LINKDOTNET TELECOM LIMITED VS CHIEF COMMISSIONER INLAND REVENUE, ISLAMABAD, 2016 PTD-ISLAMABAD 1436 (2015)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 152(5) & 2(54)---S.R.O. 248(I)/2001 dated 26.04.2001---Convention for Avoidance of Double Taxation Between the Islamic Republic of Pakistan and the Government of the United Arab Emirates, Arts. 12(3) & 11---Deduction of tax at Source---Double taxation---Payments to non-residents---"Royalty", definition and scope---Petitioner's application to Commissioner Large Taxpayers Unit for permission to make payment to its UAE business partner without deduction of tax at source under S. 152(5) of the Income Tax Ordinance, 2001 on the ground that said partner was a non-resident entity in Pakistan, was rejected---Contention of Department was that said payment was for use of equipment and amounted to royalty within meaning of Art. 12 of Convention for Avoidance of Double Taxation Between the Islamic Republic of Pakistan and the Government of the United Arab Emirates---Validity---By virtue of Convention for Avoidance of Double Taxation Between the Islamic Republic of Pakistan and the Government of the United Arab Emirates, a business concern in a contracting State was to be taxed only in its own country if it did not have any arrangement in the other contracting State---Royalty was an exception to the general scope under said Convention and under said Convention royalties arising in a contracting State may be taxed in the other state and royalties may also be taxed in the contracting State in which they arose and if recipient was beneficiary owner of the royalties, then tax so charged should not exceed a certain percentage of the gross amount of such royalties---"Royalty" as defined in the said Convention showed that the term "royalty", inter alia, included payment of any kind for use of or the right to use industrial, commercial or scientific equipment and definition of "royalty" per S. 2(54) of the Income Tax Ordinance, 2001 was payment for use of, or right of use in industrial, commercial and scientific equipment---Term that had been used in agreement between the parties was rendering of service and service had been defined as well but service that was rendered in the present case depended upon use of equipment and petitioner had the right to use said equipment of its contracting party for which payments were made to it---Scope and definition of word "royalty" was of a wide ambit and included right to use any type of commercial or scientific equipment which may be tangible or intangible---Department, in impugned order, had not interpreted the concept of "royalty" in an unreasonable or irrational manner which could be interfered with---Constitutional petition was dismissed, in circumstances.

1992 PTD 954 ref.

Saraswathi Udyog v. State of Haryana (1987) 1 Punj LR, 305; Kheyerbari Tea Co. Ltd. v. State of Assam AIR 1964 SC 925; Doma Sao Kishan Lal v. State of Bihar AIR 1952 PAT 357; Dy. Commr, Sales Tax v. GS Pai Co., AIR 1980 SC 611; Buttu Lal Makhanlal Jain v. Commr. of Sales Tax, Madhya Pradesh (1962) MPLJ 915; Birla Cement Works v. State of Rajasthen (1974) 4 SCC 277; India Cement Ltd. v. State of TN AIR 1990 SC 85; International Development Corporation Ltd. v. State of M.P. AIR 1990 MP 112 and State of W.B. v. Karosome Industries Limited 2004 266 ITR 721 rel.

Naveed A. Andrabi and Ayyaz Shaukat for Petitioner.

Hafiz Munawar Iqbal for Respondent Nos. 1 and 2.

Barrister Munawar Iqbal Duggal for Respondent No.3.

Nasir Khan, Commissioner Enforcement and Ghulam Abbas Kazmi, Commissioner Legal.

JUDGMENT

AAMER FAROOQ, J.---Through this consolidated judgment, the instant petition as well as Writ Petitions Nos. 2537, 2538, 2539 and 2540 of 2015 are being decided as common question of law is involved.

