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Petitioner: Messrs TAPAL ENERGY LTD. and others VS Respondent: FEDERATION OF PAKISTAN and JUDGMENT
Court Name: Sindh High Court Judge(s): Sayed Saeed Ashhad, Abdul Ghani Sheikh Title:Messrs TAPAL ENERGY LTD. and others vs FEDERATION OF PAKISTAN and
JUDGMENT
Reported As: 1999 PTD 4037 Result: Petitions allowed Judgment JUDGMENT ' S. SAEED ASHHAD, J.---The aforesaid three Constitutional petitions have been filed by the aforementioned two petitioners who are public limited companies incorporated under the Companies Ordinance, 1984. The petitioners in consequence of the policy Framework and Package of Incentives for Private Sector Power Generation Projects came forward to establish and install electric Power Plants in different districts of Karachi for generating electricity and for its supply to M/s. Karachi Electric Supply Corporation (KESC). The implementation agreement was singed between the President of Pakistan on behalf of Islamic Republic of Pakistan and the petitioners which contained sovereign guarantees and assurance in respect of exemptions from and facilities for payment of all kind of levies and taxes and removal of clogs and constraints in the matter of leases, licences and permits at various stages and levels. According to Item No, 1 of the First Schedule to the Implementation Agreement it was provided that the maximum income-tax liability of the non-resident contractors in respect of the construction, erection, testing and commissioning of the complex would be four per cent. Of the relevant payments made by the company to non- resident Contractors and the Contractors to their non-resident direct sub-contractors. The income of the petitioners from an electric power generation project was exempted from charge to tax under clause (176) of the Second Schedule to the Income Tax Ordinance (hereinafter referred to as the Ordinance). In consequence thereof the petitioner applied for exemption certificates under the proviso to section 50(5) of the Income Tax Ordinance to the Commissioner of Income Tax, who after examining the provisions of law and the facts of the case issued certificates of exemption as well as non-deduction of income-tax on the import of the machinery, plant and equipment
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required for the power plants. Petitioner M/s. Tapal Energy Ltd. Entered into agreements with M/s. Stork Wartsila Diesel BV for supply of the machinery, plant and equipment and M/s. Power Construction Company BV of Netherlands for constructions, erection, testing and commissioning of their power plant. Petitioner Gul Energy Ltd. Entered into agreements with M/s. Tomen Power Singapore (Pvt.) Limited for construction, erection, testing and commissioning of their power plant and five other contracts for performing various other jobs and works which were connected with the construction and commissioning of the power plant. According to Item No, 1 of the First Schedule to the Implementation Agreement the petitioners were required to deduct withholding tax from the payments made by them to the non-resident contractors engaged by them for the construction, erection, testing and commissioning of four per cent. -It was stated that this rate of deduction of tax at 4% had also been provided in paragraph E, sub-para. 2, clause (c) of Part 1 of the First Schedule to the Ordinance. Accordingly, the petitioners deducted with holding tax at the rate of four per cent. From the payments made by them to the various non-resident contractors engaged by them as per Item No,1 of the First Schedule to the Implementation Agreement and paragraph E sub-para. (ii), clause (c) of Part 1 of the First Schedule to the Ordinance. The petitioners filed returns of income for the assessment years 1996-97 and 1997-98 and their assessm ents were finalised for the assessment years 1996-97 and 1997-98 by the predecessor of respondent No,3. After the aforesaid assessment orders respondent No,3 issued show-cause notices to the petitioners under section 52 read with section 86 of the Ordinance informing them that they had not correctly deducted the withholding tax under section 50 from the payments made by them to the contractors at the required rate of 8% and calling upon them to show cause as to why the short fall in the withholding tax due to deduction at a lower rate be not recovered from them. The deduction on withholding tax at 8% as disclosed by respondent No,3 was that such contracts were turnkey contracts wherein withholding tax was to be deducted at the rate of 8% of the payments made to the contractors. The petitioners through their Income Tax Advisors/Chartered Accountants explained to respondent No,3 that in accordance with the provisions of item No, 1 of the First Schedule of the Implementation Agreement and paragraph E, sub-para. (ii), clause (c) of Part 1 of the First Schedule to the Ordinance the petitioners were required to deduct withholding tax at the rate of 4% (four per cent.) from the