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36. Trading in service, a permanent
establishment
Developing countries recognised the importance of service sector. The issue relating
to services besides somewhat distantly trade related ones like intellectual property
rights and trade related investments poses problem about its trading. Services can neither
be traded nor can be stored and they do not physically cross a border the way goods do.
They are fundamentally different from other kinds of economic activities. In the recent
years, technology advancement particularly in the areas of communication and
computerisation has permitted more timely and efficient production delivery and
consumption of services on a world-wide scale. The technological advancement has given
rise to a new concept of services as a moving force combined with a number of other
factors. The emphasis from manufacturing to services has been shifted. The trend towards
greater specialisation and the concomitant economics of scale in the service sector have
become apparent in international economic transactions. Trade in services enlarges the
scope for new jobs in various sector industries. There are two kinds of services, namely,
material services and professional services. Material services are not services which
depend wholly or largely upon the contribution of professional knowledge, skill, dexterity
for the production of a result. Such services being given to individual by individual
although remain services but not material services. Material services involve an activity
carried on through the cooperation between employers and employees to provide the
community with the use of something such as electric power, water, transport, telephones
and the like. In providing these services, there may be employment of a trained man and
even professional man but the emphasis is not on what these men do but upon the
productivity of a service organised as an industry and commercially valuable. Thus, the
services of a professional man involving benefit of individuals according to their needs
such as doctors, lawyers, solicitors, etc., are easily distinguishable from an activity
such as transport service. The later is of commercial character in which something is
brought into existence quite apart from the benefit of particular
individuals.
Where there' is a systematic activity organised by cooperation between the employer and
the employee or production of goods and services calculated to satisfy human wants and
wishes is material service because the focus of the activity is functional. The decisive
factor is the nature of the activity with special emphasis on the employer and employee
relation and if the organisation is a trade or business, it does not cease to be so
because of provision of services by the undertaking. The material services are, therefore,
placed at par with industry. The expression ‘industry’ has many meanings. It
means ‘skills’, 'dexterity', 'diligence', 'systematic work of labour’,
‘habitual employment in the productivity’, ‘acts of manufacturing’,
‘shipment', etc. The expression 'industry’ ordinarily means the process of
manufacture or production. Nowadays the expression ‘business' is taken to be in the
wider context and implies activity carried on continuously and systematically by a person
by the application of his labour and skill with a view to earning an
income.
In view of this, therefore, the service relating to banking, insurance, shipping,
consultancy, manpower, telecommunication, data processing would mean that the person who
indulges in such activities have been carrying on trade and business and the result
obtained may be on account of employment of intellectual skill coupled with manual skill
with the association of labour and employees. The result obtained because of the
application of such skill may be not tangible as in the case of manufacturing or
production where goods are produced with a different identity from the raw materials.
Thus, payments made to an enterprise in respect of furnishing by that enterprise, services
as a result of the activities of the employees or other personnel, are therefore, subject
to Article 5, and be taken as the profits of the permanent establishment.
36.1. Consultancy service, a permanent establishment -
Consulting and similar services in developing countries often involve very large sum of
money and so the developing countries have been arguing that the profits from such
services should be taxed by developing countries in certain circumstances. In recent tax
agreements, Pakistan has attempted to incorporate this provision for holding furnishing of
services, including consultancy service by a foreign enterprise through employees or other
personnel engaged by the enterprise for such purpose, as permanent establishment, but only
if the activities continue for a certain minimum period within any 12-month period. The UN
Model provides that period to be consisting of six months.
36.2. Service should relate to same or connected project -
The furnishing of services should continue for a period aggregating more than six months
within any 12-month period, and the nature of the services should relate to the same
project or a connected project. The block of 12-month period may not coincide with the
fiscal year or the calendar year. The block comprises of twelve months commencing from the
date of furnishing services. The 'month' must be taken to mean a period of 30 days, i.e., the corresponding date in the next month
minus one. The aggregate of the period(s) in the block of 12-month period should be taken
into account; and if it comes to six months, permanent establishment exists irrespective
of whether the period is continuous or broken. Reference to the words 'for the same or
connected project' would mean if the services relate to different projects even for a
period more than six months the enterprise rendering services, would not constitute
permanent establishment. An enterprise may undertake many unrelated projects for
furnishing services and may spend some period on each, the total of which in a block of 12
months may exceed six months, such an enterprise cannot be said to have a permanent
establishment in the host country.
