APPELLATE TRIBUNAL INLAND REVENUE, DIVISIONAL BENCH-I,
ISLAMABAD
ITA No.185/IB/2020
(Tax Year 2018)
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M/s Pakistan Mobile Communications Ltd. 1-A, IBC
Building F-8 Markaz, Islamabad. |
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Appellant
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VS |
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Commissioner Inland Revenue (Zone-IV), LTU, Islamabad
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Respondent |
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Appellant by: |
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Sirdar Ahmed Jamal Sukhera, Advocate |
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Respondent by: |
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Mr.Fahim Sikander Mr.Tariq Iqbal, DRs |
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Date of hearing |
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22.09.2020 |
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Date of order |
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22.09.2020 |
O R D E R
M. M.
AKRAM (Judicial Member): The
titled appeal has been filed by the Appellant/Taxpayer against an Order in
Appeal No.248/2020 dated 03.02.2020 passed by the learned CIR (Appeals-I), Islamabad
for the tax year 2018 on the grounds as set-forth in the memo of appeal.
2. The facts, in brief, are that the Appellant Company is
engaged in deriving income from providing cellular telecom services. Return of
income for Tax Year 2018 was filed on 14.12.2018 declaring loss at
(Rs.80,891,094,920/-), which was treated to be an assessment order under
section 120(1)(b) of the Income Tax Ordinance, 2001 (“the Ordinance”). During
the course of examination of the appellant’s tax record for Tax Year 2018, the
Commissioner Inland Revenue (CIR) observed certain discrepancies in the
deemed assessment order which, in his opinion, rendered the same as erroneous
in so far as prejudicial to the interest of revenue warranting remedial action
under section 122 (5A) of the Ordinance. Accordingly, a show cause notice
under section 122(9) read with section 122(5A) was issued confronting the
appellant inter alia on taxation of
gain arising on disposal of assets, non-payment of due tax under section 113C
of the Ordinance on accounting gain recognized, incorrect claim of brought
forward depreciation and amortization losses, inadmissible claim of being an
industrial undertaking, incorrect claim of tax deducted under section 148 of
the Ordinance as adjustable and proposed computation of Super Tax. In response
thereto, the Appellant submitted its written reply and attempted to defend the
case. After having examined the reply of the Appellant, the learned CIR issued
another notice wherein the arguments advanced by the Appellant were rebutted.
In response, the Appellant through its AR, filed a written reply and reiterated
its stance. The learned CIR, being unconvinced with the explanation offered by
the Appellant on certain issues, proceeded to amend the deemed assessment order
under section 122(5A) of the Ordinance wherein taxable income for Tax Year 2018
has been determined at Rs.78,004,012,513/- while balance tax payable has been
determined at Rs.22,032,622,231/-. Being aggrieved, the Appellant preferred the
appeal before the learned CIR (A) who vide Order in Appeal 248/2020 dated 03.02.2020
confirmed the order of the Assessing Officer. Aggrieved with this order, the
Appellant has preferred appeal before this Tribunal and assailed the impugned
appellate order on a number of grounds.
3. This case came up
of hearing number of times before this Bench and accordingly, both the parties
were heard in detail. After considering the arguments advanced by both the
parties and perusal of the record, we now frame the following issues for our
adjudication: -
i) Whether a Commissioner Inland Revenue (CIR) as delegator retains his powers
under the Ordinance after delegating the same to an Officer of Inland Revenue
under section 210 of the Ordinance?
ii) Whether under the facts and in the
circumstances of the case, the transactions made by the Appellant Company with
its wholly owned subsidiary Deodar (Private) Limited (DPL) qualifies to be accepted under Section 97 of the Ordinance?
If the answer to the question
No.(ii) is in the affirmative, then whether the Appellant Company is obliged to
pay tax under section 113C of the Ordinance?
iii) Whether the business of the
Appellant Company i.e telecommunication services fall within the purview of the term 'Industrial undertaking' as defined in
section 2(29C) of the Ordinance?
iv) Depreciation and Amortization Losses.
4. ISSUE
NO.(i)
Whether a
Commissioner Inland Revenue (CIR) as delegator retains his powers under the
Ordinance after delegating the same to an Officer of Inland Revenue under
section 210 of the Ordinance?
Submissions
The Department argues in favour of preservation of
powers and conversely, the learned AR for the Appellant Company argues against
the same. In arguing so, the learned AR maintains that without withdrawing the
delegation made under Section 210 of the Ordinance, the CIR had no jurisdiction
to issue a show cause notice or pass an amended assessment order under Section
122(5A) of the Ordinance. In this regard, he has made detailed written submissions
and we intend to deal with the same in our findings below.
