KARACHI: An appellate bench of High Court of Sindh (SHC) allowed a bunch of petitions, 28 in all through a common order in favor of service providing companies against levy and deduction of Withholding Tax under Section 153 (1) (b) of the Income Tax Ordinance, 2001 (“Ordinance”) on the gross amount received from recipient of services, which includes amounts of salaries, contributions, insurance etc. etc instead of service fees.

Human Resources Solution (Pvt) Ltd, M/s. ASK Development & others Petitioner,  E Square Service Pvt. Ltd & another, E Business Solution (Pvt), Icon Consultants (Pvt) Ltd and others filed the petitions

Abdul Moiz Jaferii argued the case as a leading counsel

The petitioners also seek a declaration that wherever the word “turnover” has been used in this respect, including for obtaining an Exemption Certificate, it is only the gross service fee and not the entire amount of gross receipts on which such tax is payable.

The Counsel for the Petitioners have contended that the Petitioners are human resource and manpower service providers and render such services to the recipients by providing labourers and employees under agreements; that employees, so engaged, work under the control of the service recipients, whereas, the Petitioners are paid charges for such services, which includes their fee for services and the reimbursement of the salaries and dues of the employees and labourers; that previously the tax deducted by the service recipients under Section 153(1)(b) of the Ordinance was a final tax; that post 2009, the said deduction was treated as Minimum Tax; that pursuant to Clause-94 of Part-IV of 2nd Schedule to the Ordinance, there was certain reduction in the rate of tax, whereas, even to a certain category of service providers, Exemption Certificates were also issued; that the respondent-department has misconstrued  the relevant provisions of the Ordinance and use of the word “gross amount” is interpreted so as to include the entire amount received from the service recipient, which is incorrect; that in somewhat similar circumstances, relating to levy of Sales Tax on Services under the Sindh Sales Tax on Services Act, 2011,

SHC in its Judgment dated 17.11.2020 passed in C.P No.D-5220/2017 and other connected matters, has been pleased to hold that such tax could only be levied on the amount of service fee; and not on the gross amount received from the service recipient; that Section 113(b) of the Ordinance is pari-materia to Section 153(1)(b), which has already been interpreted through various judgments and is in favour of the Petitioners; that Section 153(7)(v)(b) has defined “turnover” which excludes the total amount including reimbursement expenses; hence Petitioners are not liable for payment of advance tax on the entire amount. In support they have relied upon various reported cases

The Counsel for the respondents have argued that Section 153 has used the words “gross amount payable” and has to be read with Division-III, Part-III of the First Schedule to the Ordinance; that Section 153(7)(v)(b) refers to turnover of the prescribed persons (withholding agents) and not of the Petitioners; that the tax has to be deducted on the gross amount, whereas, the advance tax is not a tax on income and now is a minimum tax; that the accounting arrangement, through a contract between the parties cannot override the provisions of the Ordinance, which has used the words “gross amount payable”; that there cannot be any distinction in payment of such amount as it is one payment together; hence the Petitioners have no case. In support they have relied upon various reported cases4.

Kafeel Ahmed Abbasi, DAG has contended that as per agreement between the parties tax is to be levied on the full amount received by the 2 PLD 1966 SC 828 (Messrs Hotel Metropole Ltd., Karachi v. The Commissioner of Income Tax (Central), Karachi, 2009 PTD 891 (Commissioner (Legal Division) Karachi Vs. Novartis Pharma (Pvt) Ltd., PTCL 2018 CL 783 (Pakistan State Oil Ltd. Vs. Commissioner of Income Tax, Karachi, 2018 SCMR 1181 (State Oil Ltd. Vs. Bakht Siddique), 2018 SCMR 894 Pakistan State Oil Ltd. Vs. Commissioner of Income Tax Karachi and 2020 SCMR 638 (Sui Southern Gas Co. Ltd. Vs. Registrar of Trade Unions). 3 Through Mr. Shahid Ali Qureshi, Mr. Ameer Baksh Metlo, Mr. Aqeel Qureshi and Mr. Kafeel Abbasi D.A.G. 4 2000 PTD 280 (Commissioner of Income Tax Vs. Muhammad Kassim) and 2017 PTD 1359 (Pakistan Telecommunication Company Ltd. Vs. Government of Khyber Bakhtunkhwa (KPK). Petitioners, whereas, literal meaning of the “gross amount” is the total amount received by them; hence the Petitioners have no case.

