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Official Citation: 2024 PTD 818
Court / Jurisdiction: Peshawar High Court
Year of Decision: 2022
Decision Date: 2022-12-31
Parties: M/s Shah Steel Industry and others vs Federation of Pakistan throueh JUDGMENT
Ruling Summary: This decision was rendered by the Peshawar High Court on 2022-12-31, officially reported as 2024 PTD 818. In this matter between M/s Shah Steel Industry and others and Federation of Pakistan throueh JUDGMENT, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2024 PTD 818
Court Name: Peshawar High Court Judge(s): Abdul Shakoor, Syed Arshad Ali Title:M/s Shah Steel Industry and others vs Federation of Pakistan throueh
JUDGMENT
Reported As: 2023 PHC 342, 2024 PTD 818 Result: Petition Allowed Judgment JUDGMENT Sved Arshad Ali, J.The petitioners have established their industrial units at erstwhile FATA and claim that they are exempt from the payment of income tax under the Income Tax Ordinance, 2001 ("Ordinance") and further tax/extra tax under Section 3 of the Sale Tax Act, 1990 ("Act"). As common issue is involved in all the petitions, therefore, the same are disposed of through this single judgment. Particulars of said petitions are provided in Annexure 'A' to this judgment. 2. The respondent Revenue contests the claim of the petitioners on various legal grounds, i.e. that after 25th amendment in the Constitution of Islamic Republic of Pakistan, 1973 ("Constitution") through Act No. XXXVII of 2018 dated 24.05.2018 all the Federal Laws stood extended to the territories of erstwhile FATA, hence, the claim of exemption of the petitioners from payment of income tax and sales tax is misconceived. 3. Arguments heard and record perused. 4. The fact that the manufacturing units of the petitioners are situated at erstwhile FATA has not been disputed by the Respondent/Revenue. However, since the impost of Income Tax and Sales Tax on the taxable activities of the persons located at the erstwhile FATA/PATA has since long remained a controversy between the Revenue and the business community located in the said areas, before this Court as well as the apex Court, therefore, we deem it appropriate to refer to the outcome/crux of the said dispute as determined by the august Supreme Court of Pakistan. 5. Prior to the promulgation of 18th amendment in the Constitution through Act No. XXV of 2018 dated 25.05.2018, the income of the persons, who were settled/located within the territory of the erstwhile FATA were enjoying immunity from payment of Income Tax provided they were
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generating their income from their business located within the territory of erstwhile FATA. However, any portion of their income, if it was being derived by them through any business activity beyond the limits of erstwhile FATA then the same was subject to the payment of taxes. The aforesaid legal position is by now settled in view of the law laid down by the august Supreme Court of Pakistan in "Pakistan through Chairman FBR and others Vs. Hazrat Hussain and others"[2018 SCMR 939], "Commissioner Income Tax, Peshawar vs. M/S Gul Cooking Oil and Vegetable Ghee (Pvt.) Ltd." [2008 PTD 169] as well as the judgment of this Court in "Messrs Tai Packages Company (Pvt.) Ltd. Through Manager Vs. The Government of Pakistan through Federal Secretary Finance and Revenue Division and 6 others" [2016 PTD 203]. 5. The aforesaid immunity was available to the persons/corporate entities located within the erstwhile area of FATA, as in view of the legal barrier of Article 247 of the Constitution, the provisions of the Ordinance and the Act were not applicable to the said territories. 6. Upon the promulgation of 25th amendment in the Constitution, this legal barrier in form of Article 247 was removed and, thus, the provisions of the Ordinance and the Act stood extended to the business activities at erstwhile FATA, as such, their income was subject to impost of the income tax under the Ordinance and sales tax under the Act. 7. First, we will address the issue of liability of the petitioners to pay income tax and legal authority of the respondent to demand the same from the petitioners through the electricity bills. The Ordinance provides both; the provisions of charging as well as the mechanism for collection of income tax whereas the word 'income' is defined in Section 2(29) of the Ordinance which reads as under: "(29) "income" includes any amount chargeable to tax under this Ordinance, any amount subject to collection or deduction of tax under section 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A, sub- section (5) of section 234 and any amount treated as income under any provision of this Ordinance and any loss of income." Chapter II of the Ordinance deals with the charging provisions whereas Part I of Chapter III explains taxable income, total income and heads of income. Chapter X of the Ordinance envisages for procedure of filing of return/assessm ents, adjudication of claims as well as recovery of the income tax dues. The mechanism for deduction and collection of advance tax is provided in Part V of Chapter X of the Ordinance and Chapter XII. The Division IV of the said Chapter relates to the grant of exemption from total income tax or issuance of lower rate certificate. 