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Petitioner: Commissioner Inland Revenue, Zone-II, RTO, Hyderabad VS Respondent: Messrs Shaheen Enterprises
Court Name: Appellate Tribunal Inland Revenue Judge(s): Farrukh Ansari Title:Commissioner Inland Revenue, Zone-II, RTO, Hyderabad vs Messrs
Shaheen Enterprises Case No.: I.T.As. Nos.1086/KB, 1087/KB, 1088/KB, 1089/KB, 1090/KB and 1091/KB of 2018 Date of Judgment:2020-03-09 Reported As: 2021 PTD (Trib.) 2078 Result: Case remanded Judgment ORDER DR. FARRUKH ANSARI, ACCOUNT ANT MEMBER .----These appeals have been filed by the Department for the tax years 2012 to 2017 against the common order of the learned Commissioner (Appeals), Hyderabad dated 20.04.2018 and are hence decided through this common order . The appeals involve the following common grounds:- "1. That the order passed by the learned Commissioner Inland Revenue (Appeals), Hyderabad is bad in law and not based on the facts of the case. 2. The Commissioner Inland Revenue (Appeals), Hyderabad was not justified to hold that the taxpayer produced sales tax / commercial invoice showing "distribution margin" allowed to the distributor / taxpayer on the sale of their products by the company . 3. The Commissioner Inland Revenue (Appeals), Hyderabad failed to examine that the company issued sales invoices showing value of goods and amount of sales tax charged thereupon. 4. The Commissioner Inland Revenue (Appeals), Hyderabad failed to appreciate the fact that the value of goods declared in the sales invoice was the "turnover" of the taxpayer for charge of minimum tax under section 113(1) read with section 133(3)(a) of the Income T ax Ordinance, 2001. 5. The Commissioner Inland Revenue (Appeals), Hyderabad failed to discuss the terms and conditions of the distribution agreement, which contained all ingredients bf "sales" as per the Sale of Goods Act, 1930 i.e. offer from the buyer or seller , consideration, acceptance, delivery of goods etc. 6. The Commissioner Inland Revenue (Appeals), Hyderabad also failed to take notice that the company recorded transaction with the distributor / taxpayer as sales and tax was deducted under section 236G of the Income Tax Ordinance, 2001 on the sales made to their distributors.
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7. The Commissioner Inland-Revenue (Appeals), Hyderabad also failed to discu ss that the tax deducted under section 236G of the Income T ax Ordinance, 2001 has been claimed in the return of income filed by the taxpayer . 6. The Commissioner Inland Revenue (Appeals), Hyderabad has wrongly placed reliance on the Case Laws, wherein facts of the cases were not properly appreciated and relationship of the taxpayer with the company was that of a principal and agent." 2. Briefly the facts of the case are that the appellant is an individual and is deriving income from business that is allegedly described by the taxpayer as a "distribution business", i.e. the taxpayer allegedly distributes the products of M/s Tapal Tea (Pvt.) Ltd. and Continental Biscuits, (Pvt.) Ltd., for which he allegedly receives only commission / distribution margin. However the Department did not agree with this contention during the proceedings initiated under subsection (5A) of section 122 of the Income Tax Ordinance, 2001 and alleged that the taxpayer was engaged in the business of buying and selling the products of the Tapal Tea (Pvt.) Ltd. It therefore amended the orders under that subsectio n and charged the minimum tax at the reduced rate of 0.2% on the entire amount of the sales of the products, inste ad of charging the same only on commiss ion, as insisted by the taxpayer . The taxpayer filed appeals before the Commissioner (Appeals), Hyderabad who annulled the orders due to the following reasons:- "The arguments advanced by the A/R of the appellant as well as departmental representative are considered in the light of the case record. Perusal of the record reveals that the. Additional Commissioner Inland Revenue found that the deemed orders passed under section 120(1) ibid for all the impugned years were erroneous in so far as prejudicial to the interest of revenue on the following grounds for tax year 2013 and similar grounds for remaining years. "As per return of income, tax chargeable was declared at Rs.35,000/- on the basis of taxable income declared at Rs.750,000/- for tax year 2013. Perusal of monthly sales tax returns filed for the period from July 2012 to June 2013 revealed total sales at Rs.263,951,583/-. The above sales were liable for charge of minimum tax at Rs.527,903/- @ 0.2% under section 113(1) of Income Tax Ordinance, 2001, which was higher than the tax chargeable on the taxable income. Non-payment of minimum tax under sections 113(1) and (2) ibid has rendered the assessment order erroneous and prejudicial to the interest of revenue and warranted amendment of assessment under section 122(5A) ibid for the T ax year 2013." The Additional Commissioner issued show-cause notice and in response thereo