37. Activities which are not considered permanent establishment
Paragraph (4) of Article 5 contains exception to the general definition as laid down
in paragraph (1) and not to include the following to mean permanent establishment:
- The use of facilities solely for the purpose of storage or display of goods or
merchandise belonging to the enterprise
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of storage or display
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of processing by another enterprise
- The maintenance of a fixed place of business solely for the purpose of purchasing goods
or merchandise or of collecting information for the enterprise
- The maintenance of the fixed place of business solely for the purpose of carrying on,
for the enterprise, any other activity of a preparatory or auxiliary character
The fixed place of business, which would otherwise constitute permanent establishment,
used for storage or display of goods belonging to a resident of the other Contracting
State and the maintenance of an inventory for similar purpose, or used solely for the
purpose of purchasing of goods or solely for the processing of goods by other enterprise,
or used for collection of information or to the performance of other such activities of
preparatory or auxiliary nature on behalf of the foreign enterprise, is not deemed to be a
permanent establishment. If a representative office restricts its activities as mentioned
above, or to making contracts, gathering or transmitting information to its head office,
disseminating information about the products and services of the foreign enterprise and
receiving enquiries about those products and services, such an office cannot have an
extended meaning of 'permanent establishment', provided such activities do not go beyond
their support functions and yield profits, in the sense that the profits could be said to
have been derived from such activities.
The common feature of all the activities listed under this paragraph is that these are of
preparatory or auxiliary to the carrying on of the business by the enterprise, though the
words 'preparatory or auxiliary character' are found only in sub-paragraph (e) which reads
as follows :
"The maintenance of a fixed place of business solely for the purpose of carrying
on, for the enterprise, any other activity of a preparatory or auxiliary character."
The question is whether the words 'any other' before 'activity' refer to activities which
are in addition to, or to also all those mentioned in the preceding paragraphs. In fact
sub-paragraph (e) is an extension of the preceding, as could be discerned from the nature
of activities mentioned in them.
The purpose of these being of storage or display of goods or merchandise, or for
collection of information, etc., are preparatory and auxiliary in character. Sub-paragraph
(e) provides a generalised exception to the definition in paragraphs (2) and (3), which
read with those paragraphs provides a list by which to determine negatively, what does not
constitute permanent establishment. Such a test makes it unnecessary to chalk out an
exhaustive list of exceptions to the definition of permanent establishment in paragraphs
(2) and (3).
The word 'other' is not a word of limitation but of extension, so as to cover all possible
ways in which the activity of auxiliary or preparatory character could be undertaken by an
enterprise or person without the latter being designated as permanent establishment. It is
included to cover also the cases which may not come within the expressed meaning of the
preceding sub-paragraphs, though their purpose and character is similar. The words 'any
other' mean analogous to those specified before.
Thus all the activities specified in the preceding sub-paragraphs are similar and
analogous, viz., preparatory and auxiliary.
[Clause (e) of the UN Model Convention appears in the following modified form in recent treaties :
"The maintenance of a fixed place of business solely for the purpose of
advertising, for supply of information, for scientific research, or for similar activities
of a preparatory or auxiliary character for the enterprise."
The question is whether the word 'similar' before the word ‘activities’ refers
to activities mentioned in the sub-clause or to all mentioned in the preceding clauses.
The activities such as 'advertising', 'supply of information', 'scientific research' do
not constitute a class and are not susceptible of analogous meaning. Each carries a
distinct meaning and does not derive colour from the other.
There is no genus or a category to which these could belong to. The expression 'similar
activities' has not been used in a restrictive sense and cannot, therefore, be confined to
only the activities akin to those mentioned in clause (e), but also to others in the
preceding clauses. The context and object of the main paragraph (3) and the scheme of
Article 5 do not require that the expression 'similar activities' be restricted to the
activities specified in clause (e).
In fact clause (2) is an extension of the preceding, as could be seen from the nature of
the activities mentioned in them. The purpose of display [clauses (a) and (b)] is to
advertise.-Collection of information [clause (c)] is the obverse of supply of information.
The purpose and object of all the activities are the same, viz., preparatory or auxiliary.
