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Petitioner: A.H. SYED AND COMPANY (PVT.) LTD., JHANG VS Respondent: C.I.R., R.T.O., FAISALABAD
2017 P T D (Trib.) 2234 [Inland Revenue Appellate Tribunal] Before Ch. Shahid Iqbal Dhilllon, Judicial Member and Raana Ahmed, Accountant Member Messrs A.H. SYED AND COMPANY (PVT.) LTD., JHANG Versus C.I.R., R.T.O., FAISALABAD I.T.As. Nos. 2359/LB and 2360/KB of 2016, decided on 13th February, 2017. (a) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 113-A & 233---Tax on income of certain persons---Criteria, to determine whether a person was an "agent", a "broker" a "distributor" a "dealer" or a "wholesaler", tabulated.
Agent
Broker
Distributor
Dealer
Wholesaler
acts as a representative or buys or sells on behalf of the principal, under express (oral or written) or implied authority delegated by the principal, controlled by/ obligated to the principal, so as to bring the principal into contractual relationships with
acts as an intermediary or negotiator, between prospective buyers and sellers or between other persons in matters of trade, commerce, or navigation, not generally liable personally on the contract
manufactures and/or purchases goods (non-competing products or product lines) or property from a manufacturer, warehouses them, and resells them, on manufacturer's account/behalf as an agent, to retailers and/or end users
manufactures and/or purchases goods or property from a manufacturer and/or distributor for his own account/behalf as a principal, and resells them to retailers and/or end users
purchases large quantities of goods or property from a manufac-turer and / or distributor for his own account/ behalf as a principal, and resells them in smaller quantities to retailers or other merchants, who in turn sell to end users/ ulti-mate consumers
third parties, thereby acquiring legal obligations and rights and binding the principal with his acts
does not have ownership of or title to goods or property he deals in
does not have ownership of or title to goods or property he deals in
does not have ownership of or title to goods or property he deals in
may or may not have ownership of or title to goods or property he deals in
has ownership of or title to goods or property he deals in
does not have dominion over and/or possession of goods or property he deals in
does not have dominion over and/or possession of goods or property he deals in
has dominion over and possession of goods or property he deals in
has dominion over and possession of goods or property he deals in
has dominion over and possession of goods or property he deals in
recognizes commission from the principal as revenue in his final accounts
recognizes brokerage from the client as revenue in his final accounts
recognizes commission from the manufacturer as revenue in his final accounts
recognizes sales as revenue in his final accounts
recognizes sales as revenue in his final accounts
(b) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 113 & 233---Payment on account of brokerage or commission under International Accounting Standards though a distributor was obliged to recognize only the amount of commission as revenue in his final accounts; however, as per local commercial practices, only a small number of distributors were recognizing the amount of commission received from their principles as revenue in his final accounts, while a huge number of distributors were recognizing the value of sales made on behalf of their principal as revenue in their final accounts---Legislature, fully cognizant of said two local commercial practices, had covered both, in the former situation, such commission was subject to withholding of tax under S.233 of the Income Tax Ordinance, 2001 and accordingly liable to tax at 10% under final tax regime and not liable to minimum tax under S.113 of the Income Tax Ordinance, 2001; as commission was not covered by the definition of "turnover" given under S.113 of the Income Tax Ordinance, 2001 and the latter situation, such sales were liable to minimum tax as under S.113 of the Income Tax Ordinance, 2001---In the present case the taxpayer, having himself chosen to recognize sales made on behalf of his principal as revenue in his final accounts, such sales were liable to minimum tax at 0.2% under S.113 of the Income Tax Ordinance, 2001---Order accordingly. Case-law referred. Shahabaz Butt, A.R. for Appellant. Kashif Azhar, D.R. for Respondent. Date of hearing: 18th January, 2017. ORDER RAANA AHMED, (ACCOUNTANT MEMBER).---Brief facts of the case are that the taxpayer, a private limited company, is a distributor of Pakistan Tobacco Company. Returns of income were filed for the tax years 2014 and 2015 which constituted deemed assessment orders under section 120(1) of the Income Tax Ordinance, 2001. Subsequently, assessment record was examined and deemed assessments were found erroneous insofar as these were prejudicial to the interest of revenue as the taxpayer instead of declaring his sales (as was declared in his Sales Tax Returns and Final Accounts) had only declared commission of PKR 36,715,785 in his Income Tax Return and paid minimum tax under section 113 on the said commission instead of the said sales. Show-cause notices under section 122(9) dated 26.02.2016 were issued. In response, the taxpayer filed his written reply which was found unsatisfactory and assessment orders were amended under section 122(5A) as under:--
Tax Year 2014
Tax Year 2015
Turnover as per sales tax returns
1507,755,715
1836,673,136
Turnover tax @ 0.2%
1,815,231
3,673,346
Addition under section 111(1)(b)
3,792,000
