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Petitioner: Messrs CITIBANK NA VS Respondent: COMMISSIONER INLAND REVENUE and another
Court Name: Sindh High Court Judge(s): Ashraf Jehan, Munib Akhtar Title: Messrs CITIBANK NA vs COMMISSIONER INLAND REVENUE and another Case No.: Federal Excise Reference Application No,D-152 of 2012 Date of Judgment:2013-10-30 Reported As: PLJ 2014 Tax Cases (Kar.) 231, 2014 PTD 284 Result: Order accordingly
Judgment ORDER MUNIB AKHTAR, J.---This reference application arises under the Federal Excise Act, 2005 and impugns an order of the Appellate Tribunal dated 6-2-2012. The challenge is to a part of the impugned order, and the issues involved relate to the levy of excise duty on services provided by banking companies. Of the four proposed questions of law said to arise, only two were pressed at the hearing. These two questions are as follows:-- (a) Whether in the facts and circumstances of the case, federal excise duty was leviable on the transactions of (a) insurance commission, (b) merchant discount and (c) speedy cash home remittance? (b) Whether in the facts and circumstances of the case, the learned Appellate Tribunal was legally justified in confirming the levy of default surcharge under section 8 and penalty under section 9 of the Federal Excise Act, 2005? It will be seen that the two questions are interlinked in the sense that an answer in favour of the applicant to the first would automatically result in the same answer being given to the second. 2. Learned counsel submitted that the applicant was a banking company, which at the material time carried on business in Pakistan through various branches. (It has since wound up its banking business in this country.) The accounts of banking companies in Pakistan are made up on a calendar-year basis, and the present claims of excise duty were based on the accounts for two years, 2007 and 2008. The show cause notice was issued on or about 17-6-2009, and the order-in- original was made on 26-2-2010. Findings were recorded against the applicant in respect of all three types of transactions identified in the first question noted above and it was held that federal excise duty was payable accordingly. Learned counsel explained the applicant's position with
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regard to each of three types in the following terms. As regards "insurance commission", learned counsel submitted that the applicant undertook no insurance business whatsoever. Rather, it had an arrangement with an insurance company to the effect that it would recommend the said company to its clients and/or employees for their insurance needs. If the person approached the insurance company and took out a policy with it, then the applicant was paid a commission by the said company. Learned counsel contended that this did not amount to insurance business nor was the applicant acting as an insurance agent. As regards the second type, learned counsel submitted that this related to the amount that the applicant received from retailers when credit cards issued by the applicant were used by cardholders to make purchases. Learned counsel explained the position by giving an example. Suppose a person holding a credit card issued by the applicant used it to make purchases of Rs,1000 at a shop that accepted the said card. On this transaction, a certain amount would be paid by the shopkeeper to the applicant (computed as a percentage of the transaction value). This was the "merchant discount" that was booked by the applicant and on which federal excise duty was being demanded. The third type of transaction related to remittances from abroad received in Pakistan through the applicant's banking channels. Learned counsel submitted that in terms of the relevant State Bank circular, the banks (including the applicant) were disallowed from deducting any expenses incurred in respect of such remittances. Thus, if a customer received a remittance equal to Rs,1000 from a foreign source, the entire amount was credited to his account. The expenses incurred by the applicant were subsequently reimbursed by the State Bank. This was the "speedy cash home remittance" amount on which federal excise duty was being claimed. 3. The applicant preferred an appeal against the order-in-original, but the concerned Commissioner Inland Revenue (Appeals) dismissed the same. A further appeal was preferred to the Appellate Tribunal. By means of the impugned order, that appeal was also dismissed. 