8. Section 53 of the Ordinance empowers the Federal Government not only to grant exemption to any person or class of persons from the payment of income tax but can also grant exemption/partial exemption to any person or class of person from the application of the Ordinance. For convenience, section 53 is reproduced as under: 53. Exemptions and tax concessions in the Second Schedule. (1) The income or classes of income, or persons or classes of persons specified in the Second Schedule shall be (a) exempt from tax under this Ordinance, subject to any conditions and to the extent specified therein; (b) subject to tax under this Ordinance at such rates, which are less than the rates specified in the First Schedule, as are specified therein; (c) allowed a reduction in tax liability under this Ordinance, subject to any conditions and to the extent specified therein; or (d) exempted from the operation of any provision of this Ordinance, subject to any conditions and to the extent specified therein. 9. Prior to the promulgation of 25th amendment in the Constitution, the Federal Government had assured the business community of the erstwhile FATA/PATA for a tax holidays for a period of five
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years. Thus the Federal Government in order to provide exemption to the individuals/corporate entities domiciled/situated at erstwhile FATA from the payment of income Tax, clauses No. 144 & 145 were inserted in the Second Schedule to the Ordinance through S.R.O No. 887(1)/2018 dated 23.07.2018 thereby granting them exemption from tax on profit and gain. Similarly, Clause No. 106 was inserted in Part-IV of the Second Schedule to the Ordinance whereby the provisions of Sections in Division III of Part-V of Chapter X and Chapter XII were made inapplicable to certain areas forming part of the erstwhile FATA. The aforesaid S.R.O was substituted with S.R.O No. 1213(I)/2018 dated 05.10.2018 whereby Clauses No. 144 & 145 inserted through S.R.O No. 887(I)/2018 were omitted and a new Clause No. 146 was inserted in Part-I of the Second Schedule whereas in Part-IV of the said Schedule the earlier inserted Clause No. 106 was omitted and new Clause No. 110 was inserted. For ready reference the newly inserted clauses are reproduced as under. "(146) Any income which was not chargeable to tax prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) any individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2013 (both days inclusive" "(110) The provisions of sections in Division III of Part V of Chapter X and Chapter XII of the Ordinance for deduction or collection of withholding tax which were not applicable prior to commencement of the Constitution (Twenty-fifth Amendment Act, 208 (XXXVII of 2018 shall not apply to individual domiciled or company and association of person resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from the ft day of June, 2018 to the 30th day of June, 2023 (both days inclusive). 10. The effect of newly inserted Clause No. 146 is that the income of the individuals and companies etc. domiciled in the erstwhile FATA were held completely immune from impost of Income Tax. Similarly, the effect of Clause No. 110 in Part-IV of the second Schedule is that the provisions of Sections in Division III of Part-V of Chapter-X and Chapter-XII of the Ordinance for deduction or collection of withholding tax are not applicable to the individuals domiciled or the person or association of persons located in the erstwhile tribal area forming part of the province of Khyber Pakhtunkhwa and Balochistan under Para (d) of Article 246 of the Constitution. However, the aforesaid immunity/exemption is available to the aforesaid persons for five years from 1st day of June, 2018 to 30th day of June, 2023. 11. Pursuant to SRO No. 1213(1)/2018 dated 05.10.2018 two more clauses i.e. clause 109(A) vide Finance Act, 2019 & clause-110 vide SRO 1213 were added to Part-IV of the Second Schedule of the Ordinance, which reads as under:- 109-A. The provisions of Sections in Division-III of part-V of Chapter X and Chapter XII of this Ordinance for deduction or collection of withholding which were not applicable prior to commencement of the Constitution (Twenty-Fifth Amendment) Act, 2018 (XXXVII of 2018) shall not apply to individual domiciled or company and association of persons resident in the Tribal Areas forming part of the province of Khyber Pakhtunkhwa and Baluchistan under paragraph (d) of Article 246 of the Constitution with effect from the 1s' day of June, 2018 to the 30th day of June, 2023 (both days inclusive. 110. The provisions of Sections in Division III of Part V of Chapter X and Chapter XII of the Ordinance for deduction of collection of withholding tax which were not applicable prior to commencement of the Constitution (Twenty-Fifth Amendment) Act, 2018 (XXXVII of 2018) shall not apply to individual domiciled or company and association of person resident in the Tribal Areas forming part of the provinces of Khyber Pakhtunkhwa and Baluchistan under paragraph (d) of Article 246
