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Official Citation: 2024 PTD 619
Court / Jurisdiction: Islamabad High Court
Year of Decision: 2023
Decision Date: 2023-12-31
Parties: Messrs Telenor Pakistan (Pvt.) Ltd. vs Appellate Tribunal Inland Revenue, JUDGMENT
Ruling Summary: This decision was rendered by the Islamabad High Court on 2023-12-31, officially reported as 2024 PTD 619. In this matter between Messrs Telenor Pakistan (Pvt.) Ltd. and Appellate Tribunal Inland Revenue, 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 619
Court Name: Islamabad High Court Judge(s): Mohsin Akhtar Kayani, Fiaz Ahmad Anjum Jandran Title:Messrs Telenor Pakistan (Pvt.) Ltd. vs Appellate Tribunal Inland Revenue,
JUDGMENT
Reported As: 2024 PTD 619 Result: References dismissed Judgment
JUDGMENT MOHSIN AKHTAR KAYANI, J. Through this single judgment, we intend to decide the captioned income tax references having similar questions of law and facts. 2. Brief and consolidated facts are that M/s. Telenor Pakistan (Pvt.) Ltd./applicant submitted its income tax returns for the years 2006, 2008, 2013, 2014 and 2015, which are treated as assessment orders of Commissioner Inland Revenue (CIR), Islamabad under Section 120 of the Income Tax Ordinance, 2001, against which show cause notices have been issued to the applicant alleging therein that the income declared by the applicant is erroneous. Likewise, when the applicant returned losses for the years 2006 and 2008, applicant's case was selected for audit under Section 177 of the Ordinance, which ultimately culminated into issuance of show-cause notice to the applicant. Pursuant to submission of reply by applicant to the show-cause notice. Additional Commissioner Inland Revenue, Islamabad amended the assessment of applicant by making certain additions on various grounds, as such, to the extent of losses returned by the applicant, issues relating to addition to fixed assets, activation tax, advertisement expenses and interconnect costs were decided against. The applicant being aggrieved thereby preferred an appeal before Commissioner Inland Revenue (Appeals), Islamabad, who vide orders-in-appeal, dated 25.07.2011 and 29.12.2016, dismissed the appeals of applicant. Consequently, the applicant tiled appeals before Appellate Tribunal Inland Revenue (ATIR), Islamabad, which were dismissed vide orders dated 05.06.2014, 28.11.2016 and 13.02.2018. Hence, the captioned income tax references.
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3. Learned counsel for applicant contended that learned ATIR has failed to appreciate the fact that ACIR being officer of Audit Department Inland Revenue has no jurisdiction to invoke subsection (5A) of Section 122 of the Income Tax Ordinance, 2001, therefore, exercise of jurisdiction by ACIR over the tax affairs of applicant is illegal and without lawful authority; that applicant Company while paying sales tax against free air time is entitled to claim the sales tax so paid as expenses, but the learned ATIRs has failed to appreciate this fact and disallowed the sales tax on free air time, as such, learned ATIR has erred in upholding the decision of the fora below whereby actuarial loss on defined benefit plans has been disallowed to the applicant; that softwares along with licences are embedded softwares and are in part and parcel of the equipment used by the applicant, as such, the same do not fall within the definition of intangible as defined in Section 34(11) of the Income Tax Ordinance, 2001; that. applicant is responsible for payment of activation tax in terms of SRO dated 18.06.2001 and same is liable to be considered as an expenditure, but the learned ATIR has failed to appreciate the language of said SRO while dismissing the appeal of applicant; that learned ATIR as well as the for a below refused to allow the applicant exchange loss on the ground that such loss was unrealized and failed to take into consideration that the applicant company maintains its account on accrual method basis as opposed to cash basis, even otherwise, ACIR has erred in not allowing entire adjustment of unabsorbed depreciation and amortization loss brought forward from prior years, which is legally admissible under the Income Tax Ordinance, 2001. 4. Conversely, learned counsel for respondents opposed the filing of captioned income tax references on the grounds that forums below have passed a speaking order after proper appreciation of the facts and circumstances of the case, as such, the applicant company has failed to bring on record any defect in the impugned orders, which are liable to be maintained: that all the questions raised by the applicants and even proposed in the instant references are factual in nature, except the question of jurisdiction which requires determination as the question relating to depreciation of fixed assets, marketing, costs, expenses on account of activation tax, expenses on account of sales tax on free air time and exchange loss are question of facts which concurrently been upheld by the lower forums, therefore this Court in reference jurisdiction is not permitted to enter into factual controversies which have already been settled, hence all these references are liable to be dismissed. 