2.The facts, in brief, are that the petitioner entered into an agreement with Global Entity for Telecom Trade, Dubai, United Arab Emirates (GETT) for providing International Telecommunication Services. Under the arrangement the petitioner was to use equipments of GETT for transmission of the calls beyond interconnectivity point and was to make payments to it in this behalf. In this regard it is relevant to mention that there exists between Pakistan and UAE an agreement to avoid double taxation and the referred agreement was duly notified through S.R.O. 248(I)/2001 on 26.04.2001. Under the referred agreement the profit of an enterprise of a contracting State is to be fixed only in that State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. In case the enterprise carries on business, as mentioned above, the profit of the said enterprise is liable to be taxed in other State but only so much of it as attributable directly or indirectly to that permanent establishment. In this backdrop the petitioner made an application/request to the Commissioner of Income Enforcement and Collection Large Tax Payers Unit, Islamabad on 11.04.2008 under section 152(5) of the Income Tax Ordinance, 2001 (the Ordinance) for permission to make payment to GETT without deduction of tax at source on the ground that the referred entity is non-resident having no business place in Pakistan. On the request of the petitioner, Commissioner of Income Tax Enforcement and Collection Division, Islamabad declined the request of the petitioner on the basis that primarily that payments to GETT on account of providing services for onward transmission of calls and other data, involves use of equipment, therefore, petitioner has right to use the said equipment which amounts to royalty within the meaning of Article 12 of Avoidance of Double Taxation Treaty. Hence it was held that the petitioner is liable to deduct 12% tax on the gross amount paid to GETT. The petitioner filed revision petition against the referred order under section 122(b) of the Ordinance which was dismissed by respondent No.1. The petitioner assailed the referred order in this Court through constitutional petition which was allowed vide judgement dated 11.05.2015 and the matter was remanded for decision a fresh through a speaking order. The petitioner raised certain additional grounds after remand and after hearing of the parties the matter was again dismissed vide the impugned order.

3.Learned counsel for the petitioner, inter alia, submitted that the payments made to GETT do not fall within the scope and definition of royalty as provided in Avoidance of Double Taxation Treaty as well as Section 2(54) of the Ordinance. It was further contended that since it is not royalty and is not liable to be taxed in any way, therefore, same is counted towards expenses for the business. Learned counsel also submitted that the impugned order is against direction of this Court as all the arguments raised have not been considered by the respondents. Learned counsel also pointed out that previously the Department treated such payments as business profit hence the principle of res judicata is applicable. Reliance was placed on case reported as 1992 PTD 954; the orders are barred by time in terms of section 152(5A) of the Ordinance. Learned counsel also submitted that both the companies i.e. the petitioner and GETT are providing services to each other and there is no question of the right to use equipment which is evident from Article 11(1) of the Agreement between them. In support of his submissions learned counsel for the petitioner drew attention of the Court to the relevant clauses and articles of the agreement between the parties and the treaty as well.

4.Learned counsel for the respondent, inter alia, submitted that the petitioner under the agreement has the right to use the equipments, therefore, the referred activity falls within the definition of royalty as provided in the Treaty as well as the Ordinance. It was further contended that the impugned order does not suffer from any legal infirmity calling for interference by this Court. Learned counsel also pointed out that the petitioner has invoked the constitutional petition under Article 199 of the Constitution of Islamic Republic of Pakistan, 1973 (the Constitution) and scope of the proceedings is confined to any jurisdictional error or other legal defect.

5.The relationship between the petitioner and GETT is governed under the agreement between them. In this behalf the scope of the arrangement between them is contained in Clause 2 of the same which provides that each party shall provide the service to other party for the voice calls handed over at interconnection point. In the definition clause service is defined as conveyance of calls and/or telecommunication traffic from point of interconnection to the end user receiving calls. Interconnection means the physical point at which the networks of the parties are connected and which is located at London Telehouse Docklands, UK and Telehouse 2 Paris, France. The petitioner has to make payment to GETT with respect to the referred service at the rate provided in the agreement.

Since there is avoidance of double taxation treaty between Pakistan and UAE by virtue of which the business concern in a contracting State is to be taxed only in its country; if it does not have any arrangement in the other contracting State. Royalty is exception to this general scope of the treaty and under Article 12(1) of the referred Treaty royalties arising in a contracting State and paid to a resident of the other contracting State may be taxed in that other State. By virtue of Clause-2, royalties may also be taxed in the contracting State in which they arise and according to the by-laws of that State but if recipient is beneficiary owner of the royalties then the tax so charge shall not exceed to 12% of the gross amount of such royalties. The term royalties has been defined in Article 12 (3) as follows:--

"The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of or the right to use any copyright of literary artistic or scientific work including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. But does not include payment in respect of the operation of mines or quarries or exploitation of natural resources."

