2015 P T D (Trib.) 1370


[Inland Revenue Appellate Tribunal]


Before Shahid Masood Manzar, Judicial Member and Muhammad Majid Qureshi, Accountant Member








S.T.A. No.195/IB of 2012, decided on 5th March, 2014.


PLD 1980 Kar. 492 and PLD 1975 Lah. 65 rel.


Khawaja Farooq Saeed and Shaukat Amin Shah, FCA for Appellant.


Irfan Abbas, D.R. and Saeed Ahmed Zaidi, L.A. for Respondent.


Date of hearing: 26th February, 2014.




Through this appeal the Registered Person has challenged the Order-in-Appeal dated 30-4-2012 passed by the learned CIR(Appeals-II). Islamabad which is arising out of the Order-in-Original No.35/2011 dated 17-10-2011 passed by the adjudicating authority. The following grounds have been agitated:–


“(2) That the learned CIR (A) was not justified in upholding the invocation of the assessment provisions of the Sales Tax (Act, 1990, including section 36(1), since such provisions are not applicable to assessment of Federal Excise Duty on telecommunication services in Sales Tax Mode.


(3) Notwithstanding the above ground, the learned CIR (A)was not justified in upholding the charging of amount received as reimbursement of interconnect cost of Federal Excise Duly.


(4) Notwithstanding the above ground, the learned CIR (A) was not justified in upholding the assessment order in ignorance of the fact that Federal Excise Duty on the amount of interconnect has already been paid by the final consumer i.e. the calling party and that its charging again would tantamount to double taxation which is confiscatory and illegal.


(5) Notwithstanding the above stance, the learned CIR(A) was not justified in ignoring the fact that certain periods related to which tax has been assessed were barred by time.


(6) Notwithstanding the above grounds, the learned CIR (A) was not justified in ignoring the fact that the question of levy of default surcharge and penalty does not arise as neither any loss of revenue nor any mens rea was involved in the instant case.


2. Brief facts of the case are that during the scrutiny of sales tax/ federal excise return the DCIR noted that Federal Excise duty on the interconnect services was not paid by the Registered Person. A show-cause notice vide dated 22-3-2011 was issued to the Registered Person and reply found to be unsatisfactory. Consequently, the DCIR charged Federal Excise duty along with default surcharge and penalty.


3. Aggrieved of this treatment, the Registered Person preferred appeal before the learned CIR(A), who vide impugned Order-in-Appeal dated 30-4-2012 confirmed the action of the Deputy Commissioner Inland Revenue, (Audit, Zone-II), LTU, Islamabad. The relevant paras of the impugned order are reproduced hereunder:–


‘7. The A.R’s agitation regarding jurisdiction as the order-in-original has been passed under the Sales Tax Act, 1990 and not under the Federal Excise Act, 2005 which is the relevant law. The officer has discussed this issue in his order at length holding that duties on telecommunication services shall be levied and collected in sales tax mode as if it were a tax payable under Sales Tax Act, 1990 as per subsection (21a) of section 2 and section 7 of Federal Excise Act, 2005 read with S.R.O. 550(I)/ 2006 dated 5-6-2006 and all provisions rules and orders issued thereunder shall also apply. The definition of sales tax mode indicates that federal excise duty chargeable under the Federal Excise Duty Act, 2005 is payable in sales tax mode in terms of SROs issued in this regard. Actually this arrangement was made to facilitate the business community for making adjustment of input of sales tax against excise duty payable the payment/collection of duty on such services were made in the manner as if it were a tax under the Sales Tax Act, 1990.


8. It is also pertinent to mention here that in the case of registered person the Honourable High Court, Islamabad has passed its judgment in Writ Petition No.4197/2010 dated 9-3-2011 whereby it is held that application of Sales Tax Act, 1990 in excisable services is correct and in accordance with law. The Honourable Court in this judgment held that:–


The provisions of Sales Tax Act have been made part of Federal Excise Act, 2005 by reference legislations by way of reference is a legitimate way of legislation and the same cannot be questioned. Sales Tax Act has not been repealed and the same is still in the filed. The authority of imposition of excise duty has been derived from section 3 of the Federal Excise Act, 2005 and the rules made there under. But how this authority is to be exercised that mechanism has been taken from the Sales Tax Act, 1990. To hold that by making reference to Sales Tax Act, excise duty stands transformed is not correct. As such constitutionality of this law cannot be questioned.


9. In view of the above discussion and the judgment of the Honourable High Court, Islamabad referred above the contentions of the AR are devoid of merits hence the action of the DCIR is confirmed.