4. The applicant contested the impugned order on the same legal ground in respect of all three types of transactions. According to learned counsel, duty was leviable (if at all) in terms of entry No, 8 of Table II of the First Schedule to the Federal Excise Act, 2005 ("FE Act"). This entry (herein after "Entry 8") related to the services listed under Heading No, 98.13 of the First Schedule to the Customs Act, 1969. (This schedule is commonly known as the Pakistan Customs Tariff and is so referred herein after.) Learned counsel referred to the various sub-headings of this heading and contended that the transactions sought to be taxed did not come within the ambit of any of them. His case was that since the transactions did not come within the scope of Heading No,98.13, they did not fall within the ambit of Entry 8. There was accordingly no liability to pay federal exercise duty and the claim against the applicant failed in its entirety. The first question ought therefore to be answered in its favour. Since there was no liability to pay excise duty, no question could arise of any penalty or surcharge being imposed and the second question ought also to be answered in favour of the applicant. 5. Learned counsel for the respondent Department contested the applicant's case. Learned counsel relied on the definition of "non-fund banking services" as contained in section 2(16a) of the FE Act to submit that all non-interest based services provided or rendered by banking companies "against a consideration in the form of a fee or commission or charges" were liable to federal excise duty. Learned counsel laid particular emphasis on the use of the term "consideration" in the definition and contended that there could be no doubt that the applicant received consideration for each of the three types of transactions. Learned counsel also referred to section 2(23) of the FE Act, which defines "services", and submitted that when these definitions were read with Heading No, 98.13, the applicant's transactions were clearly liable to excise duty. Learned counsel submitted, and this was central to his case, that it was the principal description of Heading No, 98.13 (reproduced below in para 18) that was relevant for present purposes, and not merely (or only) the various sub-headings
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thereof. In other words, the levy of excise duty was not limited to the services specified in the various sub-headings (although those were, of course, certainly liable to tax). Rather, it was the description given in the principal heading itself that was the subject of the levy and all three types of transactions were covered in terms of the same. Therefore, even if the transactions did not specifically come within the scope of any of the sub-headings that was not fatal for the demand. Without prejudice to this submission, learned counsel contended that the transactions in any case came within the scope of at least two of the sub-headings, being 9813.6000 and 9813.8000. Thus, on any view of the matter the applicant's transactions were liable to duty and the two questions proposed ought to be answered against it and in favour of the Department. 6. We have heard learned counsel as above, examined the record and considered the relevant statutory provisions. Section 3 of the FE Act provides, as presently relevant, that services provided in Pakistan are liable to excise duty at the rate of 15% ad valorem, except the services specified in the First Schedule, "which shall be charged to Federal excise duty as, and at the rates, set-forth therein". At the same time section 16 provides, in its subsection (1), that all services provided or rendered in Pakistan are exempt from the whole of the excise duty, except those as are specified in the First Schedule. The combined effect of these provisions therefore is that it is only those services as are specified in the First Schedule that are liable to excise duty. If any service is not specified in this schedule, it is exempt from excise duty even if it comes within the definition contained in section 2(23). The First Schedule comprises of two parts, and the second part (Table II) lists the services that are liable to excise duty. As already noted, it is Entry 8 of this table that is relevant for present purposes. 7. Since the demand for excise duty spans the calendar years 2007 and 2008, it seeks to tax transactions from 1-1-2007 to 31-12-2008. Now, Entry 8 underwent certain changes during this period, which need to be kept in mind. Before the Finance Act, 2007 (i,e,, for the period January to June, 2007), Entry 8 read as follows (the numbers in square brackets have been inserted by us for ease of reference):-- Service provided or rendered by banking companies in relation to:9813.4000 Letter of credit 9813.4100 Guarantee 9813 .4200 Brokerage 9813.4300 Issuance of pay order and demand drafts9813 . 4400 Bill of exchange charges 9813 . 4500 Transfer of money including Telegraphic transfer, mail transfer and electronic transfer9813.4600 Providing bank guarantees 9813 .4700 Bill discounting commission 9813 . 4800 Safe deposit lockers fee 9813 .4900 Safe vaults 9813.4910 Credit and debit card issuance, processing and renewal9813.5000 Commission and brokerage on foreign exchange dealings9813.6000 The references in the second column to various sub-heading numbers were to the relevant parts of Heading No, 98.13 of the Pakistan Customs Tariff. By the Finance Act, 2007, Entry 8 was substituted in its entirety. As so substituted, the entry read as follows:--
