APPELLATE
TRIBUNAL INLAND REVENUE, PESHAWAR
(SINGLE
BENCH)
STA
No.122/PB/2020
(Tax Period July-2018
to June-2019)
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M/s Four Season Fast
Food,
Arbab Road, Peshawar
Cantt.
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Appellant
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Vs
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Commissioner Inland Revenue
(Unit-22 Zone Peshawar), RTO, Peshawar.
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Respondent
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Appellant By:
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Mr.
Muhammad Azam, Advocate/AR
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Respondent By:
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Mr.
Aziz Ur Rehman, DR
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Date of Hearing:
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03.10.2024
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Date of Order:
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03.10.2024
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O
R D E R
M. M. AKRAM (Judicial Member): The
titled appeal has been filed by the appellant registered person against an
Order in Appeal No.123 of 2020 dated 20.10.2020 passed by the learned
Commissioner Inland Revenue (Appeals), Peshawar on the grounds as set forth in
the memo of appeal.
2. The key facts culled out from the record
are that the appellant was registered with the respondent department as a restaurant
under Sales Tax Registration No. 0501210004473. It was alleged that the
appellant fell under the category of a manufacturer and was legally obligated
to file sales tax returns for the periods from July 2018 to June 2019. However,
the appellant failed to submit these returns, violating Section 26(1) of the
Sales Tax Act, 1990 ("the Act"). As a result, a show cause
notice was issued, proposing a penalty of Rs. 5,000 for each month of
non-compliance under Section 33(1) of the Act. In response, the appellant
submitted a written reply, but the Assessing Officer was unsatisfied with the
explanation. Consequently, the assessing officer issued Assessment Order No.
99/2020 dated 30.06.2020 under Section 11(1) of the Act, raising a sales tax
demand of Rs. 60,000 for the appellant's failure to file the required tax
returns in violation of Section 26(1) of the Act. The appellant, dissatisfied
with the decision, appealed before the Commissioner Inland Revenue (Appeals),
who dismissed the appeal through Order in Appeal No. 123 of 2020 dated
20.10.2020. The appellant has now filed the current appeal before this forum,
challenging that decision on a number of grounds.
3. The
case was heard on 03.10.2024. Mr. Muhammad Azam, Advocate, appeared on behalf
of the appellant/registered person, while Mr. Aziz Ur Rehman, DR, represented
the department in the appeal.
4. We have heard the parties and perused the
record. It is an admitted fact that the appellant operates a restaurant under
the name "Four Season Fast Food," where food is both prepared and
served at the request of customers who visit the restaurant. Following the 18th
Constitutional Amendment, specifically with reference to Item No. 49 of Part-I
of the Fourth Schedule to the Constitution, and in conjunction with Article 8
of the 7th NFC Award, the Provincial Assembly of Khyber Pakhtunkhwa (KPK)
enacted the Khyber Pakhtunkhwa Finance Act, 2013 ("2013 Act").
The First Schedule of the 2013 Act lists services, including those under tariff
heading 9801.2000, and Schedule-II of the 2013 Act designates taxable services,
which include "services provided or rendered by hotels, restaurants,
marriage halls, pandals and shamiana services, lawns, caterers, motels, guest
houses, by whatever name called, including any ancillary services."
Notably, tariff heading 9801.2000 pertains to "services provided by
restaurants."
5. To address the controversy between parties
regarding whether the food prepared and served in restaurants to customers
qualifies as a good or a service, it is essential to examine the tariff
classification of goods and services, along with the rules for interpreting
these tariffs. Prepared foods are classified as goods under various headings of the
Pakistan Customs Tariff (PCT) in Chapter 21 (Miscellaneous Edible
Preparations) of the First Schedule to the Customs Act, 1969. In this context,
tariff heading 21.06 (Food preparations, not elsewhere specified or included)
is particularly relevant. However, the services provided by restaurants are
specifically categorized under PCT Heading 9801.2000 in Chapter 98 (Services)
of the same First Schedule to the Customs Act, 1969. It is important to note
that the General Rules for Interpretation (GIR) of the Tariff Schedule
are also part of this First Schedule, and Rule 3 of the GIR specifies that when
goods are potentially classifiable under two or more headings, the heading
providing the most specific description should be preferred over a more general
one. Additionally, if the goods cannot be classified based on Rule 3(a) or
3(b), they should be classified under the last numerical heading among those
equally meriting consideration. According to Rule 3 of the
GIR, it is clear that tariff heading 9801.2000, "Services provided or
rendered by restaurants," should take precedence over headings 21.04
("Soup or broth") and 21.06 ("Food preparations not elsewhere
specified or included"), as it provides a more specific description and is
numerically the last of the three headings. Furthermore, these tariff headings
and descriptions from the First Schedule of the Customs Act, 1969, have been
adopted in the Schedules of the Sales Tax Act, 1990, Section 2(23) of the
Federal Excise Act, 2005, and the Schedules of the 2013 Act. Therefore, the GIR
applies equally in determining the correct heading for classification purposes.
For the
reasons outlined above, it is evident that the food prepared and served by the
appellant's restaurant should be classified as a "service" under
tariff heading 9801.2000, rather than as "goods" under any preceding
headings in Chapters 1 to 97 of the PCT.