f the A/R of the appellant filed explanation and contended that the appellant being a distributor of M/s. Tapal Tea (Pvt.) Limited was selling their products on the price structure provided by them. He also contended that the appellant earned "Distributor Margin" on sale of the company's products. The Additional Commissioner rejected the contention of the appellant and passed the orders under section 122(5A) ibid for all the above tax years. Further perusal of the record shows that the Additional Commissioner while passing the impugned orders has failed to appreciate the facts of the case that the appellant being a distributor of M/s. Tapal Tea (Pvt.) Ltd. had declared distribution margin on sale of company products as per distributor agreement. It is learnt from the distribution agreement executed between the appellant and the company that the "Distributor Margin" was allowed as per price structure provided from time to time and the distributor could not change the brand name or packing. The distributor is bound to sale company products of their printed price structure. It is further noted that the company after sending the stock does not relinquish control over the stock till its disposal to the end consumer . The A/R also filed a copy of the price structure and sales tax / commercial invoice issued by the company . From which it is evident that the company allowed 'distribution margin' to the distributor on sale of their products. The A/R of the appellant relied on the reported judgment of Honorable Inland Revenue Appellate Tribunal duly reported as 2015 PTD (T rib) 1926 , wherein their Lordship have held that: " S. 113----Minimum Tax---Assessee, a distributor -- Issue requiring consideration and adjudication was as to whether commission/margin of profit was amenable to the minimum tax or turnover in the case of distributor --- Marginal profit/commission as "turnover" in case of a "distributor" was amenable to minimum tax under S. 113 of Income Tax Ordinance, 2001---Right of sale of goods by distributor was limited, restricted and controlled by the
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principal, which could not be treated as "normal business / sales--For the services rendered by the distributor , principal / manufacturer would allow him remuneration in the form of discount at a fixed percentage of the value of goods distributed--Ordinary trader , having purchased the goods had the right to sell to any person, at any rate and in any manner he could choose, but in the case of distribution, the price, the customer and the manner of sale were prescribed by the principal / manufacturer and the distributor had no choice in the matter--Ordinary trader in the case of rise and fall of the market, would make a profit or loss in respect of the stocks held by him, whereas in the distribution, the principal would increase the prices of its products the distributor was obliged, to distribute the product on the price fixed by the principal when the principal would reduce the prices, the distributor had to sell the goods on the reduced price and the principal would compensate him, so that he could get the stipulated remuneration -- Principal would not relinquish control over the goods till its disposal to the end consumer --No opening and closing stock had been declared by the taxpayer , even in his original return -- Action of Adjudicating Authority in treating the sales mentioned in the original return as turnover for the purpose of Section 113 of the Income Tax Ordinance, 2001 was unjustified and against the facts and circumstan ces of the case, for the reason that the taxpayer owned only margin profit / commission which could be treated turnover for the purpose of Section 113 of the Income Tax Ordinance, 2001 -While charging and confirming the issue of minimum tax, both the authorities below had not appreciated the true and correct facts of the case -- Margin of profit / commission as declared by the taxpayer in the revised return was amenable to minimum tax under Section 113 of Income Tax Ordinance, 2001, if exceeded the minimum threshold of charging turnover tax. The A/R of the appellant also invited my attention towards another decision of a case having same nature of the instant case duly reported as ((2015) 111 TAX 270 (T rib)) of Honorable Appellate T ribunal Inland Revenue, wherein their Lordship held that: "(13) It is an admitted fact that the taxpayer is a distributor of M/s. Unilever Pakistan (Pvt.) Limited and sells the products of the principal company under an agreement on fixed margin allowed by the said principal company in fixed / assigned territorial jurisdiction under the terms and condition laid down in the agreement. The taxpayer has rightly declared Margin of Profit / Receipts in the return. (14) It was contention of the learned Additional Commissioner Inland Revenue, while issuing the notice under subsection (9) of Section 122(9) of the Income Tax Ordinance, 2001, that the taxpayer himself declared sales in the returns of