Findings
First argument of the learned AR of the
Appellant, to which we agree, is that there is a difference between contractual
and statutory delegation. In this context, in relying on the case titled as Muhammad
Rafiq vs State (NAB)[1],
the learned Counsel argues that in case of a contractual delegation the
delegator retains his power concurrently; whereas, this principle is not
applicable to statutory delegation. We have keenly gone through the entire
judgment of the Honourable Supreme Court, unfortunately we have not been able
to find any such dictum laid down by the Apex Court. Rather, what the above
quoted decision does say is that, a delegation of authority, under Section 34A
of the NAB Ordinance, 1999, by a Chairman NAB, is not time bound and a valid
delegation of a lawful authority by a Chairman NAB survives his voluntary or
involuntary removal from the office of Chairman. In distinguishing this
principle from the contractual relation of a “Principal” and “Agent”, it was
held that, it is only in a contractual delegation of Authority that the
delegation automatically expires when the principal loses its position. In
order to further support his contention, the learned Counsel has also relied
upon the case of Blackpool Corporation v. Locker[2],
which deals with delegation of authority by way of delegated legislation,
whereas, instant case relates to delegation of authority by an executive action
under a primary legislation. The relevant extract of the judgment is reproduced
hereunder for ease of reference: -
“On
the issue of ratification, a delegate, here a statutory delegate, is not an
agent, but a principal and once the Minister has delegated his powers of
requisition then, if he has not reserved those powers to himself, he has
denuded himself of them and can no longer exercise them. The relationship
between the Minister and the local authority or their town clerk was not that
of principal and agent but of delegator and delegate, and the local authority
were not acting as an agent when they seized the property. A delegate cannot be
given retrospectively a greater power than that with which he was invested at
the time when the function was delegated. His invalid actions cannot be
ratified by the delegator.”
Moreover, the
learned Counsel has also relied upon two further cases of a foreign
jurisdiction, titled as Department for Environment Food &
Rural Affairs V Mr G Robertson & Others[3]
and Mr.
Guy Robertson & Ors Vs Department for Environment Food & Rural Affairs[4],
which we are not able to follow.
The second
argument, of the learned Counsel is that he is entitled to two bites of the
cherry. In this respect, he has relied upon the case of M/S Al-Khair Gadoon Ltd. v. The Appellate Tribunal and others[5]
to argue that in deciding the question of jurisdiction of the CIR to
exercise its authority under Section 122(5A), the CIR(A) has not relied upon
any provision of the Ordinance, and if this Tribunal so relies upon any
provisions of the Ordinance, then the matter shall be remanded to the CIR to
consider the said point of submission. We are afraid that the reliance of the
learned Counsel on the case of M/S
Al-khair Gadoon Ltd., is also absolutely misplaced. In this case,
what the Honourable Supreme Court has held is that where the Tribunal has not
decided a mixed question of law raised before it, it is better to remand the
matter to the Tribunal for the reasons that (1) said crucial determination
could best be undertaken by the Tribunal; (2) any finding of the Honourable
Supreme Court or High Court would surely prejudice the taxpayer by denying a
forum of redressal. However, in the instant case, admittedly, the question was
raised before the learned CIR(A) and he has candidly considered the submissions
and decided the question of law raised before him. This dictum of the Honourable
Supreme Court could have been applied to the instant case, if the question
raised had been a mixed question of law and fact and further that such question
had not been decided by this Tribunal, which indeed is not the case. Therefore,
we are not inclined to agree with the submission of the learned Counsel for the
Appellant.
In the third argument, the learned Counsel for
the taxpayer means to argue that if by virtue of Section 211(2) of the
Ordinance, this Tribunal decides that despite delegation, the CIR has concurrent
authority to exercise authority under the Ordinance, then there is a condition
precedent that before the CIR can exercise the power which he has already
delegated, the delegate must have first exercised the power. In further
amplifying his point, the learned Counsel has illustrated that the CIR retains
the power to further amend the assessment which had been amended by the
delegate. By arguing so, the learned Counsel is asking us to imply additional
text, that is, “in further amending the amended assessment”, at the end of
subsection (2) of the Section 211 of the Ordinance. We reject the submissions
made by the learned Counsel for the Appellant because, it is established
principle of interpretation of law as held in the cases of Oxford University Press v. CIT[6]
and also CIT v. Khurshid Ahmad and Others[7] that there is no place for reading words into
a statute to ascertain meaning of a legislative text. In Loreburn L.C. in Macbeth v. Chislett[8],
it was observed to the effect that it would be a new kind of terror in the
construction of Acts of Parliament if the Courts were required to limit a word
to a particular sense of a Statute, which is not incorporated or referred to in
the legislation that requires interpretation. Moreover, we find that section
211(2) is an enabling provision, which implies that where the delegate has
started a lawful proceeding under the Ordinance, the CIR still retains the
authority to exercise jurisdiction upon the matter further to the steps having
already been taken by the delegate. In this respect, we rely upon the case of Huth v. Clarke[9],
in which Wills J. writing for the bench that included Lord CJ Coleridge, has
held that there is difference between delegation and resignation of power. In
this case, the executive committee of a Local Government delegated its
authority to a local sub-committee, to make regulations in their district under
the Rabies Order, 1887. However, later on, the executive committee itself made
and issued regulation with regard to dogs under the said Order (1887). Upon
challenge, it was held that by delegating its authority to the local
sub-committee, the delegator (executive committee) had not deprived itself of
the right to exercise powers delegated and the regulations were good and valid.
