, tax may be imposed on those profits by Pakistan, but only on so much of them as is attributable to that permanent establishment."

23. Dissatisfied with the orders of the Appellate Assistant Commissioner of Income‑tax, the Department filed appeals with the Income‑tax Tribunal (Karachi Bench), Karachi which were all dismissed by the order dated 12th May, 1970.

24. The Tribunal after referring to the definition of the "Patents" given in the agreement between the Assessee and the Company held that the fee earned by the assessee was `royalty' and was exempted under Article VII of the Agreement and relying on Article III which provides that industrial and commercial profits if Swiss Enterprises shall not be subject to Pakistan Tax unless the enterprise carries trade or business in Pakistan through a permanent establishment situated therein held that in view of the definition of `permanent establishment' given in Article II(1) of the Agreement admittedly the Assessee did not have permanent establishment' in Pakistan and accord ingly the % fee received by the Assessee on account of technical services and instructions was not chargeable to tax in Pakistan.

25. Therefore, the Commissioner of Income‑tax has come up in this and in connected references to seek answer to the question mentioned herein above.

26. We have heard Mr. Nasrullah Awan, learned counsel for the applicant and Mr. A. A. Shareef learned counsel for the respondents.

27. So far as the question of income derived from the `royalty' is concerned, that is not in question. So far as the question of exemption of the technical fee is concerned, that depends on the application of Article II(1) of the Agreement which reads as follows:‑

28. "The term `permanent establishment', when used with respect to an enterprise of one of the territories, means a fixed place of business in which the business of the enterprise is wholly or partly carried on, it includes an office, a branch, a place of Management, a factory, a workshop a mine, quarry or other place of natural resources subject to exploitation. In this connection :

(i) An enterprise of one of the territories shall not be deemed to have a permanent establishment in the other territory merely because it carries on business dealings in that other territory through a bona fide broker, general commission agent or other independent agent acting in the ordinary course of his business as such, or because it makes purchases of goods or merchandise direct from an independent exporter in that other territory in the normal course of international trade.

(ii) The use of mere storage facilities or the maintenance in one of the territories of a stock of goods or merchandise by an enterprise of the other territory, whether in a warehouse or not, merely for the convenience of delivery and not for purposes display shall not by establishment even though the delivery of such goods and merchandise is made in pursuance of the instructions issued by the enterprise in that other territory on the acceptance by it of an offer of purchase obtained by an agent of the enterprise in that territory not being an agent who maintains the stock of goods or merchandise.

(iii) An enterprise of one of the territories shall be deemed to have a permanent establishment in the other territory if it has in that other territory an agent or employee who

(a) has and habitually exercises a general authority to negotiate and conclude contracts on behalf of the enterprise;

(b) has in that other territory a stock of goods or merchandise from which he regularly fills orders secured by him on behalf of the enterprise.

(iv) An enterprise of one of the territories shall not be deemed to have a permanent establishment in the other territory if it carries on in that other territory instalation or the setting up of plant and machinery the duration of which does not exceed 12 months in all, not with understanding the fact that it has a fixed place of business in such ether territory.

(v) The fact that a Company which is a resident of one of the territories has a subsidiary Company which is a resident of the other territory or which carries on a trade or business in that other territory (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary Company a permanent establish ment of its parent Company."

29. It is not in dispute that the fees earned by the assessee are in the nature of commercial profit. It is also not in dispute that the assessee is Swiss Enterprise. It is the finding of the Tribunal that "admittedly the respondent did not have a permanent establishment in Pakistan."

30. It is, therefore, clear that Article III of Agreement squarely applies and the income derived from the fee has been rightly exempted. It was, however, I submitted by Mr. Nasrullah Awan that the finding of the Tribunal that "admittedly the respondent did not have a permanent establishment in Pakistan" is not correct and is based on no evidence.

31. However, in our opinion there is no substance in this submission for firstly, no question has been raised with regard to this finding, secondly, the finding is one of fact and not law. In tact not a word has been said in the application with regard to the incorrectness of this finding. We find from order of the Appellate Assistant Commissioner of Income‑tax that the Appellate Assistant Commissioner, specifically applied his mind to this question when he held "taxability of such receipts is beyond the scope of Income‑tax Act in the face of the aforesaid agreement without the existence of a 'permanent establishment'. Permanent establishment is the basic require ment which has so vehemently been denied in the instant cause". It was not the case of the Department before the Tribunal that this finding could not have been given on the basis of material oaf record before the Tribunal for, obviously no evidence was produced before the Appellate Assistant Commissioner of Income‑tax to prove that the assessee had 'permanent establishment' as defined in the Double Taxation Agreement. Even the Income‑tax Officer who had decided the case against the petitioner had not given any contrary finding or reasons on the point in his order, In fact the Income‑tax Officer had proceeded on altogether different rounds.

32. We are, therefore, clearly of the view that on the facts and circumstances of this case the Tribunal was justified in exempting the technical fee received by the Assessee and accordingly answer the question referred to us in the positive. However, in the circumstances of the case and the connected cases we leave the parties to bear their own costs.

33. Question answered in affirmative.