Clause (c) provides a combination of activities mentioned in clauses (a) to (c) in the
same fixed place of the business to be used for storing goods or merchandise or to be
maintained for advertising supply or collection of information 'or for research, etc.
Thus, if such combination results in an activity which is of preparatory or auxiliary in
nature, the fixed place of business cannot be deemed permanent establishment.
Some agreements in fact make the position clear by a provision which is of clarificatory
in nature, to the effect that 'the maintenance of a fixed place of business solely for any
combination of activities mentioned in subparagraphs (a) to (e) provided that the overall
activity of the fixed place of business resulting from this combination is of a
preparatory or auxiliary character.'
The emphasis is on the combination of the activities being preparatory or auxiliary. Such
a combination is possible only if the components are preparatory or auxiliary in
character.
Clause (e) provides a generalised exception to the definition in paragraph (2) which read
with the clause provides a test by which to determine what does not constitute permanent
establishment. Such a test makes it unnecessary to chalk out an exhaustive list of
exceptions to the definition of permanent establishment in paragraph
(2).
38. Person is also taken a permanent establishment
The definition of 'permanent establishment', inter alia, also means a person
who represents a permanent establishment and who in himself represents a 'fixed place of
business'. The person may be an individual or a juridical entity. A person acting in one
of the Contracting States on behalf of an enterprise of other Contracting State is deemed
to be a permanent establishment in the first-mentioned Contracting State if--
(a) he has and habitually exercises in that Contracting State, an authority to conclude
contracts on behalf of the enterprise, unless his activities are limited to the activities
as mentioned in paragraph (4), or
(b) he habitually maintains in that Contracting State a stock of goods or merchandise
belonging to the enterprise from which he regularly delivers goods or merchandise on
behalf of the enterprise.
38.1. 'Habitually exercises an authority to conclude contract' -
If there is an agent in Pakistan who has been authorised by the foreign enterprise to
conclude contracts on its behalf (unless such activity is limited to the purchase of goods
or merchandise for the enterprise); and who exercises such authority habitually, the
foreign enterprise could be said trading within and having a permanent establishment in
Pakistan. Conclusion of agreement done repeatedly or persistently in exercise of authority
conferred upon a person by the foreign enterprise, is the requirement for that person to
be taken permanent establishment of that enterprise in Pakistan.
If an enterprise chooses to keep an agent in Pakistan, who obtains orders in Pakistan and
who causes goods to come over to Pakistani customers and through whose hands the money
pass and through whom all such arrangements such as keeping an establishment, securing
orders from the customers, collection of money from them and keeping a banking account in
Pakistan are made that enterprise can be said to be carrying on trade in Pakistan.
Normally a trade is exercised at a place where a contract is made. A contract represents legal relations resulting from the act of
parties, and means a total obligations in law resulting from the parties' enforceable
agreement. Total obligations follow from the enforceability of the promises. The contract
does not contemplate simply the act of promising but obligations arising therefrom.
Repeated, persistent and similar acts, conveying an idea of continuity, on behalf of the
non-resident, would hold him the latter's permanent establishment, as the use of such
expressions as 'habitually exercises', ‘maintains’, 'regularly fulfils' conveys.
Such expressions convey some kind of frequency or repetition of, or permanence of things
done by the person on behalf of the foreign enterprise.
38.1-1 'Habitually' - The expression habitually means
repeatedly or ‘persistently’. It implies a thread of continuity stringing
together similar repetitive acts. Repeated, persistent and similar but not isolated
individual and similar acts are necessary to justify an inference of habit. It connotes
frequent commission of acts or an aggregate of similar acts. Because the idea of 'habit'
involves an element of persistence and a tendency to repeat the acts of the same class or
kind, if the acts are not of the same class or even if they are of the same kind when they
are committed with a long interval of time between them, they cannot be treated as
habitual ones.
38.1-2 'Maintains' - The inherent concept in the word
'maintenance’ involves a sense of continuity, periodicity or permanence. Maintenance
of stock of goods or merchandise connotes the idea of possessing it continually or
somewhat with permanence, so that for fulfillment of the orders on behalf of the foreign
enterprise the agent draws from such stock.
38.1-3 Regularly - 'Regularly' is characterised by reasonable
punctuality; that is to say, happening on regular times or intervals. The 'regularity'
contemplated may not be punctuality of clock-wise precision and exactitude, but it must
reasonably conform with substantial proximity to the sequence of time or intervals at
which delivery of goods or merchandise is made.