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of the Constitution with effect from the 1st day of June, 2018 to the 30th day of June, 2023 (both days inclusive). 12. Section 235 of the Ordinance deals with the impost of advance income tax on the consumption of electricity, which reads as under:- "235. Electricity consumption -- (1) There shall be collected advance tax at the rates specified in Part-IV of the First Schedule on the amount of electricity bill of a commercial or industrial consumer. (2) The person preparing electricity consumption bill shall charge advance tax under sub-section (1) in the manner electricity consumption charges are charged. Explanation. - For removal of doubt, it is clarified that for the purposes of this section electricity consumption bill referred to in subsection (2) means electricity bill inclusive of sales tax and all incidental charges. (3) Advance tax under this section shall not be collected from a person who produces a certificate from the Commissioner that his income during tax year is exempt from tax. (4) Under this section, (a) in the case of a taxpayer other than a company, tax collected up to bill amount of 3 (three hundred and sixty thousand Rupees per annum) shall be treated as minimum tax on the income of such persons and no refund shall be allowed; (b) In the case of a taxpayer other than a company, tax collected on monthly bill over and above thirty thousand rupees per month shall be adjustable; and (c) in the case of a company, tax collected shall be adjustable against tax liability; " Section 235, falls in Chapter XII of the Ordinance and applications of all provision in Chapter XII has been specifically excluded to the individuals and the corporate entities situated within territorial limits of erstwhile tribal area, in view of insertion of clause 110 in part IV of the second schedule through S.R.O No. 1213(I) 2018 dated 5.10.2018. 13. From the aforesaid legal discussion, the admitted position is that the income/profit and gains of the individuals/domiciled and the corporate entities located within the territorial limits of erstwhile FATA, which they derive from the taxable activities being carried at the said territory is exempt from the impost of income tax under the Ordinance and the demand of the Revenue for advanced income tax under section 235 of the Ordinance is un-founded. 14. Moving on to the crucial issue for determination, which is subject matter of these cases, is the assertions of the Revenue that in order to avail the said immunity/exemption, the petitioners are required to approach the Commissioner Inland Revenue u/s 159 of the Ordinance. For ready reference Section 159 of the Ordinance is reproduced as under. 159. Exemption or lower rate certificate. (1) Where the Commissioner is satisfied that an amount to which Division II or III of this Part 2 [or Chapter XII] applies is (a) exempt from tax under this Ordinance; or (b) subject to tax at a rate lower than that specified in the First Schedule 3; or (c) is subject to hundred percent tax credit under section 100C the Commissioner shall, upon application in writing by the person, issue the person with an exemption or lower rate certificate. 4(1A) The Commissioner shall, upon application from a person whose income is not likely to be chargeable to tax under this Ordinance, issue exemption certificate for the profit on debt referred to in clause (c) of sub-section (1) of section 151. (2) A person required to collect advance tax under Division II of this Part or deduct tax from a payment under Division III of this Part or deduct or collect tax under Chapter XII shall collect or deduct the full amount of tax specified in Division II or III or Chapter XII, as the case may be, unless there is in force a certificate issued under sub-section (1)
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relating to the collection or deduction of such tax, in which case the person shall comply with the certificate. (6) Notwithstanding omission of sub-sections (3), (4) and (5), any notification issued under the said sub-sections and for the time being in force, shall continue to remain in force, unless rescinded by the Board through notification in the official Gazette. The very opening paragraph of Section 159 envisages that this provision is applicable to that amount to which Divisions II or III of Part-II or Chapter-XII applies. Thus, the income/amount to which Division II or III of Chapter X or XII does not apply, then in that case, the provision of Section 159 envisaging for exemption certificate or lower certificate would not be applicable. In the present cases, since, through SRO referred to above, the provisions in chapter XII of the Ordinance are not applicable to the area of erstwhile FATA, therefore, a person located in erstwhile FATA who exclusive carries his business at the erstwhile FATA is not required to obtain exemption certificate from the Revenue under Section 159 of the Ordinance. 