Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: C.I.R., ZONE-I, LTU, KARACHI VS Respondent: Messrs KARACHI PORT TRUST, KARACHI
Court Name: Appellate Tribunal Inland Revenue Judge(s): Abdul Nasir Butt, Abdul Qayyoom Sheikh Title: C.I.R., ZONE-I, LTU, KARACHI vs Messrs KARACHI PORT TRUST, KARACHI Case No.: F.E.A. No,14/KB of 2011 Date of Judgment:2014-02-07 Reported As: 2014 PTD (Trib.) 1428 Result: Order accordingly
Judgment ORDER The captioned Federal Excise appeal has been filed by the department against order dated 26-5- 2011, passed by learned CIR (Appeals-II), Karachi in Appeal No,87 of 2011. The department has agitated following grounds:-- (i) That the order of learned Commissioner Inland Revenue (Appeals-II), Karachi is bad in law and contrary to the facts of the case. (ii) That the learned Commissioner Inland Revenue (Appeals-II) was not justified in annulling the order on the grounds that the OIR has failed to make out a case to convert Royalty in to Franchise Fee despite the fact that the payments made were rightly classified as Franchise payment, by the OIR in the light of definition of Franchise as provided in section 2(12a) of the Federal Excise Act, 2005 read with rule 43A of the Federal Excise Rules, 2005. (iii)That the learned Commissioner Inland Revenue (Appeals-II) was not justified in annulling the order on the basis of case-laws which relate to the chargeability of income tax on income under Income Tax Ordinance, 2001, as the F.E.D. is not levied on income but on goods and services as mentioned in the first schedule to the Federal Excise Act, 2005. (iv)It is therefore, prayed that the order of learned CIR (A) may be vacated and that of Officer Inland Revenue Unit-12 may be restored. (v)That the appellant craves permission to add, amend, alter, modify, etc any ground of appeal at the time of hearing or before the hearing. 2. Brief facts of the case are that the respondent/taxpayer is a company under the Income Tax Ordinance, 2001, and a person under the Federal Excise Act, 2005. The respondent/taxpayer (henceforth to be referred to as subject company) is deriving income from provision of sea port
---
## Page 2
facilities and allied services. The subject company was considered liable to pay FED and for its failure to pay FED on the amount received by it as royalty from KICT LTD and PICT LTD (TOCs = Terminal Operating Companies), was proceeded against on the basis of certain issues/objections raised by the department vide show-cause notice/letter No,OIR-10/E&CDIV/KPT/2010/510, dated 21- 5-2010. The department took stand that as shown in the agreements between KPT and TOCs; KPT was receiving payments from TOCs in the name of 'royalty.; and in the light of definition of franchise in section 2(12a) of the FE Act, 2005, read with Rule 43A of Federal Excise Rules, 2005; the subject company (KPT) was required to pay FED on royalty amount received from KICT and PICT. The subject company in response to referred show-cause notice, gave appearance through its AR and after seeking some adjournments filed reply through Ld. AR vide letter No, HY&CO/2010/ 183 dated 25-6-2010. The subject company in its reply contended that the TOCs namely KICT and PICT were conducting their business on BOT basis (Build, Operate and Transfer basis), so they cannot be called as Franchisees of KPT for various reasons with reference to their respective trade agreements with KPT. The reply given by the company was found unsatisfactory by the department and there upon for further clarification, the company was served with another notice vide letter No, TO-10/ E&CD-IV/2009-10/34 dated 10-8-2010, wherein it was explained to the subject company (KPT) that by virtue of Clause (c) of subsection (5) of section 3 of Federal Excise Act, 2005 r/w Clause-IV of Federal Excise General Order No, 5/2006 C N.1/1-STB/2006 dated 5th August, 2006; the franchisor, in the light of definition under Section 2(12a) of FE Act, 2005 is duty bound to pay FED on the royalty received in lieu of the services provided through franchisees. The matter was subsequently transferred to Audit Division-1, RTO-III, Karachi as viewed to fall within their jurisdiction on account of involving the question of determination of duty. The transferee office of Audit Division-1, RTO-III Karachi, before determining the, liability of duty under section 14(2) of FE Act, 2005, issued a notice to the subject company vide letter/notice No, DCIR Unit-2/Audit Div-1/RTO-III/ 16A/182 dated 31-1-2011, for appearance and hearing on 7-2-2011. The subject company vide notice dated 31-1-2011, was requested to furnish month wise details of royalty received from KICT and PICT during May, 2007 to December, 2010, for the purpose of correct ascertainment of FED, default surcharge under section 8 and penalty under section 19 of FE Act, 2005. However, no one attended the hearing on 7-2-2011, on behalf of subject company. To afford opportunity of being heard to the company, yet another notice was issued for hearing on 