5. Arguments heard, record perused. 6. Perusal of record reveals that the applicant Company through the captioned references has brought several questions of law before this Court to be answered, as such, many of the questions framed in the captained reference are identical, therefore, for the purpose of brevity, the consolidated and common questions of law in the captioned references are reproduced as under: I. Whether the impugned order passed by the learned Respondent No.1 can be termed as a speaking order as while passing the same, the learned Respondent Nod has failed to address the jurisdictional objection raised by the Petitioner against Respondent No.3, who can exercise jurisdiction under section 122(5A) only if the case of a tax payer is selected for audit and not otherwise? II. Whether the learned Respondent No.1 has erred in hold in that the provisions of subsection (5A) of Section 122 of the Ordinance has been rightly invoked by the Respondent No.3, without considering the fact that tile pre-requisites to invoke the said subsection are missing in the instant case. III. Whether the learned Respondent No.1 was right in placing the reliance on Order in ITA No.752/IB/2011 dated 05.06.2014, to disallow to the expenses incurred by the Petitioner for customers acquisition, hence, an allowable expense under subsection (1) of Section 20 of the Ordinance?
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IV. Whether the learned Respondent No.1 is right to uphold the treatment of the fora below on account of advertisement publicity and royalty to PTA where under the said expenses are treated to be as of capital nature as opposed to the fact that such expenses are of recurring nature, hence allowable under the Ordinance? V. Whether the Appellate Tribunal is right in upholding the decision of the fora below whereby the exchange loss claimed by the Petitioner has been disallowed in violation of the judgment of the august Supreme Court of Pakistan rendered in the case of General Tyre and Rubber, reported as 1993 PTD 383? VI. Whether the learned Respondent No.1 was right to disallow the actuarial loss on defined benefit of plans, by placing reliance on an earlier decision of the Tribunal, without considering the fact that the said loss is a genuine business expenditure? VII. Whether the learned Respondent No.1 was right in disallowing sales tax on free air time on account that the Petitioner's company did not book any revenue against free air time while ignoring the fact that the Petitioner had paid sales tax on the same which qualifies for an expense under subsection (1) of Section 20 of the Ordinance? VIII. Whether the learned Respondent No.1 was right in disallowing deductions of Activation Tax on the plea that the same is a liability of the consumer and not that of the Petitioner without taking into consideration that only part of activation was borne by the Company and it meets all the tests of commercial expediency, the same is an expenditure incurred wholly and exclusively for the purpose of the business of the Petitioner in accordance with Section 20(1) of the Ordinance? IX. Whether the Respondent No.1 was right in holding that the Petitioner is a with agent as per SRO 390(I)/2001, the Petitioner is liable to pay activation tax? X. Whether the learned Respondent No.1 was right in holding softwares in the machinery as intangibles without taking into consideration that such soft wares are embedded softwares and are part and parcel of the equipment used by the petitioner Company and are not computer softwares as envisaged under Section 24 of the Ordinance? XI. Whether the leaned Respondent No.1 was right in treating marketing Cost as intangibles for the reason that benefit of the same would have the effect for a period longer than one year without taking into consideration/relying on any evidence to substantiate such findings more so, when marketing expenses are for a limited period and are not of permanent nature and consist of marketing cost on year to year basis and in line with the industry practice? XII. Whether the learned Respondent No.1 has erred in upholding the treatment of the fora below on account of Government grants, received from Universal Service Fund (USF) without considering the fact that subsidy from Federal Government is exempt under Clause (102A) of pars 1 of Second Schedule to the Ordinance? 7. During the course of arguments, Question XI i.e. relating to marketing expenses/cost has already been settled by the Alternate Dispute Resolution Committee constituted under section 134A of the Income Tax Ordinance, 2001 in case of M/s. Telenor Pakistan (Pvt.)Ltd. for tax year 2007/08, vide order dated 11.06.2018, therefore, said question stands disposed of in the light of said order being not pressed. Activation Tax 8. While dealing with the question relating to Activation Tax (Questions VIII and IX), it has been observed the same has already been decided by this Court, vide judgment dated 07.03.2019, passed in ITR No.234/2011, whereby the relevant extract of judgment is as under: 7. Vide SRO No.390(I)/2001 dated 18.06.2001 issued by Ministry of Finance, Government of Pakistan, there was a levy at the rate of Rs.500 per set for activation of the cellular phone. For ease of convenience, relevant notification is reproduced below:-