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"Non-fund services provided by the banking companies or non-banking financial companies 98.13"
This was the entry applicable from July, 2007 till December, 2008. Thus, consideration of the legal issues raised must be divided into two parts, one relating to the first six months (January-June, 2007; herein after referred to as the "first period") and the other to the remaining 18 months (July, 2007 to December, 2008; herein after referred to as the "second period"). It is to be noted that section 2(16a) was also added by the Finance Act, 2007. This definition, as also that of services in section 2(23) (which remained the same throughout) provided as follows:-- [2(16a)] "non-fund banking services" includes all non-interest based services provided or rendered by the banking companies or non-banking financial institutions against a consideration in the form of a fee or commission or charges. [2(23)] "services" means services, facilities and utilities leviable to excise duty under this Act or as specified in the First Schedule read with Chapter 98 of the Pakistan Customs Tariff, including the services, facilities and utilities originating from Pakistan or its tariff area or terminating in Pakistan or its tariff area. 8. We begin with the first period. It is at once obvious that the first type of transactions, i,e,, "insurance commission", could not possibly come within any of the twelve specifically enumerated services then listed in Entry 8. There could therefore be no levy of federal excise duty in relation thereto during the first period. 9. The second type of transactions, "merchant discount", could, if at all, only relate to service No, [11], "credit and debit card issuance, processing and renewal" and then only to credit card "processing". Now, the findings of the Appellate Tribunal in relation to "merchant discount" were stated as follows in the impugned order:-- "11. The findings of this forum on the issue [are] that the bank is receiving commission in the shape of merchant discount from retailers. The retailers are paying commission to the bank as they keep the credit card machines at their business premises to promote their sales on account of credit card sales. The earning of the bank under this head is therefore considered as services rendered and are clearly the non funded and accordingly attracts the payment of FED on merchant discount. We therefore, do not interfere in order passed by the CIR(A)." 10. In our view, a fundamental error made by the Appellate Tribunal was that it failed to appreciate that there were two periods involved, and the first period had nothing to do with "non-fund banking services". This is clearly an error in law. For the first period, the true question was whether, on the facts as found by the forums below, the applicant could be regarded as providing the service of "credit card processing". In our view, the "merchant discount" paid by retailers to the applicant could not be so regarded in the facts and circumstances of the case. Service No, [11] related to three activities in respect of credit cards: their issuance, processing and renewal. Now, the first and third activities could relate only to the credit card itself and/or its holder, since it was to him that the credit card was issued and it was only his card that could be renewed. Entry 8 imposed (and imposes) a levy in a fiscal statute. While it is a fundamental principle of interpreting fiscal statutes that there is no intendment or equity with regard to the charging provision, which must be applied as it stands, it is also an established principle that if two reasonable interpretations are possible, the one favoring the taxpayer will be adopted. It is, in our view, at the very least a reasonable interpretation that credit card "processing", when considered in the context in which it appeared, applied only in relation to the credit card and/or its holder. It did not therefore apply in relation to the commission earned by banking companies from retailers on the basis of the latter keeping credit card machines at their business premises. Furthermore, the objective sought to be achieved
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was for the retailers to "promote their sales on account of credit card sales". This is the finding (which is of a factual nature) recorded by the forums below. Could the banking companies be regarded as providing the service of credit card "processing" on such a finding? In our view, the answer ought to be in the negative. Rather, on such a finding, it was the retailers that were paying for the privilege of having a credit card machine on their business premises. This was in order to enhance and promote their sales. In our view therefore, during the first period, there was no liability of the applicant to pay federal excise duty in respect of "merchant discount". 