The' delivery of goods sold to a purchaser is one aspect of the trading activity.
38.2. Agents - A considerable part of the international
trade is conducted through agents. When and to what extent the presence of agents in other
countries could be taken a projection of business enterprise, has been a matter of
agreement. An agent is one who represents, acts for and accounts to another. Agency is the
relationship that exists between two persons one of whom, the principal expressly or
impliedly consents that the other, the agent, similarly consenting, should represent him
or act on his behalf. The use of the phraseology in the terms of contract cannot in any
way be conclusive and what one has to look for is the substance and not the form thereof,
and that mere use of the words 'principal' and 'agent' employed in an agreement would not
necessarily mean that the principal was carrying on the business through his agent, if the
basic element of control or carrying on the business and sharing of the profits and the
losses were absent. Mere use of the terminology
of the principal and agent may at times, far from being conclusive, may be misnomer. One
has, therefore, to go to the root and substance of the contract and not merely to its form
and name, because, otherwise, it would be open to the parties to camouflage the substance
of an agreement by merely employing the labels of principal and agent.
38.2-1 Types of agents - Dependent and independent agents -
The OECD/UN Model draft contemplates two types of agents, dependent and independent. If
the agent is independent and acting in the 'ordinary course of business' there is no
permanent establishment of the non-resident. Where an agent is not independent, the
non-resident may have a permanent establishment. By virtue of the permanent establishment
certain income associated with or derived through that permanent establishment may be
subject to tax. The dependent agent has an authority to conclude contracts on behalf of
the enterprise and he habitually exercises this authority in the country where he is
located, i.e., the agent has a legal authority to bind the enterprise or who in the
absence of such authority habitually maintains a stock of goods or merchandise from which
he regularly delivers goods or merchandise on behalf of the enterprise. The agents of
independent status acting in the ordinary course of their business are excluded from the
scope of permanent establishment. Nor, will the fact that the parent company or a
subsidiary of an overseas company being resident in Pakistan necessarily mean that
overseas company is deemed to be a permanent establishment. However, care needs be taken
when dealing with some of the older agreements, as 'the parent/subsidiary exclusion will
not apply if the Pakistani company manufactures, assembles, or processes, packs or
distributes any goods; or where it carries out any mining, quarrying, forestry, or other
natural resource extraction, or breeding management of livestock, on behalf of or to the
order by the overseas company.
However, agreements entered into after 1980 follow much more closely, in format and
content, the 1977 of the OECD Model or 1980 UN Model. Even so, care must still be
exercised as the generalisation referred to above may not apply to the relevant agreement.
In case of Bhopal Sugar Industries Ltd. v. STO, the
Indian Supreme Court observed that a mere formal description of a person in a contract
as an agent or a buyer is not conclusive, unless the context shows that the parties
clearly intended to treat a buyer as a buyer and not as an agent and that one must look to
the substance of the transaction as disclosed in the contract in order to determine the
nature of the contract.
Commission agents 'appear to resemble independent parties rather than agents'. As regards
the principal, a commission agent seems to be a seller of goods as regards the third party
as buyer of goods. The relationship between a principal and a commission agent is,
therefore, a mixture of that involved in agency and that involved in the sale of goods.
The contracts with commission agents do not follow a single pattern and it is always
necessary to bear in mind, while considering such contracts as to what are the terms of a
Particular contract.
38.2-2 Deciding factors as to whether an agency or selling of
goods - The following considerations should be taken into account for deciding whether
the relationship between the two parties is of agency or of seller and buyer of goods:
- The true relationship has to be gathered from the nature of the contract, its terms and
conditions. The terminology used agents or 'sale distributors, or ‘buyers’ is
not decisive of the legal relationship. The substance of the transaction as disclosed in
the contract has to be looked into in order to determine the nature of contract.
- When one party transfers goods to another for a price which is paid or is promised to be
paid, the transferee is liable to the transferor as debtor for the price to be Paid and
not as an agent for the proceeds of the sale.
- The essence of agency to sell is the delivery of goods to a person who is to sell them
not as his own property but as the property of the principal who continues to be the owner
of the goods and will, therefore, be liable to account for the sale proceeds.