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GOVERNMENT OF PAKISTAN MINISTRY OF FINANCE, ECONOMIC AFFAIRS, STATISTICS AND REVENUE (REVENUE DIVISION) Islamabad, the 18th June, 2001 NOTIFICATION (CUSTOMS AND SALES TAX) SRO No.390(I)/2001.----In exercise of the powers conferred by Section 19 of the Customs Act, 1969 (IV of 1969), subsections (3A) and (6) of section 3, clause (b) of subsection (13) and section 8, clause (a) of subsection (2) of section 13 and section 71 of the Sales Tax Act, 1990, the Federal Government is pleased to exempt customs dun) leviable under the First Schedule to the Customs Act, 1969 (IV of 1969), and sales tax on the import or, as the case may be, on the supply of cellular telephone sets (hand-held sets) to the extent that the combined effect of both the levies shall be one thousand rupees per such set, hereinafter called the said amount, subject to the following conditions, namely: (i) No customs duty or sales tax shall be collected on such cellular telephone sets at the time of import or, as the case may be, at the time of supply, but the said amount will be charged, collected and paid by the cellular company operator at the time the sets are presented to the cellular company operator for activation or energization. (ii) Omitted; (iii) The cellular company operator shall, if not already registered, obtain registration under the Sales Tax Act, 1990; (iv) No cellular telephone set' shall be activated or energized by the cellular company operator without charging and collecting the said amount. (v) The said amount shall also be charged collected and paid on every new activation or energization done by the cellular company operator. (vi) The liability to charge; collect and pay the said amount shall be on the cellular company operator who shall deposit same through a monthly tax return in terms of Section 26 of the Sales Tax Act, 1990 and rules made thereunder; (vii) The cellular company operator shall, maintain proper records, whether in electronic form or otherwise of all the sets energized or activated after, payment of the aforesaid amount for a period of five years, and such records, shall be produced for inspection, audit or verification as and when required by all officer authorized by the Collector of sales tax and such officer shall not ask for proof of import of cellular telephone sets activated or energized; and (viii) No adjustment of input tax shall be admissible to the cellular company operator or the buyer against the amount chargeable and payable under this notification. Explanation.---For the purpose of this notification, a cellular telephone set (hand-held set) includes one battery and a battery, charger identifiable for use in connection with such mobile telephone set; provided that the amount payable under this notification shall not be effected on the ground that such battery or battery charger has not been presented or is not accompanied with such telephone set at the time of activation or energization. Explanation 2.---For the purpose of condition (v), the expression "new activation or energization means a new connection or number given by the cellular company operator but does not include a change in number given to a customer due -to change in package or his location in Pakistan. [C. No. 3(9)STLEP/2001] (Riaz Ahmad Khalid) Addition Secretary The bare perusal of the above notification shows that liability to charge, collect and pay the said amount teas on cellular company and the referred amount was to be deposited through a monthly tax return in terms of section 26 of the Sales Tax Act, 1990. Moreover, under clause (viii), no
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adjustment of input tax was admissible to the cellular company operator or the buyer against the amount chargeable or payable under said notification. The charge was an indirect tax and was to be recovered from the customer. In this behalf the burden was on the customer and the cellular company was only a collecting agent. 8. The fact, that respondent did not pass on the burden and paid that amount in Government treasury from its own funds, is not tenable, especially when the respondent has claimed the same as an "expense for commercial expediency. Undoubtedly, the market is competitive and cut-throat competition exists amongst the cellular companies but the same is no justification for not paying on liability to the customers, as the levy was across the board and hot on any individual company. 9. As noted above, activation tax/charges were to be received from the customer and were not the liability of the cellular company. 