SHC dismisses about 94 petitions and Special Tax Reference Applications (STRAs)

KARACHI: A tax appellate bench of High Court of Sindh hearing 77 petitions and 17 Sindh Sales Tax Reference Applications filed by Zona Pakistan (Pvt.) Ltd, against Province of Sindh & others dismissed all the petitions in favor of the department These petitions and STRAs were divided into four categories Category “A”, consists of a bunch of references filed by the alleged indenters against the order of the Tribunal bringing them within the frame of Sindh Sales Tax on Services Act, 2011 (SSTA 2011).

The second category “B”, includes those references which are filed by the department against same judgment of the Tribunal in respect of a portion that concerns with fine/penalty only.

Category “C”, is a bunch of petitions which are filed by the alleged indenters who, apart from filing the petitions, have also exhausted statutory remedy under SSTA 2011, and their References are attached as category “A”, as above.

The next category “D”, comprised of cases/petitions which have directly been filed, without undergoing process of statutory determination.

The bench framed the following possible questions that may originate from the proceedings in consideration of the propositions of the counsel, which are as under:-

I) Whether the business activities of the petitioners/applicants, who are identified as indenters are covered by SSTA 2011?

II) II) Whether the Province of Sindh has legislative competence to tax the services of the indenters serving in this province and hence are liable to be registered under SSTA 2011?

III) III) Whether under the provisions of SSTA 2011, it is the service providers/indenters who are required to be taxed without being passed on to the recipients of the goods?

IV) What could be the value of services for the purposes of

SSTA 2011?

V) Whether the business activities of the indenters constitute import and export of goods and/or extra territorial application and hence the Province of Sindh lacks competence in legislating the subject law?

vi) Whether the tax under question is tax on income of the indenters?

VI) Whether fine/penalty was rightly reduced by the Tribunal?

Besides counsel for respective petitioners and respondents, Zameer Khalid, Commissioner Sindh Revenue Board has substantially led the arguments on ably supported by Saifullah, Assistant Advocate General.

The case of indenters was that they do not have any contractual relationship with the local parties receiving the goods from foreign exporters and hence in the first instance it may be a transaction of direct import by the local party through foreign entity and any understanding between foreign principal and the indenters does not come within the clutches of at least the subject provincial statute SSTA 2011. Conversely privity of contract between applicant/indenters and foreign principal is a document which are governed by foreign laws including foreign arbitration. These indenters claimed to have been paid fixed emoluments by principal and that too on the conclusion of sale of goods to the local party by its foreign principal. 5. It is claimed that since the amount is received in foreign exchange as remittance through banking channels, it is only federation which could impose tax on such foreign remittance which is otherwise covered 4 in terms of Section 154 of Income Tax Ordinance, 2001. It is thus a tax which cannot be recovered from the foreign principal by the indenters as it becomes a direct tax and hence constitutionally not permitted through provincial legislation. It is argued that the province lack the competence to legislate on the subject on the touchstone that it is in relation to extra territorial jurisdiction and SSTA 2011 cannot encroach upon the subject of extra territorial jurisdiction in terms of Article 141 of the Constitution as it is with the parliament to legislate and make laws in reference therewith.

The counsel for indenters argued that the principal of the petitioners/indenters are foreign entities and they did not have place of business or office in Pakistan and apart from this the agreement and the relationship between them i.e. principal and indenters is also governed by foreign laws and the dispute between them is resolved through a resolution or arbitration which jurisdiction too is contemplated abroad and hence the foreign entity cannot be subjected to the local laws for the purposes of implementing SSTA 2011 to recover taxes, as levied and had been the subject matter of show-cause notices issued to them (indenters). The placed reliance upon a judgment of SHC passed in CP No.D-4778 to 4780 of 2021 i.e. case of Pakistan Mobile Communication (being unreported till date). They further relied upon the case of Imperial Tobacco where the aforesaid concept was discussed. It was further urged that the activities across the country and beyond territorial limits of a province could only be governed by Article 141 of the Constitution and hence being of extra territorial limits of this province, the SSTA 2011 lacks its application over the subject and province lacks competence to legislate.

In addition to the above, learned counsels have taken us to Entry No.27 of Federal Legislative List of Fourth Schedule to the Constitution of Islamic Republic of Pakistan, 1973 (hereinafter called “Constitution”) that relates to import and export across customs frontiers as defined by the Federal Government, inter-provincial trade and commerce, trade and commerce with foreign countries, standard of quality of goods to be exported out of Pakistan.

The next entry that was relied upon was Entry No.3 of Federal Legislative List to the Fourth Schedule of the Constitution i.e. implementing treaties and agreements, including educational and cultural pacts and agreements with other countries; extradition, including the surrender of criminals and accused persons to Governments outside Pakistan.