- In the case of a mercantile agent, the accepted practice is that he has control
over or possession of the goods to pass the property in and title to the goods. If this is
so, undoubtedly when a commission agent sells goods belonging to his principal with his
authority and consent and without disclosing to the buyer the name of the owner,
there is certainly a transfer of property in the goods from the commission agent to the
buyer. The relationship between the commission agent and its principal, however, continues
to be of agency.
- If the agreement between the parties suggests that if any loss is suffered
by the alleged agent in the transaction of sale, he is to be indemnified by the principal
because he is not the owner of the goods, the relationship of agency between them is
inferred.
In a contract of sale, title to the property passes on to the buyer on delivery of
goods for a price paid or promised. Once this happens the buyer becomes the owner of the
property and the seller has no vestige of title left in the property. The concept of sale
has undergone a revolutionary change, having regard to complexities of modern times and
the expanding needs of the society which had made departure from the doctrine of laissez
faire by including a transaction within the fold of a sale even though the seller may,
by virtue of an agreement, impose a number of restrictions on the buyer, e.g., fixation of
price, maintenance of accounts in a particular manner and submission thereof. These
restrictions per se would not convert a contract for sale into one of agency,
because in spite of these restrictions the transaction would still be a sale, subject to
all the incidents of a sale. A contract of agency however differs essentially from a
contract of sale inasmuch as an agent on taking delivery of the property does not sell it
as his own property but. sells the same as the property of the principal and under his
instructions and directions. Furthermore, since the agent is not the owner of the goods if
any loss is suffered by the agent, he is to be indemnified by the principal. This is
another dominating factor which distinguishes the agent from a buyer - Becker Gray
& Co. v. CIT and Punjab State Cooperative
Supply & Marketing Federation Ltd. v. CIT.
38.2-3 Sales representative, whether agent - The existence of
sales representative in Pakistan of a foreign enterprise, does not by itself constitute a
permanent establishment, unless the representative has an authority to conclude contracts
or he regularly delivers goods or merchandise on behalf of the foreign enterprise. In the
absence of such authorities, the representative is not deemed to be permanent
establishment of a foreign enterprise if his activities are limited to purchase of goods
or merchandise on behalf of or maintains stock belonging to it, or is engaged in the
collection of information or for making advertisement or any other ancillary, auxiliary or
support functions on behalf of the foreign enterprise.
Thus, a sales representative who has no authority to conclude contracts for his employer,
nor is he holding a stock of merchandise from which he regularly makes delivery, is not a
permanent establishment. But if he has an
authority to contract and accept orders on behalf of the foreign enterprise, he represents
a permanent establishment. Presence of an agent
acting on behalf of the foreign enterprise is not enough. If the agent trades on his own
behalf, without authority to fill orders on behalf of the foreign enterprise from a stock
of goods, he is not a permanent establishment.
38.2-4 Pakistan subsidiary - Whether agent - A
question arises whether the dealings between a non-resident parent company and its
Pakistani subsidiary can at all be regarded as on principal-to-principal basis since the
former would be in a position to exercise control over the affairs of the latter. In such
a case if the transactions are actually on a principal-to-principal basis and at arm's
length and the subsidiary company functions and carries on business of its own, instead of
functioning as an agent of the parent company, the mere fact that the Pakistani company is
a subsidiary of the non-resident company is not a valid ground for holding it to be a
permanent establishment of the parent company.
The mere existence of a ‘business connection' arising out of the parent subsidiary
relationship will not give rise to an assessment, nor will the fact that the parent
company might exercise control over the affairs of the subsidiary company. Thus, if in
pursuant to indents placed by the Pakistani subsidiary which are accepted outside Pakistan
and the contracts are also executed outside Pakistan by putting goods on ships and there
being no reservation of right of disposal of goods by the non-resident these products are
not merely supplied by the non-resident company to the Pakistani subsidiary but are
actually sold to the Pakistani subsidiary at certain prices which are C&F prices. What
is charged by the non-resident to the Pakistani subsidiary is the price and the
transactions are not of the nature that there is supply of goods by the non-resident
company to its Pakistani subsidiary on the basis of any commission or otherwise or for any
other similar consideration. The transactions are as between principal-to-principal and
not as between principal and agent Pakistani subsidiary and thus cannot be regarded
affecting the sales as an agent of the non-resident company.