This ancient dictum was later followed after a century by the Supreme Court of
Zimbabwe in the case of Principal
Immigration Officer and Another v. O’Hara and Another[10],
in which while quoting the case of Huth v Clarke, the full bench of the
Zimbabwe Supreme Court has held that: -
'Delegation' said Wills J in Huth v Clarke [1886–90] All ER Rep 542 at 544,
25 QBD 391 at 395, as the word is generally used, does not imply parting with
powers by the person who grants the delegation, but points rather to the
conferring of an authority to do things which otherwise that person would have
to do himself.
We are further
fortified by a decision made by Bombay High Court in the case of M/S
Venkatesh Trading Co. v. State of Maaharastra and Others[11],
in which the learned Bench has held that the power which is delegated can be
exercised by the delegator until the delegator becomes bound by an act of its
delegate.
We
take this opportunity to further dilate upon the question involved and find
that it is practically impossible for a CIR to exercise all the functions under
the Ordinance personally. It is only for that impracticability, that the
Commissioner is enabled under the statute to delegate its functions and in
interpreting the relevant provision, administrative common sense must prevail.
It can never be the intention of the legislature to render the CIR disable by
putting a restraint on his authority under different provisions of the
Ordinance which was bestowed upon him by the legislature in first place. This
presumption is further displaced by the fact that the overall responsibility
for the actions or omissions of the delegate still remains with the CIR; and it
would be wholly unfair to presume that after delegation of its authority the
actions of the delegate are presumed to be taken by the delegator but he does
not have right to exercise his authority concurrently. Hence, it can be
reasonably inferred that the delegate in the instant case is merely alter
ego of the CIR and the delegator essentially retains the power to exercise
the powers delegated to the subordinate authority unless the same has already
been exercised by the delegate.
In the fourth
argument, the learned counsel has relied upon the different legislations
and structured his argument on the basis of drafting practice applied in
Pakistan and abroad. However, he has not been able to refer to any principle of
interpretation or a judicial precedent to support his contention and expecting
us to use the drafting practice as a tool for interpretation of a statute. In
this context, it is pertinent to observe that in our opinion the drafters of
different times are guided by the principles of interpretation applicable in a
particular jurisdiction and ever growing modern drafting techniques, therefore,
it is not safe to determine the intention of the legislature by doing a
comparative analysis of two or more different statutes of different regimes.
Lastly, in
view of above findings, we are unable to concur with the argument of the learned
counsel that the question of law in dispute may be interpreted in two
reasonably equal but different ways. In our opinion, there is no ambiguity in
the plain legislative text and it may simply be held that the CIR always holds
concurrent powers to exercise jurisdiction under Section 122(5A) of the
Ordinance. However, the Commissioner may exercise such power before he becomes
bound by the act of its delegate.
5. ISSUE NO. (ii)
Before dilating upon the issue, it would be expedient to first recapitulate the brief facts relating to the said issue.
Facts:
The undisputed
facts of the matter are that the Appellant Company has declared
Rs.91,166,966,000/- as accounting income which included Rs.59,297,894,000/-, as
accounting gain on disposal of assets to Deodar (Pvt.) Ltd (DPL) . It is pertinent to point out that M/S Deodar (Pvt.) Ltd is
wholly owned subsidiary of the Appellant Company. It is also an admitted fact
that the Appellant Company (PMCL) is
a part of VEON Group. It is
subsidiary of International Wireless Communication of Pakistan limited (IWCPL) which is a subsidiary of Global
Telecom Holding (GTH). The ultimate
parent entity is M/s VEON Ltd (formerly Vimpelcom Ltd). However, the proper
appreciation of the wholly owned group structure can be tabulated in the
following manner;
The Appellant
did not pay any tax on the gain on disposal of assets to Deodar (Pvt.) Ltd. (DPL) on the basis of Section 97 of the
Income Tax Ordinance, 2001(‘the
Ordinance”). The CIR disputed the claim of the Appellant and after
following the due process, he has considered the deemed assessment order is
erroneous in so far as prejudicial to the interest of revenue within the
meaning of Section 122(5A) of the Ordinance.
In view of above facts the sole issue for the opinion
remains that: -
Whether under the facts and in the
circumstances of the case, the transactions made by the Appellant Company(PMCL)
with its wholly owned subsidiary Deodar (Private) Limited (DPL) qualifies to be
accepted under section 97 of the Ordinance?
In this context,
before going any further it would be beneficial to set out the relevant law
which is section 97 of the Ordinance. For ease of reference, section 97 is
reproduced hereunder: -
“Section 97. Disposal of asset between wholly-owned
companies: -
(1)
Where
a resident company (hereinafter referred to as the “transferor”) disposes of an
asset to another resident company (hereinafter referred to as the
“transferee”), no gain or loss shall be taken to arise on the disposal if the
following conditions are satisfied, namely: -
(a)
Both
companies belong to a wholly-owned group of [resident][12]
companies at the time of the disposal;
(b)
the
transferee must undertake to discharge any liability in respect of the asset
acquired;
(c)
any
liability in respect of the asset must not exceed the transferor’s cost of the
asset at the time of the disposal; and
(d)
the
transferee must not be exempt from tax for the tax year in which the disposal
takes place.