The bench after detailed hearing and perusing record noted that Petitioners, as stated, are service providers engaged in providing human resource, labour and manpower services to different service recipients, which includes unskilled and skilled labourers/ employees. The Petitioners have arrangement/agreements duly executed between them and the service recipients and for that they receive payments, which include payments of salaries of the workforce supplied by them, including payables such as contributions for Employees Old Age Benefits, gratuity, premium for life insurances, provincial sales tax etc. etc. After receiving such payments, the salaries are paid to the employees through banking channels on which, wherever applicable, necessary tax is also deducted and deposited, while rest of the payables are deposited directly with the respective departments and entities, and the balance amount is retained in lieu of their fee and service charges. It is their case that usually on an average; this amount is not more than 5% of the total amount received by them. In terms of Section 153(1)(b)6 of the Ordinance while making such payments, the service recipients (prescribed persons) are required to withhold advance income tax, whereas, for certain period of time Clause-94 of Part-IV to the Second Schedule of the Ordinance had provided that Section 153(1)(b) (ibid) shall not apply to a Company engaged in providing or rendering manpower services provided that the tax, payable or paid from such income, shall not be less than 2% of the gross amount of Turnover.

It is a matter of record that various such certificates were issued from time to time, but suddenly were refused, and even in certain cases show cause notice were also issued to amend the assessment orders. All these actions have been impugned; but the only legal issue as presented before us by the Respondent department is that in any case the advance tax in respect of the petitioners is to be calculated on entire gross amount received by them from the prescribed person or service recipient. This according to them would also apply when an exemption certificate is being claimed pursuant to the repealed Clause-948 of Part-IV of the 2nd Schedule to the Ordinance as it also requires payment of tax on “turnover”. On perusal of relevant provisions of Section 153(1)(b), it appears that the prescribed person, which in the instant matter, is the service recipient or the client of the Petitioner, while making payment in full or part including a payment by way of an advance for the rendering of or providing of services shall at the time of making payment deduct tax from the gross amount payable including sales tax, if any, at the 8 Clause 94 of Part-II of the 2nd Schedule “[(94) The provisions of clause (b) of the proviso to sub-section (3) of section 153 shall not apply for [the period beginning on the first day of July, 2015 and ending on the thirtieth day of June, [2019] to a company being a filer and engaged in providing or rendering freight forwarding services, air cargo services, courier services, manpower outsourcing services, hotel services, security guard services, software development services, [IT services and IT enabled services a defriend in clause (133) of Part I of this Schedule] tracking services, advertising services (other than by print or electronic media), share registrar services, engineering services [.] car rental services [ building maintenance services, services rendered by Pakistan Stock Exchange Limited and Pakistan mercantile Exchange Limited (inspection, certification, testing and training services)]. Provided that the tax payable or paid on the income from providing or rendering aforesaid services shall not be less than two percent of the gross amount of turnover from all sources and that the company furnishes in writing an irrevocable undertaking by the fifteenth day of November, 2015 to present its accounts to the Commissioner within thirty days of filing of return, for audit of its income tax affairs for [any of the tax year 2016 to /2019] Provided further that for tax year [2019], the company shall furnish irrevocable undertaking by November, [2018], to present its accounts to the Commissioner.] C.P No.D-2694 of 2019 & others Page 6 of 12 rate specified in Division-III of Part-III of the First Schedule9. Now the precise legal issue before us is, that what is the gross amount on which advance tax is to be deducted by the recipient of service. The Petitioners have relied upon the definition of “turnover” in Section 153 (7) (v) (b)10, which is defined as the gross fee for rendering of services for giving benefit including commissions, and according to them, it is only the gross fee on which advance tax is to be deducted by the prescribed person and not the gross amount paid by such prescribed person.

