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2015 P T D (Trib.) 319

 

[Inland Revenue Appellate Tribunal]

 

Before Muhammad Jawed Zakaria, Judicial Member and Faheemul Haq Khan, Accountant Member

 

C.I.R., ZONE-IV, LTU, KARACHI

 

Versus

 

Messrs PEARL SECURITIES (PVT.) LTD. KARACHI

 

F.E.A. No.77/KB of 2012, decided on 5th November, 2013.

 

Messrs Gear Hobbings Ltd.’s case 2003 PTD 739; 2004 PTD (Trib.) 2352; Civil Appeals Nos. 1866 of 1996, 1262/1999, 1288/2000, 1293, 1294, 1296 and 1306 of 2001; CIT Karachi v. Gelcaps (Pvt.) Ltd. Karachi 2009 PTD 331; Advance Law Lexicon 3rd Edition Pages 886-887; Harihar Raw Cotton Pressing Factory v. CIT (1960) 39 ITR 594, 610; I.T.As. Nos.923/924/KB of 2012 dated 7-10-2013; 2012 PTD (Trib.) 954; Cape Brandy Syndicate v. Commissioner of Inland Revenue (1921) 12 Tax Cas. 358; CIT Balkrishna Malhotra’s case 81 ITR 759 at 762; 1989 SCMR 353; PLD 1970 SC 453; 2003 PLC (S.C.) 1222 and PLD 1965 SC 412 rel.

 

Shafqat Hussain Keehar, D.R. for Appellant.

 

Abdul Qadir Memon and Rashid Malik for Respondents.

 

Date of hearing: 8th October, 2013.

 

ORDER

 

MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER, J.–This order will dispose of the captioned appeal, which has been preferred against Order-in-Appeal No.10 of 2012 dated 31-7-2012 by the Department/appellant on the grounds set forth with the memo. of appeal.

 

2. Brief facts of the case are that the taxpayer is engaged in the business as a stock broker. After scrutiny of the annual financial statements and returns of sales tax and federal excise duty for the period July, 2009 to June, 2010 it was found that the taxpayer is not paying the Federal Excise Duty on the various receipts. In this respect a show-cause notice under section 14 of the Federal Excise Act, 2005 was issued to the taxpayer, and asked for explanation along with documentary evidence to defend his case. The taxpayer filed his reply and documentary evidence, which was found unsatisfactory. After providing opportunity of hearings to the taxpayer the DCIR passed the Order-in-Original No.2/18/2012 dated 19-3-2012 for recovery of Rs.66,847,648 along with default surcharge under section 8 of the Federal Excise Duty Act, 2005 and a penalty amounting to Rs.3,342,384.

 

3. The taxpayer being aggrieved with the impugned order-in-original filed an appeal before the learned Commissioner Inland Revenue (Appeals-III). The learned CIR(A) vide his Order-in-Appeal No. 10 of 2012, dated 31-7-2012 adjudicated that vide S.R.O. 550(I)/2006 dated 5-6-2006 read with Rule 43 C of the Federal Excise Rules, 2005 the Stock Brokers are required to pay FED on their brokerage services only in respect of purchase or sale of share in Stock Exchange and the “Late Charges” earned for the arrangement of financing facilities are distinctly different from the brokerage and commission in respect of purchase or sale of shares in a Stock Exchange. Therefore, other income i.e. “Late Charges” will not attract FED in sales tax mode under Notification S.R.O. 550(I)/2006 dated 5-6-2006 read with Rule 43 C of the Federal Excise/Rules, 2005. The CIR(A) further held that if for argument sake it is assumed that mark up on financial services are covered even then the same will not attract FED in sales tax mode as same are exempt from FED under Sub-Rule (4) of Rule 40A of the Federal Excise Rules, 2005 meaning thereby services rendered by the respondent do not fall under the services rendered by stock brokers as provided under Rule 43-C of the Federal Excise Rules, 2005.

 

4. Being aggrieved and dissatisfied from the order-in-appeal, the department has now come in appeal before this Tribunal.

 

5. Mr. Shafqat Hussain Kehar, DR, attended on behalf of the appellant/department and Mr. Abdul Qadir Memon and Mr. Rashid Malik, Advocates attended on behalf of the taxpayer.

 

6. During proceedings before this Court, learned DR contended that the impugned order of the learned CIR(A) is bad in law and on facts and the learned CIR(A) is not justified in deciding the case. The DR during the course of hearing further submitted the following preliminary objections in writing:-

 

(I) The taxpayer during the course of hearing raised the ground that the matter i.e. action period between show-cause and the final order was barred by time. In this regard it is said that there was no issue of time Bar before the learned CIR (Appeals). Neither the taxpayer has filed the appeal against the said order. The matter in this regard cannot be raised at this stage due to the reason that taxpayer has not filed the appeal within time. Further, on factual grounds matter is not as per law.

 

(II) The learned CIR (Appeals) has not adjudicated the issue involved by discussing the various provisions of law i.e. Entry No. 13 of Table II of First, Schedule of the Federal Excise Act, 2005 in which services of brokers have been made taxable. In facts the learned CIR(A) has admitted that the “Brokerage Services” are excisable services. User of this phrase by CIR(A) means his admittance that the services within “Brokerage House” are covered by the provisions of subsection (12) of section 2, which includes ancillary services are excisable items. In this regard it is said that the purpose of the “Brokerage House” is to provide various services to the clients including brokerage. This is evident from the Note No. 1 to the audited statements of account in which the principal activity of the company has been mentioned as under:–

 

” ..the company is a corporate member of Karachi Stock Exchange (Guarantee) Limited and National Commodity Exchange Limited. The principal activity of the company includes, share brokerage, consultancy services and underwriting.”