(2)
---------
(3)
---------
(4)
The transferor and transferee companies belong to a wholly-owned
group if-
(a)
one company beneficially holds all the issued shares of the other
company; or
(b)
a third company beneficially holds all the issued shares in both
companies.”
Legal
Test
The above
provision has not come under judicial dilation in any reported case therefore,
we venture to give our opinion on the basis of legislative analysis of the
above provision of Section 97 of the Ordinance. In our view, under the facts
and circumstances of a particular case, if answers to all of the following
questions are in affirmative, then the gain on disposal of assets shall be
deemed to have not arisen as envisaged in Section 97 ibid.
1. Whether the transferor Company is a resident company within the meaning of Section 83 of the Ordinance, i.e it is incorporated or formed by or under any law in force in Pakistan and the control and management of its affairs is situated wholly in Pakistan at any time in the year?
2. Whether the transferee Company is resident company within the meaning of Section 83 of the Ordinance i.e it is incorporated or formed by or under any law in force in Pakistan and the control and management of its affairs is situated wholly in Pakistan at any time in the year?
3. Whether at the time of disposal of assets, either of the Companies beneficially holds all the issued shares of the other Company; or a wholly owned group of resident companies, that is, a third Company so holds all the issued shares of both the Companies?
4. Whether the transferee Company has undertaken to discharge any liability in respect of the assets acquired?
5. Whether liability in respect of asset does not exceed the transferor’s cost of the asset at the time of the disposal? And
6.
Whether
transferor is not exempt from tax for the tax year in which the disposal takes
place?
Opinion: -
Now we undertake
to apply the above legal text to the facts and circumstances of this case in
the following paragraphs.
In
relation to question Nos. 1 & 2, the CIR or the CIR(A) does not appear to
have disputed the fact that the Appellant Company (the “transferor”) or the
Deodar (Pvt.) Ltd. (the “transferee”) are incorporated with SECP under the law
relation to Companies in Pakistan. Similarly, neither the CIR nor the CIR(A)
has raised any issue about the situation of the management and control of the
affairs of the Company in Pakistan. Hence, the answer to question Nos. 1 &
2 is in affirmative. Similarly, in relation to aspects of the matter enumerated
in questions Nos. 5 & 6, no issue has been raised by either of the forums
below, therefore, the answer to the same is in affirmative.
Now
we turn to our opinion about question No. 3 above. However, for that matter it
would be beneficial to quote the crucial observations of the CIR(A) at this
juncture: -
“8. …………………... It is mandatory for both the
transferor and the transferee to belong to a wholly-own group of resident
companies to avail the benefit available in terms of Sub Section (1) of Section
97 of the Ordinance. During the appeal hearing the learned AR has admitted that
not all the members of the said wholly group are resident companies thus
confirming the findings of the learned Assessing Officer on this account. It is further noted that the word “resident”
was inserted in clause (a) of Sub Section (1) of Section 97 vide Finance Act,
2003 indicating the intent of the Legislature to limit the scope of the benefit
available under the said provision to only such companies which belong to a
wholly-owned group of resident Companies. Since, some of the
members of the wholly-owned group in the Appellant’s case are non-resident,
therefore, the Appellant is not entitled to claim the benefit available in
terms of sub Section (1) of Section 97 of the Ordinance and as such the gain on
disposal of assets by the Appellant to M/S Deodar (Pvt.) Limited as declared in
the financial statements is to be taken to have arisen ad liable to be taxed
under the relevant provisions of law as rights held by the Assessing Officer.”
The above quote from the impugned order of the
learned CIR(A) reveals that this involves interpretation of clause (a) of
subsection (1) of Section 97 through the prism of clause (b) of sub-section (4)
of the Section 97, and the crucial word is incorporation of word “resident” which was inserted by
Finance Act, 2003. In this context, it is pertinent to point out that for the
purposes of interpretation of clause (a) of sub-section (1) of Section 97
through the lens of clause (a) of sub-section (4) of Section 97, the insertion
of the word “resident” is not much significant; because, even in the
pre-amendment scenario, in order to avail relief under Section 97, the
transferor and the transferee Company had to be resident companies by virtue of
pre-condition set out in sub-section (1) of Section 97 which reads as under: -
“(1) Where a resident company (hereinafter referred to as the “transferor”) disposes of an asset to another resident company (hereinafter referred to as the “transferee”)”
Now, as it has been held by the Hon’ble Supreme Court
in the case of M/S Pakistan Television Corporation Ltd. v. CIR[13]
that “amendment cannot be
regarded as inconsequential, rather it has to be given meaning”, therefore,
the addition of the term “resident” by Finance Act, 2003 had to have
consequence and the only other provision that it could have affected is clause
“(b)” of sub-section “4” of Section 97, which relates to the wholly owned group
in the form of a third company beneficially holding all the shares in the
transferor and transferee companies. It clearly shows that the benefit under
this section is available only to the resident companies and if the two
resident companies are beneficially held by a third company the same has also
to be a resident company and if the third company happens to be a non-resident
company then the benefit of this section shall not be available as in that
situation the real beneficiary would be the third company which is a
non-resident company, and any gain arising from the transfer would naturally go
to the non-resident holding company which is certainly not the intention of the
legislature. Any other interpretation of Section 97 would defeat the real
intention of the law which is to restrict the benefit only to the resident
companies. In other words, the benefit of the section is restricted to one tax
jurisdiction, and not to provide any tax benefit to a foreign tax jurisdiction.