“It appears that thereafter, through Finance Act, 2019, the said clause (94) now stands omitted, and once again the Petitioners are now exposed to deduction of advance tax which tax is now a minimum tax; it is neither refundable nor can be carried over, and if finally the liability of tax is less than the tax already deducted, it becomes the minimum tax payable and the burden is to be borne by the Petitioners. This, according to them, as service providers if accepted, would amount to taxing the entire amount of gross turnover, and would put them out of business. It further appears that between July, 2015 to June, 2019 pursuant to Clause-94 in Schedule-II, Part-IV, of the Ordinance, the provision of Clause (b) of the proviso to subsection (3) to Section 153 was not applicable on a Company being a filer and engaged in providing or rendering various services including services of labour and manpower provided that the tax payable or paid on the income from providing of such services shall not be less than 2% of the gross amount of Turnover from all sources. This facility or exemption from withholding of advance tax, to service providers upon payment of 2% advance tax on their Turnover was benefiting them as no withholding tax was being deducted; nor was any further tax required to be paid. This use of the word “turnover” in this provision was understood as to be the “turnover” defined in Section 153(7)(v)(b) and as soon as Clause (94) ibid was omitted, the issue has come as to the correct value or amount on which the advance tax is to be deducted. It is but natural that the service recipients, in order to avoid any punitive action from the department have started deducting advance tax on the gross amount, they were paying to the service providers and this has resulted in this dispute now before us”, the bench held. It is clear that the gross amount, they are receiving includes the service fee alongwith various amounts, which are either expenses or reimbursable. It has come on record and has not been denied that the major chunk of this gross amount is the salary of labourers or the manpower provided by the Petitioners, which is then paid to them and necessary tax, if liable to be deducted from such salary, is being done and then deposited with the concerned authority. Time and again changes have been brought as to the treatment given to the advance tax deducted from the payment received by the petitioners, as sometimes it was treated as a final tax under the presumptive tax regime; at times as minimum tax, which is though not refundable; but is adjustable in filing normal tax returns from time to time. These changes have brought these disputes as to the quantum and gross amount, on which tax has to be deducted by the service recipient. Insofar as Section 153(7)(b)(v) of the Ordinance, wherein, turnover has been defined is concerned; it appears to be identical to section 113(3)(b) which also defines turnover in respect of minimum tax on the income of certain persons including service providers. Both these provisions clearly provide that wherever a reference has been made to turnover, it is the gross fee for the rendering of services for giving benefits including commissions. The turnover in section 153(7)(b)(v) is though in relation to the “prescribed person” who has to deduct tax on payments referred to in section 153 and is defined in section 153(7)(i)(h) & (i), wherein individuals and association of persons have been defined as prescribed persons with relation to their turnover; whereas, when we read this provision alongwith Section 153(1)(b), it appears that use of C.P No.D-2694 of 2019 & others Page 10 of 12 the word “turnover” has no nexus with this provision as the said provision has referred to gross amount payable. Similarly, the rate of tax on such gross amount has been prescribed under Division-III of Part-III of the First Schedule, which relates payment of goods or services and Clause 2(i) prescribes rate on which tax is to be deducted from a payment referred to in Clause (b) of Subsection 1 of Section 153 and it shall be 3%13 of the gross amount payable in respect of various service providers including the Petitioners i.e. manpower outsourcing services.

Parting with the judgment the bench ordered that “ In view of hereinabove facts and circumstances of the case, the petitioners have made out a case and it is accordingly held that for the gross amount referred to in section 153(1)(b) on which advance tax has to be deducted at the rate specified in Division III of Part III of the First Schedule to the Ordinance, is the gross fee received in lieu of services excluding the amount of reimbursable expenses. It is further held that for the purposes of clause 94 in Schedule II Part-IV of the Ordinance (since repealed) the turnover would be as defined in section 153(7)(b)(v) which is gross fee for rendering services excluding the amount of reimbursable expenses. All petitions are accordingly allowed to this extent. All impugned actions of the Respondents stand modified accordingly”.