15-2-2011, vide notice/letter No, DCIR Unit- 2/Audit Div-1/RTO-III/16A/192 dated 8-2-2011. In response to this notice, the subject company through Ld. AR filed comments vide letter dated 9-2-2011, contending therein that the jurisdiction lies with enforcement division and not with audit division. On 15-2-2011, Mr. Arshad Malik of Haji Yusuf Rehmatullah and Co. the AR in this case, appeared and submitted a letter of authority in his favour to conduct the case on behalf of subject company. Ld. AR during the hearing, did not submit the required information or documents and only objected on the assumption of jurisdiction by audit division. Accordingly, the order in original bearing No, 34/7 dated 15-2-2011, was passed by DCIR Audit Unit-12, Audit Div-1, RTO-III, Karachi, whereby he held the KPT liable to pay FED and determined the amount of FED outstanding against the subject company amounting to Rs,160,378,781 as a total demand for the period; May and June 2007 @ 5% of the amount received as royalty, 2008 @ 5% of the amount received as royalty, 2009 @ 10% of the amount received as royalty and January to March 2010 @ 10% of the amount received as royalty. Taxpayer/subject company feeling dissatisfied with the order of Ld. DCIR, preferred appeal before learned CIR(A-II), Karachi, who vide impugned Order No,87 of 2011 dated 26-5-2011, allowed the appeal of the taxpayer/subject company and by annulling the order of Ld. DCIR, absolved the subject company of chargeability of FED determined by Ld. DCIR. Thus the department being dissatisfied with the impugned order of Ld. CIR(A-II), Karachi, as filed present appeal before this Tribunal on the above stated grounds.
---
## Page 3
3. While arguing, Ld. DR fully supported the order-in-original passed by Ld. DCIR on legal and factual grounds. Ld. DR conversely contended that the impugned order passed by Ld. CIR(A) is much against the law and facts. The impugned order does not contain any finding on the main point which is actually and apparently involved in this case. Ld. DR argued that the impugned order is based upon irrelevant observations of Ld. CIR(A) and misunderstanding of grounds. The correct approach of the department in the present case has not been appreciated and even slightly touched in throughout the impugned order. According to Ld. DR, the main question involved in the case is to determine, as to whether or not the amounts received by KPT as royalty for the services/facilities/rights provided and performed under the contract between KPT and TOCs fall within the purview of the definition of franchise services under section 2(12a) and thus chargeable as mentioned in Table II of First Schedule to the Federal Excise Act, 2005? Ld. DR contended that there is no exemption under the Federal Excise Act, 2005, to the government agencies which are engaged in the activity of providing excisable services. Ld. DR further contended that the subject company has been continuously changing its stance by terming the payments received by KPT under contract with TOCs as royalty, rent and handling charges, etc. etc without any substantial evidence in proof. Ld. DR argued that these confusing tactics of other side prove the departmental view as correct. The subject company (KPT) is not providing any handling services in relation to these payments. The handling services are being provided by the TOCs if any, for which they receive payments from their clients. These TOCs under the name of royalty are transmitting a share from these payments to KPT at no expenses of KPT. Therefore, in the hands of KPT, these charges are royalty/franchise fee in lieu of granting rights to TOCs for doing activity on behalf of KPT for using the berths, provisions and port facilities to provide services of loading and unloading containers to and from the ships. It has been further argued by Ld. DR that non-mention of the word 'franchise' in the contracts/agreements between KPT and TOCs only for the reason of inclusion of word royalty in these agreements/ contracts, does not impose a bar upon the department from classifying these agreements as being equivalent to Franchise agreement for the purpose of Federal Excise Act, 2005. Ld. DR contended that a contract should be construed in the light of its whole contents and not merely for certain terms inserted therein by ignoring the rules of usage and abusage. Ld. DR contended that for the purpose of determining the liability of any person under Federal Excise Act, 2005, the definition of franchise provided in the very Act is substantive and appropriate and its conventional or dictionary meaning is not applicable. Ld. DR quoted a reference of AIR 1928 Lah 325 from the volume of Sales Tax Act, 1990, 55th edition by Tariq Najeeb Choudhry, wherein it is shown to have held as under:-- - "Where word or phrase is defined in an enactment to have a particular meaning that meaning alone should be given to it notwithstanding it may bear different meanings in ordinary legal practice." (AIR 1928 Lah 