The counsels have also relied upon Entry No.32 that relates to international treaties, conventions and agreements and International arbitration. Thus, geographical stretch of the business under consideration claimed to have taken it away, beyond the territorial limits of province, as alleged, and either goods or services, could not be squeezed down to a restricted area of province of Sindh alone. It is thus concluded in terms of the aforesaid entries of the Federal Legislative List that the parliament has exclusive powers to make laws on the subjects enumerated in the Federal Legislative List and the parliament is only restricted to make laws with respect to matters not enumerated thereunder.

Replying to the above submission of counsel appearing for indenters/petitioners/applicants, Mr. Zamir Khalid, Commissioner SBR, gave us an overall view of the history and more importantly the legislative competence of the province particularly after 18th Amendment to the Constitution. He relied on Entry 49 of Federal Legislative List which, in terms of 18 the Amendment, excludes the federation to levy taxes on services as previously Entry 49 has been catering for both kinds of levies.

The Commissioner further submitted that the agreements between (indenters and foreign principals) which may either have been disclosed or concealed by the indenters from this Court, are in their nature independent of sale of goods as it is the concept of services that is being selected and touched upon by SSTA 2011, which is different from additional concept of sale of goods to the proposed buyers in Sindh or any part, which may or may not be within the province of Sindh. Foreign principal receives the services from the indenters serving within the territorial limits of Province of Sindh provided by the Constitution and SSTA 2011. On maturity of such transaction, the indenters get their commission and perhaps determine the value of service/consideration, as stipulated in terms of Section 5(1) of SSTA 2011.

In relation to the liability to be borne by the ultimate consumer, learned Commissioner submitted that the local buyer in the matter of import indenters and also local manufacturer in a matter of export indenters has nothing to do with a service provided to the foreign principal and hence element of passing of service tax does not come in the transaction. He submitted that there is no hard and fast rule in the event of indirect taxes, that the same must be passed on to end consumer. It may be a general concept but carries exception as long as statute requires it differently. 17. With reference to the value of service for the purposes of SSTA 2011, learned Commissioner submitted that the commission received by both kind of indenters is separable from the sale of goods and the value is identifiable and calculable. The Board has the prerogative under the law to fix value inclusive or exclusive of the tax which could be determined within frame of SSTA 2011 and the Rules framed thereunder. He thus concluded that this exactly is not the principle on which the parties are litigating. It is rather the concern of indenters that province lacks competence, which is seriously expressed by the petitioners. 18. It is argued that the petitioners have made an attempt to mislead the Court that indenters are in fact importers and exporters of goods and hence are covered by relevant entries in the Federal Legislative List (4th Schedule). The Commissioner emphasized that as far as sale of goods are concerned in terms of Section 2(13) of Sales Tax Act, 1990 it could be a subject matter thereunder as being a person who imports the goods into Pakistan other than import indenters and for the purposes of export indenters it is the manufacturer of goods within Pakistan who could come within the definition of exporter of goods but the indenters do not 9 come in the picture as they are neither importers nor exporters of the goods. 19. In the similar way, Section 154 of Income Tax Ordinance 2001 read with Division IV Part-III of the First Schedule to ibid law it is apparent that only an authorized dealer of the bank was required to deduct notified amount of the income tax from the commission received by the indenters. It does not lead to conclude that this deduction is only meant to consider the recipient of such amount as being importer and exporter of the goods.

The bench after hearing the sides noted that the dispute commenced when show-cause notices were issued by the Assistant Commissioner, Sindh Revenue Board requiring the indenters to be registered with Sindh Revenue Board under section 24B of SSTA 2011 with consequential penal action under Serial No.1 of Table provided in Section 43 of SSTA 2011 on violation and breach of Section 24 of the Act read with Rules of Chapter II of Sindh Sales Tax On Services Rules, 2011. 10 The bench noted that petitioners in substance have challenged the definition 2(51A) provided by SSTA 2011 whereas in two of the petitions Rule 41B of Sindh Sales Tax on Services Rules 2011 are sought to be declared ultra vires the Constitution which provide tax benefit in relation to passing on issue. By definition under 2(51A), the indenter is defined to be a person who is representative of a non-resident person or non-resident company or of a foreign product or a foreign service. The indenters get their consideration in the shape of commission, remuneration or royalty on a transaction, irrespective of whether the transaction has taken place out of his effort, consent or otherwise. This is a universal definition and simply by challenging a definition of indenter nothing could be achieved by the petitioners. This definition is claimed to be confiscatory and claimed to be hit by doctrine of occupied field in terms of entries relied upon and/or having been catered by Chapter 21 of Foreign Exchange Manual and Section 154 of Income Tax Ordinance, 2001 which shall be discussed later for the purposes of considering whether challenge to this definition could still be of any benefit. The petitioners have challenged PCT Heading 9819.1200 to the First Schedule of SSTA 2011 being ultra vires to the Constitution as contrary to referred entries of Federal Legislative List that deals with foreign exchange, import/export and extra territorial limits, being within the domain of federation. The petitioners/ applicants have further sought declaration that the impugned show-cause notices which seek registration of these indenters, to be declared ultra vires to the Constitution in view of above.