 

(III) However, the CIR(A) after using the above phrase of “brokerage services” commented that the “services for arrangement of financing facilities are different from brokerage commission, therefore, same will not attract FED in Sales Tax Mode under Notification S.R.O. 550(I)/2006 dated 5-6-2006 read with Rule 43C of Federal Excise Act, 2005. In this regard it is said that S.R.O. 550(I)/2006 is related advertisement, facilities of travel, carriage goods by air, shipping agents and telecommunication services and not applicable on Stock Brokers. Similarly, the learned CIR(A) has also wrongly applied the provisions of subsection (4) of section 40A which is applicable only on Banking Companies, Financial Institutions and Non-Banking Finance Companies. Hence, the findings of the CIR(A) are not as per law and thus relief provided is in result of some misunderstanding of the relevant/quoted provisos of law.

 

(IV) Word “Gross Commission” has been written of Rule 43C(1) of Federal Excise Act, 2005. Hence, entire Brokerage House, Income is a Commission which is excisable “Services”. It may be mentioned here that entire “services” are excisable under Entry 13 of Table II of the First Schedule with reads as under:–

 

(1)

(2)

(3)

(4)

13

Services provided or rendered by Stock Brokers.

9819.1000

Sixteen percent of the charges.

 

(V) From above, it is abundantly clear that all services are excisable and there is no exception. The Rule 43C is only providing the mechanism. Further, the Rule says that all the items of Brokerage House are Commission. It is mentioned that any arrangement to provide finance is actually nothing but arrangement of funds from bank(s) and payment of the investors. This is reflecting in Balance Sheets as the loan of banks and debt against the investors respectively. Hence, no financial lending of registered person is involved. The registered person takes the financial charges from the investors on account of Margin Finances or Badla etc. This fact is available in the Balance Sheet of the registered person where on Note No. 7 to the Audited Statements of Account. It is abundantly clear that loan is either for the capital requirement or for trading of shares. Hence, incidence of interest if any is that of banks or financial institutions. His interest is only to the extent of charging certain amount on the facility of loan provided to customers from banks. Hence, the receipts are services in nature and not interest on the money lending. In other words money lended is that of the banks and not of the registered person.

 

(VI) Under the law, the brokerage house (Member Karachi Stock Exchange) cannot transact the money lending business. Hence, it cannot claim the exclusion from FED under Rule 40A(4) of FED Rules. Even if the transaction has been made it will be considered as the commission or brokerage income of the said Registered person (Stock Exchange Member). Under the FED Act, Rule 40A(4), this exclusion available only to the Banking companies and financial institution and the stock members are not covered therein. Further, any act on violation of law will not make the taxpayer as a financial institution and thus tax charge of his own wrong doing. No one can take advantage of his wrong act. This has been decided in the case of Messrs Gear Hobbings Ltd cited at 2003 PTD 739.

 

(VII) The Registered person company is providing services. The main section 12(2) says that services include ancillary facilities and utilities. The facilities available in the stock exchange include the arrangement of money lending and taking charges from the customers. Hence, gross/entire services provided by the company in the brokerage house are excisable items.

 

(VIII) The purpose of brokerage house is to earn the commission income and providing facilities in the form of loan arranged from banks and subsequently lended to the customer is associated with the brokerage house-receipts/services. Hence, receipt cannot be separated under one head or another head and thus excisable and not excisable. The auditor of the registered person in original audited account has mentioned these as the commission income considering the same as ancillary to brokerage house services. In the subsequent re-narration of the facts the taxpayers has submitted the letter of auditor Messrs Mansoor Aslam Seraj Saleem, Chartered Accountants attaching the breakup of services which includes commission and late payment charges amounting to Rs. 313,652,572. Here again the auditor has not admitted it a markup income as such.

 

(IX) In fact it is to mention here that under section 12(2) of the FED Act services are taxable which includes all the services provided in the brokerage house. The markup paid on loan to banks (reflecting in liability side of balance sheet as loan against equity requirement and trading of shares) and on asset side as debtor to various customers and markup received on the said facility is actually ancillary service to the commission earned from the customers. Hence, it is purely a service receipt and excisable item.

 

(X) The fact is that the entire income is commission service or ancillary services as is evident from the audited accounts.

 

(XI) It has already been narrated that late payment charges are the nature of services provided in the brokerage house.

 

(XII) It has already mentioned above that all services in brokerage house are excisable in nature.

 

(XIII) It is to say that the taxpayer itself says that there are the late payment charges. Hence, considering it the markup within the meaning of sub-rule (4) of Rule 40A and claiming itself as the financial institution or the banking company is against the factual position. The taxpayer receives only the late payment charges and those are ancillary to brokerage house services i.e. commission.

 

7. In addition to the above, the learned D.R. submitted that the CIR(A) was not justified in placing reliance on sub-rule (4) of rule 40A of the Federal Excise Rules, 2005 which provides exemption to the financial institutions and the respondent being not a financial institution, the same is not applicable in the case of the respondent. He last, submitted two questions before this Tribunal for resolving the issue. The same are reproduced hereunder:–

 

(A) Whether under the facts and circumstances of the case, the learned Commissioner Inland Revenue (Appeals-III) was justified to exclude the service of arrangement of financing facilities form the value of service provided to clients by the registered person in the light of section 12(2) of the Federal Excise Act, 2005 read with the rule 43C of the Federal Excise Rules, 2005?

 

(B) Whether under the facts and circumstances of the case the Deputy Commissioner IR had not passed order with legal backing of the Federal Excise Act, 2005?

 

8. The learned D.R. prayed that in view of the above stated facts, grounds and question of law, it is earnestly this Appellate Tribunal Inland Revenue may graciously be pleased to answer the questions referred to hereinabove in favour of the Applicant and declare the impugned order passed by the Commissioner IR (Appeal-III) not sustainable in law, otherwise the applicant department will suffer irreparable loss, as the matter is related to and connected with recovery of legitimate Government revenue payable by the respondent.

 

9. On the other hand, the learned Authorized Representatives of the respondents (AR) submitted that the show-cause notice under consideration was issued on 30-9-2011 and the appellant was required to pass the order within 120 days; whereas the Order-in-Original No. 2/18/2012 was issued on 19-3-2012, therefore, the same is barred by time by 49 days. The learned AR also stated that they have raised this ground before the learned Commissioner Inland Revenue (Appeals III). It was also argued that keeping in view the ratio of judgment reported as 2004 PTD (Trib.) 2352, legal issue/grounds being purely legal in nature can be raised at any stage and in order to dispense justice Courts/ Tribunals have to allow the same to decide the controversy once for all touching the merits of the case from its all angles.