2. Being aggrieved, the taxpayer filed appeals before the learned CIR(A) vide order under section 129 dated 18.07.2016 rejected the same. Hence, the instant appeals of the taxpayer before the ATIR, on the following grounds:-- 1) That the orders of both the authorities below are bad in law and against the facts of the case. 2) That the assessment amended under section 122(5A) as upheld by the learned CIR(A) is unjustified and without any lawful authority. 3) That the learned Addl. CIR and the learned CIR(A) were not justified to treat the taxpayer as a trader instead of a commission agent, for charging of tax under section 113 of the Income Tax Ordinance, 2001. 4) That both the authorities below have failed to rebut recent judgment of the Hon'ble Appellate Inland Revenue (ATIR) in case of another distributor Messrs Allied Marketing (Pvt.) Limited, recorded as I.T.A. No.1293/LB/2011 to I.T.A. No.1296/LB/2011 and I.T.A. No.1578/LB/2011 dated 24th February, 2012. 5) That both the authorities below have miserably misunderstood the provisions of section 113 of the Ordinance and have wrongly treated the turnover of the parent company as turnover of the appellant distributor. 6) That both the authorities below have completely misread audited accounts of the appellant company and while passing the impugned order have failed to understand the notes to the account of the company which clearly depict the relationship between the parent company and the appellant distributor. 7) That both the authorities below on the basis of audited accounts have erred in holding that the appellant is engaged in the business of sale and purchase of goods. 8) That both the authorities below have misunderstood the factors for holding that the appellant is engaged in the business of sale and purchase of goods 9) That both the authorizes below have, while holding relationship subsisting between the parties, also completely lost sight of the agreement inter se the appellant distributor and the principal company. 10) That the learned Addl. CIR has wrongly relied on 2014 PTD 1064 and 2013 PTD 6413. 11) That the learned Addl. CIR was not justified to charge minimum tax on the gross turnover of the principal company instead of charging minimum tax on distribution margin which accrued to the appellate by virtue of the relationship subsisting between the parties. 12) That both the authorities below have completely ignored that taxing the sale through charge of minimum tax in the hands of appellant shall tantamount to double taxation which is not permissible under the law. The amount of turnover declared in the accounts was just in order to reflect correct position of the accounts and there is no denial on the part of the learned Addl. CIR that sales declared in the accounts belong to the principal company and not the appellant. 13) That the learned Addl. CIR was not justified in making an addition of Rs.37,92,000/- in the hands of appellant in terms of section 111(1)(b) of the Ordinance and the learned CIR (A ) has unlawfully and without reason upheld the same. 14) That both the authorities below were not justified in treating the explanation tendered by the appellant as not being plausible. 15) That both the authorities below have shied away from the documents and evidences produced before him during the amendment proceedings and the amendment has been made in haste ignoring the factual and legal position. 16) That learned CIR (A) has lost sight of the fact that the impugned order was hit by the mischief of section 124A(1) of the Income Tax Ordinance, 2001 as the question of subject matter of charge of minimum tax i.e. distributor margin stands settled in the case of the appellant. 17) That both the authorities below have completely lost sight of the order passed by the Appellate Tribunal Inland Revenue (AT(R) in I.T.A. No.4901/LB/2004 and I.T.A. No.2581/LB/2005 wherein the Hon'ble ATIR has categorically held in case of the appellant that minimum tax is chargeable on the gross commission earned from distribution of goods. 18) That the appellant reserves the right to add, modify or amend any grounds of appeal at the time of hearing in appeal subject to permission by this Hon'ble forum. 3. Both the parties have been heard. While the learned AR elaborated his grounds of appeal, the learned DR defended the order of the learned CIR(A). Relevant record was also perused. 4. The appellant's primary contention contained in grounds of Appeal No. 3 through 12 and debated during hearing is that he, being a distributor of a manufacturer who charges fixed margin on sales done on behalf of the manufacturer, is a commission agent and, as such, is liable to pay minimum tax on his commission which is his turnover @ 1% under section 113. The learned CIR (A) rejected the contention of the appellant that he was a commission agent on the ground that he himself had declared sales in the Audited Final Accounts. Before deciding this issue, it is pertinent to define meaning of certain business relationships between parties, which are relevant to the instant case, such as Agent, Broker, Dealer, and Distributor. As per legal and commercial dictionaries and case laws, these terms are defined as under:-- Agent "Generally speaking, anyone can be an agent who is in fact capable of performing the functions involved. The agent normally buying not himself but his principal by the contracts he makes; it is therefore, not essential that he be legally capable to contract (although his duties and liability to his principal might be effected by his status). " Floyd R Mechem, Outlines of the Law of Agency 8-9 (Philip Mechem ed., 4th ed. 1952). "The word agent denotes one who acts, a doer, force or power that accomplishes things." Harold Gill Reuschlein & William A. Geregory, The Law of Agency and Partnership 1, at 2-3 (2d ed. 1990). (Black's Law Dictionary Page 205) "Party that has express (oral or written) or implied authority to act for another (the principal) so as to bring the principal into contractual relationships with other parties. An agent is under the control (is obligated to) the principal, and (when acting within the scope of authority delegated by the principal) binds the principal with his or her acts. Additional powers are assigned to agent under the legal concept of 'apparent authority.' The agent, however, does not have title to the principal's goods in his or her possession, except where agent's lien is applicable." (http://www.businessdictionary.corn/definition/agent.html)