10. The other contention the AR that the interconnect charges are re-imbursement of expenses incurred by an operator to the other is not convincing, if this contention is accepted then how this reimbursement can be treated as income of the registered. The registered person, has himself shown revenue under this head. The reimbursement is never shown as income/revenue as it is the receipt of an expense already made and it cannot be treated as income. The contention of the AR is self contradictory. The other contention of the AR that Federal Excise Duty in respect of telecommunication services is charged and collected from subscriber by the service provider and these service charges charged to subscriber include the interconnect cost is misconceived. In this scenario two types of transaction occur;


(i) The company provides services to the customers/subscribers in this situation the customer used a pre-paid card and as soon as he used these cards tax is deducted. As regards these transactions no issue is involved.


(ii) In other transactions with the other telecom companies the registered person provides its services and allows to use its net work in this situation the registered person raises invoices for the recovery of amounts of those services which are actually interconnect charges no Federal Excise duty is charged. These services are liable to Federal Excise Duty. The registered person did not refer to any section under which these services are exempt.


11. Further written arguments of the A. R indicated that he has pointed out mainly the technicalities which cannot be considered as the Honourable apex court in case No. 702-L of 2003 Collector of Sales Tax and Central Excise Lahore v. Zamindara Paper Board Mills held that where substantial compliance to the notice has been made then the assessments cannot be contested on technicalities. Here in this case the registered person fully made compliance to the notice hence at this stage the order-in-original cannot be contested on technicalities. Further the legal issues as mentioned in the written arguments were never contested in the grounds of appeal filed hence the same are not accepted.


12. In view of above noted discussion the contention of the department is based on the fact that those telecom operators who share their infrastructure to facilitate their subscribers to get connected with each other and those telecom operators charge each other for rendering such interconnect services should issue invoice for that revenue and pay the excise duty on that service received on account of interconnect service. The registered person has rendered services to these telecom operators companies and as per law the registered person was bound to issue invoices and charge federal excise duty on rendering of interconnect services against the companies to whom services have been rendered as the law does not provide any kind of immunity to the registered person for not issuing the sales tax/federal excise duty invoice after rendering of any taxable service. Hence the contentions of the AR are not worth acceptance and order in original is confirmed.”


4. The learned counsel representing the appellant have firstly explained the procedure of working in respect of Interconnect. It is submitted that Subscribers of Cellular Mobile Operators (CMOs) and fixed line operators in Pakistan call subscribers of PTCL. Such calling subscribers may be referred to as the calling, parties. The calls originating from the calling parties cannot be completed unless these calls are allowed access and termination on PTCL’s network. Thus the two networks i.e. the call originating network and the network of PTCL must be interconnected for the aforesaid call to be completed. In order to complete the above referred calls, PTCL has interconnenct agreements with each CMO and fixed line operator in Pakistan. The format of these interconnect agreements known as reference Interconnect Officer, RIO, as well as the rates to be charged by PTCL for interconnect are approved by Pakistan Telecommunication Authority (PTA). In the year 2000, PTA introduced the Calling Party Pays (CPP) regime for CMOs in Pakistan. Under the CPP regime, as the name suggests, all the call charges including all related taxes are charged to the calling party by the respective telecom operator. Prior to this regime, the Mobile Party Pays (MPP) regime was in place under which mobile users paid for incoming calls. Under the CPP regime, as soon as the call from another operator is successfully terminated at PTCL’s network the automated billing systems of the originating operator charges the calling party for both the interconnect charges of PTCL and originating network’s own call charges. At the same time both Federal Excise Duty (FED) and advance income tax are also charged on the aggregate amount of call charges which include PTCL’s interconnect charges. The FED so collected from the calling party on PTCL’s interconnect charges are deposited in Government treasury within one or two months of the billing period under the Federal Excise Rules, 2005 depending upon the nature of the package i.e. pre-paid or post-paid.


The learned representative have also placed before this Bench on illustration of the above transaction which is laid out below using actual tariff of a mobile operator and interconnect charges specified by PTA:–




Particulars of charges


PTCL Interconnect charges specified by PTA for National Calls >80 km


Mobilink’s call charges


Total call charges billed by Mobilink to its subscriber i.e. the calling party


FED on total call charges @ 19.5%


Advance income tax @ 10%


Total billing to calling party



* PTA specified rate as per page 2 of RIO.


* * As per indigo ‘900’ package tariff.