 

10. The AR further submitted that regarding the use of term gross commission in Rule 43C(1) of the Federal Excise Rules, 2005, it does not mean that it will be applicable on all services rendered by the respondent. As a matter of fact it means that the respondent will not be allowed to make deduction of any expenses/charges or sub-commission paid out of commission earned relating to purchase or sales of shares in Stock Exchange only.

 

11. The learned counsel for the respondent pointed out that the ACIR, while finalizing the proceedings under section 122(5A) of the Income Tax Ordinance, 2001 for the same period and subsequent tax year 2011 for income tax purposes has accepted that the respondent is also recovering late charges on overdue amount from their clients and has accepted the taxpayers explanation for levy of income tax on brokerage commission under Final Tax Regime and levy of income tax on late charges under the Normal Tax Regime. In other words it has already been accepted by the department that the taxpayer is not only engaged in providing brokerage services to their clients for sale and purchase of shares in a stock exchange, but it is also charging late payment on overdue amounts, which does not attract Federal Excise Duty under section 3 read with Entry No.13 of Table II of the First Schedule to the Federal Excise Act, 2005 and Rule 43C of the Federal Excise Rules, 2005.

 

12. The AR submitted that in view of entry No.13 of the First Schedule read with the scope of such services laid down in rule 43-C of the FED Rules, 2005 read with Notification S.R.O. 550(I)/2006 dated 5th June, 2006, the department itself for the period from July 2010 to June 2011 has accepted that the taxpayer was required by law only to charge and deposit FED on Gross Commission on account of services rendered by them to their clients for purchase or sales of shares in Stock Exchange only. He further submitted that no default surcharge/penalty can be recovered from a taxpayer till the department establishes through independent and cogent evidence that the taxpayer has intentionally failed to follow any provision of the Federal Excise Act, 2005. No evidence exists which establishes that the respondent has intentionally failed to comply with any provision of Federal Excise Act, 2005. It has been held by the Superior courts in number of judgments that default surcharge and penalty cannot be imposed in the absence of mens rea and without absolute proof. Reliance is placed on the recent judgment of Honorable Supreme Court of Pakistan in Civil Appeals Numbers 1866/1996, 1262/1999, 1288/2000, 1293, 1294, 1296 and 1306 of 2001. The relevant portion of the said judgment is reproduced hereunder:–

 

“Each and every case has to be decided on its own merits as to whether the evasion was wilful or mala fide, decision on which would depend upon the question of recovery of additional tax”

 

13. Rival parties have been heard and case record perused. On the legal issue relating to limitation period, we do not agree with the respondent that order-in-original is barred by limitation. In the instant case an agreed date of show-cause notice is 30-9-2011 and an agreed date of order-in-original is 15th June, 2012 meaning thereby consumption of 167 days. The learned AR pleased that the officer was bound to pass the order within 120 days. On the contrary the provisions of section 31(3) of Federal Excise Act, 2005 permit further extensions of 60 days for reason to be recorded in writing and 30 days in case the adjournments availed by the taxpayer. Hence a total number of 210 days were available to the officer to pass an order-in-original. The record reveals that case was heard on 7-10-2011, 25-11-2011, 22-2-2012 and 28-2-2012. The hearings and factual grant of opportunities and adjournment fully justified the officer to step in the additional time limits, which is beyond 120 days and also construed valid reason; hence we hold that order-in-original is within days statutory time limit. The plea of the taxpayer is rejected on this score.

 

14. Reverting back to the facts of the case the respondent/taxpayer derives income mainly from sale and purchase of shares in Stock Exchange and from these activities earned commission income. Apart from these activities the respondent received late payment charges for arranging financial facilities to its clients on overdue amounts. The treatment of late payment charges has been accepted by the department as income from other source while proceeding under section 122(5A) of the Income Tax Ordinance, 2001 for the tax years 2010 and 2011 by the higher authorities i.e. Additional Commissioner while the Order-in-Original No.02/2012 dated 22-3-2012 by the Deputy Commissioner who is lower in rank than the Additional Commissioner. From perusal of the amended Order under section 122(5A) of the Income Tax Ordinance, 2001 we have found that the while passing the order the department itself treated the late payment charges recovered from its clients in respect of such debts qualify as “profit on debt” under section 2(46) and the same qualify under section 39 as “income from other Source”. The above said factual and legal position is fully verifiable from the amended assessment under section 122(5A) of the Income Tax Ordinance, 2001 passed by the learned Additional Commissioner-IR (Audit Range-A), Zone II, LTU, Karachi and confirmed and accepted by the department for the tax year 2011 itself and in its order of the subsequent tax year vide order under section 14 of Federal Excise Act dated 27-8-2012. The Deputy Commissioner vide its Order No. DCIR-03/Zone-IV/LTU/2011-2012 dated 27-8-2012 has vacated the show-cause notice dated 19-3-2012 by accepting the treatment of late payment charges not liable to FED. The relevant extract from the order passed by the Deputy Commissioner IR under section 14 of the Federal Excise Act for the subsequent period is reproduced as under:–

 

“The off-shot of above discussion is that the Registered Person was required by law to levy FED on gross commission on account of services rendered by it to their clients for purchase and sales of shares in a Stock Exchange, as per entry No. 13 of the First Schedule read with the scope of such services laid down in Rule 43-C of the FED Rules, 2005 read with Notification S.R.O. 550(I)/2006 dated 5th June, 2006. The record and evidences provided during the course of proceedings shows that the Registered Person has duly charged and paid FED on the gross commission component of its receipts and therefore the show cause notice dated 19-3-2012 is hereby vacated.”

 

15. From perusal of the above extract from the order passed under the FED regime it is manifest that the department has withdrawn the notice issued for the subsequent year and hence accepted the principle stance of the taxpayer. At this juncture we may observe that where departmental practice had followed a particular course in implementation of some rule, whether right or wrong, it would be extremely unfair to make a departure from it and thereby disturb rights that have been settled by a long and consistent course of practice.