Further,
while interpreting and applying Section 97, the intention of the legislature
has to be implemented. In other words if the purpose of the provision is known
or apparent then the language is to be interpreted in a manner that the purpose
is advanced, and there is no exclusion from purposive construction in the case
of taxing Acts. In this regard we may beneficially refer to the speech of Lord
Wilberforce in the case of W.T.Ramsay Ltd vs. IRC[14]:-
“A subject is only to be taxed on clear
words, not on “intendment” or on the “equity” of an Act…….What are “clear
words” is to be ascertained on normal principles; these do not confine the courts to literal interpretation. There
may, indeed should, be considered the context and scheme of the relevant Act as
a whole, and its purpose may, indeed
should, be regarded………”
Here it may also
be pointed out that in fact, what Lord Wilberforce stated in the case of WT
Ramsay is not unknown in our jurisdiction and is also the prevailing view of
our Hon’ble Supreme Court. Reference in this regard may be made to the judgment
of the Hon’ble Supreme Court in the case reported as Dr. Tariq Iqbal vs. Government of Khyber Pakhtunkhwa[15].
In this case the Hon’ble Court was seized of interpretation of various
provisions of the Khyber Pakhtunkhwa (Building Management, Control and
Allotment) Act, 2018, and the Rules framed thereunder. Before embarking on the
interpretation, the Hon’ble Court observed that the same was to be done
according to “the cardinal and well settled principle of interpretation which
requires that a purposive rather than a literal approach of interpretation be
adopted...”. Thereafter, the Hon’ble Court referred to a few
judgments wherein purposive interpretation was given, for example, in the case
titled as Federation of Pakistan
through Ministry of Finance and others v. M/s Noori Trading Corporation (Private)
Limited and 14 others[16].This
was a judgment under the Central Excise and Salt Act, 1944 which is a fiscal
statute. Therefore, even in our jurisprudence the learned Courts have
increasingly resorted to give effect to the intention of the Legislature instead
of sticking to the literal interpretation.
Another
concept of fiscal jurisprudence closely knitted to purposive interpretation is
that while interpreting a provision it has to be given a harmonious
interpretation, and the various sections/parts of a provision are not to be
looked at “in blinkers” if we may borrow the phrase used by Lord Wilberforce in
W.T. Ramsay supra. Therefore, while interpreting sub-section (1); clause
(a) of sub-section (1) and clauses (a) and (b) of sub-section (4) of Section 97
of the Ordinance these are to be harmoniously construed so as to give effect to
the intention of the legislature.
Hence, the
interpretation of the learned CIR(A) that in order to avail the benefit of
Section 97, the Companies forming the group who owns the transfer and
transferee Companies must be resident reflects the precise
intention of legislature. The group structure given in tabulated form above,
leave us in no doubt that the real beneficiary of the subject transaction in
the instant case is a non-resident company namely International Wireless
Communication of Pakistan limited (IWCPL)
holding all the shares in the transferor and transferee companies. In a
nutshell, in view of findings of fact made by the learned CIR(A), which are
essentially based upon the admission of the learned AR for the Appellant, the
answer to the above question No.3 is in negative, which is sufficient to
dismiss the appeal on the issue of entitlement to benefit under the provisions
of Section 97 by the Appellant, however, for the completeness, we now proceed
to give opinion on the next remaining question No. 4 above.
In relation to question No.4, there is no evidence of
undertaking as envisaged under clause (b) of subsection (1) of Section 97 has
been fulfilled at any stage of the proceedings. In this context, it is
pertinent to note that the Appellant’s claim of relief under Section 97 has
always been refuted by all the forums below on different grounds. Moreover, the
CIR(A) has refused the claim on specific ground of lack of evidence by the
Appellant. However, at the time of hearing of appeal, these facts were
confronted to the learned AR and in response thereto, he placed on record the
copy of the undertaking given by the transferee Company. Therefore, the
appellant has met the requirement as contemplated in clause (b) of sub-section
(1) of section 97 ibid. So the answer
to this question is in affirmative.
Conclusion
For what has been discussed above, it may be
concluded that the Appellant Company does not meet the requirement of clause
(a) of sub-section (1) read with clause (b) of sub-section (4) of Section 97 of
the Ordinance because of admission of the learned AR that not all the companies
forming the group are resident Companies.
6. ISSUE NO.(iii)
Whether the business of the Appellant Company rendering or providing telecommunication
services fall within the purview of the term 'Industrial
undertaking' as defined in section 2(29C) of the Ordinance?