325). Ld. DR contended that in the light of definition under section 2(12a) of FE Act, 2005, it is evident that respondent/subject company has given/assigned the rights to TOCs to engage, in the business activity of providing services related to port facilities on the assigned berths of terminal and in lieu thereof the respondent/subject company has been receiving a fee from the licensees/authorized TOCs which has been referred to as 'royalty' in the business agreements between KPT and TOCs, therefore, in all the fours of law and facts, the subject company is liable to pay FED on amount received by it from TOCs as royalty. Ld. DR prayed for annulling the impugned order passed by Ld. CIR(A) and for upholding the order in original passed by Ld. DCIR. 4. Ld. AR in turn has argued that the impugned order passed by Ld. CIR(A) is just, proper and based upon correct appreciation of law and facts. Ld. AR contended that the order in original passed by Ld. DCIR is without jurisdiction and the action of the department is time barred. The Audit Division lacked jurisdiction as the case falls within the jurisdiction, powers and domain of Enforcement
---
## Page 4
'Division. The OIR/DCIR failed to consider the reply and the contentions raised on behalf of the subject company in three detailed letters submitted by AR. The procedure laid down in Federal Excise Act, 2005 has not been followed by Ld. OIR/ DCIR. The provisions of law have been wrongly interpreted and misapplied. The notices issued were time barred. The relation between KPT and TOCs has been misconstrued as that of Franchisor and Franchisees which otherwise is exactly similar to that of a land lord and tenant. The payments received by KPT as 'royalty' cannot be equated with franchise fee and 'royalty' is not subject to FED. Ld. Ak contended that the taxpayer had never filed returns and as a non-filer its case falls under the jurisdiction of Enforcement Division and not under the Audit Division. The notice under section 46 of FE ACT, 2005, which is required to he issued, has not been issued in this case. The Information allegedly gathered through audit, has not been confronted to the taxpayer. The reply to letters filed by taxpayer in compliance of notice under section 14(1) of FE Act, 2005 was not given as required under section 14(2) ibid. The letters are not mentioned in the original order. The agreements relied upon by the taxpayer have been executed between Karachi Port Trust (subject company) and PICT and KICT {TOCs (Terminal Operating Companies)}. The PICT is stated to have built a container terminal at Karachi Port on the berths Nos, 6 to 9 at East Wharf on BOT basis and likewise other TOC namely KICT has built container terminal at Karachi Port on the berths Nos, 22, 23, 24 and 24-A at West Wharf on BOT basis. These TOCs have built the Container Terminals solely with their own money and investment and have executed an agreement with KPT to operate these terminals for 20 year's period and then to transfer its operational responsibilities/rights to KPT. Ld. AR has contended that the referred TOCs are doing business on the basis of a BOT agreement and as such cannot be called as Franchisees of KPT. These TOCs earn by charging money on the loading and unloading of containers to and from the ships standing or arrived at the terminals of Karachi Port. Ld. AR contended that the TOCs namely KICT and PICT as per their respective agreements with KPT dated 1-6-1996 and 18-6-1996, will pay 25% of their container handling income as a royalty being share of KPT on the space used by TOCs by using cranes to load and unload containers from berths to ships and from ships to berths in case the quantity handled by them is in excess of 400,000 TEUs and 450,0Q0 TEUs per annum in any calendar year. Therefore, in any case, it cannot be termed as franchise fee. The remainder of the total income is carried over by these TOCs in lieu of their investment and for adjustment of their capital invested. These TOCs as per agreement shall transfer/retain back all their movable and immovable assets along with terminals to KPT after expiry of the period stipulated in the referred agreements without any consideration i,e, for Rupee one only. Ld. AR has contended that in the relationship of a Franchiser and Franchisee, no Franchisee transfer its assets in favour of the Franchiser without consideration at the point of completion of any Franchise Agreement. Ld. AR contended that OIR/DCIR in the order in original has treated KPT as local Franchiser with reference to FED clause No,4 of General Order No,5/2006 dated 5-8-2006, which reads as under:-- "In case, where the Franchiser and Franchisee are both locally based, the liability to deposit the Franchise fee or royalty shall be upon the Franchiser." Ld. AR on this point has contended that KICT is not a local company but it is a USA based company having its head office at Manila, Philippines. Ld. AR has contended that the income termed as royalty earned by KPT is in fact akin to the income earned through `Rent' and is therefore, subject to normal income tax if KPT is not treated exempted as a trust with charitable income. In all circumstances this kind of income cannot be subjected to FED. Ld. AR further contended that Ld. DCIR in his order-in-original has treated 'royalty agreement' as 'franchise agreement' without giving any reason therefor, to hold the assessee as 'franchisor'. As per Ld. AR this approach of Ld. DCIR is contrary to the decision of Hon'ble Supreme Court of Pakistan reported as 2010 SCM R 1778. Ld. AR in this context also referred to and relied upon the provisions