 

16. The Inland Revenue has been established just to facilitate the taxpayers under one roof facility. Had the DCIR scrutinized the record of income tax proceedings and tried to tally it from the Federal Excise/Sales Tax he would not have come to such erratic conclusion. The relevant portion from the order under section 122(5A) of the Income Tax Ordinance, 2001 for the tax year 2010 is reproduced as under:–

 

“The Taxpayer on one hand has incurred huge financial costs and on the other the late payment charges have been received/ charged to the various clients on behalf of whom various shares were purchased. The late payment charges have also been clubbed with the commission in the accounts. The punch line is the corresponding income i.e. “late payment charges” has been included in the income offered for the year for tax and that too under normal law. The amounts due from various clients in respect of the stocks purchased on their behalf and credited to their ledgers qualify “debt” defined under section 2(15). The late payment charges imposed/recovered from various clients in respect of such debts qualify as “profit on debt” as defined under section 2(46) and the same qualify as “income from other sources” i.e. section 39 the corresponding financial costs incurred on the borrowed sums used for such purposes of clients is therefore, admissible against the said profit on debt- which has been offered for tax taxed under normal law.”

 

(Underline and bold provided for emphasis)

 

17. The Definition of “profit on debt” as used in the above said order under section 122(5) of the income Tax Ordinance and as has been defined in section 2(46) of the Income Tax Ordinance, 2001 which is reproduced as under:–

 

(46) “profit on a debt”1[whether payable or receivable, means] –

 

(a) any profit, yield, interest, discount, premium or other amount, owing under a debt, other than a return of capital; or

 

(b) any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a credit facility which has not been utilized;

 

18. The other income defined under section 39 of the Income Tax Ordinance, 2001 is as under:-

 

“39. Income from other sources.—(1) Income of every kind received by a person in a tax year, if, it is not included in any other head, other than income exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Income from Other Sources”, including the following namely:–

 

(a) [Dividend;]

 

(b) [royalty;]

 

(c) profit on debt;

 

(cc) additional payment on delayed refund under any tax law;

 

(d) ground rent;

 

(e) rent from the sub-lease of land or a building;

 

(f) income from the lease of any building together with plant or machinery;

 

(fa) income from provision of amenities, utilities or any other service connected with renting of building;

 

(g) any annuity or pension;

 

(h) any prize bond, or winnings from a raffle, lottery, prize on winning a quiz, prize offered by companies for promotion of sale or cross-word puzzle;

 

(i) any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources;

 

(j) the fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property; and

 

(k) any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof.

 

(l) any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules, 2005;

 

19. The heads of income has been defined under section 11 of the Income Tax Ordinance, 2001 the same is reproduced as under:–

 

“11. Heads of income.—(1) For the purposes of the imposition of tax and the computation of total income, all income shall be classified under the following heads, namely: —

 

(a) Salary;

 

(b) Income from Property;

 

(c) Income from Business;

 

(d) Capital Gains; and

 

(e) Income-from Other Sources.

 

(2) Subject to this Ordinance, the income of a person under a head of income for a tax year shall be the total of the amounts derived by the person in that year that are chargeable to tax under the head as reduced by the total deductions, if any, allowed under this Ordinance to the person for the year under that head.

 

(3) Subject to this Ordinance, where the total deductions allowed under this Ordinance to a person for a tax year under a head of income exceeds the total of the amounts derived by the person in that year that are chargeable to tax under that head, the person shall be treated as sustaining a loss for that head for that year of an amount equal to the excess.

 

(4) A loss for a head of income for a tax year shall be dealt with in accordance with Part VIII of this Chapter.

 

(5) The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan- source income and amounts that are foreign- source income.

 

(6) The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income.”

 

20. After careful examination of the above referred sections relating to heads of income and income from other sources, we have to observe that the “Heads of Income” is not the same as “Sources of Income”. For the same head of income, there can be more than one source of income. By “source” is not the “head of income” but the specific source from which a particular income arose. The source of income is relevant for determining first whether it is assessable or not, and if it is not exempt from tax, the next step is to decide under which head of income it has to be assessed and relevant provisions of law are attracted.

 

21. Looking from this back ground we are of the view that it is not open either to the Revenue or to the taxpayer to claim that an income which clearly falls under one head should be dealt with under a different head for the purpose of this Ordinance. For determining under which head an income will fall, its commercial character is a relevant factor. Time or method of book-keeping by the taxpayer is not relevant consideration. This is decided from the nature of the income by applying practical notions and not by reference to treatment by the taxpayer in his books of account. An income wrongly included by the DCIR/OIR/ Assessing Officer under one head can be taken out from that head, and included under the correct head, in appeal proceedings. Section 10 of the Income Tax Ordinance, 2001 also provides scope of total income with reference to residential status of the person. Where a person is resident, its total world income (Pakistan Source as well as foreign source) is chargeable to tax. In the case of non-resident person, only Pakistan source income is taxable under this Ordinance. Whether an income is Pakistan source is tested on the criteria given in section 10 of the Income Tax Ordinance, 2001.

 

22. We have also examined the corresponding section 15 of the Repealed Income Tax Ordinance, 1979. A perusal of section 15 of the Income Tax Ordinance, 1979 shows that, the sole criterion to classify the income under section 15, in ordinary course, is the source and/or the nature of activity and conduct wherefrom and/or whereby the particular income is being generated. As long as the sources can be factually found, circumstances seldom have any bearing on the characteristic of income; Ref: CIT, Karachi v. Gelcaps (Pvt.) Ltd. Karachi 2009 PTD 331 [Kar.H.C.]