10. The fact, that cellular company did not pass on the burden, is its own doing and cannot turn around to claim it is an expense. In this view of the matter, we are of the opinion that assessing officer has rightly disregarded the expense claimed by the respondent company regarding payment of activation charges for the Tax year 2008. Hence, in the light of above referred judgment of this Court, the question relating to Activation Tax (Question VIII) his been answered as above. 9. While dealing with Question No. X i.e. relating to declaring the softwares in the machinery as intangibles despite the fact same are embedded softwares, we have gone through the concept of depreciation on fixed assets discussed by the assessing officer in order dated 30.05.2009, whereby fixed assets were number of software and licenses which have their use full life of more than one year were liable to be classified as intangible within the definition as term "intangible" in terms of Section 24(11) of the Income Tax Ordinance, 2001. The softwares and licenses were required to be amortized in terms of Sections 24(3) and 24(11) of the Ordinance by the company; as a result whereof, show-cause notice under Section 122(9) was issued, same was replied by the applicant company and it has been claimed by the applicant company that the software in question are not computer software as mentioned in definition of intangible in Section 24(11) of the Ordinance, but these are embedded softwares which are part and parcel of the equipments used by the company. Similarly. it has also been highlighted by the applicant company that the softwares arc depreciable items. While going through the record and arguments there is no cavil to proposition that different softwares are for specific purpose and tailor made supplied with equipments, however the supplier bifurcated the hardware and softwares parts of equipment and claimed separate prices for two components. We have gone through Section 24(11) of the Ordinance for intangibles which separately provides computer software's and licenses. The forums below have rightly observed every software's whether computer software's or system software's is developed to obtain determined results. The primary function of softwares remains essential the same wherever it is used for the purpose of receiving data and performing a sequence of function to produce certain result and as such, they fall within the definition of intangibles. Hence, the softwares and licenses are integral part of the equipment of the applicant company but at the same time softwares alone could not perform any function without the hardware equipment even the softwares could not be transmitted to the user permanently being its property, rather it has been controlled or managed by the vendor/supplier who upgrades the same with passage of time against charges/license fee from time to time, though the principal softwares is embedded part of the hardware. In view of above discussion, the entire issue relates to a factual controversy which has rightly been settled by the forums below and the question raised by the applicant taxpayer is not made out. The tax forums have rightly amortized the same while considering the pro and cons of each and every aspect by the arguments advanced by the applicant company before the lower
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forums as the equipments and softwares used therein are treated separately and distinctly by the Ordinance. 10. While considering the question relating to the disallowing sales tax on free air time i.e., Question No.VII, the learned counsel for applicant company contends that the sales tax paid on free air time is considered to be an expense as the applicant company in order to attract the customers offered free air time, resulting into increasing of their revenue falls within the concept of Section 20 of the Income Tax Ordinance, 2001 where deduction in computing income chargeable under the head of Income from Business for a tax year be allowed for any expenditure incurred by a person in the year wholly and exclusively for the purpose of business. Contrary to that the learned counsel for tax department referred the deductions which are not allowed in terms of Section 20(1) of the Ordinance and contends that in terms of Section 21(a) of the Ordinance, no deduction shall be allowed in computing the income of a person under the head of "Income from Business". While considering the arguments we are of the view that the applicant company adopted their own marketing strategy to increase the business or attract the customers provided free air time at their own end but such practice does not absolve them from payment of sales tax upon those free air time to the customers and when the sales tax has been paid, the same could not be allowed to be considered in terms of expenses under Section 20(1) of the Income Tax Ordinance, 2001 as the applicant company has not booked any revenue against the free air time, therefore, sales tax paid on free air time could not be made part of deductions. We have also gone through the record and it appears that the applicant was specifically directed to provide break up of sales tax paid against free air time but the applicant company remained unable to segregate the tax paid on account of free air time from consolidated figure of total sales tax paid by the applicant company and as such, the deduction are not allowed in terms of Section 21(a) of the Ordinance. Hence the decision passed by the lower tax forums is within four corners of law and no legal question is made out in this regard. 