6.The bare reading of the definition shows that the term royalty inter alia includes payment of any kind for the use of or the right to use industrial, commercial or scientific equipment. The definition of royalty is also provided in Section 2(54)(e) of the Ordinance and is the payment for the use of or right to use in industrial, commercial or scientific equipment. The main thrust of the arguments by the learned counsel for the petitioner is that under the agreement between the petitioner and GETT the services are being rendered common use and there is no exclusive right to use equipment, therefore, the same does not fall within the definition of royalty so provided in the treaty and the Ordinance. Respondent No.1 while passing impugned order has taken into consideration and has dilated upon the concept of royalty and on the basis has held that since in the present transaction petitioner has right to use equipment, therefore, the same is royalty.

7.Learned counsel for respondents cited various cases regarding the principles for constitution of taxing statute. The principles enunciated are as follows:--

"While determining the vires of a taxing statute the courts shall bear in mind that the power of the state to levy taxes for the purpose of governance and carrying out its welfare activities is a necessary attribute of sovereignty and is of paramount character." Saraswathi Udyog v. State of Haryana (1987) 1 Punj LR 305; relying on Kheyerbari Tea Co. Ltd. v. State of Assam AIR 1964 SC 925.

"In the case of fiscal enactment, one has to look at what is clearly said. There is no room for any intendment. No argument based on hardship or inconvenience can be entertained." Doma Sao Kishan Lal v. State of Bihar AIR 1952 PAT 357; and Liquidators; Pursa Ltd. v. Commr of Income Tax, Bihar and Orissa (1952) ILR 30 Pat 1033, AIR 1952 Pat. 106.

"While interpreting entries in sales tax legislation, one cardinal rule of interpretation which must always be borne in mind is that words used in the entries must be construed neither in any technical sense nor from the scientific point of view, but as understood in common parlance. The words used by the legislation must be given their popular sense of the meaning, 'that sense which people conversant with the subject matter with which the statute is dealing would attribute to it'." Dy. Commr, Sales Tax v. GS Pai Co. AIR 1980 SC 611; Minerals and Metals Trading Corporation of India v. Union of India (1972) 2 ,SCC 620.

"That construction should be avoided which involves injustice and that construction should be adopted which produces the greatest harmony. Taxing statutes should be construed to suppress the mischief against which they are directed and to advance the intended remedy". Buttu Lal Makhanlal Jain v. Commr. of Sales Tax, Madhya Pradesh (1962) MP LJ 915, 1962 Jab LJ 657.

Though the charging section, which fix the liability is generally to be construed strictly, yet the machinery provisions require to be construed so as to effectuate the object and purpose of the statute". Birla Cement Works v. State of Rajasthen (1974) 4 SCC 277; Gurusahai Saigal v. Commr. of Income-tax Punjab (1963) 3 SCR 893, AIR 1963 SC 1062.

Undoubtedly the term that has been used in the agreement between the parties is rendering of service and the service has been defined as well but the service that is rendered in the instant case depends upon the use of equipment. By virtue of the agreement the petitioner has the right to use equipment of GETT for which payments are made to it. The scope and definition of royalty is of wide ambit. In this behalf in case titled "India Cement Limited v. State of TN" (AIR 1990 SC 85) it was held that royalty is a tax. In another decision titled "International Development Corporation Limited v. State of M.P." (AIR 1990 MP 112) it was held that concept of royalty inter alia means payment made to the owner of certain types of rights by those who are directed by the owners to exercise such rights. Another approach to the concept was taken by the Courts from Indian jurisdiction in case titled "State of W.B. v. Karosome Industries Limited (2004) 266 ITR 721) and it was held that royalty means compensation paid to landlord by occupier of land for occupation allowed by a contract between them. It is a share of the product or profit reserve by the owner for permitting another to use this property. In context of the diverse interpretation granted to the word royalty if the definition of the word in treaty it would be clear that scope of the concept is not included or conferred to any copyright or patent but includes the right to use any type of commercial or scientific equipment which may be tangible or intangible.

8.Respondent No.1 while passing impugned order has not interpreted the concept royalty in an unreasonable or irrational manner which results in any legal or jurisdictional infirmity calling for interference by this Court. Even otherwise the objections/grounds taken by the petitioner have been duly met with and there is no legal defect in the same.

9.For the foregoing reasons the instant petition as well as the afore-noted constitutional petitions are dismissed.

KMZ/43/IslPetition dismissed.