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Petitioner: ASSOCIATION OF BUILDERS AND DEVELOPERS OF PAKISTAN VS Respondent: PROVINCE OF SINDH and others
Court Name: Sindh High Court Judge(s): Abdul Maalik Gaddi, Munib Akhtar Title:ASSOCIATION OF BUILDERS AND DEVELOPERS OF PAKISTAN vs PROVINCE OF
SINDH and others Case No.: Constitutional Petition No.D-3723 of 2013 Date of Judgment:2018-01-23 Reported As: PTCL 2018 CL. 270, 2018 PTD 1487 Result: Petitions allowed Judgment ORDER MUNIB AKHTAR, J.---(1) By this judgment, we intend disposing off the petitions listed in para 45 below. The petitions arise under the Sindh Sales Tax on Services Act, 2011 ("Act"). The petitioners, who are in one way or another Part of the construction industry (a term used here not in any legal sense), are for reasons stated herein below, aggrieved by the levy, or intended levy, of provincial sales tax under the Act. Their case, stated briefly, is that they do not come within the ambit of the Act as they do not provide services at all, or at any rate do not provide services within the meaning of the Act. The petitions can, for convenience, be regarded as primarily challenging two types of show-cause notices. In one category are those notices whereby the petitioners are required to show cause why they should not be registered in terms of the Act. The petitioners submit that such registration is an obvious preclude to the levy of the provincial sales tax. In the other category are those notices whereby the petitioners are not merely directed to get themselves registered, but also to show cause why certain stated amounts may not be recovered from them as tax payable under the Act. In at least one case it appears that an.order-in-original has been made against the petitioner concerned requiring registration under the Act, and payment of the tax as specified in the order. The issues raised in all the petitions are however the same. 2. Before proceeding to note the submissions made by learned counsel, it will convenient to set out some of the relevant provisions of the Act. Section 2(79) defines "services" as, inter alia, including those services listed in the First Schedule to the Act. The tax itself is levied on a "taxable service" which expression, section 2(96) tells us, has the meaning as given in section.
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3. That section, in its subsection (1), inter alia states that a taxable service is one that is listed in the Second Schedule to the Act. We are concerned with tariff headings Nos. 9807.0000, 9814.3000 and 9824.0000. These entries, as set out in the First and Second Schedules, are as follows:-- Tariff Heading No.First Schedule Second Schedule 9807.0000 Services provided or rendered by property developers and promotersServices provided or rendered by property developers or promoters for development of purchased or leased land for conversion into residential or commercial plots. construction of residential or commercial units. 9814.3000 Services provided or rendered by architects, town planners, contractors, property developers or promoters, interior decorators.... Property developers, or promotersProperty developers or promoters 9824.0000 Construction servicesConstruction services (We may note that in the period over which these petitions are spread, 2013-2016, various provisions of the Act, including the entries noted above and the rate of the tax, underwent certain changes and amendments. However, the position as set out herein above suffices for present purposes.) 3. Learned counsel appearing for the petitioner in C.P. D-5194/ 2013 drew attention to the show- cause notice issued under section 24 of the Act (which, in its first two subsections, sets out the persons required to be registered) and to the tariff headings referred to above. Referring to heading No. 9807.0000 as set out in the First Schedule, learned counsel submitted that the "and"
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between "property developers" and "promoters" had to be read conjunctively. However, the Second Schedule used the word "or", which would indicate a disjunctive reading. Referring to the notice, it was submitted that the petitioner was identified as a "builder", a term not used in the Act itself. In any case, none of the terms and expressions used (such as "developer" and "promoter") was defined. It was submitted that since the Act was a fiscal statute, its charging provisions had to be construed accordingly. The First Schedule Controlled, and the "or" in the Second Schedule therefore had to be read as an "and" and applied accordingly. The notice gave three different categories under which the petitioner was to be brought to tax. Therefore, it was obvious that the Sindh Revenue Board ("SRB"), which is the authority under the Act, was itself unsure as to what applied to the petitioner. It was submitted that in such circumstances the petitioner was not liable to be registered under the Act and could not be brought to tax in terms thereof. 4. Learned counsel for the petitioners in C.P. D-3723/2013 (who include the Association of Builders and Developers of Pakistan (ABAD), the trade body), submitted that in the course of their business activities, the petitioners sometimes acted as developers, other times as builders and from time to time as both. Learned counsel submitted that as "builders" the petitioners would buy a plot or piece of land, raise construction thereon (typically a multistorey building or "project") and sell the units (flats, apartments, shops, offices or some combination thereof, depending on the nature of the project) therein to the public. As "developers", the petitioners would typically buy a piece or tract of land, develop it by creating infrastructure (by way of roads, utilities etc) thereon and dividing it into plots and then sell the same to the public. Learned counsel emphasized (and in many ways this was the core of the case set up by all learned counsel appearing for the petitioners) that in all relevant situations, all that was happening was that immoveable property was being sold. No services whatsoever were being rendered. Thus, the petitioner's activities were wholly beyond the scope of the Act and, it was submitted, even the legislative competence of the Province insofar it related to