11. Similarly, Questions Nos. I and II require legal interpretation as the applicant company has raised objection of question of jurisdiction exercised by the tax officers under Section 122(5A) of the Income Tax Ordinance, 2001, and is regarding selection of audit and whether the officer who exercised the jurisdiction has considered the prerequisite to invoke the provision of subsection (5A) of Section 122 of the Ordinance in a proper manner. Learned counsel for applicant company contends that the respondent ACIR (Audit-II) LTU, Islamabad has failed to appreciate the fact that there exists no circumstances to invoke the provision of subsection (5A) of Section 122 of the Ordinance and as such, the said provision could only be invoked on material available on record at the time of assessm ent, whereby the ACIR has initiated a rowing inquiry in the affairs of applicant company hence the very assumption of jurisdiction suffers from illegality. In the light of arguments advanced by the applicant company we have gone through the law i.e. Section 122(5A) of the Ordinance, whereby the said provision deals with amendment of assessment in detail manner and provides different eventualities as to when and how the Commissioner may amend an assessment order treated as issued under Section 120 or under Section 121 of the Income Tax Ordinance, 2001, the minimum requirement of law is the satisfaction of the Commissioner who considers it necessary and may initiate an inquiry as he deems consider that the assessment order is erroneous in so far it is prejudicial to the interest of revenue, as such, the plain reading of this details provision only imposes a single restriction that no assessment shall be amended, or further amended, under this Section unless the taxpayer has been provided/with opportunity of being heard in terms of subsection (9) of Section 122 of the Income Tar Ordinance, 2001. 12. As per law, the Additional Commissioner was duty bound to amend the assessment order so as to bring the deemed order in harmony with law and as such, the only requirement to provide an opportunity of being heard has been extended before amending the order. The record reveals that
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the relevant information and data provided by the applicant taxpayer in the return has been scanned for correct arithmetical working of the tax demand, per se, this aspect does not put any clog upon the tax authorities to call for information as to whether the deemed order is within four corners of law or not. It has been observed by the forums below that the tax liability has not been assessed and calculated by the applicant company in accordance with provisions of law. In such eventuality, it is legal duty and obligation of the Additional Commissioner Audit to give effect to the provisions of law ill a strict manner and when he observed that the tax has not been calculated in a proper manner, he considered it to be erroneous on the part of applicant company, who is, avoiding the tax liability, resultantly the assessment order is considered to be prejudicial to the interest of revenue, where the jurisdiction in terms of section 122(5A) of the Ordinance has rightly been exercised even with the only condition of limitation to provide an opportunity to the applicant company of being heard in terms of Section 122(9) of the Ordinance as held in 2016 PTD 596 Islamabad (Pakistan Tobacco Company Ltd. v. Federation of Pakistan). Hence, no illegality has been observed in this regard, therefore, respondent No. 3 Additional Commissioner Audit-II has rightly invoked the provision of Section 122(5A) of the Ordinance. Exchange Loss 13. The applicant company with respect to exchange loss has brought the following question of law (Question V) to be answered by this Court. V. Whether the Appellate Tribunal is right in upholding the decision of the fora below whereby tile exchange loss claimed by the Petitioner has been disallowed in violation of the judgment of the august Supreme Court of Pakistan rendered in the case of General Tyre and Rubber, reported as 1933 PTD 383? 14. While dealing with the question of exchange loss raised by the applicant company in above referred question, we have hard the contention of learned counsel for applicant Company, who contends that exchange loss was unrealized by the tax forums and they have failed to take into consideration that the applicant Company maintains its account on accrual basis as opposed to cash basis. In accrual method, any expense incurred in ordinary course of business, though not paid, is an allowable expense. We have gone through the orders of the forums below and it has been observed that the exchange loss has been declared unrealized and same cannot be allowed as an expense. In order to resolve the controversy, we have gone through…
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