15. Moving on further to the claim of petitioners relating to their liability to pay extra tax and further tax which is reflected in their monthly bills. Sale tax is charged under Section 3 of the Act. However, as stated above, there has been a long standing dispute between the resident of the erstwhile tribal area as well as the revenue department regarding the liability of the consumers/residents of the erstwhile FATA relating to payment of sales tax. However, on promulgation of 25th amendment in the Constitution, the Federal Government through S.R.O No. 1212 dated 05.10.2018 while exercising its power under Section 13 (2)(A) has exempt the supplies made by the persons located in the erstwhile tribal area from impost of sale tax which reads as under: WHEREAS prior to commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018), the sales Tax Act, 1990, was not in force in the Tribal Areas as defined in Article 246 of the Constitution of the Islamic Republic of Pakistan, hereinafter called as the Constitution, and the levy of sales tax was not attracted to the supply transactions made in the said Tribal Areas; AND WHEREAS Article 247 of the Constitution stood omitted on commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) with effect from the 31st day of May, 2018 and the Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Ares (PATA) stood merged in the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution; AND WHEREAS on commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018), the Sales Tax Act, 1990 is in force in the said provinces including the erstwhile Tribal Areas forming part thereof AND WHEREAS a phased approach was needed for the full application of fiscal laws to the said erstwhile Tribal Areas, a decision was made to exempt all those supplies and transactions from levy of federal taxes which were not applicable to the said areas by virtue of said Article 247 and accordingly three sales tax Notifications No. S.R.O. 888(1)/2018, No. S.R.O.889(1)/2018 and No. S.R.O. 890(I)/2018, all dates the 23rd July, 2018, were issued by the Federal Government granting exemption from sales tax to the supplies specified therein; AND WHEREAS concerns were raised by the trading community of the said erstwhile Tribal Areas to the effect that the three aforesaid Notifications did not restore the position as existed prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018); NOW, THEREFORE, in order to address the concerns so raised and to restore the position in relation to levy of sales tax to the said erstwhile Tribal Areas, the Federal Government, in exercise of the powers conferred by clause (a) of sub-Section (2) of Section 13 of the Sales Tax Act, 1990, is pleased to -- (a). ab-initio rescind its Notifications No. S.R.O. 888(I) /2018, No. S.R.O. 889(I)/2018 and No. S.R.O. 890(I)/2018, all dated the 23rd July, 2018; and
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(b). exempt from whole of sales tax, by whatever name called, as levied under the Sales tax Act, 1990, or notifications issued thereunder, on supplies made till the 30th June 2023, to which the provisions of the said Act of 1990 or the notifications issued thereunder, would have not been applied had Article 247 of the Constitution not been omitted under the Constitution [Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018). In this regard it is the assertion of the Revenue that the consumption of electricity by the petitioners is not the sole determining factor to conclude that further taxable activities have also been carried out in the exempted area. In other words, it is the objection of the Revenue that since the petitioners' manufacturing unit are involved in the manufacturing of products which might reach to the settled area, therefore, the petitioners cannot claim blanket exemption from the said levy. This was in fact a valid objection prior to the promulgation of 25t1 amendment in the Constitution because at the relevant time the persons who were domiciled in the erstwhile FATA, were enjoying immunity from the levy of sales tax as the Act was never extended to the erstwhile FATA, however, in the new dispensation, the exemption provided by the Federal Government is specific to a person who is the permanent resident of erstwhile FATA and generate his income from the business which is situated at erstwhile FATA or the taxable activities which he carries there. Thus, the said assertion of the learned counsel for the Revenue is misconceived. 