Submissions:
-
The learned AR for the Appellant submits that
according to the definition of “industrial undertaking” given in section 2(29C)
of the Ordinance means an undertaking which is setup in Pakistan and employs
ten or more persons in Pakistan and involves the use of electrical energy and
which is engaged in the subjection of material to any process which
substantially changes their original condition. Appellant is engaged in the
provision of telecommunication services. The process of provision of
telecommunication services involves subjection of voice and data to a process
which changes their nature for transmission into different materials and then
re-converts them to voice and data at the time of delivery to the recipients.
This process of conversion and reconversion of voice and data renders these
materials to undergo a change that substantially changes their original
condition. He explains the words “Process” and “Materials” used in the
definition of industrial undertaking by relying upon different dictionary
meanings in respect thereof. According to the learned AR, voice and data falls
within the definition of materials and the scientific explanation of the
process for provision of telecommunication services falls within the ambit of
process. He pointed out that the requirement in the definition of “industrial
undertaking” is not that the final product should be substantially different
from the materials used; the mandate of law is that the materials be subjected
to process which substantially changes their original condition i.e. so long as
the subjection of materials to any process substantially changes their original
condition, the mandate of law is satisfied. He argues that if the requirement
of law had been that the final condition should be substantially changed from
the original condition the legislature would have expressly said so. It has
been further stated that the Honorable Islamabad High Court in the case
reported as 2017 PTD 1181 has
observed that telecom companies are industrial undertaking after interpretation
of the terms “materials” and “process” and have also discussed that
notifications issued by Federal Government are crucial in determining status of
telecom sector as an industrial undertaking. The relevant para of the said
judgment which has been relied upon by the learned AR is reproduced hereunder:
-
“17. It is, therefore, obvious from the above
that the expression ‘materials’, inter alia, also refers to information and
data, likewise the expression ‘process’ has wide meanings going beyond the mere
manufacturing of goods as materials. There appears to be force in the argument
advanced by the learned counsel for the Taxpayers that the telecommunication
systems used by the companies engaged in providing telecommunication services
are covered under the definition of an ‘industrial undertaking’. Data
processing through various machines, equipments and other modes would also be
covered within the meaning of ‘subjection of goods and materials to any
process’. It was, therefore, essential on the factual side that the learned
Tribunal ought to have examined the process through which the telecommunication
operators render the services. The Telecommunication System involves machines,
equipments and material for enabling the service providers to achieve various
results. However, this factual aspect
has not been considered or adverted to be any forum in all these Tax
References. There is also force in the argument that telecommunication services
involving telecommunication systems are globally treated as an industry. The Mobile
Cellular Policy of 2001 notified by the Federal Government explicitly provides
that the telecom sector, including mobile cellular operators, were to be
classified as an industry. The Federal Government, vide notification dated
20-04-2014, pursuant to the said policy has declared and classified the
cellular operators as an ‘industry’. These aspects were crucial for
consideration but none of the forums have been taken them into consideration.
The taxpayers have been declared as not being covered under section 2(29C)
without undertaking an enquiry on the factual side and thus rendering the
findings in this regard as perfunctory and perverse.”(Emphasis supplied)
On the other hand, the learned DR has supported the impugned order and
contended that that the order passed by the learned CIR(A) is a speaking order
and there is no infirmity in the impugned order.
Relevant Law
In this context, before going any further it would be
beneficial to set out the relevant law which is section 2(29C) of the
Ordinance. For ease of reference, section 2(29C) is reproduced hereunder: -
“Section 2(29C) “Industrial undertaking” means-
(a) an
undertaking which is set up in Pakistan and which employs;
(i) ten or more persons in Pakistan and involves the use of
electrical energy or any other form of energy which is mechanically transmitted
and is not generated by human or animal energy; or
(ii) twenty or more persons in Pakistan and does not involve the
of electrical energy or any other form of energy which is mechanically transmitted
and is not generated by human or animal energy;
and which is engaged
in: -
(i)
the manufacture
of goods or materials or the subjection of goods or materials to any process
which substantially changes their original condition;
(ii)
ship-building; or
(iii)
generation, conversion, transmission or distribution of electrical
energy, or the supply of hydraulic powers; or
(iv)
the working of any mine, oil-well or any other source of mineral
deposits; and
(b) any
other industrial undertaking which the Board may by notification in the
official Gazette, specify. (Emphasis supplied)
Opinion: -
The plain reading of the
above provisions of law clearly suggest that clauses (i) to (iv) refer to the
nature of the trade or business in which an undertaking must be engaged in
order to be covered under the definition of an “industrial undertaking”. Clause (i) is general in nature and the
language has wide meanings so as to cover a large number of undertakings.
Clauses (ii) to (iv) are in relation to specific reference to a particular
trade or business. Besides the four categories expressly mentioned in clauses (i) to
(iv), the Board (FBR) under clause (b) is also vested with the power to declare
an entity as an “industrial undertaking” through a notification published in
the official gazette. It is noted that clauses (i) to (iv), specified in the
context of the engagement of an undertaking, are distinct and independent of
each other and each clause is to be read with clause (a)(i) or (a)(ii). An
undertaking which is not engaged in one of the trades and businesses described
in clauses (ii) to (iv) would be treated as an ‘industrial undertaking’ if it
satisfies the tests provided in clause (i). However, according to the learned
AR, the case of the appellant company fall under clause (i) because it involves
subjecting goods or materials to a process which substantially changes their
original condition.