6. Reference is also made to the United
Nations International Standard Industrial Classification of All Economic
Activities (ISIC), Rev.4. In this classification, Section "I,"
Division 56, Group 561, Class 5610 is defined as follows:
"1.
Accommodation and Food Service Activities
56 Food and beverage
service activities
This
division covers food and beverage serving activities that provide complete
meals or drinks ready for immediate consumption, whether in traditional
restaurants, self-service or take-away establishments, or through permanent or
temporary stands, with or without seating. The key factor is that meals fit for
immediate consumption are offered, regardless of the type of facility providing
them. Excluded from this division is the production of meals that are not
intended for immediate consumption, or prepared food that is not considered a
meal (see Division 10: Manufacture of food products and Division 11:
Manufacture of beverages). Also excluded is the sale of non-self-manufactured
food that is not classified as a meal, or meals that are not fit for immediate
consumption (see Section G: Wholesale and retail trade).
561 Restaurants and
mobile food service activities
See class 5610.
5610 Restaurants and
mobile foods service activities
This
class covers the provision of food services to customers, whether they are
served while seated or serve themselves from a display, whether they consume
the prepared meals on-site, take them away, or have them delivered. It also
includes the preparation and serving of meals for immediate consumption from
motorized vehicles or non-motorized carts.
This class includes
activities such as:
- Restaurants
- Cafeterias
- Fast-food
restaurants
- Pizza
delivery
- Take-out
establishments
- Ice
cream truck vendors
- Mobile
food carts
- Food
preparation in market stalls
Additionally,
it covers restaurant and bar services connected to transportation, when
conducted by separate units.
This class excludes:
- Operation of concession eating facilities
(see 5629).
7. In contrast, the manufacturing of prepared
meals and dishes is classified as "goods" under Section "C"
(Manufacturing), Division "10", Group "107" (Manufacture of
other food products), and Class "1075" (Manufacture of prepared meals
and dishes) of ISIC. This classification applies when meals are processed for
preservation (e.g., frozen or canned) and are typically packaged or labeled for
resale. However, Class 1075 does not include the preparation of meals for
immediate consumption, such as those in restaurants. Accordingly, under the
United Nations ISIC classification, the provision of food services for on-site
consumption, takeout, or delivery is categorized under "5610 - restaurant
and mobile food service activities," supporting my findings in paragraph 5
of this Order.
8. In the case Mondis Refreshment
Room and Bar, Karachi versus Islamic Republic of Pakistan and another
(PLD 1983 Karachi 214), involving a question whether the service of liquor (a
"goods" liable to Provincial Excise Duty) in a Refreshment room or
Bar could attract the levy of central excise duty on the services provided or
rendered by restaurants, it was held that:-
"54. Taking up the second point of Mr. lqbal Kazi
that in view of the provisions of Entry 43(b) of the Third Schedule of 1962
Constitution, the Federal Legislature had no power to levy duty on liquor, the
argument of Mr. lqbal Kazi was that by levying excise duty on liquor, the
Central Legislature has legislated in respect of a matter which was
specifically excluded from its purview. He submitted that the levy of duty on
services rendered or provided in a place where liquor is sold was in fact, levy
of duty on liquor. He further submitted that it is settled principle that what
cannot be done directly cannot be done indirectly. He relied on the Attorney
General of Saskatchwan v. the Attorney General of Canada (1). In our view the
point raised is misconceived for duty has not been levied on liquor but on
'excisable service' which expression has been defined as services, facilities
and utilities as specified in Part II of the First Schedule to the Act, wherein
the meaning of 'restaurant' is explained as an establishment, organization,
place where food or drinks are sold, whether or not it provides any other
services, facilities or utilities and includes a night club and cabaret. From
the explanation it is clear, that the duty is levied on services, facilities and
utilities, provided or rendered in a restaurant which is a place where a person
is provided with drinks and food and where he takes rest, sometime for hours,
and where he may be provided with other services, facilities and utilities. It
is therefore, these services, facilities and utilities which have been taxed.
However, the basis of levy of the duty is the charges recovered for the drinks,
foods and other services, facilities and utilities. The Legislature instead of
levying duty in that manner could have very well taxed the entrance in a hotel
or restaurant or occupation of a chair or table therein but it has chosen a
different basis, it being sovereign it could do so subject however, to any
limitation provided in Constitution. Really therefore, the duty is on services,
facilities and utilities in hotel or restaurant. So far as AIR 1949 PC 190 is
concerned the principle in support whereof it has been cited and which has
already been quoted, is not in dispute but what can be questioned is the
application of the principle to the provisions of law under
consideration".
9. Based on the reasons outlined in the
preceding paragraphs, I conclude that the services provided by the appellant's
restaurant are taxable under tariff heading 9801.2000 of Schedule-II to the
2013 Act. Therefore, restaurant services fall under the jurisdiction of KPK
Province, and the Federation has no authority to levy taxes on them. The
penalty imposed by the assessing officer under the Sales Tax Act, 1990, is
unlawful, void from the outset, and beyond their jurisdiction. As a result, the
decisions made by the lower authorities are annulled, and the appellant's
appeal is accepted.
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-SD-
(M. M. AKRAM)
JUDICIAL
MEMBER
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