"A person employed to do any act for another or so represent the other in dealings with third person. The person for whom such act is done, or who is so represented, is called the "principal". An agent is a person who is authorized to contract legal obligations and acquire legal rights (for generally to enter into relations involving rights and duties) on behalf of another person from whom his authority is derived." (Tagore Law Lectures) Broker "An agent who acts as an intermediary or negotiator, esp. between prospective buyers and sellers; between other persons in matters of trade, commerce, or navigation. A broker differs from the factor because the broker usually does not have possession of the property." Cf. FACTOR [Case; brokers 2. C.J.S. Brokers 2-5.] (Black's Law Dictionary Page 205) Mercantile agent for the sale and purchase of goods, etc. (of which he is not given possession or control), remunerated by a commission on the price of goods sold but not generally liable personally on the contract." (Readers Digest, Great Encyclopedic Dictionary 1970 Ed., Vol. III, p. 1158) "Means an agent, but used generally in a more special sense for one who buys and sells on behalf of another. He must act according to the instructions given to him and as a general rule his task is finished when he has made the contract between the buyer and the seller.... Brokers are remunerated by commission known as brocage or brokerage." (Harms) Distributor "A wholesaler, jobber, or other manufacturer or supplier that sells chiefly to retailers and commercial users." (Black's Law Dictionary Page 509) "An entity that buys non-competing products or product lines, warehouses them, and resells them to retailers or direct to the end users or customers. Most distributors provide strong manpower and cash support to the supplier or manufacturer's promotional efforts. They usually also provide a range of services (such as product information, estimates, technical support, after-sales services, credit) to their customers." (http://www.businessdictionarycom/definition/distributor.html)
"Any individual, partnership, corporation, association, or other legal relationship which stands between the manufacturer and the retail seller in purchases, consignments, or contracts for sales of consumer goods." (Aaron E. Levine & Co., Inc. v. Calkraft Paper Co., D.C. Mich., 429 F.Supp. 1039, 1046) "A person who distributes goods of the manufacturer to the consumers and in so doing, he acts for and on behalf of the manufacturer. A distributor normally is, therefore, an agent of the manufacturer for the purpose of reaching out the goods to the consumers. The transaction between the distributor and the manufacturer in such a case in not a transaction of sale as a principal, to a principal, but the distributor is in effect an agent who acts for and on behalf of the manufacturer. Such a distributor who acts for and on behalf of the manufacturer probably earns something which is generally recognized in the commercial world as commission is not a buyer of goods from the manufacturer on his own account. Such a distributor does not himself pay price for the goods purchased before the goods are passed on to the consumers. However, in the case of a buyer who purchases goods in payment of a commercial price to the manufacturer and the transaction is in effect a sale, such a buyer is different from the kind of distributor earlier noticed even through such a buyer is sometimes described as a distributor. The distributor in such a case is in fact a whole sale buyer and the property in the goods passes to such a buyer. It is wholly immaterial whether the price is paid in cash or the goods are supplied on credit." (Tax LR 2869 p.2875 (Bom.)) Dealer "A person who purchases goods or property for sale to others; a retailer. A person or firm that buys and sells securities for its own account as a principal, and then sells to a customer." (Black's Law Dictionary Page 427) "Individual or firm that buys goods from a producer or distributor for wholesale and/or retail reselling. Unlike a distributor, a dealer is a principal and not an agent." (http://www.businessdictionary.corn/definition/dealer.html)
"A Commission Agent who sells or buys on behalf of the principal is not a "dealer" and is not liable to taxation in respect of the purchases and sales effected by him on behalf of the principal at his instance and that such transactions do not constitute his turnover." (AIR 1950 Mad. 521) "A person acting as broker and recovering only his brokerage in a transaction of sale, is not a dealer as defined in Sec. 2(c ) of the C.P. and Berar Sales Tax Act (1947)." "In (1950) 1 S.T.C. 245, commission agent who sells or supplies on behalf of a principal is not a dealer within the meaning of Sec. 2(b) of the Madras General Sales Tax Act, 1939." (1952 N.L.J. 285 p.285) "A commission Agent who has dominion over and possession of the goods in which he deals, comes within the definition of "dealer" contained in Sec. 2(c) of the C.P. and Berar Sales Tax Act." (1952 NLJ 285) "A salesman or a servant of the owner of a business can be a "dealer" within the meaning of the definition in Cl. 3(b) of the Cotton Cloth and Yarn (Control) Order, 1943. There is no warrant for holding that the definition of "dealer" necessarily excludes a salesman or servant of the owner or proprietor of the business or involves or imports the idea of ownership or proprietorship