the taxing of services. With regard to the latter submission, learned counsel referred to various provisions of the Constitution including in particular Entry No. 49 of the Fourth Schedule, and the position that emerged after the 18th Amendment, whereby the legislative competence to impose a tax on services was shifted exclusively to the Provinces. Learned counsel also referred to a pre-18th Amendment decision of the Supreme Court, Federation of Pakistan and others v. Haft Muhammad Sadiq and others 2007 PTD 67 = 2007 CLD 1. That decision was rendered at a time when the providing of services was taxed by the Federation under its competence to impose duties of excise. Learned counsel read various passages from the judgment and respectfully submitted that it was distinguishable and did not apply in the situation that had come about as a result of the 18th Amendment, and the facts and circumstances now before the Court Reliance was also placed on a Division Bench decision of this Court, Defence Authority Club and others v. Federation of Pakistan and others 2007 PTD 398. Learned counsel also referred to the Sindh Building Control Ordinance, 1979 under which the petitioners were registered for purposes of their business. Reliance was placed, in particular, on the following definitions contained in clauses (c) and (g) of section 3 thereof: "(c) "builder" means a person or body of persons, including a society engaged in construction of a building on contract, or, as owner or agent of the owner for the purpose of transferring such building on hire or by sale or on the basis of ownership, but does not include a person or persons engaged as masons or such other artisan"; "(g) "developer" means a person or body of persons including a society, engaged in developing a plot, or plots for any kind of building activity, for transfer by allotment to the members if the developer be a society, or to other persons on basis of ownership or by sale". 5. Learned counsel submitted that insofar as the facts and circumstances of the present case were concerned, the key question was, what was the dominant purpose of the activity that was sought
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to be brought within the tax net. Was it the rendering of any services (as contended by the SRB) or (as submitted by the petitioners) merely a sale of immoveable property? Reliance was placed in this regard on certain Indian decisions. Learned counsel referred to Article 366 of the Indian Constitution, which contains the various definitions as used therein (corresponding to Article 260 of our Constitution) Reference was made to clause (29A) (which was inserted by an amendment made in 1982), which defines "tax on the sale or purchase of goods". We pause here to note that under the Indian Constitution, the power to levy a tax on the sale and purchase of goods is (subject to certain exceptions) exclusive to the States (i.e. the Provinces) and the power to levy a tax on services is exclusive to the Union (i.e.; the Federation). In other words, the position in India is the reverse of what prevails under our Constitution after the 18th Amendment. (Reference in this context may also be made to a Division Bench decision of this Court, Pakistan International Freight Forwarders Association v. Province of Sindh and another 2017 PTD 1 where the position in India is explained in para 37.) Learned counsel referred to decisions of both of the Indian Supreme Court and High Courts to submit that whenever a question arose as to the taxation of a contract comprising of elements of a service on the one hand and a sale of goods on the other, the test applied was that of the dominant purpose. It was the dominant purpose that determined whether the contract was taxable (whether in whole or in respect of its constituent parts) as one of the rendering of services or the supply of goods. In this regard reliance was also placed on an American decision (of the US Court of Appeals for the 5th Circuit). Learned counsel submitted that the question was whether the sale of immoveable property could ever be regarded as a service? To this, it was submitted, an answer had to be given in the negative. To illustrate his point, learned counsel gave the example of a property dealer who, if the sale of the property went through, was entitled to a commission. It was submitted that here there were two contracts. One was the sale of the immoveable property between the vendor and the vendee. This did not constitute a service, and hence, was not within the ambit of the Act. The other was that between the property dealer and his client (whether the vendor or vendee or, sometimes, both). The property dealer did provide a service and therefore his contract could be brought within the ambit of the Act. (Indeed, the Act contains, in section 2(64D), a definition of "property dealer", whose services are brought to tax under tariff heading No. 9806.2000.) Learned counsel submitted that the legislative competence of tax on services had to be rationally understood and applied and could not conceivably be stretched to include what were nothing other than, and only, contracts/ transactions for the sale of immoveable property. Learned counsel referred to various provisions of the Act, and clauses in the definition section, to submit that services that could be brought to tax were provided in relation to something, but that that something itself (here immoveable property) could never be properly the subject of the levy. 6. Learned counsel appearing in C.P. D-1774/2016 submitted that the charging provisions being applied were vague and undefined. Thus, tariff heading No. 9824.0000 simply said "construction services" and nothing more. There was no classification or elaboration of the services being brought to tax Indeed, learned counsel submitted, that the entries were so vague and there was such an overlap that they were sought to be applied together, which was clearly impermissible. It was also emphasized that although the Act had a sprawling definition section, it did not define "builder", "developer" or "promoter". Learned counsel submitted that in some cases notices had been issued to builders who had not even launched their projects. In other cases, notices had been issued to builders who had not yet started taking "bookings", although construction had started. Learned counsel submitted that if at all any tax was payable, it would be at the time of the sub- lease of the unit being sold to a particular person. Yet, the impugned notices had been issued in haste and much before that time could conceivably have arisen. 7. Learned counsel in C: P. D-679/2016 submitted that the correct test to apply was that of
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dominant purpose as laid down by the Indian courts, and referred to above. It was submitted that the primary transaction was that of transfer of immoveable property. That would come about only when the project was completed and all the installments paid by a given allottee for his unit. It was submitted that the "service" purported to be taxed may never be provided. Thus. e.g., if the allottee failed to make payment of all the installments, he would not be entitled to the property. In such situations, there could be no levy of the tax. 8. Learned counsel in C.P. D-7657/2015 referred to the overall scheme of the Act, and submitted that there were three types of services brought within the ambit of the Second Schedule. Firstly, there were services that were specifically and expressly referred to by name. Secondly, there were services that were specified by reference to the person providing the service. And, thirdly, there were services provided in respect of something. Referring to sections 3 and 4, learned counsel submitted that in all cases there had to be a specific service provider and a recipient and there had to be conscious transaction of supply of services. For a transaction to be brought within the tax net, it had to be established that there was a "service" within a specific tariff heading contained in the Second Schedule, and that the dominant purpose of the transaction was the providing of the said service. The object had to be to tax the service and not any product or thing resulting from the service. Referring to the judgment of the Supreme Court in Federation of Pakistan and others v. Haji Muhammad Sadiq and others 2007 PTD 67 = 2007 CLD 1, learned counsel submitted that there the levy was on services in relation to loans or advances. However, these were intangibles, which could not be separated from the service itself (which was what was being taxed). As opposed to that, there could be many cases which involved a tangible in which, e.g., the elements of supply of goods could be ascertained and identified separately from any service being provided. Learned counsel submitted that in such cases the recipient was invariably more interested in the end product or result (which was something tangible) rather than any element of service as may be involved in the transaction. By way of illustration, the example of a painting was referred to. Learned counsel submitted that in the situation at hand, the transaction involved immoveable property but also carried a strong element of the supply of goods. However, it was only the Federation that could tax the latter. The Act, as sought to be enforced against the petitioners, did not draw the necessary distinction. It was too broadly stated and therefore could not be enforced, at least in the facts and circumstances of the present ease. 9. Learned counsel in C.P. D-2719/2016 submitted that the tariff headings challenged went far beyond levying a tax on "services" and had to be properly read down. It was submitted that if an activity produced a tangible, then it could not be regarded as providing a service. The distinction between services on the one hand and goods on the other was that of tangibility and perishability. A service had to be both intangible and perishable. Goods on the other hand were tangible and (at least in a relative sense) permanent. Learned counsel submitted that it was only that which was, holistically, a service that could be brought to tax under the Act. In the facts and circumstances of the present case, there were no objective criteria that could determine what were the service and the goods components. Learned counsel submitted that in all the tariff headings that were sought to be applied, there were elements of both service and goods, which could not be disentangled and hence no tax could be levied in the present circumstances. The case against the petitioners accordingly failed. 10.Learned counsel in C.P. D-807/2016 submitted that the petitioners were involved in the transfer of immoveable property and that did not amount to an "economic activity" within the meaning of section 4 of the Act. It was submitted that if a transaction did not come within the legislative competence of the federation (as being liable to tax as a supply of goods) that did not mean that it automatically could be brought to tax under the Act. It was submitted that it was crucial to keep in mind that the petitioners, as builders or developers, also supplied the land itself. That would not
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be the situation where the land belonged to someone, and in respect thereof or thereon construction activities were carried out by the builder or developer. The petitioners were sought to be taxed in the former and not the latter situations. Learned counsel also submitted that services are "consumed" when received. The tangibility of the cases at hand (i.e., the sale of immoveable property) was such that if completely overshadowed any other element. 11.Learned counsel appearing for the petitioners in other petitions adopted the arguments and submissions as noted above. 