 

23. Now, coming to section 3 of the Federal Excise Act, 2005 which is charging section under which Federal Excise Duty was charged on the taxpayer. The Section is reproduced hereunder to grasp the situation:–

 

3. Duties specified in the First Schedule to be levied.—(1) Subject to the provisions of this Act and rules made thereunder, there shall be levied and collected in such manner as may be prescribed duties of excise on,–

 

(a) goods produced or manufactured in Pakistan;

 

(b) goods imported into Pakistan;

 

(c) such goods as the Federal Government may, by notification in the official Gazette, specify, as are produced or manufactured in the non-tariff areas and are brought to the tariff areas for sale or consumption therein; and

 

(d) services provided in Pakistan including the services originated outside but rendered in Pakistan; at the rate of fifteen per cent ad valorem except the goods and services specified in the First Schedule, which shall be charged to Federal excise duty as and at the rates set-forth therein,

 

(2) Duty in respect of goods imported into Pakistan shall be levied and collected in the same manner and at the same time as if it were a duty of customs payable under the Customs Act, 1969 (IV of 1969), and the provisions of the said Act including section 31A thereof shall apply.

 

(3) The Board may, by notification in the official Gazette, in lieu of levying and collecting under subsection (1) duties of excise on goods and services, as the case may be, levy and collect duties,-

 

(a) on the production capacity of plants, machinery, undertakings, establishments or installations producing or manufacturing such goods; or

 

(b) on fixed basis, as it may deem fit, on any goods or class of goods or on any services or class of services, payable by any establishment or undertaking producing or manufacturing such goods or providing or rendering such services.

 

(4) Without prejudice to other provisions of this Act, the Federal Government may levy and collect duty on any class or classes of goods or services by notification in the official Gazette at such higher or lower rate or rates as may be specified in such notification.

 

(5) The liability to pay duty shall be-

 

(a) in case of goods produced or manufactured in Pakistan, of the person manufacturing or producing such goods;

 

(b) in case of goods imported into Pakistan, of the person importing such goods;

 

(c) in case of services, provided where services are rendered by the person out of Pakistan, the recipient of such services in Pakistan shall be liable to pay Duty];

 

(d) in case of goods produced or manufactured in non-tariff areas and brought to tariff areas for sale or consumption therein, of the person bringing or causing to bring such goods to tariff areas.”

 

24. From perusal of the above quoted section we have come to irresistible conclusion that section 3 is the charging section under this Act and states what excisable goods or excisable services are liable to duty under the Act. This section relates itself of First Schedule and provides that all excisable goods in Pakistan or imported into Pakistan and on such goods, as the Federal Government may, by notification in the official Gazette, specify, as are produced or manufactured in the non-tariff areas and are brought to the tariff areas, and on all excisable services, provided or rendered, in Pakistan, as and at the rates, set forth in the First Schedule. Section 3(1) contemplates levy of duties as mentioned vide subsection (1) clause (a) goods produced or manufactured in Pakistan, sub-clauses (b) and (c) provides levy of Federal duties on all such goods imported into Pakistan as notified by the Government in the official gazette and Federal Government may bring such goods into the net of Federal Excise which are produced and manufactured in non-tariff area, and sub-clause (d) of subsection (1) provides rate of fifteen percent ad volarem as mentioned in the First Schedule. Sub-Clause (2) of section 3 ibid provides manner of imposition of Federal Excise on all goods imported into Pakistan, which shall levied and collected in the same manner and at the same time as it was the duty of customs payable under the Customs Act, 1969. Further, section 3 is the charging section, which creates a charge on all the excisable goods, the moment the goods are manufactured. The charge, however, remains dormant until it is quantified and the payment of the duty is made or enforced under the provisions of the Rules. Section 3 being a charging section creates charge on all the excisable goods and services subject to the conditions laid down in sub-clauses (a), (b), (c) and (d) discussed supra. The federal excise duty is a levy under section 3 of the Act which is a charging section. The levying of federal exercise duty is legislative act and its collection is regulated by the Rules prescribed under the Act. In between ‘levy’ and ‘collection’ the process of ‘assessment’ “adjudication” or duty falls which is determined by the department. This section has prescribed the manner and method under which this duty is collected. The assessment adjudication of federal excise duty is done by the authorized [now OIR]. The collection of duty is an executive act which is the last step. Before the duty is collected its levy must have the sanction of law. It is a basic rule in a democratic form of Government that no tax can be levied or collected except under the constitutional authority of Islamic Republic of Pakistan, 1973, which reads as under:–

 

“Article 77.Tax to be levied by law only.—No tax shall be levied for the purposes of the Federation except by or under the authority of Act of Parliament.”

 

25. At this juncture if we look at the legislative history of fiscal statute we can say that there are three stages of the enforcement of a fiscal statute. The first stage is the fixation of rate of a duty or tax which is called imposition, the second stage is assessment adjudication and the third stage is the collection and recovery. Section 3 of the Act declares the liability which determines what goods or services are liable to duty. No liability depends on assessment adjudication but it is found on charging section 3 of the Act. The assessment and collection are machinery provision, which enable the liability to be qualified, and when quantified, to be enforced against the person liable to duty. The duty of excise is primarily a duty levied upon goods and services which is payable by any person, whether male or female or company or association or body of individuals whether incorporated or not. A person is liable to pay duty of excise whether or not, he charges it on goods or services. His liability is founded on section 3 of the Act and does not depend on his ability to charge the duty on such goods or services. Therefore, the person is liable to pay duty on goods or services, even if he uses them for his own use or gives them to any person free of cost. The duty is also chargeable on all excisable goods, even if they are used within the factory for the manufacture of other excisable or non-excisable goods. While imposing federal excise duty on goods or services under the FED Act, 2005 the legislature cannot bring within the tax net any transaction or event which otherwise on a plain, ordinary and grammatical meaning of the terms may by no stretch of imagination be construed as “goods” or “services”. The excise duty cannot be avoided on the ground that the goods are meant for the producer’s own consumption.

 

26. Before a person can be made liable to the payment of a tax or a FED levy he must be shown clearly to fall within the category so made liable under the letter of the law. The law does not intend to bring any and every one or all within its mischief. It is only as prescribed clearly in the Act.

 

27. Now reverting back to the stance taken by the Department in the case in question that late payment charges attract FED as part of its commission income in view of Entry No. 13 of Table II of First Schedule of the Federal Excise Act, 2005 which services have been made taxable.

 

28. Before we embark upon the discussion we would like to first analyze the word “services” to grasp the issue in better perspective. The word Services has been defined under subsection (23) of section 2 of Federal Excise Act, 2005 is reproduced as under:–

 

Section 2(23):

 

“services” means services, facilities and utilities leviable to excise duty under this Act or as specified in the First Schedule read with Chapter 98 of the Pakistan Customs Tariff, including the services, facilities and utilities originating from Pakistan or its tariff area or terminating in Pakistan or its tariff area;

 

The rate of levy has been prescribed under section 3 of Chapter II of the Federal Excise Act, 2005 which is also reproduced even at the cost of repetition:

 

“3. Duties specified in the First Schedule to be levied.—(1) Subject to the provisions of this Act and rules made there under, there shall be levied and collected in such manner as may be prescribed duties of excise on,–

 

(a) goods produced or manufactured in Pakistan;

 

(b) goods imported into Pakistan;

 

(c) such goods as the Federal Government may, by notification in the official Gazette, specify, as are produced or manufactured in the non-tariff areas and are brought to the tariff areas for sale or consumption therein; and

 

(d) services provided in Pakistan including the services originated outside but rendered in Pakistan; rendered at the rate of (fifteen] per cent ad valorem except the goods and services specified in the First Schedule, which shall be charged to Federal excise duty as, and at the rates, set-forth, therein.

 

(2) Duty in respect of goods imported into Pakistan shall be levied and collected in the same manner and at the same time as if it were a duty of customs payable under the Customs Act, 1969 (IV of 1969), and the provisions of the said Act including section 31A thereof shall apply.

 

(3) The Board may, by notification in the official Gazette, in lieu of levying and collecting under subsection (1) duties of excise on goods and services, as the case may be, levy and collect duties,

 

(a) on the production capacity of plants, machinery, undertakings, establishments or installations producing or manufacturing such goods; or

 

(b) on fixed basis, as it may deem fit, on any goods or class of goods or on any services or class of services, payable by any establishment or undertaking producing or manufacturing such goods or providing or rendering such services.

 

(4) Without prejudice to other provisions of this Act, the Federal Government may levy and collect duty on any class or classes of goods or services by notification in the official Gazette at such higher or lower rate or rates as may be specified in such notification.

 

(5) The liability to pay duty shall be-

 

(a) in case of goods produced or manufactured in Pakistan, of the person manufacturing or producing such goods;

 

(b) in case of goods imported into Pakistan, of the person importing such goods;

 

(c) in case of services, provided where services are rendered by the person out of Pakistan, the recipient of such services in Pakistan shall be liable to pay Duty;

 

(d) in case of goods produced or manufactured in non-tariff areas and brought to tariff areas for sale or consumption therein, of the person bringing or causing to bring such goods to tariff areas.”

 

29. From perusal of the above referred section 3 of FED Act, 2005, it is clear that the rates for services have been provided under the First Schedule, which shall be charged to Federal excise duty as, and at the rates, set-forth therein. The rate of FED for services provided under the heading of 98.19 in the said Schedule is also reproduced hereunder:–

 

FIRST SCHEDULE TO THE CUSTOMS ACT, 1969

[For duties on Services (Sections 2(23) & 3)]

 

Heading

Description

98.19 9819.1000

Services provided or rendered by specified persons or businesses. Stockbrokers

 

A glossary reading of the above, clearly shows that under this heading stock brokers rendering service rendered by specified persons are liable to pay FED. The stock brokers are earning commission income on which they are under the law obliged to pay FED.

 

30. Rule 43C relied upon by the CIR(A) is also reproduced hereunder:-

 

“Chapter VIII SPECIAL PROCEDURES FOR EXCISABLE SERVICES

43C. Special procedure for services provided by stockbrokers.–

 

(1) Value of excisable services for the purpose of levy of duty shall be the gross commission charged from clients in respect of purchase or sale of shares in a Stock Exchange.

 

(2) The Stock brokers shall maintain records as stipulated in section 17 of the Act in such manner as will enable distinct ascertainment of payment of duty due.”

 

(Underlining for emphasis)

 

From perusal of the above Rule 43C it is unequivocally provides that FED is applicable on the commission earned from clients in respect of purchase or sale of shares in a stock exchange. The words used “purchase or sale of shares” have significant value, which restrict the activity to the sale and purchase of shares and not other activities.

 

31. A further perusal of Notification S.R.O. 550(I)/2006 dated 5-6-2006 read with Rule 43-C of the Federal Excise Rules, 2005 revealed that the stock brokers are required to charge and pay FED on their Gross Commission services only in respect of purchase or sale of share in a Stock Exchange. On Pages 886-887 of Advance Law Lexicon – 3rd Edition the word “Commission” has been defined as under:-

 

“In Commercial law, Commission is a compensation to a factor or other agent for services to be rendered in making a sale or otherwise; a sum allowed as compensation to a servant, factor or agent who manages the affairs of others, in recompense for his services. It is an allowance, recompense or reward made to agents, factors, brokers and others for effecting sales or carrying out business transactions. It is generally calculated as a certain percentage on the amount of the transactions or on the profit to the principal”

 

32. The Honourable Bombay High Court in the case of Harihar Raw Cotton Pressing Factory v. CIT, (1960) 39 ITR 594, 610 held as under:–

 

“The expression “Commission” has no technical meaning but both in legal and commercial acceptation of the term it has definite signification and is understood as an allowance for service or labour in discharging certain duties such as, for instance, of an agent, factor, broker or any other person who manages the affairs or undertakes to do some work or renders some service to another. Mostly it is a percentage on price or value or upon the amount of money involved in any transaction of sale or service or the quantum of work involved in a transaction. It can be for a variety of series and is of the nature of recompense or reward for such services.”

 

33. This Tribunal in a case vide I.T.As. No.923/924/KB of 2012 dated 7-10-2013 has deliberated upon the concept in the following words.

