2018 P T D (Trib.) 1391
[Inland Revenue Appellate Tribunal]
Before Mrs. Ambreen Aslam, Judicial Member and Faheemul Haque Khan, Accountant Member
COMMISSIONER INLAND REVENUE, ZONE-II, KARACHI
Messrs SECURITY LEASING CORPORATION LIMITED, KARACHI
F.E. Appeals Nos. 43/KB and 44/KB of 2013, decided on 30th March, 2016.
PTR No.20 of 2001; 1999 PTD 14; 2002 PTD 2210; 1995 PTD 401; 2003 PTD 1135; 2002 PTD 2210; 2015 PTD 424 and 2015 PTD 772 ref.
Zulfiqar Ali Memon, D.R. for Appellant (in F.E. Appeals Nos.43/KB of 2013).
Nadeem Ahmed Farooqui for Appellant (in F.E. Appeal No.44/KB of 2013).
Nadeem Ahmed Farooqui for Respondent (in F.E. Appeal No.43/KB of 2013).
Zulfiqar Ali Memon, D.R. for Respondent (in F.E. Appeals Nos. 44/KB of 2013).
Date of hearing 11th February, 2016.
MRS. AMBREEN ASLAM (JUDICIAL MEMBER).—These cross-appeals have been filed by the taxpayer and the Department against the Order No.33 of 2013 dated 29-03-2013 passed by the learned Commissioner Inland Revenue (Appeals-III), Karachi on the grounds as set-forth in the memo. of appeals.
2. Brief facts of the case are that the respondent is engaged in the business of leasing. The Deputy Commissioner, Unit-III of the Large Tax Payers Unit issued show-cause notice on 06.02.2012 alleging therein that the appellant was liable to federal excise duty under item 8 of Table-II of the Federal Excise Act, 2005, for the period 2007 to 2011. After conducting proceedings she levied federal excise of Rs.105.87 (M) and penalty of Rs.5.29 ibid Vide the combine ONO bearing No.07/2012. The said ONO was challenged in appeal before the Commissioner Inland Revenue (Appeals-III), LTU, Karachi. While disposing appeal the Commissioner (A) held the period of 2007-2008 to be barred by time under section 14(1) of the Federal Excise Act, 2005 prior to amendment in 2011. However, he maintained the levy of federal excise duty for the remaining periods vide the appellate Order No.33 of 2013 dated 29-03-2013 on the analogy of amendment brought item of Table II of the Act as well as sub-rule (4) of Rule 40A read with Rule 45 of Federal Excise Rules, 2005.
3. Instant appeals have been filed by the department and taxpayer against the impugned appellate order with the following grounds:
GROUNDS OF DEPARTMENT
1. That the order of the learned Commissioner Inland Revenue (Appeals-III) is bad in law and on facts of the case.
2. That the learned CIR (Appeals-III), Karachi was not justified in deleting the demand of FED for the period from July 2007 to June 2009 on the assumption that leasing is fund based/Interest based activity, hence not dutiable, without considering various types of receipts.
3. Whether or not Finance Act, 2011 empowers the assessing officer to issue show cause up to 5 years to taxpayers who made short/non payment of FED?
4. Whether the action of the assessing officer for the time period from July 2007 to May 2008 was in time hence not hit by time limitation.
5. That the appeal craves leave to add, alter or amend the grounds of appeal any time on or before at the time of hearing of the appeal.
GROUNDS OF TAXPAYER
1. That the proceedings initiated by the learned Respondents 1 and 2 are bad in law and void ab-initio.
2. That the learned Respondent No.1 passed the ONO in a whimsical manner and failed to give consideration to the valuable written comments furnished by the Appellant.
3. That the learned Respondents Nos.1 and 2 erred in disregarding Note 1 of the annual financial statements of the Appellant which states that the company is principally engaged in leasing business.
4. That the learned Respondent No.1 had grossly failed to honour the general principle of prosecution as laid down in Section 10 of the Civil Court Procedure Act, 1908 by passing the impugned ONO against the Appellant when the instant matters laying before the Respondent No.1 were subjudice before the Honourable High Court at Sindh. Therefore, the impugned ONO passed by the learned Respondent No.1 is prayed to be struck down and declared to have no legal effect on the principles of res-sub judice.
“10. No Court shall proceed with the trial of any suit in which the matter in issue is also directly and substantially in issue in a previously instituted suit between the same parties or between parties under whom they or any of them claim litigating under the same title where such suit is pending in the same or any other Court in [Pakistan] having jurisdiction to grant the relief claimed or in any Court beyond the limits of [Pakistan] established or continued by [the Central Government] and having like jurisdiction, or before [the Supreme Court]” (Underline ours)
5. That the learned Respondent No.1 failed to comprehend that the Section 3 of the Financial Excise Act, 2005 (FE Act, 2005) is applicable on services provided in Pakistan and not on every stream of income reported in the profit and loss account. The Entry No.8 of the First Schedule to the FE Act, 2005 clearly stipulates its application on the “services” provided by banking companies and non-banking financial institutions. Therefore, the view of the learned Respondent No.2 that every stream of income generated by entitles listed in the First Schedule to the FE Act, 2005 is incorrect and only “service” are subject to FED under the FE Act, 2005.