We have not been able to find any substance
in the submissions made by the learned AR for the Appellant. The basic
argument of the learned Counsel for the Appellant is that the exchanges of the Appellant
come within the purview of the words “the
subjection of goods or materials to any process which substantially changes
their original condition” used in
clause (i) and therefore, it squarely fall in the definition of “industrial
undertaking”. The learned Counsel also inter alia submitted that in the
telephone exchanges electrical energy is converted into electro-magnetic waves
to provide service to its customers. As a sequitur, it was contended that a new
product is manufactured. It was also canvassed that the activities of the
appellant are in the nature of business and trade. It was argued that this
being so, the activities squarely fall within the definition of the term
'Industrial Undertaking” as defined in section 2(29C) of the Ordinance.
We have considered the submissions of the learned Counsel for the
appellant. The question whether the appellant is carrying out any process of
manufacturing of goods or supply of any goods is no longer res-integra. In Bharat Sanchar Nigam Ltd. and Anr. v. Union
of India and Ors[17], the principal
question to be decided was the nature of the transaction by which mobile phone
connection is made available by the telecom company to the consumers, namely, is it sale or is it a service or is it both.
The Supreme Court held that the appellant was not carrying out any process of
manufacturing of goods or supply of any goods; it was simply rendering service
to customers. In this connection, it was held as follows:
“61.
We will proceed on the basis that incorporeal rights may be goods for the purposes
of levying sales tax. Assuming it to be so, the question is whether these
electromagnetic waves can fulfill the criteria laid down in Tata Consultancy
for goods. In our opinion the question must be answered in the negative.
Electromagnetic waves have been described in David Gilles & Roger Marshal:
Telecommunications Law:
Butterworths:
1.14. Electromagnetic
waves travel through free space from one point to another but can be channeled
through waveguides which may be metallic cables, optical fibres or even simple
tubes. All electromagnetic waves are susceptible to interference from one
another and unrelated electrical energy can distort or destroy the information
they carry. To reduce these problems they have been organized within the
spectrum into bands of frequencies or wavelengths for the transmission of
particular types of services and information.
62. The process of
sending a signal is as follows:
Data
is superimposed on a carrier current or wave by means of a process called
modulation. Signal modulation can be done in either of two main ways: analog
and digital. In recent years, digital modulation has been getting more common,
while analog modulation methods have been used less and less. There are still
plenty of analog signals around, however, and they will probably never become
totally extinct. Except for DC signals such as telegraph and baseband, all
signal carriers have a definable frequency or frequencies. Signals also have a
property called wavelength, which is inversely proportional to the frequency.
(Encyclopedia of Technology Terms of Techmedia)
63.
It is clear, electromagnetic waves are neither abstracted nor are they consumed
in the sense that they are not extinguished by their user. They are not
delivered, stored or possessed. Nor are they marketable. They are merely the
medium of communication. What is transmitted is not an electromagnetic wave but
the signal through such means. The signals are generated by the subscribers
themselves. In telecommunication what is transmitted is the message by means of
the telegraph. No part of the telegraph itself is transferable or deliverable
to the subscribers.
64. The second reason is
more basic. A subscriber to a telephone service could not reasonably be taken
to have intended to purchase or obtain any right to use electromagnetic waves
or radio frequencies when a telephone connection is given. Nor does the
subscriber intend to use any portion of the wiring, the cable, the satellite,
the telephone exchange, etc. At the most the concept of the sale in a
subscriber's mind would be limited to the handset that may have been purchased
for the purposes of getting a telephone connection. As far as the subscriber is
concerned, no right to the use of any other goods, incorporeal or corporeal, is
given to him or her with the telephone connection.
65. We cannot anticipate
what may be achieved by scientific and technological advances in future. No one
has argued that at present electromagnetic waves are abstractable or are
capable of delivery. It would, therefore, appear that an electromagnetic wave
(or radio frequency as contended by one of the counsel for the respondents),
does not fulfill the parameters applied by the Supreme Court in Tata,
Consultancy for determining whether they are goods, right to use of which would
be a sale for the purpose of Article 366(29-A)(d).”
Thus, it needs to be noted that there is no consumption of
electro-magnetic waves by the customer. The mere fact that electrical energy is
converted into electro-magnetic waves does not detract from the fact that the
appellant is providing only service to its customers and nothing more. In the
process, no goods are being manufactured. Unlike goods the electro-magnetic
waves are neither delivered to the customers nor consumed by them. Needless to
mention here that the judgment of the Hon’ble Islamabad High Court titled as CM
Pak Limited and another Vs Commissioner Inland Revenue, (2017 PTD
1181) was remanded by the Hon’ble Supreme Court of Pakistan with the consent of
the parties to the Hon’ble High Court with certain direction vide order dated
17.05.2018. Thus, at present, the judgment of the Hon’ble Islamabad High Court
does not hold the field.
Further in our opinion Clause (i) is to be construed keeping in
view the principle of ejusdem generis.
As per this
clause, it has to be seen that the undertaking should be engaged in manufacture
or processing of goods through any material or process. In our considered
opinion, an undertaking to be considered as an industrial undertaking, the
total activities of the undertaking should be that of manufacturing or
processing of goods and even if the undertaking is engaged in some other
activities also, the primary activity of the said undertaking should be that of
manufacturing or processing of goods. In the instant case, undisputedly the primary
and dominant object of the company is to provide telecommunication services. The
words “engaged in” have not been defined in the Ordinance and have to be read and interpreted as they are understood
in normal parlance. The word “engaged” is rather ambiguous as was observed by the Hon’ble Supreme Court in Regional Provident Fund
Commissioner vs. S.K. Manufacturing Co[18]. In the said
case, it was held that while dealing with a provision/clause capable of two
constructions, it might not be easy to make a choice particularly, when both
constructions would lead to some anomaly. While interpreting the expression “a
person engaged in any business”, it was held that it shall mean to be engaged
mainly or usually in that business. This was a common sense view consistent
with current and accepted denotation to the words “engaged in”. Primary
and dominant purpose as the decision signifies is encompassed in the word
"engaged". In the instant case it is an admitted fact that the
primary and dominant object of the Appellant Company is to provide and
rendering of telecommunication services to the customers. The Appellant has
also been paying sales tax and excise duty on its services therefore, it cannot be
said that the Appellant Company falls under the definition of an industrial
undertaking.
It is also to be
noted that in India under the Income Tax Act, 1961, the expression “industrial
undertaking” has been defined in sub-section (7)(aa) of section 72A wherein the
services of the telecommunication sector have specifically been included
therein. The said definition is reproduced hereunder for ease of reference: -
“(aa) "industrial undertaking" means any undertaking
which is engaged in--
(i)
the manufacture or processing of goods; or
(ii) the manufacture
of computer software; or
(iii) the business of generation or
distribution of electricity or any other form of power; or
(iiia) the
business of providing telecommunication services, whether basic or cellular,
including radio paging, domestic satellite service, network of trucking,
broadband network and internet services; or
(iv) mining; or
(v) the construction
of ships, aircrafts or rail systems;”(Emphasis supplied)
Whereas the definition of “industrial
undertaking” given in section 2(29C) of the Ordinance does not include the
services of telecommunication sector and therefore, by interpreting clause (i)
it cannot be included the same. Therefore, we are of the considered opinion that the activities of the Appellant Company do not fall
within the purview of “industrial undertaking” and as such, the tax collected under section 148 is a final tax and the
appellant is not entitled to adjust or claim refund thereof.
7. ISSUE
NO.(IV): Depreciation and
Amortization Losses.
During hearing of the appeal, the learned AR has not
argued this issue. However, we have perused both the orders passed by the lower
authorities, the record of the case and the law on the subject. We have not
been able to take any exception to the reasoning of the impugned judgment and
are of the view that it does not warrant any interference. The learned CIR(A)
has observed in the impugned order as under:-
“10……………..The
amount of allowable depreciation/amortization losses determined by the
assessing officer appears to be based on facts available on record. On the
other hand, the learned AR, while rebutting the findings of assessing officer
on this account, however, could not produce any counter supporting evidence to
establish that the determined amount suffers any calculation errors or against
the facts available on record. The AR has also failed to identify the relevant
tax years in which the Appellant’s case has been remanded back by the Appellate
Fora for re-examination and as such, as per his claim, the amended assessment
order for such tax years are no more in field. The AR has also failed to
produce the relevant orders passed by higher appellate fora. Foregoing in view,
I find no reason to dislodge the treatment meted out by the assessing officer
on this account.”
It appears from the above, the learned
CIR(A) has refused the claim on facts and grounds of lack of evidence by the
appellant. We regret to note that no such evidence has been produced in the
Tribunal as well. Therefore, the appeal of the appellant also fails on this
issue as well.
8. For what has been
discussed above, the appeal of the Appellant company is dismissed being devoid
of merits.
9. This order
consists of (22) pages and each page bears my signature.
|
|
Sd/- (M.M. AKRAM) JUDICIAL MEMBER |
|
Sd/- (IMTIAZ AHMED) ACCOUNTANT
MEMBER |
|
[1]2019 SCMR 846
[2] [1948] 1
K.B. 349
[3]2003 WL 23014903
[4] 2005 WL
353385(2005)
[5](2020) PTD 18
[6] 2019 SCMR
235 Para [12]; (2019) PTD 523 Para [12]
[7] (2016) PTD 1393 Paras 5 & 8, 2016 PLD SC 545 Paras 5
& 8,
[8](1910) AC 220
[9] (1890) 25
QBD 391
[10] (1994)
1 LRC 136
[11] [2011]
(1) All MR 796
[12] Added by
Finance Act, 2003
[13](2017) PTD
1372 Para 11.
[14][1981] 1
All ER 865 at page 870-871
[15]2019 SCMR 859
[16]1992 SCMR 710
[17]Case No.Writ Petition (civil)183 of 2003 decided by SC India on 2 March, 2006
[18]AIR 1962 SC 1536.
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