Referring the stance of the Department that FED should be charged on both the interconnect charges and the total billed amount to the cellular calling party it is contended that the department, on the basis of the above stance, issued show-cause notices to various cellular companies who challenged the same before the Honourable Islamabad High Court which struck down these show-cause notices in its judgment dated 8th January 2014 in Writ Petition No.2957/2012 Warid Telecom Ltd. v. Federation of Pakistan 2014 PTD 752. Relevant part of this judgment is reproduced below;


‘7. I have carefully heard the learned counsel of the parties and perused the relevant record. The following four pivotal questions have surfaced from the pleadings and contentions put forth;


(1) Whether the FED levied and deducted initially from the calling party is the same for the telecommunication network who connects the network from which call is made, i.e. receiving party?


(2) Whether services for interconnection require re-imposition and demand of FED?


(3) Whether the entire amount of FED @ 19.5% includes the amount of FED levied on behalf of both networks i.e. the calling party receiving party, and if so, what is the justification to demand independently form the telecommunication network which connects the call to the other network?


(4) Whether the demand of FED from both networks is to complicate the process and burden the ultimate subscriber?”


5. It is further contended that the Honourable Islamabad High Court has clearly held in the above judgment that the intention of the legislature is not to tax interconnect charges twice. According to learned ARs the collective reading of sections 3(1), 16(1) and Entry No.6 of Table-II of the First Schedule to the Federal Excise Act, 2005 reveals that all telecommunication services under sub-headings of heading 98.12 as contained in the First Schedule to the Custom Act, 1969 are excisable. Section 3(1) charges all services provided in Pakistan at the rate of 15% except those services listed in the First Schedule to the FED Act which shall be taxed at rates mentioned in the said Schedule. The FED Act having charged all services through Section 3(1) then exempts all services through Section 16(1) except those services listed in the first schedule. The Third Schedule deals with conditional exemptions.


6. It is argued that the net result of the above collective reading is that services listed in the First Schedule to the FED Act are excisable. Thus the relevant entry for telecommunication services in the First Schedule needs to be examined and interpreted. According to learned A.Rs. in the assessment order stance has been adopted that interconnect services are an essential part of the service listed at sub-heading number 9812.1210 i.e. ‘Cellular Telephone’. It is contended that a call made from a cell phone to PTCL’s rendition of interconnect service to the cell phone operator. According to learned A.R. the above stance of the Department may be factually correct but still cannot justify the separate taxation of interconnect charges. It is argued that being part of the Cellular telephone service, PTCL’s charges are taxed when the caller from a cell phone is billed for the entire amount of the call charges including PTCL’s interconnect service as explained above in the illustration. Having been taxed as part of the sub-heading Cellular telephone and there being no separate sub-heading for interconnect services conclusively proves that interconnect services are not taxable independently. The fact that there is no separate entry for interconnect services and only for Cellular Telephone clearly speak of the legislative intent nor to tax interconnect charges twice. Interconnect services are taxable and indeed taxed but only as a component of Cellular Telephone services and not independently.


7. In making the above construction it is submitted that all the services listed in the group of two-dash sub-headings of heading 9812.1000 (Telephone Services a one dash sub-heading) are those services which are provided to subscribers of telecommunication services such as Short Messaging service (SMS), Multimedia Messaging service (MMS) and Video telephone. None of these services are provided or rendered to a telecommunication operator. According to representative of the appellant here the accepted legal maxim known as ejusdem generis applies which has been referred by the Honourable High Court, Karachi the case of Commissioner of Income Tax-I, Karachi v. Orix Leasing Pakistan Ltd., reported as 2007 PTD (HC Kar.) 1151=95 Tax 367. It is latin for “of the same kind.” Where a law lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed. Example is that if a law refers to automobiles, trucks, tractors, motorcycles and other motor-powered vehicles, “vehicles” would not include airplanes, since the list was of land based transportation. Similarly, a service which is dissimilar in character from those services listed in the group of two-dash sub-heading from 9812.1100 to 9812.1990 cannot be regarded as part of telephone services. Interconnect service is distinct from all services in this group as interconnect service is provided by one telecom operator to another whereas all the services in the aforesaid group are provided by a telecom operator to a subscriber. Accordingly, interconnect services cannot be taxed independently under any of the above two-dash sub-headings.