11. We turn to consider the third type of transactions, "speedy casa home remittance". The finding recorded by the Appellate Tribunal in this regard was as follows:-- "12. The counsel on behalf of the appellant argued that the activity of the bank regarding speedy cash home remittance cannot be considered as service as they, do not charge any fee in respect of speedy cash home remittance. The fact is contrary to the statement of the appellant as they are earning the rebate from State Bank of Pakistan on account of the said service where no fund is involved and accordingly termed as non funded service chargeable to Federal Excise Duty. The appeal on this score fails." It is also pertinent to note what was said by the adjudicating authority in the order-in-original (in para 6 thereof):-- "State Bank of Pakistan introduced a scheme in which SBP provides incentives to the banks to accelerate 'Home remittance' by overseas Pakistanis workers residing in Saudi Arabia. The tax consultant argued the since no service [was] provided by the banks hence no FED is leviable on this amount received from SBP. The departmental representative did not agree with the view of the tax consultant and said that since amount received from SBP is due to their speeding services provide[d] to overseas workers so FED is leviable on this commission income earned from non-funded services. I also agree with the arguments of the departmental representative as this is non-funded service provided to overseas Pakistanis on which SBP provides certain commission which is liable to FED as per law." 12.As already noted in relation to "merchant discount", it is clear that both the adjudicating authority and the Appellate Tribunal failed to appreciate the changes that took place in Entry 8 over the calendar years 2007 and 2008. The point of "non-funded services" arose only in relation to the second period. To this extent, as already noted, a clear error of law was made. In our view, as the entry stood during the first period, it was only service No, [6], "transfer of money including telegraphic transfer, mail transfer and electronic transfer", which could apply, if at all, in relation to "speedy cash home remittances". Now, the transactions in question, namely, remittances received in Pakistan from overseas workers certainly involved the transfer of money by one or more of the described modes. Therefore, the applicant's contention (as recorded by the adjudicating authority) that it did not provide any service was rightly rejected. In the normal course, the applicant, like other banking companies, would have charged for such a service, and such charges would have been liable to excise duty (which was on an ad valorem basis, being 5% of the charges). However, the applicant's case was also (as noted by the Appellate Tribunal) that it had no liability because it did not charge anything at all for the service, and this was so because it was reimbursed by the State Bank in terms of its applicable circular. The fact that the applicant did not charge anything on the remittance was accepted, but the amounts received from the State Bank were held liable to tax. The question therefore is whether the said amounts could be regarded as "charges" within the meaning and for purposes of Entry 8? In order to answer this question, it is necessary to look at the scheme in terms of which the amounts were received by the applicant. 13. From the record as made available, it appears that the relevant State Bank directives were contained in Circular Letter No, 21/EPP1(96)poly-2000 dated the 28-7-2000 read with Foreign Exchange (FE) Circular Letter No, 40 dated 29-11-2000. The first mentioned circular letter set forth
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the details of the scheme and was as follows (to the extent presently relevant; emphasis supplied):-- "Please refer to our Cir. letter No, 7174/ECP.1(95)-85 dated the 3rd October, 1985, which provides that from places where the banks have their branches or exchange companies managed by them, all the funds required to be remitted should be transferred by telegraphic transfer and the remitter should not be charged any amount for telegraphic or telex charges. The expenditure incurred by overseas branches of banks or exchange companies managed by them on remitting funds through telegraphic transfer will subsequently be reimbursed by banks in Pakistan and reported on form 'M' to seek reimbursement on this account from the State Bank of Pakistan on monthly basis. 2. In order to encourage home remittances from Pakistanis working abroad, particularly in Saudi Arabia and Middle East, it has been decided to broaden the scope of the scheme. The reimbursement for the Telex/Swift charges will be made, in Pak Rupees, not exceeding @ Saudi Riyals 20 per remittances of not less than US$ 200 (per Telex/Swift message) if the remittances are transferred through the banks' foreign branches, foreign correspondents, fully managed exchange companies and those exchange companies with whom they have drawing arrangements, out of which Authorised Dealers may remit in foreign exchange up to Saudi Riyals 6 per Telex/Swift message to the concerned remitting agency. The procedure as contained in preceding paragraph will be followed by all the banks in Pakistan...." FE Circular Letter No, 40 sought to liberalize the scheme. It was as follows (emphasis supplied):-- "Please refer to our Circular letter No, 21/EPP-1(96)poly-2000 dated the 28th July, 2000 .... 