6. That the learned Respondents Nos.1 and 2 erred in passing ONO by rejecting the Appellant’s contention that leasing activities are interest based activities rendered or provided by banking companies, non-banking financial companies or financial institution (including leasing companies) and therefore are exempt from levy of FED under the FE Act, 2005
7. That in paragraph 5.5 of the impugned ONO, the learned Respondent No.1 have conferred that leasing is a fund based activity; however surprisingly disregarded the element of interest or mark up in the fund based activity of leasing company.
8. That without prejudice to any other ground taken hereafter the learned Respondent No.1 has misconceived the entire issues relating leasing business with the loan and advanced provided by the banking companies and discussed in the entire order the exclusion of interest/mark-up on loans and advances under Sub-Rule (4) of Rule 40A of Special procedure provided by banking companies under PCT Heading 9813.2000 which were the subject matter in the appeal before the learned Respondent No.1.
9. That the learned Respondent No.1 has grossly failed to distinguish between the non fund based activities and fund based activities relating to interest and mark up. The learned Respondent No.1 interpreted that all fund based activities are non interest based activities and fails to identify the difference among the two source of revenue/income which are different in nature.
10. The learned Respondent No.1 erroneously intermingled the two terminologies i.e. fund based activities and interest/markup derived from fund based activities.
In paragraph 5.5.2 of the impugned ONO, the learned Respondent No.1 have totally misunderstood the contentions of the Appellant which were based on the grounds that interest and mark up from fund based activity is not subject to FED in terms of Sub-Rule (4) of Rule 30 of Special Procedure and nowhere the Appellant has confronted the levy of FED on any other fee, commission or income arising out of fund based activities.
11. That in paragraph 5.6 of the impugned ONO, Respondent No.1 wrongly deliberated the reason for the deletion of the word “non fund” from Entry No.8 of the First Schedule to the FE Act, 2005 and Rules thereunder to mean that all the fund based activities of non-banking finance companies involving interest or mark-up may also be subject to FED. The Appellant prays that this is not the intent of the law makers and the reason for exclusion of the word “non fund” from the Special Procedure. The words “non fund” were deleted to levy FED on all fund based activities which do not involve interest of mark-up whereas the income booked in the profit and loss account of the leasing companies is purely interest.
12. That the learned Respondent No.1 erred to adopt a unqiue and unprecedented interpretation to hold that Rule 40A Sub-Rule (4) is only applicable to advances and loans provided by a banking company falling under the Tariff Heading 9813.2000 which exclude the mark up or interest from the levy of FED whereas no such distinction is made in aforesaid Sub-Rule (4) of Rule 40A.
If for argument sake, such interpretation was correct then the word “non-banking finance companies” clearly mentioned in the Sub-Rule (4) of Special Procedure would become redundant. If this would have been the case, there would be separate Rules for non-banking finance companies and financial institution other than banking company. Further, the leasing business carried out by the banks may also be separately required to be subject to FED, which is not the case.
13. That paragraphs 5.7 and 5.8 of the ONO are self-contradictory. The learned Respondent No.1 in paragraph 5.7 of the ONO have explained that in leasing arrangement the asset used by the lessee is owned by the lessor and the lessor enjoys the benefit of the ownership of the asset. Thus the learned Respondent No.1 in the impugned ONO had made all efforts to prove that leasing in not a financing arrangement and no asset is transferred against a loan.
THAT the learned Respondent No.1 by providing the aforesaid explanation has totally neglected the true and correct essence of leasing arrangement which is in nature of loan against an asset. The Appellant submit that in a finance lease arrangement, the lessee is entitled to all the risk and rewards of the ownership and enjoys all the inflow of economic benefits related to the assets. The income derived from the use of the asset is not booked by the lessor but by the lessee in the financial statements. The asset remains in the use of the lessee for most of the economic life of the asset and transferred to the lessee at nominal value after the lease tenure.
14. THAT the Respondent 1 erred in concluding that “Lease Rental” is a kind of proceed which is different from “interest” hence, leasing could not classified as interest based transaction. It will be pertinent to mention that lease rental is not merely comprises of the income earned by the lesser, it is also repayment of money (loan) provided to or paid on behalf of the company for acquiring the asset. Therefore, it consists of two portions; one is principal amount (re-payment of loan) and another is income (interest) portion and the company is eligible to declared only interest portion in its income which is in excess of principal amount (re-payment of loan).
In terms of International Accounting Standards 17 i.e. Leases, the lessee is required to book the asset with corresponding liability as loan in its own financial statements. The lessee is required to pay off the loan according to terms agreed between the lessor and the lessee and the interest expenses arising from the lease in charged in the financial statements of lessee. The lessor booked the lease arrangement as investment in the lease and earns interest/mark up on the investment. The relevant paragraphs of IAS 17 are reproduced below.
“At the commencement of the lease term, lessees shall recognize finance lease as asset and liabilities in their statements of the financial positions (balance sheet) at amount equal to the fair value of the leased property or if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculation of the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practical to determine, if not, ‘the lessee’s incremental borrowing rate shall be used.” (Underline ours)
“Minimum lease payments shall be apportioned between the finance charge (i.e. interest) and the reduction of outstanding liability. The finance charge (interest) shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of liability” (Underline ours).
“Lessor shall recognise asset held under finance lease in their statements of financial position (balance sheet) and present them as receivable at an amount equal to the net investment in the lease.” (Underline ours)
“The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return (i.e. interest rate) on the lessor’s net investment in the finance lease (investment).” (Underline ours)
An illustration of the amounts booked in the financial statement of the lessee is reproduced in the below table: