2019 P T D 1668

[Islamabad High Court]

Before Athar Minallah, C J and Miangul Hassan Aurangzeb, JJ




S.T.R. No.28 of 2014, decided on 30th January, 2019.

Hafiz Munawar Iqbal, Babar Bilal and Saeed Ahmed Zaidi for Applicants/Appellants.

Khalid Anwar, Iftikhar Ahmed Bashir and Ayyaz Shoukat for Respondents.

Date of hearing: 29th October, 2018.


ATHAR MINALLAH, C.J.—Through this consolidated judgment we shall decide the instant Tax Reference along with Intra Court Appeal No.26 of 2014 titled “The Commissioner, Inland Revenue (Legal) etc. v. Warid Telecom (Private) Limited, etc.”, Intra Court Appeal No.401 of 2014 titled “Pakistan Mobile Communications Limited v. Federation of Pakistan, etc.” and Review Petition No.04 of 2015 titled “Pakistan Mobile Communications Limited v. Federation of Pakistan through Chairman FBR etc.” in the Intra Court Appeal No.401 of 2014. The questions of law are common in the instant Sales Tax Reference and the connected appeals.

2. The brief facts necessary for adjudication of the cases in hand are that the respondent in the instant Tax Reference and one of the appellants in the connected appeals have been granted licenses by the Pakistan Telecommunication Authority (hereinafter referred to as the “Authority”) in exercise of powers conferred under the Pakistan Telecommunication (Re-organization) Act, 1996 (hereinafter referred to as the “Act of 1996”). The taxpayers licensed by the Authority are, inter alia, engaged in the business of rendering telecommunication services. For ease of reference, they will be referred to as “Service Providers”. The Sales Tax Department served upon the them show-cause notices wherein they were asked to explain as to why they had failed to pay Federal Excise Duty relating to interconnection of their respective systems with other service providers. In the instant Tax Reference, the show-cause notice was adjudicated vide Sales Tax Order-in-Original No.35 of 2011, dated 17-10-2011 (hereinafter referred to as the “Order-in-Original”). The Service Provider preferred an appeal, which was dismissed by the learned Commissioner, Inland Revenue (Appeals-II), Islamabad vide Order-in-Appeal No.ST-226/2011, dated 30.04.2012. The Service Provider filed a second appeal, which was allowed by the learned Appellate Tribunal Inland Revenue, Islamabad (hereinafter referred to as the “Tribunal”) vide judgment, dated 05.03.2014. The Department has proposed questions of law in the instant Tax Reference for our consideration. In the Intra Court Appeal No.401/2014, the Service Provider has challenged the order, dated 25.06.2014, passed in W.P. No.1173 of 2013. Likewise, the Department has assailed the judgment, dated 08-01-2014, rendered by the learned Single Judge in W.P. No.2957 of 2012, by preferring Intra Court Appeal No.26 of 2014. In a nutshell, the question of law which we are required to answer is, whether interconnection between two service providers amounts to rendering of telecommunication services in the context of Heading Number 98.12 in the Table to S.R.O. 550(I)/2006 (hereinafter referred to as the “S.R.O.550”). In case the answer to the said question is in the affirmative, then whether merely executing an agreement between two service providers would amount to rendering of telecommunication services or the actual use by the customers of such interconnection facility would attract levy and charge of Federal Excise Duty.

3. The learned counsel for the Department has argued that; a service provider has multiple sources of revenue and unless expressly exempted they would attract the levy and charge of Federal Excise Duty; interconnect charges received by one service provider from another service provider is not an independent source of revenue; the service providers, through interconnection, share their respective infrastructure in order to facilitate the users to complete a call; interconnection service is an integral part of the telecommunication services and falls under the Heading Number 98.12/1990 of heading of 98.12 of the First Schedule to the Customs Act, 1969 (hereinafter referred to as the “Act of 1969”); the interconnect charges are not exempt from charge and levy of Federal Excise Duty; the interconnect services are based on the concept of value added taxation; telecommunication service has been defined in the Act of 1996; the expression ‘Interconnection’ is defined under clause (i) of Article 3.1 of the Interconnection Guidelines, 2004; the agreement executed between service providers explicitly mentioned what the charges would be, inter alia, exclusive of central excise duty; reference has been made to the various provisions of the Federal Excise Act, 2005 (hereinafter referred to as the “Act of 2005”); the Sales Tax Act, 1990 (hereinafter referred to as the “Act of 1990”) in support of their contention that interconnection attracts the provisions of the said statute and, therefore, the service providers are under an obligation to charge and pay federal excise duty on interconnection; factual controversies were involved and, therefore, the learned Single Judge while rendering judgment, dated 08.01.2014, could not have adjudicated regarding the demand of Federal Excise Duty on interconnection charges amounting to double taxation.