payments made by them to the contractors engaged in the construction, erection, testing and commissioning of the power plants which they had done and requested respondent No,3 to withdraw the show-cause notices issued by them 8 they could not be held to have failed to deduct the withholding tax or to have deducted the same at the working rate. The explanation advanced by the petitioners was not accepted by respondent No, 3 who held that the contracts awarded by the petitioners for the purpose of constructions, erection, testing and commissioning of the power plants were in the nature of "turnkey contract" and according to para. Of Part 1 of the First Schedule to the Income Tax Ordinance the petitioners were under obligation to deduct withholding tax at the rate of 8% from the payments made by them to the contractors. Respondent No, 3 was informed alongwith evidence that more than one contractors were engaged by both the petitioners for the purpose of carrying out different jobs and works to be undertaken for the purpose of constructions, erection, testing and commissioning of the power plants that the contracts in respect of both the power plants were not turnkey contract that the deduction at 4% were made according to the law and did not amount to short deduction as to why the amounts and the same had been duly deposited in the Government treasury. The petitioner further submitted that this action of respondent No, 3 was in pursuance of the instruction issued by the Central Board of Revenue to all the Income Tax Authorities to treat all contracts of power projects plants as "turnkey contract" and to deduct the withholding tax at the rate of 8%. It was further averred that respondent No,3 did not take into consideration the explanation advanced by the petitioners, the relevant provision of the Ordinance
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and the facts of the case and merely on the instructions of the Central Board passed the impugned orders under section 52 read with section 86 of Ordinance holding the petitioners as the assessees in default and issued demand notice under section 85 of the Income Tax Ordinance calling upon the petitioner Tapal Energy Limited to make payments of the sums of Rs,38,94,56,732.00, and Rs,52,44,260 and M/s. Gul Ahmed Energy Ltd. Of the sum of Rs,31,40,28,671 which according to him was the short payment on account of deduction of withholding tax wrongly at the rate of 4% instead of 8% by the petitioners from the payments made to the contractors. Since the aforesaid orders of respondent No, 3 were in clear disregard of the evidence and the facts of the two cases, the concessions and the implementation agreement entered into between the petitioners and the Islamic Republic of Pakistan the scheme and the principle relating to the turnkey contract and the provisions of law, the petitioners considered them to be unlawful, illegal, contrary to law, mala fide and of no legal consequence being void ab initio. The petitioners submitted that in view of the above they were not required to resort to the proceedings provided under the Income Tax Ordinance as it was submitted by the petitioners that it is an established principle that an order which is illegal, without jurisdiction or corum non judice being of no legal effect be directly challenged by the aggrieved party in the Constitution jurisdiction of this Court. Hence these petitions, wherein they prayed for the following reliefs:-- (a) Quash the order passed by the respondent No, 3 under section 52 read with section 86. (b) Declare the order passed by the respondent No, 3 under section 52 as being without jurisdiction, or in excess of jurisdiction without lawful authority and of no legal effect. (c) Restrain the respondent No, 3 from taking any measures including notice under sections 92, 93 or 94 of the Income. Tax Ordinance, 1979 and otherwise restrain him to take any measures of recovery of the impugned tax of Rs,5,244,260. (d) Award costs of this petition to the petitioner. Respondent No, 3 filed his comments in all the three petitions wherein he denied the various averments made by the petitioners in their petitions. It was submitted that according to the Implementation Agreement the construction contractors were supposed to perform the functions of (i) designing; (ii) manufacture; (iii) engineering; (iv) procurement; (v) construction; (vi) installation; (vii) completion; (viii) start up; (ix) testing; and (x) commissioning. He further submitted that the construction contract was designed to be a single compact contract to be awarded to a single contractor who was to perform all the afore stated functions. Petitioners on their own bifurcated the contracts and awarded contracts to contractors other than the construction contractors for performing some of the aforesaid functions in violation of the Implementation Agreement with a view to defeat the concept of turnkey contract. It was also submitted that plant and machinery was part of turnkey contract and the same was different from the concept of imports of plant and machinery as pleaded by the petitioners. Respondent No, 3 further submitted that there was no provision in the Implementation Agreement which required the petitioners to import plant and machinery as a commercial import and the same would be treated as procurement of plant and machinery for installation, completion and commissioning of the project on turnkey basis. 