sales tax. It is an established fact that the provisions of Sales Tax Act, 1990 are different from the provision of Income Tax Ordinance, 2001 being two different laws covering the different aspect of the transactions connected with the business of the taxpayer . Admittedly , the sales declared by the taxpayer are covered under the 3rd Schedule of the Sales Tax Act, 1990, meaning thereby Sales Tax upto the retail price has been charged by the principal company no further sales tax makes sufficient that the taxpayer's sales are on behalf of its principal company being selling agent and its margin of profit / receipts are the turnover of the taxpayer/appellant. (15) Keeping in view the nature of business as well as declared version of the taxpayer in the previous years, the taxpayer , under the circumstances, is required to pay turnover tax on its margin of profit/receipts ids 113 under section applicable. The 'Turnover' is defin ed in subsection (3) of Section 113 of the Income Tax Ordinance, 2001 which read as under:- Section 1 13(1) (3) TURNOVER MEANS:- (a) the gross sales of Gross Receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final discharge of tax liability for which tax is already paid or payable; (16) Taking into consideration, the above definition of turnover which includes 'RECEIPTS' where applicable, liable to turnover tax if exceeds the required threshold limit. So I consider that deemed assessment framed under section 120 of the Income Tax Ordinance, 2001 is not prejudicial to the interest of revenue as the provisions of Section 113 of the Income Tax Ordinance, 2001 are not attracted in the present case. It is clear from the definition of turnover , the receipts are not subjected to Turnover Tax being distributor of the Principal Company . In support thereto the learned authorized representative relied upon two decision of the Honorable Lahore High Court Reference No. I.T.A. 71/999 in the case of C.I.T. v. M/s. Mehniood and Company and Tax Reference No.22/2007 dated
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02.04.2008 in the case of M/s. Abul Wafa and Sons wherein Honorable High Court decided the matter in favour of the taxpayer ." Keeping in view the above facts and case laws referred by the A/R of the appellant which apply in all four corners in the instant case, the minimum tax charged on the basis of turnover declared in the Sales Tax Return is not legally sustainable being declared under two different laws covering the different aspects of the transactions connected with the business. However , the orders passed for all the impugned years by the Additional Commissioner under section 122(5A) of the Income T ax Ordinance, 2001 are hereby annulled." The instant Departmental appeals are filed against this order . 3. The cases were fixed for hearing on 27.02.2020 and in response to the notices, Mr. Rizwan Ali Memon, Departmental Representative appeared for the appellant while Mr. Aleem Khan, Advocate appeared for the respondent. Both the learned representatives were heard. 4. The learned Departmental Representative submitted that the respondent in the present appeals was the distributor of the Tapal Tea (Pvt.) Ltd. The respondent had shown his sales in the Income Tax returns at the amounts that were less than the amounts shown in the Sales Tax returns on accou nt of which the impugned action was initiated. The respondent had taken the plea during the proceedings that he was a distributor earning commission income and should be subjec ted to minimum tax under section 113 of the Income Tax Ordinance, 2001 on the basis of the commission and not on sales. During the proceedings, it was discovered that tax was being deducted under section 236G of the Ordinance on the sales made by the respondent, which showed that the respondent was making sales and was not receiving commission. Referring to the dealership agreement between the respondent and the Tapal Tea (Pvt.) Ltd., he submitted that the stipulations of the agreement also suggested that the respondent was making sales and not receiving commission. 5. The learned Authorised Representative of the respondent, referring to Page No. 6 of the order of the learned Commissioner (Appeals), submitted that the respondent was dealing in the tea, which item did not figure in section 236G of the Ordinance and hence any reference to that section was incorrect. The respondent showed the sales and purchases at an identical figure in his Sales Tax returns. The invoice issued in his line of business was known as a "commercial invoice" and was different from the regular invoice. The respondent was not authorised to fix the sales price of the products on his own, but this was done by the principal Company . Similarly he was not authorised to fix the distribution margin on his own. The respondent made his payments at the time he received the same from the ultimate buyers. Referring to the last two clauses on Page No. 1 of the dealership agreement, he submitted that the product did not belong to him, but to his principal. He referred to the Clause No.4 on page No.2 of the agreement, Clauses Nos. 6 and 8 on page No. 3, Clauses 9, 10, 12, 15, 16, 21, 23 and 24 of the agreement as well as to the addendum to the agreement to bring home his point that the respondent was only an agent receiving his commission from the principal. He relied upon the decisions of this Tribunal in ITA No. 4469/LB/2002 dated 06.05.2006, ITA No.2381/LB/2003, 2003 PTD (Trib) 869, 2009 PTD (Trib) 1004 , 2015 PTD (Trib) 1926 and (2015) 111 Tax 270 (T rib) in support of his contention. 