as a necessary ingredient of the expression "dealer"." (AIR 1948 Pat. 266) "An auctioneer of goods is a dealer within the meaning of Sec. 2(c)(i) of the Bengal Sales Tax Act. He has dominion over and possession of the goods. It is the stroke of his manner that completes the sales and transfers property or ownership in the goods to the bidder who purchases goods. He is the person who is actually engaged in the business of the selling the goods. It is immaterial whether the auctioneer is the owner of the goods or not." (55 CWN 583) "The word "dealer" in the Provincial Government's order relating to oilcakes means not only a person who buys and sells but also includes one who manufactures and sells." (AIR 1948 Nag. 413) "The word "dealer" in the C.P. and Berar Oilcake (Control) Order includes a person who manufactures and sells, and is not confined to a person who merely buys and sells as is generally understood." (3DLR (Nag.) 13) Wholesaler "One who buys large quantities of goods and resells them in smaller quantities to retailers or other merchants, who in turn sells to the ultimate consumer." (Black's Law Dictionary Page 1628) One who "sells the whole or a large part of his articles or goods or produce direct at a fixed price to his customers who will be mostly retail dealers." (AIR 1930 Born. 597) It is also appropriate here to determine time and scope of revenue recognition in the above business relationships. As per International Accounting Standards, principles of revenue recognition are as under:-- "18. Revenue Scope 1 This Standard shall be applied in accounting for revenue arising from the following transactions and events: (a) the sale of goods; (b) the rendering of services; and (c) the use by others of entity assets yielding interest, royalties and dividends. ...... Definitions 7 The following terms are used in this Standard with the meanings specified: Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. 8 Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission. (emphasis provided)..... Sale of goods 14 Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied: (a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the entity; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably. 15 The assessment of when an entity has transferred the significant risks and rewards of ownership to the buyer requires an examination of the circumstances of the transaction. In most cases, the transfer of the risks and rewards of ownership coincides with the transfer of the legal title or the passing of possession to the buyer. This is the case for most retail sales. In other cases, the transfer of risks and rewards of ownership occurs at a different time from the transfer of legal title or the passing of possession. 16 If the entity retains significant risks of ownership, the transaction is not a sale and revenue is not recognized. An entity may retain a significant risk of ownership in a number of ways. Examples of situations in which the entity may retain the significant risks and rewards of ownership are: (a) when the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions; (b) when the receipt of the revenue from a particular sale is contingent on the derivation of revenue by the buyer from its sale of the goods; (c) when the goods are shipped subject to installation and the installation is a significant part of the contract which has not yet been completed by the entity; and (d) when the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return. 17 If an entity retains only an insignificant risk of ownership, the transaction is a sale and revenue is recognized. For example, a seller may retain the legal title to the goods solely to protect the collectability of the amount due. In such a case, if the entity has transferred the significant risks and rewards of ownership, the transaction is a sale and revenue is recognized. Another example of an entity retaining only an insignificant risk of ownership may be a retail sale when a refund is offered if the customer is not satisfied. Revenue in such cases is recognized at the time of sale provided the seller can reliably estimate future returns and recognizes a liability for returns based on previous experience and other relevant factors. 18 Revenue is recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity. In some cases, this may not be probable until the consideration is received or until an uncertainty is removed. For example, it may be uncertain that a foreign governmental authority will grant permission to remit the consideration from a sale in a foreign country. When the permission is granted, the uncertainty is removed and revenue is recognized. However, when an uncertainty arises about the collectability of an amount already included in revenue, the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognized as an expense, rather than as an adjustment of the amount of revenue originally recognized. 5. On the basis of the above, the criteria, to determine whether a person is an agent or a broker or a distributor or a dealer or a wholesaler and to recognize revenue by each, is as under:--
Agent
Broker
Distributor
Dealer
Wholesaler
acts as a representative or buys or sells on behalf of the principal, under express (oral or written) or implied authority delegated by the principal, controlled by/ obligated to the principal, so as to bring the principal into contractual rela-tionships with third parties, thereby acquiring legal obligations and rights and binding the principal with his acts
acts as an intermediary or negotiator, between prospective buyers and sellers or between other persons in matters of trade, commerce, or navigation, not generally liable personally on the contract
manufactures and/or purchases goods (non-competing products or product lines)…
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