2. In respect of the petition filed by M/s. Gul Ahmad Energy Ltd, it was submitted that they entered into four different contracts which was contradictory to the terms of the Implementation Agreement as the construction contractor in their case consisted of a consortium of two contracts which was to perform all the functions enumerated hereinabove but with mala fide intention in order to avoid deduction of withholding tax at the rate of 8% on the basis of turnkey contract the petitioner M/s. Gul Energy engaged more contractors to perform some of the functions to be performed by the construction contractor. Respondent No, 3 further submitted that there is no provision in the Implementation Agreement which required the petitioners to deduct withholding tax from the non-resident contracts at the rate of 4% and the tax was to be deducted according to
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law detailed in the Ordinance. Respondent No, 3 denied the submission of the petitioner that withholding tax was to be deducted at 4% from the payment made to the contractors non-resident in accordance with para. E, sub-para. (ii), clause (c) of Part 1 of the First Schedule to the Ordinance and submitted that the same was to be deducted at the rate of 8% in accordance with para. E, subpara. (ii), clause (b) of Part 1 of the First Schedule to the Ordinance. It was submitted that the rate of 4% would be applicable where there are many contracts or sub-contracts for a project,. Which is not the case of the petitioners as according to the terms of the Implementation Agreement there was to be one contractor for performing all the functions on turnkey contract basis. 3. With regard to the assessm ents made by his predecessor, respondent No,3 submitted that he did not consider and examine the nature of the contract as to whether it was a turnkey contract, whether deduction of withholding tax-at 4% was proper and legal and whether non-deduction of withholding tax from the contractor who supplied plant and machinery was legally correct and on examination of these issues the petitioners were to have defaulted and were deemed as assessees in default which warranted initiation of proceedings against them under section 52 read with section 86 of the Ordinance. Respondent No, 3 denied that he had no authority or jurisdiction to proceed under sections 52 and 86 of the Ordinance though admitting that jurisdiction to assess the non-residents was with companies. It was submitted that as he had jurisdiction to make assessm ents in respect of the petitioners, he could proceed against them as assessees in default in view of the provisions of section 52 of the Ordinance. He further submitted that the orders made by him under sections 52 and 86 of the Ordinance were on the basis of the jurisdiction vesting in him after examining all the facts and legal position. He further submitted that he had not exercised jurisdiction over non-residents. 4. Respondent No,3 also challenged the maintainability of these Constitutional petitions as effective, alternate and adequate remedy has been provided by section 129 of the Ordinance by way of appeal before the Additional Appellate Commissioner. It was also submitted that controversial and intricate questions of law were involved which could not be decided on the basis of evidence/material on record in these Constitutional petitions and the forums established under the Ordinance would be the proper forums to decide such controversial and intricate questions of facts. It was submitted that the Constitutional petitions were liable to be dismissed on these grounds alone. 5. We have heard the arguments of both the learned counsel Mr. Sirajul Haq, for the petitioners and Mr. Shaikh Haider, for the respondents. Both of them were put on notice that these Constitutional petitions would be finally heard and disposed of on merits, if need be, after admission thereof to regular hearing. As the facts and circumstances in the three petitions are almost similar and identical questions of law are involved, we would, dispose of these Constitutional petitions by this common order. 6. Mr. Shaikh Haider fully supported the impugned orders both on factual and legal aspects and submitted that respondent No, 3 had proceeded with and made the impugned orders in exercise of the jurisdiction vesting in him and on consideration of the various provisions of the Ordinance applicable to the facts of these petitions. 7. Mr. Shaikh Haider the learned counsel for the respondents vehemently objected to the maintainability of the aforesaid Constitutional petitions on the ground that the respondent No,3 had made assessm ent order under section 52 read with section 86 of the Ordinance and his order were liable to be challenged by way of first appeal before the Commissioner of Income Tax, file second appeal before the Income Tax Appellate Tribunal. He further submitted that the petitioners instead of taking recourse to the appeals provided under the Ordinance had approached to this Court in its Constitutional jurisdiction which is not legally permissible. In support of his above
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contention he placed reliance on the case of Mrs. Farzana Kamran v . District Magistrate and others reported in 1992 SCM R 2434, (2) Adamjee Insurance Co. Ltd. v. Pakistan and 5 others reported in 1993 SCM R 1798, and (3) Income Tax Officer v. Chappal Builders, reported in 1993 SCM R 1108. Mr. Siraj Haq, the learned counsel for the petitioners refuted the objection raised by Mr. Shaikh Haider and submitted that the principle referred to by Mr. Shaikh Haider of availability of adequate and alternate remedy would be applicable for challenging an order only passed by a Government functionary on proper appreciation of the evidence and material on record and in lawful exercise of the powers confessed on him by law but if the Government functionary had passed an order which is contrary and not consistent with the evidence and material on record, is based on misreading and misinterpretation of the provisions of the agreement or the contents arrived at between the parties and is also violative of the statutory provisions the party would not be required to have recourse to the remedies available under a particular statute under which the illegal and void orders had been passed and it would be open to such aggrieved party to directly approach this Court in its Constitutional jurisdiction. In support of his arguments he placed reliance on the case of Mst. Farzana Kamran v. District Magistrate and others, reported in 1992 SCM R 2434, which had also been relied upon by Mr. Shaikh Haider. In this case the Honourable Supreme Court was pleased to hold that order which was neither mala fide nor suffered any jurisdictional defect could not be challenged directly in a Constitutional petition and the specific remedy provided in the relevant statute would be adequate for obtaining the desired relief. The pronouncement made in this case is applicable to all fours to the facts of these cases inasmust as the impugned orders passed by respondent No, 3 have been described petitioners to be without jurisdiction, contrary to and inconsistent with the evidence and material on record based on misreading and misinterpretation of the provisions of the Implementation Agreement and the covenants agreed upon the parties in violation of the statutory provisions and illegal and mala fide made solely with a view to collect more revenue. Mr. Siraj Haque, also referred to us to the cases of (i) M/s. Julian Hoshang Dinshaw v. Income Tax Officer and others reported in 1992 SCM R 250, and (ii) Collector of Customs and others v. M/s. Ahmed & Co. Ltd., reported in 1999 SCM R 138. We have considered the arguments of the learned counsel for the parties regarding the maintainability and we are of the view that the aforesaid Constitutional petitions are maintainable notwithstanding the fact that adequate and alternate remedy by way of first and second appeals before the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal respectively were available to the petitioner. In view of the fact that the impugned orders passed by respondent No, 3 appear to have been made by a wrong Authority, illegal exercise of the jurisdiction and also that in arriving at the findings respondent No, 3 appears to have ignored/disregarded the relevant material on record, the pronouncement made in the case of M/s. Al-Ahram Builders (Pvt.) Ltd. v. Income Tax ' Appellate Tribunal (1993 SCM R 29) to the following effect would be attracted: "The tendency to bypass the remedy provided under the relevant statute and to press into service the Constitutional jurisdiction of the High Court has developed lately, which is to be discouraged. However, in certain cases invoking of Constitutional jurisdiction of the High Court instead of availing remedy provided for under the statute may be justified, for example when the impugned order/action is palpably without jurisdiction and/a mala fide. To force an aggrieved person in such case to approach the forum provided under the relevant statute may not be just and proper." 8. Mr. Shaikh Haider also objected to the maintainability of the petitions on the ground that the same involved interpretation and enforcement of the agreements entered into by the petitioners with the Government of Pakistan and it is a settled law that contractual rights and obligations are not to be decided in Constitutional petitions. We are mindful of the above established principle. However, we may refer here to the cases of: (1) Muhammad Ashraf Ali v. Muhammad Naseer and others, reported in 1986 SCM R 1096 and (ii) M/s. Wake Orient Power & Light Ltd. v. Government of
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Pakistan and others, reported in PLD 1998 Lah. 665, wherein it has been held that writ petition is permitted to be resorted to in cases involving contract between a private party and State. 9. On consideration of the case-law relied upon by the learned counsel for the parties, we are satisfied that the facts of these petitions are such that they warranted the petitioners to invoke the Constitutional jurisdiction of this Court for agitating their grievance arising out of the alleged illegal impugned orders of respondent No, 3. 10. The first ground on which the orders of respondent No, 3 holding the petitioners as assessees in default for their alleged failure to deduct or collect tax from the payments made by them to the contractor assailed by Sirajul Haq was that respondent No,3 had no authority to call in question the issue regarding the failure of the petitioners to deduct tax altogether or a less than on the specified rate and deposit the same in Government Treasury within the specified date in the course of the income-tax assessm ent proceedings relating to the assessment of income of the petitioners. It is to be observed that the profits and gains derived by the petitioners from their respective power plants were exempted from charge to income-tax by clause (176) of the Second Schedule to the Ordinance. Respondent No,3 in finalizing the assessment of the petitioners was to confine himself to the inquiry whether all the conditions postulated in sub-clauses (a), (b) and (c) of clause (176) of the Second Schedule to the Ordinance existed or were 'complied with by the petitioners. Once it was established that three conditions were complied with the petitioners would be entitled to have their income exempted from charge to income-tax. In these proceedings the issues of declaring the petitioners as assessee in default on their failure to deduct tax from the payment made by them to non-resident contractors and to deposit the same in Government Treasury could not be initiated in view of the provisions of sections 52 and 86 of the Ordinance. The alleged default is not making. Deductions at the rate postulated by respondent No, 3 were not receipts of the payments rather they were the "Buyers" as envisaged in section 50(4) of the Ordinance for a better understanding of the issue and for resolving it with clarity it would be appropriated to reproduce sections 50(4) and 52 of the Ordinance hereunder:-- "Section 50(4). Notwithstanding anything contained in this Ordinance--- (a) any person responsible for making any payment in full or in part (including a payment by way of an advance) to any person (being resident) (hereinafter referred to respectively as 'payer' and 'recipient'), on account of the supply of goods or for service rendered to, or the execution of a contract with the Government, or a local authority, or (a company) (or a registered firm), or any foreign contractor or consultant or consortium shall (where the total value, in any financial year, of goods supplied or contracts executed exceeds fifty thousand rupees, or of services rendered exceeds ten thousand rupees), deducted advance tax, at the time of making such payment, at the rate specified in the First Schedule, and credit for the tax so deducted in any financial year shall, subject to the provisions of section 53(d), be given in computing the tax payable by the recipient for the assessm ent year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year, if any, in which the 'said date', as referred to therein falls, whichever is the later: ' Provided that the provisions of this clause shall, mutatis mutandis, apply to any payment made on or after the first day of July, 1992, to any non-resident person as they apply to any payment made to a resident recipient on account of execution of a contract for construction, assemble or like project in Pakistan; (b) the Commissioner may, on an application made by any recipient and after making such inquiry as he thinks fit, allow, by an order in writing, any person responsible for making such payment not to deduct any tax from any payment or payments made to such recipient in any financial year; and where such order is made, the person responsible for making any payment
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shall thereafter, and until such order is cancelled, make such payment without deduction of tax under clause (a), (and): ' Provided that; (i) Nothing contained in clause (a) or clause (b) shall apply to any payment made on account of the refund of any security deposit; and (ii) nothing contained in subsection (1) shall apply to companies as payers, 'Section 52. Liability of persons failing to deduct or pay tax.---Where any person fails to deduct or collect, or having deducted or collected, as the case may be, fails to pay the tax as required by, or under, section…
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