6. The learned Departmental Representative in his counter rebuttal submitted that the clauses referred to by the learned Authorised Representative did not prove that there was a principal and agent relationship between the respondent and the Tapal Tea (Pvt.) Ltd. He referred to the Clauses Nos. 1 to 7 as well as to Clauses Nos. 17 and 18 of the agreement and iterated that the goods were purchased by the respondent along with the payment and with a corresponding transfer of the title. 7. I have given due consideration to the arguments of both the learned representat ives and have gone through the orders of both the officers below as well as through the documents submitted before this Bench and the case law relied upon by the learned representatives. The controversy that needs to be resolved involves two questions. A question that has to be resolved on the legal plane is whether the entire sales receipts are taken as the turnover for the purpose of charge of tax under section 113 of the Income Tax Ordinance, 2001 or only the amount of commission received by the distributor has to be taken. However on the factual plane, the question that has to be answered is whether under the facts and circumstances of the present case, the taxpayer was acting as an agent for the principal Company or was himself involved in the buying and selling of the product. This latter question
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would seek answers to certain legal questions involving the concept of agency and the sale of goods as well. It would be in the fitness of the things that these questions should be answered separately and for this purpose, I shall take up the matter on the legal plane first. 8. On the legal plane, the learned counse l of the taxpayer placed his reliance upon the decisions of this Tribunal in ITA No. 4469/LB/2002 dated 06.05.2006, ITA No. 2381 /LB/2003, 2003 PTD (Trib) 869, 2009 PTD (Trib.) 1004, 2015 PTD (Trib.) 1926 and (2015) 111 Tax 270 (Trib.) to bfing home his point that the minimum tax was only chargeable on the commission received by the taxpayer and not upon the entire value of sales, which were allegedly made on behalf of the principal Company . Since the cases relied upon by the learned counsel relate both to section 80D of the repealed Income Tax Ordinance, 1979 as well as to section 113 of the Income Tax Ordinance, 2001; it would be in the fitness of the things to go through both the statutory provisions. Section 80D was inserted vide Finance Act, 1991 and for the purposes of assessment of income and determination of tax thereon, it took effect from the assessment year commencing on or after the first day of July , 1991. The section read as under:- "80D. Minimum tax on income of certain companies.--(1) Notwithstanding anything contained in this Ordinance or any other law for the time being in force, where no tax is payable by a Company resident in Pakistan or the tax payable is less than one-half per cent of the amount representing its turnover from all sources, the aggregate of the declared turnover shall be deemed to be the income of the said Company and tax thereon shall be charged in the manner specified in subsection (2). (2) The Company referred to in subsection (2) shall pay as income tax-- (a) an amount, where no tax is payable, equal to one-half per cent of the said turnover; and (b) an amount, where tax payable is less than one-half per cent of the said turnover , equal to the difference between the tax payable and the amount calculated in accordance with clause (a). Explanation.-- For the removal of doubt it is declared that "turnover" means the gross receipts, exclusive of trade discount shown on invoices or bills, derived from sale of goods or from rendering , giving or supplying services or benefits or from execution of contracts." The term "turnover" was defined in the explanation to subsection (2) of the section and as can be discerned from the above reproduction, it only made reference to the "gross receipts" and the word "commission" was not specifically mentioned in the provision. The controversy as to what constituted "turnover" in the case of a distributor arose before a Division Bench of this Tribunal for the assessment years 1993-94 and 1994-95 in the case reported as 2003 PTD (Trib.) 869, which has been cited by the learned counsel of the taxpayer in the instant appeals. In this case, the honourable Division Bench decided the issue as under:- "The