The Supreme Court of Belgium (judgment of the Supreme Court of Belgium on French-Belgium
Treaty) has held that a Belgian subsidiary of a French parent company was not the parents'
'permanent establishment’, notwithstanding the very light control exercised by the
parent company over the sales territory and product lines allocated to the subsidiaries
notwithstanding the considerable amount of management and financial reporting which was
required of the subsidiary. This decision of the Belgium Supreme Court, if regarded as
persuasive in other countries, is of immense relief to multinational corporations (MNCs),
which often do lay strict guidelines for the operations of their subsidiaries.
38.2-5 Independent agents - Carrying on business is one thing
and establishing a place of business is another. Establishment of a place of business
connotes some visible and physical connection with a locality in Pakistan. If an
enterprise has a specified and identifiable place in Pakistan at which it carries business
here, it can be said to have established a place of business here. Such a place may be
termed ‘office’ or a 'local habitation'. The establishment of such a 'local
habitat/on' may be intended to have a sort of permanence, which cannot be inferred if a
business is carried through a broker, general commission agent or any other agent of an
independent status, provided that such persons are acting in the ordinary course of their
business. But, when the activities of such an 'agent are devoted wholly or almost wholly
on behalf of that enterprise, he is not considered an agent of an independent status. Such
activities may relate to negotiations of terms of sale, carrying on survey of goods
imported, arranging for the delivery of goods sold, collection of the price of the goods
sold. All such activities are trading activities and the agent undertaking them on behalf
of a foreign enterprise is the manifestation or projection of that enterprise in Pakistan.
38.3. Agent and Income Tax Ordinance, 1979 - Section 78 does
not define an agent but only provides as to what could be included in this term in
relation to a non-resident. The provisions of section 78 are, therefore, inclusive and do
not define the term 'agent'. Therefore, to find the definition of the term 'agent', we
have to fall back upon the provision of the Contract Act. The said Act defines agent as a
person employed to do any act for another or to represent another in dealing with third
person. For the appointment of an agent, it is not necessary that there must be a written
authority. Appointment can be made even orally. The order of an Assessing Officer under
section 78 does not clothe a person who has already been acting as an agent though by his
order he is treated as an agent of the non-resident. [n the capacity of the agent of the
non-resident, he would be representative assessee within the meaning of section 78(4)
right from the date on which he acted as agent of the non-resident. For a person to be a
representative assessee within the meaning of section 78(4) it is not necessary that he
must have been treated as agent of a non-resident in the capacity of the agent of the
non-resident, he would be the representative assessee in respect of the income of the
non-resident irrespective of the fact whether he has been treated as agent under section
78(4) or not. It is only in addition to an agent of the non-resident that persons who are
treated as agents under section 78 are also included in the definition of representative
assessee within the meaning of section 78(4)(a) or (b).
38.3-1 Taxability of non-resident through agents under the
Income Tax Ordinance, 1979 - A non-resident assessee is made liable to pay tax through
his agent or representative in Pakistan as per provisions contained in Chapter VIII of the
Ordinance. The Ordinance focuses its attention primarily on the person who in fact
receives income, though he may not have the ownership or enjoyment thereof, or even of the
business which is responsible for the generation of such income. The person charged with
tax is neither the trustee nor the beneficiary as such, but he is in actual receipt and
control of the income which it is sought to reach. The object of the Ordinance is to
secure for the State a proportion of profits chargeable, and this end is attained by
simple and effective expedient of taxing the profits where they are found.
Thus the convenience of assessment and collection of tax is the
reason for making the person, though not the proprietor of the business and not entitled
to enjoy the income therefrom, liable for tax. The
other reason is to catch the income at the earliest point of time and tax the same
where it is found, instead of waiting until such time when the income reaches the person
who is the owner thereof.
38.3-2 Representative assessee under the Income Tax Ordinance,
1979 - Section 78 of the Ordinance contains provisions which aim at assessing a person
and collecting from him the tax who is in receipt of income in a representative capacity
as representing the person on whose behalf income is received. This section defines the
various categories of representative assessees in respect of the income set out against
each. Section 78 is reproduced as under:
"Liability of agents representing assessee.- (1) Every agent shall, in respect of
the income for which he is, or is declared to be, or is treated as, an agent, be deemed to
be an assessee for the purposes of this Ordinance and be subject to the same obligations
and liabilities as if he were the assessee, and shall be liable to assessment in his own
name in respect of that income.