---
## Page 5
contained under section 24-A of General Clauses Act, 1897, which require every public functionary and judicial officer to decide cases after application of mind. Ld. AR went on to contend that the given definition of term "Franchise" has been inserted in the FE Act, 2005 through Finance Act, 2008, and as such the FED cannot be applied to any franchise for the Financial Year 2007. The subject BOT agreement cannot be changed into a franchise agreement. Ld. AR on this point relied upon the judgment of Hon'ble Supreme Court of Pakistan pronounced in the case of Siemens AG and reported as 1991 PTD 488. 5. In our view, above account of facts and contentions of the parties depict a wholesome picture of controversial points involved in present matter. Parties to the appeal, while conducting this case, have proceeded with their respective standpoints in a multidimensional manner. The appellant side / department, has assailed the legality of the impugned order passed by Ld. CIR (A-II), Karachi, on legal and factual grounds and as such we are required to examine the legality of impugned order on the legal as well as factual grounds. Besides, in view of the line of arguments followed by the parties in this case, we are also laden with another responsibility, requiring us thereby to weigh the legal objections raised by Ld. AR against the order in original passed by Ld. OIR/DCIR. Although, we may not be legally bound in stricto sensu, to address these contentions but owing to their legal and juridical posture, we feel ourselves under obligation to find the answers to such contentions as well, in order to do complete justice and also for a matter of propriety. 6. In order to meet the ends of justice, we are required to find the answers to all natural, logical and corollary questions arising in this case. In our humble opinion, following points for determination can be framed: (i)Whether the impugned order passed by Ld. CIR(A) is just and proper in facts and law? (ii)Whether KPT is liable to pay FED on the royalty payments received by it from TOCs? (iii)Whether the order in original passed by Ld. OIR/DCIR as a whole is proper and enforceable according to law? (iv)What should be the order in present appeal? 7. In order to examine the legality of impugned order and for finding answer to first point for determination framed by us, we would be required to address the grounds raised in this appeal. Accordingly, we tackle the grounds of appeal hereunder. 8. Taking in hand the grounds of appeal to decide the issues raised therein; we in the first instance, prefer to deal with the grounds Nos,1 and 3 jointly and simultaneously. The ground No, 2, is deferred for the time being and will be dealt with at later stage. 9. The appellant's contention in the grounds Nos, 1 and 3, is that the order of learned Commissioner Inland Revenue (Appeals-II), Karachi is bad in law and contrary to the facts of the case and Ld. CIR(A) was not justified to annul the decision of OIR on the basis of case-laws which relate to the chargeability of income tax on income under Income Tax Ordinance, 2001, as the F.E.D. is not levied on income but on goods and services as mentioned in the first schedule to the Federal Excise Act, 2005. 10. Perusal of impugned order shows that Ld. CIR(A) has allowed the appeal by annulling the order in original on the basis of following observations:-- "it is a cardinal principle that the tax department cannot change nature of the contract intended by the parties under the pretext that the rule of interpretation of a fiscal law in this behalf is different" - CIT, Peshawar Zone .v. Siemens A.G. [PLD 1991 SC 368 = 1991 PTD 488 Supreme Court of Pakistan in CIT, Peshawar Zone v. Siemens A.G. reported as 1991 PTD 488 relying on Injunction of Holy Quran contained amongst other in Chapter Maida Verse (1) and Chapter Al-Isra'a Verse (34) to the effect that the contracting parties are bound to fulfill their contracts. And they would remain liable for any contraventions-obviously both here and hereafter. The Hon. Court also held "when two contracting parties agree to do something by mutual valid contract or intend to do so and it
---