 

“We find it an opportunity to elaborate the concept of services and commission and their mutual comparison. At the very outset, we feel that it is incorrect to compare the two activities with each other, at par. Service is one of the core economic activities and a source of earning. Even no manufacturing is possible without the input of human services. Services have distinctive four attributes like simultaneity, heterogeneity, intangibility and perishability. On the contrary, the services yield consideration in lieu thereof when performed. Thus the consideration or remuneration of such service can be in the form of salary, wages, commission, fee, perquisites etc; the service renderer may get the remuneration in any other agreed form as well. So it is incorrect to compare the service with commission. Service is performance whereas Commission is one of the various forms of remuneration of such performance. We are also of the opinion that there exist cause-effect relationship between the two where commission (an effect) is caused by the services. The tax law, for the purpose of taxation, refers to either of them generally or specially. The commission as remuneration for services is oftenly unlimited. The more you perform, the more you get or a pecuniary benefit directly proportional to the volume of activity. Moreover, in the contractual arrangement of franchise, the agency model exists in which a principal wishes to hire an agent to carry out a task, assets (tangible and intangible) owned by the principal with three basic ingredients i.e. the agent is risk averse, (ii) out put of the agent is stochastic function of efforts, (iii) The agent’s effort is imperfectly observable.”

 

34. In a recent judgment reported as 2012 PTD (Trib.) 954 the Tribunal has deleted the Federal Excide Duty by holding as under:–

 

—S.3—Federal Excise Rules, 2005, R.40-A (2)(1)—Duties specified in the First Schedule to be levied—Exchange gain—Levy of Federal Excise Duty—Validity—Taxpayer contended that income termed as “dealing in foreign currencies” by the auditor was, in fact, an income generated during the course of trading, due to difference in the rate prevailing on the date of buying and selling (or on closing date of accounts) of foreign currency i.e. “exchange gain”; and there was no service rendered to any customer or any commission or brokerage was earned for generation of such income; and First Appellate Authority wrongly confirmed the treatment meted out by the auditor by treating the “exchange gain” on dealing in foreign currency as “commission and brokerage on foreign exchange dealings”—Validity—Assertions made by the taxpayer carried weight and auditor had wrongly treated the “exchange gain” on trading in foreign currency as “commission and brokerage on foreign exchange dealings”—Federal Excise duty levied on income from dealing in foreign currencies was deleted by the Appellate Tribunal; and as a result, levy of default surcharge was not applicable which was also deleted.

 

35. The principal activity of the taxpayer is to earn commission on the sale-purchase of shares. The historical and functional specialization of the taxpayer company is in this field. However, in order to promote the principal activity and ensure its extention in the volume of business, it planned to arrange finances for the intended purchasers of shares. The question arises had the taxpayer performed the task of arranging funds only, would it have attracted any levy on its services as arranger of finances excludings markup? The answer is in negative. Another important fact is that funds were arranged for own client. The taxpayer did not extend this facility to others or clients making their investment through different brokerage house. This also means that by arranging finances, taxpayer promoted his primary business. The details reveals that otherwise exciseable commission would have been on the lower side.

 

36. Another vital fact worth consideration is the treatment given to particular receipts under Income Tax Ordinance, 2001 and Federal Excise Act, 2005. In the same period, the gross receipts of the taxpayer had been dealt separately, distinctively and different from commission income from sale/purchase of shares for income tax purpose i.e. vide order under section 122(5A) dated 18-6-2011 for tax year 2010. Moreso, in the immediately following period, department has accepted the contention of the taxpayer that late payment receipts do not form part of gross commission learned from sale and purchase of shares for the purpose of Federal Excise and Income Tax i.e. vide orders under section 14 of Federal Excise Act dated 27-8-2012 and under section 122(5A) dated 27-2-2012.

 

37. For the foregoing reasons and after cumulative reading of the above referred sections we are of the considered opinion that late payment charges is not earned as a part of such systematic or organised course of activity or conduct with a set purpose the said receipt rightly assessed, under section 39 as income from other sources and not as income from business under section 18(2) of the Income Tax Ordinance, 2001. Once the department has accepted the stance of the taxpayer while proceeding under section 122(5A) of the Income Tax Ordinance, 2001 by the Senior Officer in rank and also in the subsequent Federal Excise proceedings. A different view altogether taken by the department is nullity in the eyes of law and the Taxpayer cannot be burdened with the FED by any stretch of imagination in the instant appeal and the department cannot blow hot and cold in the same breath to ignore favourable to taxpayer. The Kaleidoscopic assessments are being made by the Revenue Department without knowing or analyzing the exact nature of business and nature and status of Receipt (late payment Receipt)

 

38. It may be appropriate to observe that taxes are the life-blood of any government, but it cannot be over-emphasized that the blood is taken from the arteries of the taxpayers and, therefore, the transfusion has to be accomplished in accordance with the principles of justice and fair play. More is lost to the State by way of damage to taxpayers’ morale, which is a valuable but fragile national asset, than is gained by such arbitrary and whimsical taxation as has been done by the Revenue Department in the case in hands. Although every government has a right to levy taxes but no government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that the Department (DCIR) has made the victim of palpable injustice.

 

39. As the department itself has considered the late payment charges as income from other sources and thus, keeping in view the cardinal principle of law that “Principles of consistency and certainty” occupy a very prominent position in the law of precedent which has to be adhered to by the Revenue Department in order to maintain discipline in the administration of justice. It is very shocking to observe that Tax authorities would not be acting properly and judiciously if they exercise their power in the manner most beneficial to the revenue and consequently most adverse to the taxpayers.

 

40. Therefore, the late payment charges is not income from business and not part of commission income/brokerage income when the department itself treated it as late payments (markup) income from other sources. Subsequently Revenue is not the part of Gross Commission and FED is not levied.