4. The learned counsel for the Service Providers on the other hand have argued that; the Department has misinterpreted and misconstrued the concept of interconnection; mere interconnection does not amount to rendering telecommunication services; it is only when actual telecommunication services are rendered to a subscriber that telecommunication service takes effect; the charges are included in the cost of a call charged from the customer; Federal Excise Duty, therefore, covers the amount charged as rendering of telecommunication services; the interconnection services are regulated by the Authority and in this regard it has issued the Guidelines of 2004; pursuant to directions given by the Authority it is mandatory for the Service Providers to observe “calling party pays” method; interconnection is an internal arrangement between the service providers; the service provider on whose system the call originates is responsible to pay all the charges, including federal excise duty relating to interconnection services; the customer, therefore, making a call pays for the cost, which includes interconnection charges and the corresponding amount of federal excise duty; the service provider, after providing complete service to its subscriber, recovers all the charges from the latter; the federal excise duty so recovered includes the charges relating to the interconnection service; the arrangement between service providers to connect their respective systems so that their subscribers can avail all the benefits of telecommunication services does not attract levy and charge of federal excise duty.

5. The learned counsel have been heard and the record perused with their able assistance.

6. The controversy is regarding interconnection of systems between two or more service providers. The expression ‘Interconnection’ has been defined by the International Telecommunications Union as the set of legal rules, technical and operational arrangements between networking operators that enable customers connected to one network to communicate with customers of another network. Likewise, the said expression has been defined by the World Bank as the physical and logical linking of public electronic communications networks used by the same or a different undertaking, in order to allow the users of one undertaking to communicate with the users of the same or another telecommunication network or to access services provided by a telecommunication network and the services may be provided by the parties involved or other parties who have access to the network. Interconnection between two service providers is a regulated activity and in this regard the Authority, in exercise of powers conferred under section 5(2)(h) of the Act of 1996, has issued the Guidelines of 2004. Clause (i) of sub-article 3.1 has adopted the definition of the expression ‘Interconnection’ as defined by the World Bank. Article 3.1(k) of the Guidelines of 2004 defines the expression ‘Interconnection Services’. Likewise, Article 3.1(u) defines “Telecommunication Service” as meaning a service consisting of emission, conveyance, switching or reception of any intelligence within, or into, or from Pakistan by any electrical, electro-magnetic, electronic, optical or optico-electronic system, whether or not the intelligence is subjected to rearrangement, computation or any other process in the course of the service. When these expressions are read together it makes it obvious that merely entering into an interconnection agreement or an arrangement between two service providers to connect their respective systems would by no stretch of the imagination amount to rendering of telecommunication services. It is only when the subscriber of a service provider is able to complete the call that “telecommunication service” is rendered. The Authority, as a regulator, has issued the Guidelines of 2004 which, inter alia, governs the interconnection charges and procedure for billing the users.

7. Section 3 of the Act of 2005, which is the charging section, provides that there shall be levied and collected in such manner as may be prescribed duties of excise, inter alia, on services provided in Pakistan, including the services originated outside but rendered in Pakistan. Section 7 further provides that in case of the services, as specified by the Federal Board of Revenue through a notification in the official gazette, the duty shall be payable in sales tax mode. In exercise of powers vested in the Federal Board of Revenue under section 7 of the Act of 2005, the latter has issued S.R.O. 550, which includes Heading Number 98.12 of the First Schedule of the Act of 1969 i.e. telecommunication services. There is no cavil to the proposition that telecommunication services, if rendered by a service provider, would attract levy and charge of federal excise duty, but not otherwise. It is the case of the Department that mere interconnection of two systems is sufficient to constitute rendering of telecommunication services. If that was so then a call which originates on the system of one service provider but not answered or responded to by the subscriber of the other service provider would also have attracted levy and charge of federal excise duty. Admittedly, an incomplete call, despite having been connected to the network of other service provider, is not treated as rendering of telecommunication service and thus the question of charging federal excise duty does not arise. Federal Excise Duty and the charge thereof is attracted only when the call is completed i.e. when it is answered or received by the subscriber of the receiving network. In the event of completion of a call made by a subscriber on one network of the service provider to that of the other, the former is charged the entire cost of rendering of telecommunication service, which essentially includes federal excise duty. This obviously includes the charges relating to providing the facility of interconnection between two distinct networks. Merely agreeing to provide interconnection service to subscribers of two or more service providers would not constitute rendering of telecommunication service as has been misconstrued by the Department. The interconnection of two networks of distinct service providers is for the purposes of rendering of telecommunication services to the subscribers and on its own cannot be treated as rendering of such service. We have carefully gone through the Order-in-Original and the written arguments filed on behalf of the Department. We are afraid that the Department has misinterpreted the concept of interconnection, which obviously appears to have been confused with ‘rendering of telecommunication services’. There is no force in the argument advanced by the learned counsel for the Department that the interconnection of the networks by two service providers is sufficient to attract federal excise duty.

8. In view of the above discussion, the learned Tribunal has rightly set-aside the Order-in-Original. Moreover, the impugned judgment, dated 08-01-2014 in the Intra Court Appeal No.26 of 2014, is to be read in the context of the above discussion. The questions of law proposed for our consideration in the instant Sale Tax Reference are, therefore, answered in the light of the above discussion. The Intra Court Appeal No.26 of 2014 preferred by the Department is without merit and accordingly dismissed. The Intra Court Appeal No.401 of 2014 is allowed and, therefore, the judgment impugned therein is set-aside. Consequently, Review Petition No.04 of 2015 has become infructuous and, therefore, accordingly dismissed.

MH/91/Isl. Order accordingly.

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