## Page 6
was not prohibited by Islam, a third party, like the Income Tax Department or for that matter the court had no powers to modify either the contract or interfere with what they intend to do with it." Ld. CIR(A) has also observed that OIR has been failed to make out a case to treat and consider royalty into franchise fee. Royalty is not liable to FED. The payment as per contract is royalty and OIR has no power to rewrite a contract entered between two responsible contracting parties. Ld. CIR(A) has concluded the impugned order as under:-- "I also respectfully follow the ratio of decision of Hon. Supreme Court of Pakistan, CIT, Peshawar Zone v. Siemens A.G. PLD 1991 SC 368 = 1991 PTD 488 and hold that the payments as per clear terms of the contract are ROYALTY and OIR has no power to re-write a contract entered between two responsible contracting parties. I also hold that on facts and circumstances of the case, the OIR has failed to make out a case to convert Royalty into franchise fee. Based on the above, I hold that the Officer Inland Revenue on facts and circumstances of the case and in law was not justified in taxing royalty as franchise fee and subjecting it to Federal Excise Duty. Therefore, the treatment meted out by the Officer Inland Revenue cannot be maintained and is hereby directed to accept the receipts as royalty and tax accordingly. The appeal of the appellant succeeds." 11. We are of the humble view that in order to determine the correctness and justifiability of impugned order, we still have a need to find out the answers to following corollary questions:-- (a)Whether the act and finding of OIR/DCIR amounts to change or to rewrite the terms and conditions of the contract? (b)Whether the act and finding of OIR/DCIR amounts to make an interpretation of the contract which is purely a judicial work and beyond his powers and domain being an administrative or executory authority? (c)Whether the act and finding of OIR/DCIR is in conflict with or in contravention of the above mentioned judgment of Hon'ble Supreme Court? (d)Whether the above mentioned judgment of Hon'ble Supreme Court is applicable to the present case in circumstances of law and facts? 12. In the machinery of government, an administrative department is an governmental body empowered with the authority to direct and supervise the implementation of particular laws; rules and regulations. The taxation authorities in their administrative and executory capacity are empowered to manage all the affairs related to tax collection in respect of all the taxes imposed under law, thereby taking all required steps in the manner and as provided, authorized or sanctioned by law. In the discharge of their duty and function, at times the officials/department may be thrown in a vocabulary entangle that might have come with the dark arts of tax evasion. It is not very unusual that the tax avoidance becomes one of the main objects or purposes of the parties to a contract of commercial nature. In order to avoid tax the parties try to depict the distorted picture of a transaction as to enable them for tax advantages to be obtained. This object is usually achieved by abusage of words and bending the rules and by manipulating the system in order to get desired outcome. Tax authorities in such a situation cannot be supposed to be totally ab agendo to let such situation to persist without taking any step in order to coup with and overcome the situation. Clearly one has a duty to do something about this absurd and unjust situation created due to the use of arcane terminology with obscure purpose or intent. Solution to this problem, if not clearly provided by law, is naturally found ab intra by traversing through record of the case itself or by precedents. This power is always considered admin per se in every authority. Ld. OIR/DCIR in the present case has taken the contents of the contract between KPT and TOCs, exactly in their same, original and natural form as they stand in the very contract. Ld. OIR/DCIR has simply decided that the amount received by KPT from TOCs under the name of Royalty as shown in the contract, is subject to FED in view of the provisions of Section 2(12a) of FE Act, 2005, read with
---
## Page 7
Rule 43A of FE Rules, 2005. Ld. OIR/DCIR has neither changed any word of the contract nor has he rewritten any of the terms and conditions of the contract. Therefore, our answer to the question (a) above is in negative. 13. Proceeding further to find out the answer to question (b) above, we deem it pertinent to clarify that the taxation authorities in all their tiers are administrative and executory authorities having no judicial or legislative power. Therefore, the judicial power of judicial interpretation, judicial adjudication and power to pronounce judicial verdicts is not vested in the taxation authorities. As far as the present matter is concerned, we can safely hold that the act of OIR/DCIR does neither amount to the interpretation of the contract between KPT and TOCs nor any of its words and terms. Ld. OIR/DCIR has applied the law as it stands. To understand clearly as to what is meant by a 'contract' and the words 'interpretation…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.