2. Keeping in view the difficulties experienced by the banks and to provide more incentive to the banks to accelerate Home Remittance, it has been decided that henceforth: (i) The minimum amount of remittance of US$ 200 to qualify for reimbursement of charges is reduced to US$ 100 or equivalent to other currency (per telex/swift charges) (ii) The reimbursement rate of SR 20 is increased to SR 25 for each remittance. (iii)Authorized Dealers may share the reimbursement charges at their option instead of fixed SR 6 and remit in foreign exchange to the concerned remitting agency accordingly. (iv) The already conveyed benchmark will continue for the future remittances." 14. The combined effect of the two circulars was as follows. Firstly, the banks were directed not to charge any amount on remittances by way of telegraphic or telex transfer. Secondly, the banks were to be "reimbursed" for "telex/swift charges" at the rate of SR 25 per remittance (a minimum remittance of USD 100 being required). Thirdly, this reimbursement was paid to the banks in Rupees. Fourthly, this amount could be shared between the concerned bank and its foreign correspondent (i,e,, the originator of the remittance) in such proportion as was agreed between the parties and the share that fell to the latter could be remitted to it in foreign exchange. In our view, on the foregoing basis, the amounts paid to the banks could not be regarded as "charges" within the meaning, and for purposes, of Entry 8. This is so notwithstanding that but for the State Bank scheme, the banks would have charged a certain amount on each remittance (i,e,, for providing the service of transfer of money). However, while it was certainly the effect of the State Bank scheme that no such charges were claimed from the remitters or the banks' customers, this was not the scheme's purpose. In other words, the purpose of the scheme was not simply to shift the economic burden of the charges from the remitters or the banks' customers to the State Bank. Had that been the case, then the reimbursement by the State Bank could have constituted "charges" within the meaning of Entry 8. Rather, the purpose was to encourage 'remittances through official banking channels, for the obvious objective that since the foreign exchange would be surrendered to the State Bank, the country's foreign currency reserves would be increased. The reimbursement of expenses by the State Bank in such circumstances could not be regarded as "charges" within the meaning, and for the purposes, of Entry 8. Accordingly, it follows that although the service of
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transfer of money was provided by the applicant, it "charged" a nil amount for the same for purposes of Entry 8, with the result that the amount of excise duty, being ad valorem, came to zero. Nothing therefore was payable by the applicant in respect of this type of transaction. 15. In our view therefore, for the first period, the applicant had no federal excise liability in respect of any of the three types of transactions. We turn to consider the second period. 16. The shape that Entry 8 took during the second period has been reproduced in para 7 above. It will be recalled that excise duty can only be levied if the service is specified in the First Schedule to the FE Act. When the definition of "services" in section 2(23) is kept in mind, it is clear that a service can be specified in the schedule in one of three ways. Firstly, it can be specified by description (whether in terms of a definition contained in section 2 or otherwise) and without any reference to Chapter 98 of the Pakistan Customs Tariff. Secondly, it can be specified by simply referring to (i,e,, listing) a heading or sub-heading of Chapter 98 without anything more Thirdly, it can be specified by a combination of the first two possibilities. If the third possibility is used, then the service in question must both conform to the description (whether in terms of a definition contained in section 2 or otherwise) and also appear in Chapter 98. It is clear that during the second period, the services in Entry 8 were specified in terms of the third possibility. It will be necessary therefore to look at both the definition given in section 2(16a) and Heading No, 98.13 of Chapter 98. 17. In terms of section 2(16a) a "non-fund banking service" had to meet three requirements. Firstly, it had to be provided or rendered either by a banking company or a non-banking financial institution (NBFI). Secondly, it had to he "non-interest based". Thirdly. the consideration for the service could only be in one of three specified forms, i,e,, a fee, commission or charges. When this definition was read with the heading number specified…
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