12.The learned AAG, opening the case for the respondents, submitted there was a presumption of constitutionality of a statute and the onus lay, on the person claiming that the impugned statutory provision was unconstitutional to show that this was so. It was submitted that in respect of their projects the builders and developers were definitely offering services within the meaning of the Act, which could be taxed accordingly. It was submitted that the projects were publicized through advertisements and brochures and invariably a site office with a "model" unit were set up, which could be perused and visited by the public. The price of a unit and the installments in terms of which it could be paid were prominently displayed. It was only then that any interested person entered into a contract with the builder/developer, and booked a unit as per his requirements. Development charges were also charged by the builder/developer in relation to the project. The learned AAG submitted that as presently relevant the services could be divided into two categories: property based and performance based services. The cases at hand fell in the former category. Reliance was placed in particular on the aforementioned judgment of the Supreme Court. Federation of Pakistan and others v. Haji Muhammad Sadiq and others 2007 PTD 67 = 2007 CLD 1 and the learned AAG also relied on certain decisions of the Indian Supreme Court. Certain dictionary entries in relation to the meaning of terms such as "developer", etc. were also relied upon. It was denied that the tariff headings sought to be applied to the petitioners under the Act suffered from the vice of vagueness. The maintainability of the petitions was also challenged inasmuch as it was contended that statutory remedies were available to the petitioners to contest the show-cause notices. Case law was also cited in this regard. 13. Learned departmental counsel for the SRB (Mr. Atifuddin) submitted that the housing and construction industries were regarded as falling in the service sector of the economy. The services included providing and developing the infrastructure such as laying down roads, sewage lines and systems, boundary walls, providing of security, demarcation and other services of a common nature. Other services included improving the land and making it fit for purpose, plotting, etc. and charges were obtained from the allottees for all these activities. Learned counsel submitted that the petitioners were focusing only on the end result: i.e., the developed plot or constructed unit that was acquired by them. However, the services provided not merely the end result but the entire gamut of activities preceding and leading up to, and culminating in the end result. Learned counsel submitted that there was a difference between a tax on property, and a tax on services as levied under the Act. The former was an annual recurring levy on the property. The latter was a one-time levy, which was charged when the services were rendered. It was submitted that the builders and developers were the providers of the services as aforesaid and therefore liable to the payment of tax under the Act. 14.Learned counsel referred to various scenarios that could arise, all of which according to him were liable to tax under various tariff headings. It was submitted that one possibility was that the builder/ developer built the property with his own resources without any actual or potential buyer in sight. The property, once constructed, was then sold. It was submitted that here tariff heading No. 9824.0000 (construction services) would apply. A second possibility was where shops, flats, etc. were booked and payment was made in installments. Here also services were being provided and were liable to be taxed. Yet another situation was where land was developed and sold by a
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developer. It was submitted that the tax was leviable on the services being provided for such development. It was emphasized that the tax was not on the land, but rather on the services rendered. Learned counsel submitted that the builders and developers were not selling any goods at all and the dominant purpose of the activity and the transaction was clearly and obviously a service. It was denied that the tariff headings were vague or incapable of resolution in terms of the principles applicable to the interpretation of a taxing statute. The maintainability of the petitions was also challenged on grounds similar to those taken by the learned A.A.G., submitting also that the issues raised involved a factual controversy; which could not be decided in exercise of constitutional jurisdiction. Learned counsel for SRB (ML Anwar Manscor Khan) submitted that the Act was intra vires the Constitution and the levy was squarely on services rendered and not otherwise. Learned counsel challenged the maintainability of the petitions, submitting that the show-cause notices should be allowed to go forward to a hearing and determination, which, if adverse to the petitioners could be challenged by them through appropriate statutory remedies. Various provisions of the Act, including in particular sections 3 and 4 and sections 8 and 9 were referred to and relied upon. It was submitted that the efforts done towards an act as came within the scope of the Second Schedule were the services provided under the Act. Learned counsel referred to the First and Second Schedules to the Act and elaborated the relationship between and interaction of the two, referring in this regard to the various tariff headings in issue in these cases. Various decisions were relied upon. As -regards the Indian decisions and the rule of dominant purpose, learned counsel submitted that in a building contract, the aspect of the service of building (i.e., the act of construction) was always, there although it may manifest itself in different ways in different contracts. However, the essence was the act of construction, which always had to be there and which was the service being provided. It was submitted that the petitions were liable to be dismissed. 15.The right of reply was exercised by Mr. Farogh Naseem Learned counsel submitted that when the show-cause notice was patently without jurisdiction, extraneous to the statute and the questions raised involved general and important issues of interpretation, then the fact that there may be an alternate remedy was not material and no bar to the petition. The provisions and the tariff headings were vague and liable to be struck down. It was emphasized that the dominant purpose of the transaction was indeed the selling of property and nothing else. 17.We have heard learned counsel as above, considered the record and material referred to and the case law relied upon. Before proceeding further two preliminary points may be made. Firstly, a caveat, It needs to be kept in mind that we are here concerned with immoveable property. The question whether any services are, or are not, being rendered revolves around this type of…
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