(2) Every agent who pays any tax under this Ordinance, shall be entitled to recover the
tax so paid from the person on whose behalf it is paid, or to retain an equivalent amount
out of any moneys due or belonging to the said person which may be in his possession or
come into his possession at any time.
(3) Any agent, or any person who apprehends that he may be assessed as an agent, may
retain out of any money payable by him to the person on whose behalf he is liable to pay
tax (hereinafter in this section referred to as the 'principal'), a sum equal to his
estimated liability under this Ordinance, and in the event of any disagreement between the
principal and such agent or person as to the amount to be so retained, such agent or
person may secure from the Deputy Commissioner a certificate stating the amount to be so
retained pending final determination of the tax liability, and the certificate so obtained
shall be his authority for retaining that amount.
Explanation. - For the purposes of this section and section 80, "agent" includes
-
(1) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is
entitled to receive, or is in receipt of, such income on behalf of such minor, lunatic or
idiot;
(2) in respect of income which 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 on behalf of, or for the benefit of, any person, such Court of
Wards, Administrator-General, Official Trustee, receiver or manager;
(3) in respect of income which a trustee, appointed under a trust declared by a duly
executed instrument in writing whether testamentary or otherwise (including any Wakf deed
which is valid under the Mussalman Wakf Validating Act, 1913) (VI of 1913), receives or is
entitled to receive on behalf, or for the benefit, of any person, such trustee or
trustees; and
(4) in respect of the income of a non-resident -
(a) any person in Pakistan -
(i) who is employed by, or on behalf of, the non-resident; or
(ii) who has any business connection with the non-resident; or
(iii) from or through whom the non-resident is in receipt of any income, whether directly
or indirectly; or
(iv) who holds, or controls the receipt or disposal of, any money belonging to the
non-resident; or
(v) who is the trustee of the non-resident; or
(b) any person, whether a resident or a non-resident, who has acquired, by means of a
transfer, a capital asset in Pakistan; or
(c) any person, who is declared or treated as an agent of the non-resident:
Provided that -
(a) 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 an agent under this section in
respect of such transactions, if-
(i) the transactions are carried on in the ordinary course of business through the
first-mentioned broker; and
(ii) the non-resident broker is carrying on such transactions in the ordinary course of
his business and not as a principal; and
(b) no person shall be declared or treated as the agent of a non-resident unless he has
been given an opportunity, by the Deputy Commissioner, of being heard.
(5) Nothing in this section shall prevent either the direct assessment of the person on
whose behalf, or for whose benefit, any such income is receivable, or the recovery from
such person of the tax payable in respect of such income."
Section 78 provides that a representative assessee who pays any tax on behalf of the
person whom he represents (the principal) is entitled to (i) to recover from such person
the 'tax so paid, (ii) to retain out of any moneys that may be in his possession or that
might come to him in his representative capacity, an amount equal to the tax so paid by
him, and (iii) to obtain a certificate from the Deputy Commissioner of Income Tax
specifying the amount to be retained, pending final settlement' of the tax liability of
the person 'represented in the case of any disagreement between the representative and the
represented about the sum to be retained. The representative assessee after having
received such a certificate, would feel safe from being called by the revenue authorities
to pay more amount as tax on connection of assessment than what is specified in the
certificate, provided he does not have in his possession additional assets of the
non-resident principal. The additional liability cannot extend beyond such additional
assets, however.