 

41. It is further observed by us that the superior courts have given their authoritative judgments on the construction of fiscal statutes and notifications issued thereunder. Fiscal statutes must be construed strictly. The courts have to interpret the provisions of a fiscal statute strictly so as to give benefit of doubt to the litigant. In fiscal legislation a transaction cannot be taxed on any doctrine of “the substance of the matter” as distinguished from its legal signification, for a subject is not liable to tax on supposed spirit of law or by inference or by analogy. The subject is not to be taxed unless the words of the taxing statute unambiguously impose the liability on him. The court must interpret the taxing statute in the light of what is clearly expressed; it cannot imply anything which is not expressed, it cannot import provisions in the statute so as to supply any assumed deficiency. Indisputably while interpreting a taxing statute “literal though pedestrian interpretation must prevail.” One should equally be aware of the fact that whether it is a taxing statute or any other statute, the real object of the interpretation is to find out the true intention of the Legislature and that the words used must be attributed their plan and reasonable meaning. The Courts ought not to strain the language of the Act either against the taxpayer or against the State. It is equally well established that the subject to be taxed must be brought not merely within, the spirit but within the letter of the law also. The interpretation, in fiscal statutes, has to be according to strict letter of the law; and not only in case of doubt, but also in case of beneficial interpretation, the rule is to tend in favour of the subject rather the exchequer. There being no equity in matters of taxing statutes, the Court adheres and follows this path to substantially advance the cause of the dispute.

 

42. The true implication of the principle that a taxing statute must be construed strictly is often misunderstood and the principle is unjustifiably extended beyond the legitimate field of its operation. Indeed, the more well express the principle as in Cape Brandy Syndicate v. Commissioner of Inland Revenue (1921)12 Tax Cas. 358 the greater the reluctance to see its limitations. In that famous passage marked by a happy turn of phrase, Rowlatt, J., said there is no equity about a tax. There is no presumption as to a tax”. There is no equity about a tax in the sense that a provision, by which a tax is imposed, has to be construed strictly, regardless of the hardship that such a construction may cause either to the treasury or to the tax-payer. If the subject falls squarely within the letter of law, he must be taxed, howsoever inequitable the consequences may appear to the judicial mind. If the Revenue seeking to tax cannot bring the subject within the letter of law, the subject is free, no matter that such a construction may cause serious prejudice to the Revenue. In other words, though what is called equitable construction may be admissible in relation to other statutes or other provisions of a taxing statute, such a construction is not admissible in the interpretation of a charging or taxing provision of a taxing statute. We may observe without hesitation that the subject is not to be taxed unless the charging provision clearly imposes the obligation.

 

43. It would be wrong to accept the proposition that a Judge, faced with a conflict of precedent, should abdicate his judgment and accept the view, which is favourable to the taxpayer. It is only where a Judge finds that two equally reasonable views are possible and he is unable to decide which is the better view, that he may adopt the rule of interpretation that the view favourable to the taxpayer might be accepted. It is also true that a taxing provision must receive a strict construction at the hands of the courts and if there is any ambiguity, the benefit of that ambiguity must go to the taxpayer, but this is not the same thing as the saying that a taxing provision should not receive a reasonable construction. In every case it is duty of the Judge to consider which is the more reasonable view and accept that, which is more reasonable. As mentioned above, it is only where a Judge finds that both the views are equally reasonable that he may resort to the rule of interpretation favouring the taxpayer:–

 

44. Our above detailed findings can be summerized as under:-

 

Business i.e. commission income will continue to accrue if the facility of arranging finances haults.

 

Late payment charges were not earned where the borrower complied with terms of repayment but commission was duly earned on normal sale/purchase transaction.

 

As a stock broker, the remuneration consists solely on commission and taxpayer may not be interested in the profits or losses made by its clients/customer.

 

The two activities i.e. commission on sale/purchase of shares and late payment charges are capable of performance independent from each other.

 

The taxpayer as a stock broker does not owe any liability to lenders but he owes duty of care and skill to its clients in respect of sale and purchase of shares.

 

Late payment receipt did not spring or emanate from main business activity earning and deriving “commission” on purchase and sales of shares

 

The I.R. department accepted this distinction in taxpayer’s own case in its order under section 122(5A) of the Income Tax Ordinance for tax years 2010 and 2011

 

Late payment charge/Receipt is not earned as a part of such “Systematic or organized course of main business activity or conduct with a set purpose”. The said Receipt [Late Payment charges] rightly assessed under section 39 as “Income from other Sources” and not as “Income from business” under section 18(2) of the Income Tax Ordinance, 2001.

 

Where taxpayer is stock member/ broker mainly earning commission on purchase and sale of shares, receipt on “late payment charges” was not in his capacity as stock broker on purchase and sale of shares but as guarantor discharging altogether different nature it cannot be treated as “Commission Income on sale and purchase of shares” hence, not to be treated as “business income.”

 

Further, late payment receipt irrespective of the head under which such receipt/ income falls is not liable to be levied F.E.D being outside purview of excisable services on purchase and sale of shares by stock broker.

 

Further, I.R. department accepted the contention of the Taxpayer by passing order under section 14 of the Federal Excise Act, 2005 for the period ended on 30-6-2011 which still hold ground.

 

The subject is not to be taxed unless the charging provision clearly imposes the obligation with valid legislative letter of law.

 

45. Before parting with this appeal we may quote the golden words of Hedge, J. in CIT Balkrishna Malhotra (81 ITR 759 at 762) (Supreme Court) which are reproduced hereunder for interest:–

 

“Interpretation of a provision in taxing statute rendered years back and accepted and acted upon by the department should not be easily departed from. It may be that another view of the law is possible but law is not a mere mental exercise. The courts while considering decisions rendered a long time back particularly under taxing statutes cannot ignore the harm that is likely to happen by unsettling law that had been once settled.”

 

The same view has also been consistently followed by our Honourable Supreme Court of Pakistan in a chain of cases like 1989 SCMR 353, PLD 1970 SC 453, 2003 PLC (SC) 1222, PLD 1965 SC 412. The relevant except from one of its judgment may be reproduced as under:–

 

“Where departmental practice had followed a particular course in implementation of some rule, whether right or wrong, it would be extremedly unfair to make a departure from it and thereby disturb rights that have been settled by a long and consistent course of practice.”

 

46. Consequently, we uphold the stand point of CIR(A) and appeal of the department fails.

 

47. Order accordingly.

 

MH/86/Tax(Trib.) Appeal rejected.

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