16. Subsequent to the aforesaid S.R.O, the Parliament through Finance Act, 2019 has provided statutory protection to the said exemption by inserting clause 152 in the second schedule of the Act which reads as under:- "Supplies of electricity, as made from the day of assent to the Constitution (25th Amendment) Act, 2018, till .30th June, 2023, to all residential and commercial consumers in tribal areas, and to such industries in the tribal areas which were set and started their industrial production before 31st May, 2018, but excluding steel and ghee or cooking oil industries." 17. Therefore, there is no ambiguity in the intention of law maker that it has, in very specific words, exempted the supplies/consumption of electricity from levy of sales tax under the Act, inter-alia, to the industrial and commercial consumer except steel and ghee/cooking oil industries. 18. However, the present issue relates to the liability of the petitioners to pay extra tax and further taxes. In order to appreciate this contentious issue we would like to refer all the legal instruments relevant to the present controversy. The Sales Tax Act, 1990 3. Scope of tax.-- (1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of seventeen per cent of the value of-- (a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; and (b) goods imported into Pakistan, irrespective of their final destination in territories of Pakistan. (1A) Subject to the provision of sub section (6) of section 8 or any notification issued thereunder, where taxable supplies are made to a person who has not obtained registration number, there shall be charged, levied and paid a further tax at the rate of 6[three] percent of the value In addition to the rate specified in sub sections (1), (1B), (2), (5), 7[(6) and section 4] provided that the Federal Govt. may, by notification in the official Gazette, specify the taxable supplies in respect of which the further tax shall not be charged, levied and paid. (1B) On the goods specified in the Tenth Schedule, in lieu of levying and collecting tax under sub- section (1), the tax shall be levied and collected, in the mode and manner specified therein-- (a) on the production capacity of plants machinery, undertaking, establishments or installation producing or manufacturing such goods; or (b) on fixed basis, from any person who is in a position to collect such tax due to the nature of the business, and different rates may be so prescribed for different regions or areas.
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(2) Notwithstanding the provisions of sub-section (1): (a) taxable supplies and import of goods specified in the Third Schedule shall be charged to tax at the rate of seventeen per cent of the retail price or in case such supplies or imports are also specified in the Eighth Schedule, at the rates specified therein and the retail price thereof along with the amount of sales tax shall be legibly, prominently and indelibly printed or embossed by the manufacturer, or the importer, in case of imported goods, on each article, packet, container, package, cover or label, as the case may be; Provided that the Federal Government, may, by notification in the official Gazette, exclude any taxable supply 9[or import] from the said Schedule or include any taxable supply 10[or import] therein; (aa) goods specified in the Eighth schedule shall be charged to tax at such rates and subject to such conditions and limitations as specified therein; and (b) the Federal Government may, subject to such conditions and restrictions as it may impose, by notification in the official Gazette, declare that in respect of any taxable goods, the tax shall be charged, collected and paid in such manner and at such higher or lower rate or rates as may be specified in the said notification. (3) The liability to pay the tax shall be,- (a) in the case of supply of goods of the person making the supply, and (b) in the case of goods imported into Pakistan, of the person importing the goods. (3A) Notwithstanding anything contained in clause (a) of subsection (3), the Board, with the approval of the Federal Minister-incharge, may, by a notification in the official Gazette, specify the goods in respect of which the liability to pay tax shall be of the person receiving the supply Notwithstanding anything contained in sub section (1) and (3), sales tax on the import and supply of the goods specified in the Ninth Schedule to this Act shall be charged, collected and paid at the rates, in the manner, at the time, and subject to the procedure and conditions as specified therein or as may be prescribed, and the liability to charge, collect and pay the tax shall be on the persons specified therein. (4) ..... (5) The Federal Government may, in addition to the tax levied under sub-section (1) sub-section (2) and sub-section (4), levy and collect "tax at such extra rate or amount" not exceeding seventeen per cent of the value of such goods or class of goods and on such persons or class of persons, in such mode, manner and at time, and subject to such conditions and limitations as it may, by rules,…
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