Section 78 empowers the Deputy Commissioner of Income Tax to treat any person in Pakistan
as an agent and hence a representative assessee in relation to a non-resident provided he
is one who belongs to any of the categories enumerated in section 78(4). A person, who
whether a resident or non-resident, has acquired by means of a transfer, a capital asset
in Pakistan from the non-resident, is also an agent for the purposes of the Income Tax
Ordinance, 1979. The Ordinance hoists responsibility upon such person which is not cast
upon him through a contract between him and the non-resident. However, before a person is
treated agent within the meaning of section 78, he must be given an opportunity of being
heard [section 78(4)(b), proviso] as to his liability to be treated as such. Such an
opportunity is mandatory. The Deputy Commissioner of Income Tax has to make an order
making his intention known to treat such a person as representative of the non-resident
giving reasons for the same. Such an order is appealable. Thus, once the Assessing Officer
decides to assess the income in respect of which an assessment could be made under the
aforesaid sections against the representative assessee, the same income is not liable to
be assessed under any other provisions of the Ordinance. Such an assessment, however, does not exonerate the principal assessee of
his ultimate liability [section 78(5)]. It is still the principal's liability which is
enforced in the hands of the agent. So long as
the assessing authority has the payer to exercise the option to make an assessment of the
income the non-resident has earned through his agent in Pakistan, either directly on him
or against the representative assessee, following the procedure prescribed in section 78
it is for the said authority to decide as to whether it should assess the said income
directly on the non-resident or to make assessment on the agent. The number of agents is
not confined to one. It can be more. Assessment could be made against each separately in
respect of income received by each of them in terms of the provisions contained in section
78. In such cases there is no multiplicity of assessment in respect of one assessee. Also
conversely when the department has initiated proceedings against the non-resident to
assess the income, other than the aforesaid income, it does not mean that the department
has abandoned its power to make an assessment on the agent of the said non-resident, in
respect of the income earned by, or derived by, the non-resident through him. Even after
the completion of assessment in the hands of the representative assessee in respect of
income of the non-resident for which liability could be fastened on him in terms of
section 78, the other income of the non-resident can be assessed directly in the hands of
the non-resident.
A question arises as to what would be the rate of tax on the income assessed in the
hands of the representative assessee, whether it should be the one which is applicable to
all the income of the non-resident, which has arisen or accrued in Pakistan, a portion of
which is assessed in the hand of aforesaid representative, while other portions are
assessed in those of other different representatives or the non-resident himself.
The basis of the charge under the Ordinance is the total income of the income year of a
person and it includes all income from whatever source derived. The income-tax is charged
at rate or rates for the assessment year in accordance with and subject to the provision
of the Ordinance in respect of the total income of the assessee [section 9]. The charge in
respect of the total income is expressly declared to be 'in accordance with' and 'subject
to the provisions of this Ordinance'. These expressions make it clear that the assessment
of income of a non-resident through an agent shall be subject to provisions contained in
section 78. They are special provisions and, therefore, should be adhered to, as they
cannot be ignored in favour of the general provisions. If a fiscal statute makes a special
provision regarding the manner in which the burden of taxation shall be borne by a
particular set of assessees, then the said special provision shall prevail over the
general provision.
Under section 9, therefore, the rate of tax must be related to the total income of the
income year of the assessee. Since the total income of a representative assessee can be
only the income received by him on behalf of the non-resident and not any other income,
the rate of tax will be the one that is applicable to such total income only.
The liability of the representative assessee is co-extensive with
that of the non-resident and in no sense a wider or a larger liability. It is, therefore, clear that every case of assessment of
representative shall be in accordance with section 78, and it is also clear that although
the representative assessee is assessed, the assessment must be made in the manner as laid
down. in the Ordinance.
39. Subsidiary company does not constitute permanent
establishment
For a parent company its subsidiary does not constitute a permanent establishment.
Both are separate legal entities. But where the subsidiary company acts as an agent for
the parent company in circumstances pointing out to a trading of the permanent
company in the host country using the subsidiary as an agent, the subsidiary company can
be considered a permanent establishment. But
a mere use by a parent of its subsidiary company's space and employees would not
constitute a permanent establishment, because
a permanent establishment requires persons with authority to carry on some part of the
taxpayer's money making activities. The parent company and subsidiary company are
different entities in law.
Action on behalf of a foreign enterprise is not sufficient to hold a person permanent
establishment, unless the agency exists as an' organisation identifiable as the 'locus' of
operations, something physical and separately identifiable as the place of business
belonging to the non-resident enterprise. For an enterprise to trade in a foreign country
by way of a permanent establishment, the agent must fill orders on behalf of the
enterprise from a stock of goods. If the 'agency' trades on its own behalf, and not that
of the foreign. enterprise in the sense that it exercises an authority to conclude
contracts in the name of the foreign enterprise, it is not the permanent establishment.
Similarly, mere existence of a sale representative in a foreign country is not permanent
establishment, unless it has authority to conclude contracts on behalf of the enterprise
or to fill up orders on its behalf from a stock of goods. However, where the sales organisation is elaborate with full authority
to contract and accept orders on behalf of foreign enterprise, there arises a permanent establishment.