result of the above discussion, therefore, is obvious. In the present case assessee is a distributor of "items, which pertains to its principal". The rates of the items are fixed by the principal Company and the assessee does not have any role to play in it. He does not make payments on purchase of the items as he is not a buyer and that he is not selling it to a third party on his own behalf. Any problem with regard to the weight, quality at the times of sale is to be solved by principal Company , i.e. Ittehad Chemicals. The role of this assessee is of a mediator whom we technically call as distributor . Moreover , the assessee relationship with the Company i.e. of principal, and agent is subject to whims of the Company . This dealership can be terminated at any stage as per terms of the contract, which also explains the actual role of the assessee, under discussion. His receipt or turnover is his commission and as such he cannot be put to charge under section 80D on the amount paid by the Buyer to the Ittehad Chemicals. The amount of commission declared by him stands further certified by the principal. On this under section 80D the requirement of law is that if the assessee tax otherwise falls less than 1/2% of this amount, he is liable to pay the balance. In this case, therefore, if the amount paid by the assessee falls short of his commission, he shall make good the deficiency . If otherwise tax paid by him is already in excess of 1/2% of his commission amount he shall not be asked to pay the balance. The result is obvious. The order of the IAC to cancel the assessment by invocation of 66A is not justified, hence cancelled. The assessee appeal is allowed." Similar principle was held by this Tribunal in the order in ITA No. 4469/LB/2002 and in ITA No. 4470/LB/2002 dated 06.05.2004 for the assessment years 1998-99 and 1999-2000.
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9. The provision related to the minimum tax on the declared turnover was inserted in the Income Tax Ordinance, 2001 as section 113 of this statute. The word "turnover" was defined more clearly under subsection (3) of this section as under:- "(3) In this section, "turnover" means - (a) the gross receipts, exclusive of any trade discounts shown on invoices or bills, derived from the sale of goods; (b) the gross fees for the rendering of services, including commissions; (c) the gross receipts from the execution of contracts; and (d) the Company's share of the amounts stated above of any association of persons of which the Company is a member ." As can be seen from clause (b) of this subsection, this provision specifically included the "commission" in the definition of the "turnover" in the cases where the same was received. The plain statutory language is therefore, clear in this regard if the amount received is "commission" in substance in case of a business. This principle is upheld as under in the decision of this Tribunal reported as 2015 PTD (Trib) 1926 , cited by the learned counsel of the taxpayer:- "16. So long as the issue whether the minimum tax under section 113 of the Income Tax Ordinance, 2001 is chargeable on sales / turnover or margin profit / commission is concerned. We are of the view that this issue as already been settled by the superior courts that in the cases of "Distributor" the marginal profit / commission is "turnover" and amenable to minimum tax under section 113 of the Income Tax Ordinance, 2001 instead of sales. We have noted that in the case of Distributor the right of sale of goods is limited, restricted and controlled by the principal companies, which cannot be treated as normal business / sales. For the services rendered by the distributor , the principal / manufacturer allows him remuneration in the form of discount at a fixed percentage of the value of goods distributed. In the matter of sales, an ordinary trader , having purchased the goods, has the right to sell it to any person, at any price and in any manner he may chose but in the case of distribution, the price, the customer and the manner of sale is prescribed by the manufacturer/principal and the distributor has no choice in the matter . In the case of rise and fall of the market, an ordinary trader makes a profit or loss in respect of the stocks held by him whereas, in distribution the manufacturer/principal increases the prices of its products, the distributor is obligated to distribute the product on the price fixed by the principal and where the principal / manufacturer reduces the prices, the distributor has to sell the goods on the reduced prices and the principal / manufacturer compensate him so that he gets the stipulated remuneration. The most important aspect of the entire arrangement is that the principal/manufacturer does not relinquish control over the goods till its disposal to the end consumer . In the present case we have also noted that no opening and closing stock has been declared by the appellant even in his…
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