8. It is argued that the rule of ejusdem generis is being frequently applied internationally for interpretation of the Harmonized System Codes such as the ones under heading 98.12 above. In this respect a judgment of the Indian Kerala High Court in the case of Manjilas Rice Mills v. State of Kerala reported as (2007) 6 VST 403 Ker has been referred. Reliance is also placed on a Ruling of a Director of Commercial rulings Division of the US Customs and Border Protection Department. Learned ARs of the appellant have also drawn our attention towards the fact that the CPP regime of Pakistan is encoded in the Heading 9812.1000 of the Pakistan Custom Tariff As mentioned above the telephone services taxed in this heading are only those that are provided to subscribers i.e. the calling party. CPP regime also dictates that all the charges and taxes must be borne by the calling party. The application of the above rule of ejusdem generis on heading 9812.1000 also points to the legislative intent to align FED law with CPP regime by taxing only services provided to subscribers. It is submitted that it is interesting to note that around the time Pakistan was introducing the CPP regime, the US legislators were enacting the Mobile Telecommunications Sourcing Act of 2000 which has been discussed in paragraph 11 of the judgment of the honourable Islamabad High Court’. This law was designed specifically to eliminate double taxation on cross network calls. This indicates that the CPP regime and the aligned tax policy of only taxing the calling party is an international norm. Learned ARs have argued that the rationale of the assessing officer to tax interconnect services independently is that such services are an essential component of Cellular Telephone Services which are taxable under sub-heading 9812.1210. Therefore, all services forming part of Cellular Telephone services should be taxed. But the rationale of the assessing officer is against the basic principles of value Added Tax (VAT) laws. FED is being collected on specified telecommunication services in the VAT or sales tax mode under the FED act. Under any VAT regime each component of a product and the product itself are taxed separately at the time of its purchase and sale. It is perfectly plausible for a component of a good or service to be non-taxable/exempt while the related finished good or service to be taxable. In this regard the example of white crystalline sugar manufacturing has been reproduced. One of the raw materials is sugar cane which is specifically exempt from sales tax. On the other hand input sales tax is suffered on utilization of electricity which is also an essential input for sugar manufacturing. The finished manufactured product, white crystalline sugar, is again taxable and output tax is paid on it after adjustment of input tax on raw materials. It is reiterated that the rationale of the assessing officer that an element of a service that is indispensible for its rendition is taxable as part of that service is not correct. If this rationale is extended to the example of sugar manufacturing described above, then sugar cane, being indispensible to the manufacture of sugar would be considered part of white crystalline sugar and would thus become taxable, rendering its exemption redundant. It is abundantly clear that this cannot be the correct interpretation of law. The purchase or acquisition of each component of a good or service is a separate supply the VAT taxability of which has to be determined independently from its related finished product. According to the appellant in the instant case, interconnect may be an essential component of a telephone or cellular telephone service but the taxability of interconnect itself has to be determined separately from the final service of which it is a component just as the taxability of sugar cane has to be determined independently of white crystalline sugar. Interconnect services are taxable only as a part of Cellular Telephone services and not independently.


9. It is contended that the impugned assessment order has been purportedly passed both under Section 36(1) of the Sales Tax Act, 1990 and Section 14 of the Federal Excise Act, 2005. Firstly jurisdiction to assess cannot be acquired simultaneously under two distinct law. It is argued that this act of the assessing officer is alone a reason to render the impugned order illegal. It is submitted that the FED on telecommunication services can only be assessed under Section 14 of the Federal Excise Act, 2005. FED on telecommunication services is only to be collected and paid on ‘sale tax mode’, a term defined in section 2(21a) of the Federal Excise Act, 2005. Sales Tax Mode only allows application of Sales Tax Act, 1990 on FED on telecommunication only to the extent of collection and payment, which is distinct from assessment. Learned A.Rs. has argued that notwithstanding the arguments on merits the time limitation prescribed under Section 14 of the Federal Excise Act, 2005 is three years. Application of this limitation period on the tax periods covered by the impugned show-cause notice reveals that tax period beyond 1st May, 2008 are barred by time. It is contended even if assessment was to be made under the Sales Tax Act, 1990 the invocation of Section 36(l) of the said Act is illegal in this case. This provision of law clearly involves the existence of an act of collusion or deliberate act which case was never even made out by the Department while issuing the subject show-cause notice.


10. In this regard following computation of tax period have been placed before this Tribunal:–


Show-Cause Notice No.658 dated 29-6-2011 Section 14(1) of FEA= Three years from payable dated Rule 43(2)(a) of FE Rules, 2005=21st Day of the 2nd Following Month.


Service beyond 01 May, 2008 are time barred in the instant show-cause notice. Tax periods falling in year 2008-2009 and from May, 2008 to June, 2008 are not time barred.


Notwithstanding legal stance the amount of demand, if at all, chargeable is as follows:


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