The bench further noted that followed by 18th Amendment to the Constitution, Province of Sindh promulgated Sindh Sales Tax on Services Act, 2011. Its constitutionality discussed in Freight Forwarders and Pakistan Mobile (Supra) and no further discussion is required as far as provincial competence to legislate on the subject is concerned. Only thing that requires consideration is whether the event of rendering services to foreign principal is covered by relied entries.

The bench held that an attempt has been made to create an impression that indenters are in fact importers and exporters of the goods and thus are ousted from purview of the provisions of services and have relied upon several entries of Federal Legislative List of Fourth Schedule of the Constitution and Section 154 of Income Tax Ordinance, 2001, read with Chapter 21 of Foreign Manual 2012.

Sale of Goods is an independent transaction as compared to the services provided by the indenters to a foreign principal. It cannot be equated or kept at par with the goods being supplied to a local buyer or to a foreign principal, as the case may be, as both the export indenters and import indenters are being subjected to similar provisions under consideration. Both categories of indenters i.e. either import and/or export indenters provide services under an agreement or arrangement to foreign principal and hence it is this event which formed part of consideration as far as SSTA 2011 is concerned and not the goods or value of the goods. It is the foreign principal who receives services from these specialized and qualified entities calling themselves as indenters in Sindh under agreement(s) and are not agreement(s) of import and export of the goods. These services by indenters provide special assistance to foreign principals on account of their better understanding of goods‟ description and its requirement, utility and their marketing skills, as the case may be, in terms of understanding between indenters and foreign principal. The consideration and commission for such service matures at the time of maturity of sale but this itself is not sufficient to loop this transaction with import and export of goods and the value of service to be dealt with in terms of Section 5 of the SSTA 2011. The definition provided under subsection (51A) of Section 2 of SSTA 2011 thus covers the event disclosed above.

The sales tax on service has nothing to do with the ultimate destination of the goods., available. 49. With the above discussion we conclude that there is no space of interpretation provided by petitioners in relation of Foreign Exchange Manual read with Section 154 of Income Tax Ordinance, 2001. Similarly, there is no applicability of extra territorial operation for giving effect to Article 141 of the Constitution. Hence we conclude accordingly. The doctrine of occupied field would also not come into play as we are of the view that Entry 49 of Federal Legislative List, as structured after 18th Amendment, empowers the province to legislate on the subject under consideration. The legislative powers defined under Articles 141, 142 and 143 of the Constitution have not been violated while encompassing services rendered by indenters to be within the frame of SSTA 2011 and find its place within exclusion defined in Entry 49 of Federal Legislative List of Fourth Schedule of Constitution. 22 50. As regards the question as to fee and penalty, the assessment officer had imposed penalty of Rs.100,000/- under Serial No.1 of Table of Section 43 of SSTA 2011 for non-registration. The relevant provision (Section 43) provides that it can be imposed if any person who is required to apply for registration under the Act fails to make application for registration before providing or rendering taxable service, is consequently liable to pay penalty of Rs.10,000/- or 5% of the amount of sales tax. Learned counsel for the department/Commissioner has not argued at all while challenging the conclusion drawn in paragraph 28 of the Tribunal‟s judgment where the maximum fine of Rs.100,000/- was reduced to Rs.10,000/-. Even before the Tribunal they were not able to make out a case as to which penalty is of lesser or higher degree i.e. Rs.10,000/- or 5% of the sales tax, as perhaps it was premature stage since only show-cause notices were issued without any amount of sales tax disclosed/determined therein hence we do not find to interfere this conclusion as well. Parting with the detailed judgment the bench said that in view of discussion above the proposed questions No.(I), (II), (III) and (VII) in affirmative whereas questions No.(IV) accordingly and (V) and (VI) in negative, all against petitioners/indenters and in favour of Sindh Revenue Board. The result of above discussion is that all Sindh Sales Tax Reference Applications and petitions, Categorized as A, B, C and D, are dismissed with no orders as to costs.

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